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Condominium Law FLASHPOINTS July 2020

July 15, 2020Print This Post Print This Post

Kenneth Michaels, Jr., Lakelaw, Chicago
312-588-5000 | E-Mail Kenneth Michaels, Jr.

Court Recognizes Action for Breach of Fiduciary Duties Against Bulk Sale Purchaser of Condo Unit Notwithstanding §15 of Condominium Property Act

In the October 2018 Condominium Law FLASHPOINTS (available in the IICLE® Online Library to subscribers), we discussed potential problems and deficiencies under §15 of the Illinois Condominium Property Act, 765 ILCS 605/1, et seq., which provides for bulk sales of units. Section 15 of the Act was amended, effective January 2018, to enhance owner protections and provide a process for disputing the amount a dissenting unit owner could obtain through objecting to the sale within a specified time. As illustrated in the case considered this month, Kai v. Board of Directors of Spring Hill Building 1 Condominium Ass’n, 2020 IL App (2d) 190642, the legislated process for disputing the sale price of a unit does not exculpate condominium directors from their fiduciary duties.

Section 15 of the Act

Bulk sales of condominiums to a single purchaser occur when a supermajority of unit owners approve a contract for the sale of all units in a condominium property. An offer is made to purchase all the units. Because the common elements and land are owned by all the unit owners as tenants in common, the purchaser acquires all the condominium property. Similar to corporate mergers or sales of substantially all a corporation’s assets, these offers may have been solicited by the association through marketing or the offers may reflect a hostile takeover.

The condominium board informs the unit owners of the offer; informational meetings are held; negotiations ensue; unit owners evaluate whether sufficient funds will be generated to pay mortgages and to provide a return on investment; and unit owners vote to approve or disapprove the sale. Section 15 of the Act provides that when there are four or more units, if 75 percent or more of the unit owners approve the sale, the dissenting owners must comply and sell their units. The condominium instruments may provide for a higher percentage for approval. Also, home-rule municipalities, such as Chicago, have increased the approval figure to 85 percent.

If a unit owner votes against an approved sale and files a written objection with the board within 20 days of the meeting in which the sale was approved, the unit owner is entitled to the greater of (1) the value of his or her unit based on a fair appraisal or (2) the outstanding balance of bona fide debt that the owner incurred in acquiring or refinancing the unit. Under either approach, the amount of unpaid assessments or charges due from the unit owner are deducted from the distribution to the owner or lender. The objecting unit owner also may receive reasonable relocation costs based on a federal regulation.

If the dissenting unit owner(s) and association cannot agree on a value for his or her units, the dissenting unit owner designates an expert in property valuation, such as an appraiser, the purchaser designates its expert, and the two experts designate a third expert. The panel of experts then determines the value of the dissenter’s unit based on a majority of two.

Facts in Kai

The appellate court relied on undisputed facts and allegations in the plaintiffs’ second amended complaint because the appeal arose from the dismissal of the complaint. Thirty unit owners sued the boards of directors of four condominium associations, a master association, the prospective purchaser, and three individuals who were on the condominium boards, who also controlled the owner of more than 75 percent of the units in all but one association and who also controlled the purchaser. The plaintiffs alleged that the directors had breached their fiduciary duties in connection with the bulk sale of units in the buildings. The trial court dismissed the second amended complaint, finding that the sole remedies available were those provided under §15 of the Act. Only one unit owner, Maureen Jordan, appealed, and the appellate court reversed the trial court on three counts and affirmed on a fourth count.

Each of the six buildings in the condominium complex had more than four units so a supermajority of 75 percent was required to approve the sales contract. Each association had five directors. The plaintiffs were all from Buildings 1, 4, 5, and 6. The sole appellant owned a unit in Building 1 and a unit in Building 6. 2020 IL App (2d) 190642 at ¶4.

