 well at home and that they relax restrictions and allow us to enjoy our wonderful Hawaii again. My name is Richard Emory, I'm your host today on Condo Insider. Condo Insider is a show about condominium living in Hawaii, primarily for board members as well as owners. They understand our industry better and we've done about 175 shows and you can go on YouTube and Think Tech Hawaii with search by category or type and hopefully learn lots of interesting relevant information. As I said in a previous show where beside our interviews and one-on-one interviews with people, we're testing the concept of a more direct educational series. We talk about a topic and so I'm not always a guest on the host and all in one package. So we'll see how it goes. This is our second effort at this and today's topic is fiduciary duty. What is the board's meaning of a fiduciary duty? And Frank hasn't tell you, I've been doing this 25 years and I think there's more misunderstanding about fiduciary duty and what it really means and the way it's applied by many people isn't correct. We're gonna kind of go through this a little bit and talk about it, but I also used to joke many years ago that when a new director gets elected to the board, kind of drum rolls and the music sounds and out of the ground comes a halo and all of a sudden it goes above their head and they're saying, I'm now a fiduciary. And they think it means something different than it really is. So I wanna kind of go through that today because as you'll find out in this little topic seminar, you expose yourself if not properly applied to personal liability and your director in offshore liability insurance may not cover you with regard to your act as a director. So let's look at what slide one says and that is, what is a fiduciary? What is the definition? If a person who owns another, in this case a condo association, the duties of good faith, trust and confidence and candor. You gotta be honest, you gotta be acting in a good faith and you have to do it in a trustworthy way. And part two is you have to exercise a high state of the care in managing another's money or property. So as a fiduciary you have a big role but what you have to understand most common misunderstanding is, you're a fiduciary as a part of the board of directors. You individually have no independent individual authority to do anything. You get to vote and you get to participate in board meetings and other owner type meetings and you get to express yourself but all of your decisions and all of your actions should be in the best interest of the association. Not necessarily what you personally like, maybe not necessarily what you'd like to do but really what's in the very best interest of the association. Now, slide two basically says, when you make these decisions and you vote in a board meeting, you owe the association a fiduciary duty in the form of the director's duties and that duty is through the association itself. It's not to yourself, it's not to the owners, it's not to anybody but the association. So you've got to be careful that when you go to a meeting for example and you have a vote, I always use this bad example but you want to paint the building pink and you have a five member board and four of you vote yes, the paint the building pink and you don't like pink and you want the building blue and you vote no. I don't want to paint the building pink and you vote no and the motion gets passed because it's four to one. You can't go out and start writing letters to owners and say I'm on the board and the board did a crappy job that should have picked blue because it'll last longer than pink. You have an obligation to the association, the association through with governance and through with bylaws has made a decision lawfully and correctly with the board majority. You don't have the right to go out and criticize the board and say bad things about them and say they're all wrong and I'm right because you're part of a fiduciary interest as the association has a good faith past the lawful resolution. You have an obligation to support it and support it till it's conclusion to help that successful resolution be implemented and you can't create all this unbug and drama with respect to the fact you didn't get your way because that's your personal interest and the bylaws of the association established governance and they established the rules as well as condominium state law. And so you have a fiduciary obligation to support the majority decisions of the board directors. That doesn't mean you can't express yourself in your reservations and your concerns. You can't go out and you can't buy to quote sabotage the decisions the board has lawfully made and as a fiduciary your obligations to the association and the association has to a lawful governance procedures and the bylaws as supported by state law made a decision and you have an obligation to support that decision. So looking at slide three, you must always place the interest of the association above your own interests at all times. You know, New Zealand board members can debate and argue. Hopefully they'll make a personal and at the end of the day, it's gotta be the best sense of the association. I had an example recently where a board was a three-member board and two of the board members were delinquent in their main decisions. And the third board member liked those two people. The associate basically was saying, well, I think it's okay, we don't have to, we can wait longer before we enforce the requirements to pay the maintenance fees and get a lien and do whatever is necessary, payment plan, whatever it may be. Now that, doing the best interest of the association, are you doing the right thing for the association by not protecting the financial association by collecting against