Board of Directors: FIDUCIARY DUTIES

Board of Directors:FIDUCIARY DUTIES (Or, How to Avoid Legal Trouble)

A Board’s Role • Governing Body for its Association • Comprised of Directors • Directors are voted in by Members (a.k.a. Owners) • Directors then vote for Officers (i.e. President, Vice President, Secretary, Treasurer) • Owners do NOT vote for Officers • Each Director serves for a set term • Has general Decision-Making Powers • RECEIVES NO PAYCHECK!

Selection of the Board • By-Laws sets forth rules for: • Eligibility of Owners to become Directors • Delinquent Owners are usually NOT eligible to run • Number of Directors • Terms of Directors and Officers • Quorum for meetings • Voting at meetings • Removal and Resignation of Directors and Officers • Must ensure the Board is legally elected before putting any matter to a Vote!

Power to Make Decisions Board makes MOST decisions for its Association, such as for: Collections Architectural Control Maintenance Common Areas and Parking Easements and Licenses Budget and Assessments Leasing … and many more set forth in the Documents

…But there are Limits to this Power Boards MUST act: in Good Faith with the Care of an Ordinary Prudent Person, and in the Best Interest of the Association. These are the Board’s FIDUCIARY DUTIES

Sources of Duties • Maryland Law/Statutes • Condominium Act • Relevant case law • Your Association’s Documents: • Declaration or Master Deed • By-Laws • Any other recorded Rules and Regulations

MD Condominium Act • Closed Meetings of the Board (MD Real Property Article, § 11-109.1) • Dispute Settlement Mechanism (MD Real Property Article, § 11-113) • Conducting hearings of Owners in violation of Association’s rules • Notice requirement for hearing • Adjudicating the hearing • Sanctions

Confidential Association Matters:Executive Sessions • Board Meetings MUST be CLOSED when: • Discussing matters of employees and personnel • Protecting privacy/reputation of individuals in matters not related to association’s business • Consulting with legal counsel • Consulting with staff personnel, consultants, attorneys, or other persons in connection with pending litigation • Conducting investigative proceedings concerning possible or actual criminal misconduct

Executive Sessions (cont’d) • Board Meetings MUST be CLOSED when: • Complying with a specific constitutional, statutory, or judicially imposed requirement protecting particular proceedings from public disclosure • Held on an individually recorded affirmative vote of two-thirds of the board members present, for some other exceptional reason so compelling as to override the general public policy in favor of open meetings (Repealed 10/2009) • Otherwise, ALL other meetings must be OPEN

Association’s Governing Documents • DECLARATIONS often set forth rules regarding: • Architectural Control • Maintenance responsibilities • Use Restrictions • Budget/Finances • Assessments • Insurance • Overall legal rights

Association’s Governing Documents • BY-LAWS often set forth rules regarding: • Meetings of Members • Board of Directors’ Business • Selection, Terms of office, Removal • Eligibility, Nomination and Election • Meetings of Directors • Powers and Duties • Officers’ Duties • And other provisions already established in the Declaration

Beyond the Legalese Remember, a Board must perform its legal duties: in Good Faith with the Care of an Ordinary Prudent Person, and in the Best Interest of the Association.

Good Faith • All Directors are volunteers, and cannot receive compensation for their work • This means NO • Gifts • Incentives • Monetary reward of any kind! • Accepting or taking compensation is a violation of the Duty of Good Faith • May be reimbursed for out-of-pocket expenses, but only with proof of payment

The Association’s Best Interest • Decisions must be made for the Community as a whole • Some decisions may not benefit every individual member • Cannot act against any individual members • Don’t be an Interested Director • Fully Disclose any personal interests • For example, don’t encourage the rest of the Board to award a contract for your friend or family member without first fully disclosing your personal interest • Keep Association matters Confidential

Electronic Communications • Duty of Confidentiality arises • “Electronic Communications” = any form of communication, not directly involving the physical transmission of paper, that creates a record that: • May be retained, retrieved, and reviewed by a recipient of the communication, and • May be reproduced directly in paper form by a recipient through an automated process • Specific Laws in the Condo Act: • Electronic Transmission of Notice • Electronic Transmission of Votes or Proxies

