 Welcome to the Condo Insiders show, the show all about association living. My name is Cheryl Franklin and I'm your host today. And today we're going to be talking about the subject of fiduciary duty and why it matters. And we have an expert with us today. We have attorney Jane Sugimura. Welcome Jane. Thank you for having me. Yeah, it's our pleasure. I think Jane is one of the few experts out there on this topic. Let's dive right in. First, share with us with the audience something about yourself. Well, I'm an attorney and I practice with the firm called Clay Chapman, Iwamora, Police, and Avril. And we do practically everything except criminal and family law. So we, you know, and one of the issues is condominium law. Yeah. Let's dive right in. Why don't we kind of talk about what is fiduciary duty? What does that mean? OK, fiduciary duty is a legal. It's a legal term and it implies a legal duty. And what it describes is a relationship between basically two people and an example, a good way to describe it, to give an example, is a trustee and beneficiaries. And a trustee usually has some assets that they're taking care of a bank account, maybe some real property with investment income. And the duty of the trustee is to take care of those assets and report to the beneficiaries about the status of the assets and to maintain those assets so that they grow. In other words, grow and improve to the benefit of the beneficiaries so that when it comes time to give it to the beneficiaries, everything is increased and in value. And that's a duty that is required of condominium board members that's in the statute. And there's a statute. The condominium statute is chapter 514b. And the specific reference is 514b106 lowercase b. And that basically provides that board members shall have the association, which is all of the unit owners in an association, a fiduciary duty, and exercise a degree of care and loyalty required of an officer or a director of a corporation. And so this means that they have a legal duty. They have a legal duty. That means if they don't comply with this legal duty, they can get sued. And they can be personally liable. And so that's what they have to do. That's what makes it very important that they understand what fiduciary duty is all about, because they have it. Once you get elected to the board, you've got it. Yeah, excellent explanation, because I think we toss around that term quite a bit. And laymen, before they get on the board, they don't really know what it means. So I think that's very good information for board members to know. And it's just like you're saying that it means that they, at the end of the day, act in the best interest of all, of all the members of the association, because sometimes home owners, they get on the board for various reasons, not realizing their level of responsibility. Right, when a person joins the board, they've got to take off their personal hat. And let's say you got on the board because your big gripes, you didn't like what the resident manager was doing with landscape. And so you decide, OK, you get the votes, and you get yourself on the board, and you find out, that's not so much the resident manager. It's because there's not enough help. And that means hiring people, spending more money, and maybe raising the maintenance fees, and getting the owners upset, because the owners always get upset when the maintenance fees go up. I don't know why that is, but, and so boards are always reluctant to do that. And what I think, what boards need to know is that raising, going out, and spending money, sometimes is a good thing. Not so much a good thing is you have to do it. And in other words, if the building is deteriorating, you need to pay money to maintain it, to reduce the cost of the major repairs if you don't do anything at all. And for a board member, no, or don't take the steps to find out what needs to be done, and actually take steps to do it, means that in the future, you might have to pay a lot of money. And I guess one example is pipes. Now, now everybody is having problems with their pipes. And the problem is that when years ago, maybe five, 10 years ago, when we were all doing our reserve studies, people said clay pipes would last forever, right? And we're finding out that they don't last 40 years. They're failing. They're failing. And there's no money in the reserves. And what happens when you've got not enough money? Everybody starts pointing fingers at each other. Yeah. Oh, you should have known better. You should have done something. And because in order to fix the problem, you need to go out and borrow millions of dollars. And the owners will say, well, geez, how come you guys on the board didn't do something? And how come you're coming to me now to special assess me for this problem that you guys knew about? Didn't take action in the past. The problem is that they didn't know about it. But now they know. And now they're taking action. And it is a very hard time for both boards and unit owners. And rather than pointing fingers at each other, they should be trying to sit down and figure out a way to resolve this, to get the problem fixed, because it has to get fixed. Yeah, it has to get fixed. And it's going to cost money. And so rather than trying to blame somebody, I think the more positive thing is to say, OK, fine. Now we know that it's got to be fixed. And so now we have a number. And the issue is, how do we get the funds for that number, to pay for that number, to get the repairs done? And that's when your fiduciary duty comes to the forefront, because you can't be driven by, like you said, maintenance fees. I want to keep the maintenance fees low or not raise the maintenance fees. You, as a board member, have a responsibility to ensure that that association is fiscally sound. And the same thing is coming to the forefront now with what our aging buildings and some