The Standards Of The Business Judgement Rule

Board members have a fiduciary duty to the association/corporation and arguably directly to the individual members.  Fulfillment of this duty requires that the board members exercise utmost good faith.

In ordinary corporate matters, the ‘business judgment rule’ is the standard by which board action is evaluated.  The business judgment rule generally provides that, so long as the board members fulfill their duties of ‘care’ and ‘loyalty’ the board’s decisions will not be second-guessed by a court.

The duty of ‘care’ obligates the board to make their decisions only after ‘due diligence’ – after the board members have become reasonably informed about the issue at hand.  The board members may rely on experts such as engineers, architects, lawyers, accountants, contractors, etc. in fulfilling their duty of care.  The duty of ‘loyalty’ obligates the board to make their decisions for the benefit of the association/corporation rather than for their own benefit.  In the ordinary corporation, once the duties of care and loyalty are fulfilled, the board’s decisions, good or bad, will not be disturbed by the courts.

In associations, condominiums and co-ops however courts frequently graft a ‘reasonableness’ test on to the business judgment rule review.  Although often denying it, courts do in fact second guess association, condominium and co-op boards.  Courts ask themselves: ‘Assuming that the duties of care and loyalty were met, was the decision reasonable’

In your example, assuming a certain membership vote was required but was not obtained (which is likely since the board will not disclose the alleged vote results); the board is not fulfilling its fiduciary duty.  It is not acting in good faith.  It is not fulfilling its duty of care as it is not complying with the governing documents and is not fulfilling its duty of loyalty as it is pursuing its own agenda in spite of the governing documents’ membership vote requirement.

Be aware that, when considering the improvement you described, a super-majority membership vote is typically required rather than just a simple majority.  Regardless, the options are limited.  Typically one or more members will sue to enjoin the board from further action.  Court’s will issue such an injunction if the members can show that the members will be irreparably harmed in the absence of the injunction, the legal basis for the members’ claims is generally settled, the members are likely to ultimately succeed on the merits and the hardship that the members will suffer, if the project is allowed to go forward, will be greater that the hardship suffered by the board/association/corporation if the project is temporarily stopped.  Another, or possibly concurrent, option is the membership undertaking a board member removal vote.  Although the membership typically has the power to remove and replace the board members, this option is usually too cumbersome and time consuming to be used effectively in immediately stopping improper board action.

In addition to the injunction, the membership should also make the board members aware that, in knowingly proceeding without the required membership vote, the board members may be exposing themselves to personal liability.  This liability may not be covered by the Association’s insurance policy and the board members’ actions may take them outside of any exculpation provision in the governing documents.  Essentially, in not complying with the governing documents, the board members are generating unnecessary legal fees and risking having to pay their own defense cost and liability award if the membership proves damages.

CAI-NJ Conference and Expo – Refreshing Insurance

1. Cultivate a Relationship with the Association’s Insurance Representative

Insurance representatives make their living selling insurance and maintaining accounts. They are professionals and should be a part of the Association’s professional services team. Association boards should be familiar with their insurance representatives and use them as a resource. Too often, board members do not even know who their Association’s insurance representative is until a problem arises.

2. Read the Policy:

In Aden v. Fortsh, 169 N.J. 64 (2001), New Jersey’s Supreme Court ‘[R]eaffirm[ed] New Jersey’s longstanding tradition of holding professionals [an insurance broker] to high standards of care’. The court rejected the insurance broker’s claim that the condominium unit owner should bear a portion of the blame for inadequate coverage because he never read his insurance policy.

Nevertheless, policyholders should read their policies. Insureds should know what they are getting for their money and who will pay what in case of a claim. Further, not only did the Aden case work its way all the way to the New Jersey Supreme Court, it also resulted in a 4 to 3 split decision among the justices suggesting that a change in the Court’s makeup could result in a different outcome.

3. Pay the Premiums:

Sounds obvious right But on multiple occasions Associations have failed to timely pay their premiums.

4. Obtain Adequate Coverage:

Beware ‘Coinsurance’. Coinsurance seeks to compel Associations to buy sufficient coverage and pay sufficient premiums but may lead to insufficient coverage even when the value of the loss is within the Association’s policy limits.

Although coinsurance provisions may differ, the following is an example:

A policy may provide that, if the amount of coverage is not equal to at least 80% of the value of the covered property at the time of loss, a co-insurance penalty will apply.