The three individual defendants were the men who controlled one of the LLC defendants, which owned all the units in Buildings 2 and 3 and more than 75 percent of the units in Buildings 4, 5, and 6. It also owned a majority of units in Building 1. The three individuals, which the court called the “Defendant Board Members,” caused themselves to be elected to each of the condominium boards and to the master association board. Therefore, they effectively controlled all the associations. 2020 IL App (2d) 190642 at ¶5.

In 2017, the Defendant Board Members decided to acquire any remaining units that they did not own in the complex through §15 of the Act. As the appellate court noted, from their position they could approve the use of association funds to pay for lawyers and appraisers, suppress any dissent, and block other potential buyers. 2020 IL App (2d) 190642 at ¶7.

In June 2018, the unit owners received notices of a July 9 meeting with a copy of a contract to purchase all the units from a different company controlled by the Defendant Board Members. The contract prices offered were substantially less than what units sold for in 2016. The entity that already owned most of the units, and was controlled by the Defendant Board Members, was not required to transfer ownership to the new entity under this contract; it would be deemed to have done so. The appellate court noted that this contract provision would presumably reduce the transfer taxes and other costs associated with transferring ownership for the Defendant Board Members. The contract could be terminated at any time by the buyer entity. It also contained “a purported release of personal liability for association board members. The overall effect of the contract was to oust the minority unit owners on terms favoring the defendants.” 2020 IL App (2d) 190642 at ¶8.

The July 9 meetings were short. For Building 1, the Defendant Board Members realized after starting the meeting that they did not have the requisite 75-percent vote to approve the contract so they prohibited discussion, holding a vote, or allowing a board member to videotape the meeting. Meetings for Buildings 4, 5, and 6 proceeded without any discussion allowed; the Defendant Board Members controlled more than 75 percent of the vote in these three buildings so the contract was readily approved. With the exception of Jordan, all the plaintiff unit owners filed written objections to the sales within 20 days of the meetings, as required by §15. 2020 IL App (2d) 190642 at ¶9.

The plaintiffs sued shortly thereafter. After motion practice, the second amended complaint averred four counts: I, breach of fiduciary duty; II, constructive fraud (on same facts as Count I); III, recission; and IV (also referred to as Count W in the opinion), civil conspiracy between the defendants and buyer to deprive the plaintiffs of fair value of their ownership interests. No claim asserted that the defendants violated §15. 2020 IL App (2d) 190642 at ¶¶10 – 11.

The defendants moved to dismiss pursuant to §2-619 of the Code of Civil Procedure, 735 ILCS 5/1-101, et seq., arguing that the procedure under §15 was the sole remedy available to dissenting unit owners in the event of a bulk sale, thereby barring claims based on fiduciary duties of the directors. The trial court granted the motion but kept the case open to monitor the appraisal process under §15. Under the contract, owners of one-bedroom units would receive $83,475. 2020 IL App (2d) 190642 at ¶8. The appraisers’ subsequent report found that the value of a one-bedroom unit was between $105,000 to $115,000 depending on its condition. The trial court accepted the appraisers’ report and entered an order that all claims had been disposed and the order was final and appealable. Jordan, who had not objected in writing and was, therefore, not entitled to the benefit of the appraisers’ report, was the only plaintiff to appeal. 2020 IL App (2d) 190642 at ¶12.

The Appellate Court’s Analysis

The appellate court noted that although Counts I, II, and IV each presented separate legal theories, they were all essentially premised on the law of fiduciary duties. Each count raised the same question, namely: “Was §15 intended to supplant all other causes of action, including those based on a breach of fiduciary duty?” 2020 IL App (2d) 190642 at ¶17.

After a brief review of some principles of statutory interpretation, the court observed that “[t]he recognition of fiduciary duties (and a cause of action for the breach of those duties) has a centuries-long history in the common law.” 2020 IL App (2d) 190642 at ¶19. The defendants argued that the procedures under §15 were intended to displace any common-law remedies. Id. The appellate court rejected this argument.