of those buildings don't have what fire system, sprinkler systems. And so now they're having to invite an expert to kind of look at that and evaluate the cost of that. And that's a whole other legal issue at this point. And you probably know all the intricacies of that, even with the state and what they're requiring and the statutes are going to require going forward. That's a mess. That's a really big one, because you can save lives with that. And it's very difficult for the average person who sits on the board, because most people are laymen. In other words, you don't have a particular expertise in construction or accounting or legal matters or whatnot. So most people are lay people. And what the statute basically says is that if you don't know, you must ask. It's called the business judgment rule. And the business judgment rule basically says that if you're not an expert in the plumbing issue, then you have to go out and hire an engineer. And the first thing I know with a lot of boards, that costs money. But unfortunately, you have to pay for this opinion because you have lay people on the board who don't have the expertise to make a decision for a $20 million repair. And if you're staring at replacing all of your pipes, you're talking about multimillion dollars in repairs. And you want to be able to talk to an expert to tell you. And the business judgment rule basically says that if you go out and you hire an expert, one who is qualified, you pay for their opinion, and you make a decision based on that opinion, and you've done your good faith due diligence. And if it's wrong, you can't be sued because you followed the rules. You did what was requested of you. That's all the law says, is you've got to do the best you can with the information you get. And if you're the board member and you don't know, and if your board isn't going out for an extra depending, you should demand it. You should demand it, saying, all of us were all on the hook on this. So we need to have somebody guide us because we're not experts. And I don't care if the board president has an uncle Joe who's got an engineering degree who says, oh no, or a plumber, plumbing company. And that uncle Joe says, oh no, this is how you do it. That's not an expert opinion that the board can rely on. Yeah, yeah. And that lends itself to conflict of interest as well. And a conflict of interest. And the statute also talks about that. That's part of fiduciary duty. That means that if you have a pecuniary interest in a decision, pecuniary means money, which means that if there's a decision before the board that could benefit you personally. In other words, you would benefit personally where the other board members will not. And a good example is if your husband has a plumbing company and submits a bid to replace all the pipes. And he's got a different name from you, and they don't know that he's your husband. You need to raise your hand and say, that's my husband, so I can't vote on the contract. Because you would benefit if he got the job. So that's what a conflict of interest is. And so you know. Being transparent. Yeah, so what you would need to do is to declare your conflict. And it's got to appear in the minutes. And the secretary will note that your conflict is, and that's why you didn't vote on it. Because with all board minutes, the statute says that all the ayes and the nays have to be reported. In other words, you can't say the minutes can't reflect four nays and three. It has to say board member Jones, Sugimura, Galarti, Chang, voted nay. And board members Smith, and Jones, and Harris voted aye. Has to be in the board minutes like that. So that people later on, if they want to know who voted aye or nay, know who did it. And this fully disclosed in the minutes. Fully disclosed in the minutes. Yeah, yeah. All a part of doing that due diligence, if you will. Right. Yeah. And I also find when you speak with experts, and then you take that advice, and you go out to bid, it's always a best practice to get multiple bids, and analyze them apples to apples. And then have experts look at that even, to make sure, because like you said, most board members are laymen. So they're not the experts. And their property manager is just going to advise them. They're not the experts either in all these different industries that the association is responsible for. Right. And a lot of board members, what I've seen is they like to punt and say, oh, well, I rely on my property manager for that. But what they don't understand is that the statute and the declarations say that the board shall be responsible for the management of the building. That means that when they hire a managing agent like Moana or Asosia or Touchstone, those people are vendors who are hired by the board to assist them. They're not the decision makers. The decision makers are the people who sit on the board. And they need to be able to acknowledge that and to accept their responsibility. That the property managers are there to assist them, not to make their decisions for them. The ultimate responsibility is theirs. Right. Yeah, it's the board. Yep. I agree. Well, I don't have to agree. That's the law. That's the law. Yeah. Yeah. Speaking of the law, many board members, there's a lot in the law that they need to know. And so I think it's important that maybe we speak a little bit about how our boards or how they should be educated because there's a lot to learn because you have preconceived notions before you're on the board and then you get on the board and you really get into the minutiae of how boards are run, and there's a lot to learn. And I know that a lot of property managers, I don't know if this is done universally, but generally, I understand with property managers, when you get on the board, they hand you a packet, a binder or a packet. And in the packet are the declaration and the bylaws and the house rules