If the Association had $8,000,000 in insurance on its building (the ‘Covered Property’) and the Association had a fire causing $5,000,000 in damage and, at the time of loss, the value of the Covered Property was $10,000,000, $8,000,000 in insurance would be 80% of the value of the Covered Property at the time of the loss and the co-insurance penalty would not apply. Therefore, barring other issues, the carrier would be expected to pay $5,000,000.

If however, the value of the Covered Property was $12,000,000 at the time of the loss, $8,000,000 in insurance would only be approximately 67% of the value of the Covered Property and a co-insurance penalty would apply.

A co-insurance penalty may apply as follows assuming $5,000,000 in damage: $8,000,000(the Limit of Insurance)/$9,600,000 (80% of the $12,000,000 value of the Covered Property) = .83333 x $5,000,000 = $4,166,650, less any applicable deductible = the insurance payment. So, even though the Association in this example had $8,000,000 in coverage and the loss was only $5,000,000, the insurance company would only pay approximately $4,166,650.

5. Determine Who You are Covering or Should Have Coverage For:

The Association, the Board members, other volunteers, Association contractors such as managers who often require the Association to carry certain coverage and/or name them as additional insureds and/or indemnify them in certain circumstances.

6. Report Potential Claims/Demand Coverage:

Policies require notice of claims. Failure to timely notify the carrier will provide the carrier a basis for denying coverage.

7. Challenge Defense/Coverage Denials:

Defense and coverage denials should not be accepted based on the insurer’s opinion of the matter. In fact, even when insurers propose to defend a matter pursuant to a ‘reservation of rights’ the insured need not accept the insurer’s terms proposed in the reservation of rights.

Associations need and expect defense and coverage when a claim is made. Denials of defense and coverage are especially difficult for Associations as the denial may compel the Association to pay attorney fees to fight the denial and, at the same time, defend the underlying lawsuit.

This makes Associations particularly inclined to accept the terms of ‘reservations of rights’ letters. However, Association’s should not leap to accept these reservations of rights. Instead, the Association should spend time with the Association’s general counsel determining whether it is in the Association’s best interest to accept insurance counsel defense given the rights the carrier ‘reserves’ or attempt to negotiate a defense agreement whereby issues such as counsel selection, fee allocation and liability coverage are resolved amicably with a view toward defeating the underlying claim.

8. Use New Jersey’s Department of Banking and Insurance, Office of Insurance Ombudsman to Assist with Insurance Coverage and Claims

New Jersey’s Office of the Insurance Ombudsman was established ‘to assist consumers with issues related to insurance availability; claims processing; coverage questions and other matters related to consumer education and assistance’. The contact information for the Office of the Insurance Ombudsman is:

Office of the Insurance Ombudsman

NJ Dept. of Banking and Insurance

20 West State Street, P.O. Box 472

Trenton, NJ 08625-0472

1-800-446-7467

Community Associations fight the spread of COVID-19 where people live. Associations must not be stopped from collecting the assessments they need to keep up the fight. Senate Bill S2330 sponsored by Senators Joseph P. Cryan and Nellie Pou; and Assembly Bill A3908 Sponsored by Assembly Members Mila Jasey, Verlina Reynolds-Jackson and John McKeon had been listed for votes in the Senate and Assembly on April 13, 2020.

To the great relief of Condominiums, Co-Ops, and Homeowners Associations throughout New Jersey, neither the Senate nor the Assembly voted on these bills on May 13, 2020. These bills have however re-surfaced. And, at least for the moment, they do not contain Senator Pou’s proposed Amendment that would remove Association-crippling Section 3. A copy of Senator Pou’s proposed amendment may be viewed by clicking here: Senator Pou’s proposed amendment

The Assembly version, A3908, is scheduled for hearing before the Assembly Commerce and Economic Development Committee on Thursday, May 7, 2020 at 11:00 AM. The Senate version, S2330, is scheduled for hearing before the Senate Budget and Appropriations Committee on Thursday, May 7, 2020 at 1:00 PM. The Senate and Assembly Bills are identical for the time being. A copy of Senate Bill S2330 may be found by clicking here: https://www.njleg.state.nj.us/2020/Bills/S2500/2330_I1.HTM

The Committees would have taken your oral testimony on A3908 and S2330, by telephone and/or video but a deadline for submitting the required SBA Committee Registration Form was set as 3:00 pm on May 5, 2020 so it seems that the late notice will effectively exclude telephonic or video testimony. You may however still submit written testimony via e-mail to OLSAideSBA@njleg.org. Your e-mails will be included in the committee records and distributed to the Committee members. Please reference the bill numbers and Committees you are submitting your comments to in the e-mail Re: line.