the delinquent owner? What if you wait and wait and wait and that owner all of a sudden starts bankruptcy and you lose your ability to collect them? You have to put these personal friendships and judge them aside and say, I have an obligation to the association. They have a zero-sum budget. They need to have everybody pay their maintenance fees like everybody else. And so I'm sorry, you two have a conflict of interest. We're gonna have to refer to our established board collection policy and let our attorney deal with this matter because that's protecting the association's interest. It's a tough thing to do when you know people are hurting and there's COVID-19. I don't think people know exactly how many maintenance fees and delinquencies there are gonna be. And certainly the statute provides for payment plans and things going that line. So there are ways to deal with it, but just to stick your head in the sand and ignore it is not the right answer. Now what I hear all the time also is what's the management company's responsibility? Let's take a look at five formal questions. The managing agent, they understand that role. The managing agent, except in limited circumstances, must implement the policies of the board of directors. The managing agent does not have any independent authority to manage the property. Responsibility for managing the property is the board of directors and solely the board of directors. And they have to take all the actions necessary. And the managing agent has to do what the board says. However, the managing agent who doesn't like what the board says can certainly say I'm giving you notice, I'm gonna cancel my contract because of the fact that I believe my duty and my license you're putting me in jeopardy. Good example would be another association I was recently involved with, the board, they have a provision of their bylaw say they must retain a managing agent. Now under the statute, a managing agent has their license real estate broker with a bond and certain other requirements and they're registered with the real estate commission and they're a managing agent. Well, the board then, the board majority said, well, I think we better be better self-managed. I think it might be cheaper. I don't like their management company's contract. I think we're just gonna go ahead and be self-managed. But the bylaw say, you have to have a managing agent. Doesn't say may have a managing agent it says shall have a managing agent. So does the board have the authority to say, well, let's go self-managed? No, they don't. They've got to ask the owners if they want to amend the bylaws and provide for self-management. And so if they go out, which they did in this case and say we're just not gonna have a management company I'm gonna get a local bookkeeper. I'm gonna put that local bookkeeper on the checking account and they don't have a bond, but we think we're better off that we can control it. Recognizing those people may not be elected next year. I mean, get one over by bus and you may not have the continuity couple of years from now you have on day one. But the board breaches fiduciary duty, yes. They have an obligation to follow the bylaw. That's the bylaw say you shall have a managing agent. You have to have a managing agent. A managing agent is a legal terminus statute and that means a real estate broker with a bond has been out of the criteria. If you don't do that, you're not doing your job and you've breached your fiduciary duty. But they've got to stop boards. They've got to stop saying that's the management company's responsibility because it's not. The management company is the agent as the key word, the agent of the board of directors and has the responsibility to follow the board's instruction or if they don't want to do it, they can resign. And so if the board just has to recognize that it cannot change that, looking at slide five. Board members can ultimately be home liable for the actions of agents, employees of the association. If those agents are employees, they'll have to carry out the board and their own fiduciary duties. What has been by that? So boards say, well, I'm going to delegate that to a committee. Well, they can certainly assign the responsibility to a committee, but they can't take away the ultimate responsibility of that of the board of directors. Another example would be another association that was involved in recently. But essentially, the owner wanted to do some remodeling within their apartment. And of course, that affects some of the shared utilities and things along that line. And they submitted a request to the board and they had an architect and engineer. They had a building permit. And they wanted to make these internal changes to their apartment. The board said, well, we have a committee to deal with that. And the committee wouldn't approve it. They wouldn't disapprove it either. They just refused to take action. They're going to take action for three years. So the owner couldn't use this apartment because they needed to make these changes. And so this resulted in a lawsuit. And the board say, well, we gave it to the committee or we have a sub-association. Your governing documents, your bylaws are going to determine your responsibilities. And they're going to determine what you have to do. And you can't simply say, I'm going to delegate this responsibility to somebody. And therefore, I'm washing my hands. And if something goes wrong, it's not my fault. It is your fault because you as a board have ultimate responsibility for the bylaws. And the governing document has state law for that association and the ultimate outcome. And you use committees, certainly you can use committees. Can you get advice from committees? Certainly you can get advice from committees. But you can't absolve yourself