for that particular condominium. And some people, even some property managers even throw in a copy of 514A or B, whatever is applicable at that time. Although 514B, which is now the only statute that applies to condominiums, it's on the website. So anybody who wants to look at it can go to the DCCA, State of Hawaii, Real Estate Commission. I think if you put it in Hawaii Real Estate Commission, that will take you a whole plethora of resources. And all this stuff is on the internet. And so it's not like you have to go out and buy a statute. Like the old days. Just go on the internet and you can pull up 514B in a heartbeat. Yeah, so this is a real good spot to take a break. Let's take a break, and we will be right back. Thank you for joining us with Jane. Aloha, I'm Mellie James, host of Let's Mana Up. Tuesdays, every other Tuesday, from 11 to 11.30. This show is meant to dive into stories of local product entrepreneurs and how they're growing their companies from right here in Hawaii. I'm so thrilled to have our show kicked off. And so please join us on Tuesdays at 11 o'clock as we talk to local entrepreneurs and hear their stories. Hey, hello, everyone, and welcome to the Think Tech Hawaii studio. My name is Andrew Lanning. I'm the host of Security Matters Hawaii. We air here every Tuesday at 10 a.m. Hawaii time, trying to bring you issues about security that you may not know. Issues that can protect your family, protect yourself, protect our community, protect our companies, the folks we work with. Please join us and I hope you can maybe get a little different perspective on how to live a little safer. Aloha. Welcome back to Kondo and Sider. And today, I'm chatting with Jane Sugimara about fiduciary duty and why it matters. And before the break, we were just speaking about boards becoming educated in the statutes and their responsibility and what that entails. Why don't we talk about why it's important to comply with those statutes? OK, the reason why board members need to know about fiduciary duty and how to comply with it is because they're going to get sued. And maybe they haven't been sued yet, but according to Sue Savio, who represents a whole lot of condominium associations, I mean, Hawaii for some reason has got the largest number of D&O claims in the country. And I don't know how that happened, but it happens. And so that means that the board can get sued and to give you an example, there was a suit in Maui last year, and it dealt with the disability of a unit owner. And the board decided that he wasn't really disabled. How do they describe that? Because you have a bully for a president and a cheat who let him get away with anything he wants. Not a good mix. No, not a good mix. And so they started finding them for putting in a wood floor without so-called asking for permission, except two of the board members had wood floors. And this is a blind person. And he wasn't totally blind, but he was blind in one eye. He had a condition which made his eyes deteriorate. So he could see pretty good in the daytime, but at night in darkness, and he couldn't see peripherally. So he had to have hard floors. He couldn't have carpet because he would trip over it. Oh, yeah. Right? And then he had a cane. And so the tap, tap, tap, I guess, interfered. And what started it was a person underneath complained about the noise from the wood floor. So they started suing. I mean, they started finding these people. And it went on for over, I mean, and they find them something like $65 a day, and it went on for over 200 days. Wow. So they find them because, A, they didn't believe he was handicapped, and, B, because of the noise when there's an easy remedy for that. Right, and they didn't, you know, and because he didn't submit something. Yeah, to give him a reasonable accommodation. And they asked for a reasonable accommodation, which because they didn't believe he was blind, because they saw him walking his dog in the daytime. And he could see in the daytime. You know, he could see in daylight, but he had a condition which made his eyesight deteriorate. He couldn't drive at night. And so, but, you know, so he had a medical condition that was documented. Anyone not know that's a slippery slope. You don't want to. Because, well, for one thing, we found out in retrospect in talking to the lawyer, the property management company, this was like their first project. They had no experience. They didn't know about fair housing. And the attorney who was representing the association didn't have a clue about fair housing, and that it applied to condominiums. Wait, what? The perfect storm of, like, ignorance. Ignorance, yeah. And you had a bully. For the president. And a cheap. Oh, wow. And so finally, I mean, this went to court and it went on for about a year. It ended up with a jury verdict, a jury verdict. And then, to me, that's scary. But a jury verdict of $1.9 million against the association. So they just started there with the jury. They didn't know mediation or no. No mediation or nothing. But what happened, see, what happened is because of the fines, they started to foreclose on the unit. Oh, OK. This went from that to work. $200 days times 65 is a substantial amount of. And this is during the priority of payments period. So naturally, they were paying their maintenance fees, but everything was being applied to the penalties. And you couldn't keep, you know, you couldn't pay enough maintenance fees to pay off the $65 daily penalty. And so it was on the day that they were going to foreclose, they were doing the foreclosure auction, that the white, the names, I can't remember the last name was white, the white's attorney filed a lawsuit on the day that the foreclosure auction was happening to stop the sale. That's how it got. That's how this lawsuit started. And it ended. And even the judge tried to mediate it. It ended in a $1.9 million verdict against