Without amendment, the proposed legislation will cripple Association cash flow. It will make it more difficult or impossible for Associations to perform their critical functions. It will make it more difficult or impossible for Associations to pay the individuals and small businesses Associations employ.

Assessment revenue is the lifeblood of every Condominium, Co-Op, and Homeowners Association. To a degree, the crisis has already hobbled collection efforts.

We have advocated forbearance agreements and encouraged flexibility. We continue to do so.

Please e-mail the Assembly Commerce and Economic Development Committee members: Gordon Johnson, Robert Karabinchak, Robert Auth, John Catalano, Nicholas Chiaravalloti, John DiMaio, Aura Dunn, William Moen, Annette Quijano and Verlanda Reynolds-Jackson and the Senate Budget and Appropriations Committee members: Paul Sarlo, Sandra Cunningham, Dawn Addiego, Nilsa Cruz-Perez, Patrick Diegnan, Linda Greenstein, Declan O’Scanlon, Steven Oroho, Teresa Ruiz, Troy Singleton, Michael Testa, and Samuel Thompson and request that these bills not move forward without Senator Pou’s amendment removing Section 3. You may find your legislators by clicking here:  https://www.njleg.state.nj.us/members/legsearch.asp

Thank you.

On April 14, 2020, Governor Murphy signed Assembly Bill 3903 into law. The text of the Bill may be reached by clicking here: https://www.njleg.state.nj.us/2020/Bills/A4000/3903_R1.PDF  The new law provides for notarizing documents remotely during the public health emergency and state of emergency.

Among other things, notaries confirm from personal knowledge or from satisfactory evidence that the person appearing before them is the person whose true signature is on the document. In New Jersey and certain other states, lawyers may also acknowledge documents.

Although it is easy to become a New Jersey notary. Acknowledging documents and performing the other duties of a notary is serious business. In his article Signed, Sealed, Delivered…Disbarred – Notarial Misconduct by Attorneys, available by clicking here: https://repository.jmls.edu/cgi/viewcontent.cgi?article=1644&context=lawreview   Christopher B. Young surveyed improper notary practices by attorneys and the sanctions that followed such activity.  31 J. Marshall L. Rev.1085 (1998). In especially egregious cases attorney discipline has been severe.

Mr. Young’s article, highlights instances where lawyers attempted to defend themselves by claiming that it was common practice for attorneys to have notaries notarize clients’ signatures without the client being present, such arguments were rejected. A quick review of New Jersey Attorney Disciplinary Decisions reveals that the New Jersey Supreme Court has reprimanded at least two New Jersey attorneys for execution of improper acknowledgments.

The above being said, notary duties must be taken seriously and the new law, in sum provides:

During the public health emergency, except with respect to the exceptions in the law, notaries may take acknowledgements remotely via communication technology that allows the individuals to communicate with each other via sight and sound if:

  1. The notary has (a) personal knowledge of the identity of the person appearing, (b) has evidence by oath via a credible witness also appearing before the notary or (c) has obtained satisfactory evidence of the identity of the remote-located individual by using at least two different types of required identity proofing and
  2. The notary is reasonably able to confirm that the document before the notary is the same document on which the remotely located person executed a signature and
  3. The notary creates and maintains for ten years an audio-visual recording of the performance of the actions required.

Further, the acknowledgement shall state that the document was notarized using communication technology. Consult your lawyer for details. This law helps during the crisis, but the process must be followed.

I hope you and your family had a nice weekend despite the social distancing.  I write to follow up on my April 10th e-mail.  This morning the Senate met virtually and tabled S2330.  You may read the bill by clicking here: https://www.njleg.state.nj.us/2020/Bills/S2500/2330_I1.PDF.   A3908 is currently identical.  My understanding is that, when the Assembly meets this afternoon, it will table A3908.

Thank you to everyone who reached out to their Senators and Assembly Members and voiced concern on these bills.  They could cripple Condo. Co-Op and HOA cash flow.

The fact that these bills are tabled for the moment however does not mean that we should rest.  Versions of these bills will likely resurface shortly.

If you have not done so already, please reach out to your State Senator and Assembly Members and voice your concerns.  Contact information for State Senators and Assembly Members may be found here:  https://www.njleg.state.nj.us/members/legsearch.asp

I have written the following: “Dear Senator and Assembly Members:  Please revisit the above bill and either exempt or make specific provision for collection of Condo, Co-op and HOA assessments.  These Associations are financed on zero-based budgets.  There is no profit built in.  The annual expenses are distributed among the members.  If the assessments are not collected, the Associations will not have the funds to pay their expenses.”