from the responsibilities that are required of you as a fiduciary and a member of the board of directors. And on that note, we're going to go through a break and come back with more of your potential risks if you don't exercise your fiduciary vision. We'll be right back in one minute. Aloha. I'm Krista Stadler, the host of Nonprofits Mean Business 2 on ThinkTech Hawaii. Nonprofits Mean Business 2 investigates the operational challenges and costs related to managing nonprofit organizations. While encouraging our viewers to find a nonprofit organization that you're passionate about in our community. We are streamed live on ThinkTech Hawaii bi-weekly at 12 PM on Thursdays. Thank you so much for watching our show. We look forward to seeing you then. Mahalo. You're a part of a board of directors. You're obligated to support those actions for the board of directors. And at the same time, you can't go out on your own and ignore this by saying, let's just put someone else responsible for this non-hard fall. And it will be in the end your fault. Briefly looking at the next slide, which is slide 6, to recap this. A director must not permit another duty or it's just to prevent them from making an independent decision based on the best interests of the association. Let's take another example. The director gets elected by cumulative voting to an association. Because a small group that's got cumulative voting power wants to get representation because they don't like the way the board is conducting this affairs or the decisions they're making. Well, that's great. But now that's a person, the minority member of the board, and he can express and he can advocate and he can fight for what he believes in. At the end of the day, if the board makes another decision, he has, he or she, has an obligation to support it. And so, in some of these times, it involves legal matters. So can that director go back to the people who got him on the board by cumulative voting and tell him privately what happened in an executive session? Absolutely not. They've breached their fiduciary duty to their obligation, which is the association. And believe me, I've seen it before that we get so excited about what they believe they'll just cause is that they breach their duty by sharing confidential information to the board outside of a board meeting to people who don't have legal rights and to that information. And that's going to put them in a situation to do that. So let's look at what goes on to the next slide, which is conflict of interest. Under this statute, if a director has a conflict of interest, clearly, he cannot vote. In this statute, you can't vote. And you must disclose, and it must be recorded in a minute, that you have a conflict of interest. And that has an important part of protecting yourself should something go wrong down the road. What I saw recently, which seems pretty benign, is that a board of five needed to replace the roof. They were not in God's bid. All the bids were, I'll use an example, $50,000. One director says, you know, I live here. I've been a cause and assessment. I'm a licensed roofing contractor. I will do it through my cost, and I'll do it for $30,000. So look at the situation. They have a licensed roofing contractor who's prepared to do the roof of $30,000, save the association $20,000, save everybody money, and the board approved that. Yeah, they can approve that. The key is that the director who's the licensed roofing contractor has got to say, I've made a bid, and assuming the bids are all apples to apples, and my price is $30,000, and I'm disclosing I'm the owner of the roofing company that made that bid, and I'm not going to vote. And the other four vote, three to one, four to zero, and approve the contract with the owner roofing contractor, everybody has saved money and nothing is wrong. The key is that director had an obligation to disclose a conflict of interest in the minutes and then the balance of the board members and decide whether they want to make the roof happen in this case. Question, does that mean what if the board members, other board members in a separate situation say, I think you have a conflict of interest and therefore you can't vote on it? Well, the reality of it is the person who decides to have a conflict is the individual himself. The board can't vote four to zero. It's like, we're not going to let you vote on a topic if we think you have a conflict of interest. It's up to the individual, that director, to say, I have a conflict of interest. Most common time it comes up, which is kind of idiotic in my book, is when directors vote proxies for an annual meeting for the director and start to elect. And they say, oh, you have a conflict of interest you're voting for yourself. I'm sure every political candidate in the history of the world has always voted on itself in an election. And yes, the board can say, our best interest, we think these people should be candidates and they can vote proxies. That's not a conflict of interest. But the reality of it is, in fact, the individual is the one who's with the department whether it's a conflict of interest. One of the famous lawsuits here in Hawaii on this back a couple of years was an owner of board president in a timeshare association. They needed to replace all of the furniture. And the bid for the low bid for the furniture was like $3 million. And he didn't disclose he was the owner of the furniture company, they made the furniture. And so they bought the $3 million from the furniture. And then all the furniture was crap and it fell apart. And the association sued him because of the fact he didn't disclose this conflict of interest. And he voted on a matter where he had a direct pecuniary interest. You know what, that individual lost and had to pay back the $3 