the association. And in that case, the board members were individually named. Oh, that's where I was going. Like, what happens thereafter in terms of that $1.9 million? OK, $1.9 million. The verdict, when the attorney moved for a verdict, the judge would not allow it to pertain to the individual board members. Even though when they were deposed, they all said, all of the eight sheet said, oh, well, yeah, the board president said we should do this, so we all did it. We all agreed with it. And this was unusual. This was unusual, because there are other circuit court cases where condominium board members have been sued. And the courts have held that they're absolutely liable, maybe personally, and not all of them. Because remember, we were talking about the board minutes and how the ayes and the ayes have to be noted. When a board member gets sued, you get a letter from the insurance company saying, thank you for the tender. We are accepting your tender under a reservation of rights. What that means is, yeah, there's an insurance contract, and you got sued, so we've got to defend you. But we don't have to defend you to the end if we find out that you guys reached a fiduciary duty. If we find out, and how do they find out? During the course of the litigation, you ask for documents, you do depositions, and the insurance company attorney looks at this. And after a while, he says, my god, these people reached a fiduciary duty. They didn't act independently. They're a cheap. They did whatever the board president told them to do. And they didn't go out and find out about disability and fair housing. And the reasonable accommodation was made in writing, and they just ignored it. And they didn't ask the right questions. And that's something that they shouldn't have done. And so in a case like that, and it has happened, and it happened at the Marco Polo many, many, many years ago where the insurance company decided to walk away and told the only thing about two of the board members, the president and the vice president, they excused everybody else. But the court in that case held the president and the vice president personally liable for breach of fiduciary duty and find them. I think the president got fined $75,000, and the vice president got fined $65,000. And this is 25, 30 years ago when that was big money. Absolutely. And what we heard is that the vice president told his unit, made his judgment, and left the state, never to be heard from again. Again, yeah. What an experience. So it does happen. And so if you're a board member and you don't comply with your fiduciary duty and you get sued, I mean, you better make sure that your homeowners has got an umbrella policy that's going to cover this claim. Because if you didn't act appropriately, by the time you get sued, it's too late. Your actions are already recorded in the board minutes. So you could be exposed to these claims. And so to me, it's really easy to be a board member and comply with your fiduciary duty. That means that you need to look at the issue that's being voted on. And a lot of times there is no issue. There's a landscaping contract. There's three contracts. And maybe the check references, the evaluate the pricing. And everybody agrees. And that's fine. The perfect world. If there's a controversy, and you have it, and it shows later that nobody did their due diligence, nobody asked for an expert opinion, like when they got the request for reasonable accommodation. Who did they send it to? Did they send it to a lawyer who knew anything about reasonable or fair housing? That's where you start. Yeah, and so if they didn't get the right legal advice, and why did they ignore that? I mean, they could have gone on the internet and probably typed in reasonable accommodation. And they would have all. These days, yeah. You would have popped up and told them, oh, no. You've got to be careful because this is discrimination. So board members need to know that they have to ask questions and they have to act independently. And you can't just vote for the president because you think that he knows everything. Because you do that at your peril. But you yourself end up in trouble. You really do. You need to be independent because somewhere down the line, you may be singled out. They say, ah, OK, he voted nay. That's fine. He may be the only one. And so yeah, we're going to protect him under the D at all. Because if you, like I said, under the business judgment rule, if you go out and you get the opinion and you follow it, even if the decision is wrong, you're protected. And that means under DNO, your carrier will protect you. Yeah. Do diligence. Yeah, do diligence. Doing the right thing, best practice. I mean, you could go on and on. But I think the show is very beneficial in educating boards. And you're also a member of the HCCA, right? And it's important for board members, I believe, to take advantage of educational classes and seminars. Right. They're out there. Yeah. They're out there? To educate, to educate, to keep you out of trouble. Right. Yeah. That's what we're trying to do. Well, I think you've been, there is so much information. And even in terms of complying, just at the end of the day, if you just, like you said, act collectively as a board, do not be a yes person, utilize your attorney. And at the end of the day, just ask. You're not sure, and bring in the experts. Right. You know, and at the end of the day, that lends itself to safe business practices as a board. As a board. So I want to thank you. Thank you so much for all that information. It's a lot to take in. But it's very necessary that boards learn these things. So that maybe one day, we won't have the largest number of DNO claims in the country. In the country. That's kind of a big deal. So thank you again for joining us. And thank you again, Jane. And please join us again. Thank you very much. Carol Franklin. Aloha.