I cited the below as language some associations are using when considering forbearance requests:

•          Arrearage will accrue for May and June 2020’s assessments (the “Accrued Assessments”).

•           Late fees will accrue for May and June 2020’s assessments (the “Accrued Assessment Late Fees”).

•           Membership rights will not be suspended for failure to timely pay May and June 2020’s assessments so long as they are paid as provided for in this agreement.

•           Unit Owner must timely pay all Association obligations arising on July 1, 2020 and thereafter beginning on July 1, 2020 and thereafter.

•           Unit Owner must also pay Accrued Assessments in six equal payments beginning on July 1, 2020 and on the first day of each month thereafter until all Accrued Assessments are paid in full.

•           So long as the Accrued Assessments are timely paid in six equal payments beginning on July 1, 2020 and on the first day of each month thereafter and all Association obligations that arose on July 1, 2020 and thereafter are timely paid in full, the Association will waive Accrued Assessment Late Fees;

•           So long as this agreement is timely complied with, the Association will forebear from collection action with respect to the Accrued Assessments.

•           So long as the Accrued Assessments are timely paid in six equal payments beginning on July 1, 2020 and on the first day of each month thereafter and all Association obligations that arose on July 1, 2020 and thereafter are timely paid, the Association will take no legal action with respect to the Accrued Assessments.

I noted that Associations are addressing forbearance agreements depending on their populations and financial positions.  So, for example, certain Associations are forbearing for May and June while others may be forbearing for longer.

I advised that, although we may or may not represent an Association in their District, the Associations in their district work hard to keep the Associations on sound financial footing.  I suggested that the Legislators contact the President of one of the Associations in their district for feedback.

Again, please reach out to your State Senators and Assembly Members.  Emphasize the great work that you do, emphasize that your Association is showing flexibility via forbearance agreements (if true) and emphasize that, though perhaps well-intentioned, hampering Associations’ ability to collect will do more harm than good.  Thank you.

I write to follow up on my April 3, memo suggesting assessment forbearance agreements for certain Association Members. Late in the day yesterday State Senators Joseph P. Cryan and Nellie Pou introduced Senate Bill S2330; State Assembly Members Mila Jasey, Verlina Reynolds-Jackson and John McKeon introduced Assembly Bill A3908. The Senate and Assembly Bills are identical for the time being. A copy of Senate Bill S2330 may be found here: https://www.njleg.state.nj.us/2020/Bills/S2500/2330_I1.PDF

The proposed legislation will impact Association cash flow. It could make it more difficult or impossible for Associations to perform their critical functions. It could make it more difficult or impossible for Associations to pay the individuals and small businesses Associations employ.

There is speculation that these bills may be voted on this Monday, April 13, 2020. The timing of this proposed legislation is a great concern. Among other things, Passover, Good Friday and Easter have justifiably drawn Association Members’ attention to family and spiritual commitments.

Assessment revenue is the lifeblood of every Community Association. There should be adequate time for Association Members and others to consider and comment on this legislation. To a degree, the crisis has already hobbled collection efforts.

We have advocated forbearance agreements and encouraged flexibility. We continue to do so. We ask that you reach out to your State Senators and Assembly Members and request that they not vote on this proposed legislation until Association Members and others have had time to consider and comment on it.

You may find your legislators by clicking here https://www.njleg.state.nj.us/members/legsearch.asp

Thank you.

Why isn’t the pool open? What am I paying my assessments for anyway!?

The Fourth of July is a little less than 100 days away.  Memorial Day, a little less than 60 days away.  The Coronavirus crisis continues.  Why are we talking about the pool now?

Some contracts are already in place.  What do we do with them?  Should we modify?  Should we cancel?  Should we breach? Will we be sued?  What will the damages be?

Pool vendors want contacts signed now.  Understandably pool vendors want to plan their season, staffing and financials.

Memories are short.  As every property manager and board member knows, memories are short.  Even after a national crisis, manager and board member appreciation cannot be expected.  Why isn’t the pool open again?

Pool Demand: We May Want the Pool Open at Some Point. People have been shut in their homes for weeks and will likely be shut in their homes for weeks to come.  If the coronavirus crisis abates, residents will want to use the pool immediately.  Pool vendors may not be able to get pools open in a timely manner.

Pools require maintenance anyway. 