million to the association. Don't think you don't have any liability on this matter because what's interesting in that type of a case, the director and officer liability insurance we all buy won't cover you for willful intent and gross negligence. And when you violate the statute, that's gross negligence. And if you willfully didn't tell anybody what's going on, that's willful intent. So it can be a very expensive lesson for directors if they don't know what to do. Next slide, please. That's why this kind of review is that director or officer may be personally liable for damage, injury or loss covered by the result of the other gross negligence, performance or breach of fiduciary duties. Personal liability means you as a director or officer of association may be excluded from coverage of your DNA insurance. And they need to pay the defense cost and judgment out of your own pocket. So you're gonna take this very seriously, even though you may not like all the things that are going on. Let me see where we are. That's the last slide. So we're gonna talk about some more examples of what this means with regard to some examples of people who have breached a fiduciary duty. I gave you one example, you don't follow the bylaw. You gotta follow the bylaw to stay low. Not protecting the association's financial interest, not collecting delinquencies because you have a personal interest or know someone or don't feel it should be done. Now I want everyone to take one little moment to have a license real estate broker and give a little special warning to real estate agents who serve on condominium boards of directors. You know, we as real estate agents have that obligation and to stay low. But we have to maintain a honest opinion in the marketplace, kind of like we have to be noted for being honest and fair dealing as businessmen. And then the Hawaii Association Realtors and Hollywood Realtor Ethics requires the same thing. We maintain a professional position of honest and fair dealing. So if you're a realtor on a board and you breach your fiduciary duty, you may be jeopardizing your license by having a RICO complaint. You may be jeopardizing your relationship with the Realtor Association because you breach your duty of honesty and fair dealing. You see all the time when the real estate industry, RICO, they find you for having a DUI. You think if you potentially willfully breach your governing documents to cause harm to the association that you wouldn't be considered a person whose reputation isn't the best and you might get a fine for RICO, you could lose your license in some of the cases I've seen where you have intentionally ignored your fiduciary duties and caused harm to the association itself. You've breached your fiduciary role. So when the real estate agent, I would just tell you, you have to even be more clutching on these data. One of the big common things that creates a lot of this problem and how you can rely on, I'm gonna call it the safe haven, is get professional advice. You have a someone saying you can go self-managed and the bylaws say no, but they're saying, well, shell means they, you don't need no opinion from the lawyer. Go talk to an independent professional. That's what you're measured on is listening to professionals and following professional advice. This case and the one I gave you earlier about self-managed, the professional said no, you can't go self-managed, you can't do that. And the lawyer even quit because they went ahead and went ahead and tried to do self-management without any professional advice to support it. And so if your real estate agent on that board and you went along with it, I believe when you expose yourself to liability, if someone independently makes a complaint because it ought to be some harm, maybe done. And whenever you take actions, make sure it's always done on the board. I had another association recently that basically it's a two or two board, one person quit. The two were like the Republicans and the Democrats in Congress. They couldn't agree on who do we play as a point as the fifth rector. Well, you can go to court and get the judge to do it, but that's not a good idea. So two directors, one side said, well, you know, I don't think you're an owner. You're the trustee of a trust that I don't think you're an owner. So we're gonna go ahead and change the president. And we're gonna go ahead and write all these letters to the owner saying we have a new president. And we're gonna change all the rules and do a lot of changes. So let me just understand that a two or two board, not any professional legal advice, all of a sudden sconded with the association and tried to take adverse action. What they didn't think about is the fact. In these types of situations, the president has brought a party under my law and he went and hired a lawyer anyway and put them on notice and holding them legally responsible for all the extra costs and taking that action. This is not something to look and avoid that door. And the final thing, which really can hurt you with my call retaliation, if all of a sudden like in Molokai, they went and hired it, kind of beat up one of the owners who's causing the board all sorts of problems and that cost them a million dollars. So you've got like an institutionary thing very clearly as an important role. You've got to be independent. Your loyalty is to the association of the whole, not to your own beliefs and your own standards is to what the board majority vote, which are governing documents by law of state law set. And on that note, I wanna thank you for watching Kondo Insider. I hope you learned something today. We ran out of time, so I can't give you my 500 questions fast. And I wish to see you in a Kondo Insider next week for another exciting episode of Kondo Insider Aloha.