Electronic Communications (cont’d) Electronic Transmission of Notice (MD Real Property Article, § 11-139.1) • Despite language in the association’s governing documents, the association may provide notice of a meeting or deliver information to an owner by electronic transmission, IF 1) the Board gives the Association the authority to provide notice of a meeting or deliver information by electronic transmission; 2) the Owner gives the Association prior written authorization to provide notice of a meeting or deliver information by electronic transmission; and 3) an Officer or Agent of the Association certifies in writing that the Association has provided notice of the meeting or delivered material or information as authorized by the Owner. • Electronic Notice is ineffective if the Association is unable to send two consecutive notices and is aware of this inability • Inadvertent failure to deliver notice by electronic transmission does not invalidate any meeting or other action

Electronic Communications (cont’d) Electronic Transmission of Votes or Proxies (MD Real Property Article, § 11-139.2) Despite language in the governing documents, the Board may authorize Owners to submit a vote or proxy by electronic transmission if the electronic transmission contains information that verifies that the vote or proxy is authorized by the Owner or the Owner’s proxy If the governing documents require voting by secret ballot and the anonymity of voting by electronic transmission cannot be guaranteed, voting by electronic transmission shall be permitted if Owners have the option of casting anonymous printed ballots

Confidentiality:Electronic Communications Are my e-mails confidential? • Yes (generally!) • Protected from disclosure under the Attorney-Client Privilege • Reasonable Expectation of Privacy • no need for encryption • BUT, be cautious • Double-check the recipients • Compose new messages for different subjects • Keep Board matters to the Board, only!

Confidentiality:Electronic Communications What About Inadvertent Disclosure? • E-mails can be intercepted, maliciously disseminated (e.g. virus), or sent inadvertently to the wrong person (e.g. the False Keystroke) • Majority approach: Inadvertent disclosure does NOT waive the Privilege • Your e-mail would still be protected • UNLESS you voluntarily share it!

Confidentiality:Electronic Communications Did my inadvertent disclosure waive the Attorney-Client Privilege? • Factors to Consider: • Reasonableness of the precautions taken, • Time taken to rectify the error, • Scope of discovery, • Extent of disclosure, and • The overriding issue of fairness

Confidentiality:Electronic Communications Legal Protections of the Attorney-Client Privilege • Federal Communications Act • Doesn’t explicitly address electronic communications, but prohibits unauthorized publication or interception of radio or telephone communications • Electronic Communications Privacy Act • Illegal to intentionally intercept any electronic communication • American Bar Association’s opinion • Attorney may send confidential information to Client via unencrypted e-mail without violating the ethical obligation to protect information relating to representation of Client • Case Law

Keep it Confidential Electronic Communications can lead to error and increase the spread of confidential info Follow the law regarding electronic notice and voting. Do not implement unless a system is developed for tracking and verification E-mail communications between Board members on business matters should stay within the Board ONLY Keep a written record of all Board decisions; do not rely on e-mail alone When in doubt – call your Attorney, or write an old-fashioned letter And, keep personal business out of Board e-mails!

Ensuring Duties are Met:Small Things = Big Difference • Stay Informed • Familiarize yourself with your Governing Documents • Review your monthly management reports, especially bank statements • Stay Involved • Work closely with management to determine the Association’s budget • Raise or Lower Assessments based on the Association’s demonstrated financial needs • Eliminate unnecessary expenses • Oversee any Agent of the Association

Small Things = Big Difference (cont’d) • Ask for Help! • Management Company • Choose your Management based on its experience, references, certification and costs • Certified Professional Accountant (CPA) • Attorney • Previous Board Members • Formulate Committees • Architectural Control • Rules Enforcement • Contact free and low-cost resources • Community Associations Institute (CAI) • County and State agencies • Board’s duty does not end at delegation • Review the Association’s Agents • Work with Agents to ensure Association’s interests are met

Additional Protections • Insurance • MD law permits the indemnification of directors unless they act unlawfully, with gross negligence, or deliberate dishonesty • Director/Officer Liability Coverage • Insures the Association against the negligence or misconduct of Directors • Protects individual Directors from actions against the Association

And Remember… • Associations cannot function successfully without ACTIVE BOARDS • Boards must be willing to undertake Responsibility and Hard Work • The Goal of helping your community remain a desirable place to live!

For More Information: Linda S. Mericle, P.A. 6404 Ivy Lane, Suite 408 Greenbelt, MD 20770 (301) 474-2044 linda.mericle@verizon.net

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