Pool contractors have an interest in making money and keeping their employees working.  While allowing for their self-interest, some pool experts recommend opening, operating at a minimum level and closing even if the pool is never open to swimmers in 2020 (the “No Swimming Option”).

Reasons cited include:

-pools that are not maintained can become a breeding ground for mosquitos and other pests,

-pools that are not opened and maintained become swamps and will take longer to open,

-equipment works better when it is runs rather than when it idles for more than a year and a half,

-last year’s winterization may only be good for last year: plugs may have fallen out, lines may have filled with water, chemicals may have dissipated. The pool should be winterized again.

So?  Communicate the conundrum to your residents.  Attempt to understand consensus.  Do not underestimate the value of relationships.  Pool vendors want to work with you and with your management company.  You should want to work with them.  My experience has been that there is not an overabundance of good pool vendors.

Be optimistic about the coming pool season.   The Associations and the vendors should consider their BATNAs.  What’s the best alternative to a negotiated agreement?  Fighting is a lose-lose.  Incorporate a No Swimming Option in agreements.  Although I strongly prefer guarded pools, under certain circumstances, Association pools may go without guards anyway.  Estimate damages in case of breach.  Damages are often far less than the contract price and may justify the No Swimming Option anyway.  Negotiate a discount for prepayment – vendor cashflow is key to many or, negotiate a longer payment period – association cashflow is key to many. Regardless, the coronavirus crisis will pass, and Association management, counsel and pool vendors should be able to reach accommodations acceptable to all.

The above information is not legal advice and shall not create an attorney-client relationship.  This information is general and may not be applicable to your particular circumstances.  You should review your particular circumstances with Association counsel.

Contractor Relations & Disputes

1.         Do not sign the contractor’s proposal.
2.         Have an attorney prepare anything larger than a nominal contract.
3.         Make sure any conflicts of interest are fully disclosed and acknowledged in writing.
4.         Review the contract’s termination language carefully – how do you get out if you have to
5.         Keep current proof of insurance on file.
6.         Communicate dissatisfaction in writing.
7.         Terminate the contract according to the contract’s termination provision.
8.         Do not hire a replacement contractor until the old contractor is terminated.
9.         Keep the money if performance has been unsatisfactory.
10.        Advise your attorney of any dispute early.
11.        Bite back if you have a claim against the contractor.
12.        Preserve all evidence if possible.
13.        Notify your insurance carrier of damage, dispute and/or lawsuit.
14.        Get signed release agreements before paying anything toward disputed sum.

We are regularly asked how Associations can save money on attorney fees.  Some argue: “go with an hourly agreement, that way the Association can control the attorney’s work.”  Others might argue: “flat-fee retainer agreements are best; budgeting will be easier.”  Still others might say: “a contingent fee arrangement is best, that way the Association won’t have to pay unless the attorney wins.”

While these answers and others may be right in certain circumstances, the real answer, sure to save attorney fees in virtually every Association, is: “Hire strong management, pay fair management fees and use management personnel properly.”

Seems like a simple answer but, counterintuitively, at a time when few manager resumes are circulating, management fee proposals are bent on a race to the bottom.  I do not know what is driving this. Board demands?  Desire for market share?  Ability to sell ancillary services?  Increased technology usage?  A combination of these factors?  Regardless, isn’t it a matter of pay management today or pay way more in legal tomorrow?  Worse, isn’t it a matter of pay management today or pay way more in legal, audit, engineering, contractors etc. tomorrow?

Experienced, trained and dedicated managers are effective.  Among many other things, they help with risk management and insurance; specifications, bidding and moving projects forward, managing the budget, collecting delinquent fees, managing personnel, maintaining books and records, resolving disputes, etc., etc.

Failure to properly deal with risk management leads to more insurance claims.  Failure to properly deal with insurance claims means coverage denial.  Failure to properly deal with specifications, bidding and project management leads to flawed projects, cost-overruns and lawsuits.  Failure to properly budget and collect Association fees leads to lack of reserves, special assessments, large increases, borrowing and collection lawsuits.  Failure to properly manage human resources leads to unnecessary costs, work not getting done and lawsuits.  Failure to properly maintain books and records leads to an inability to manage, member suspicion and lawsuits.  Failure to promptly address disputes leads to lawsuits.

We do not own a management company, but we work with most of them.  Associations should be keenly aware that the management fee supports the manager and much more.  When considering a management company proposal, the cost should be one selection factor but not the primary factor.  We perform great legal work and appreciate Associations paying our legal fees, but we encourage Associations to hire strong management, pay fair management fees and use management personnel properly.