Common-law rights and remedies remain in full force in this state unless expressly repealed by the legislature or modified by court decision. [Citation.] A legislative intent to alter or abrogate the common law must be plainly and clearly stated. [Citation.] As a consequence, “Illinois courts have limited all manner of statutes in derogation of the common law to their express language, in order to effect the least — rather than the most — alteration in the common law.” McIntosh [v. Walgreens Boots Alliance, Inc.], 2019 IL 123626, ¶30, 434 Ill.Dec. 189, 135 N.E.3d 73 (quoting Rush University Medical Center v. Sessions, 2012 IL 112906, ¶16, 366 Ill.Dec. 245, 980 N.E.2d 45). 2020 IL App (2d) 190642 at ¶19.

The court found that §15 did not express any legislative intent to alter common-law fiduciary duties, and no such intent can be inferred from the statute. Indeed, §18.4 of the Act imposes a fiduciary duty on directors serving on the board. The court concluded that the fiduciary duty remains in full force and “applies to the bulk sale of condominiums under Section 15.” Id.

The court rejected as straw men the defendants’ arguments that nothing in §15 prohibits directors from owning a majority of the units, voting in their own interests, or forcing a bulk sale if sufficient votes approve so. The court agreed that nothing in §15 prohibits directors from owning an interest in the bulk purchaser but noted that nothing in §15 approves such self-dealing. 2020 IL App (2d) 190642 at ¶20.

The appellate court also rejected the defendants’ argument, characterizing it as convoluted, that the fact that the bulk sale buyer appoints one of the appraisers in the event of an objection, rather than the majority of unit owners (whose share in the purchase price may be diminished in the event the appraisers find a higher value for the dissenter’s units), demonstrates that the legislature contemplated that the buyer could be the same as the majority unit owners and, therefore, §15 is the only remedy available. 2020 IL App (2d) 190642 at ¶21. The court offered a better explanation why the buyer is allowed to select one of the appraisers. When there is no self-dealing, both the majority of unit owners and dissenters are interested in obtaining the maximum price; therefore, the market is functioning as it should. The buyer must be given a voice to protect its interest in the process. When the majority of owners and buyers both seek a lower price, the market has been distorted. This, combined with the fact that the dissenters cannot refuse to sell, can result in substantial unfairness. The court noted that these circumstances make it more important that fiduciary duty actions be available. 2020 IL App (2d) 190642 at ¶22.

The court also rejected the defendants’ argument that the record was not complete to define their fiduciary duties. 2020 IL App (2d) 190642 at ¶23. It also refused to consider the defendants’ reliance on an unpublished Rule 23 order cited extensively in their brief for the proposition that acting in one’s self-interest is not a breach of fiduciary duty. 2020 IL App (2d) 190642 at ¶24. The court went further and relied on several cases recognizing heightened duties of candor, rectitude, care, loyalty, and good faith as being owed by directors as fiduciaries to unit owners. 2020 IL App (2d) 190642 at ¶25. The court summarized factual allegations from the complaint and found “[w]e have no difficulty in concluding that, if proven, these allegations could amount to a breach of the defendants’ fiduciary duties.” 2020 IL App (2d) 190642 at ¶26. The court also rejected the defendants’ argument that their only fiduciary duty was to comply with §15. 2020 IL App (2d) 190642 at ¶27.

Regarding Count III seeking recission, the appellate court agreed that recission is one of several equitable remedies available, in addition to injunctive relief, when a confidential relationship has been breached. 2020 IL App (2d) 190642 at ¶¶33 – 35. “Thus, the trial court erred in holding that recission was unavailable as a matter of law.” 2020 IL App (2d) 190642 at ¶35. However, the court accepted the defendants’ argument that given the lapse of time on the sale, more than a year, it would be less equitable to rescind the sale.

Moreover, we note that Jordan seeks punitive damages in this suit. Such damages are potentially available when a transaction involved a breach of fiduciary duty . . . , and they can be an appropriate avenue of relief when restoring the parties to their initial positions is not possible or advisable. [Citations omttied.] 2020 IL App (2d) 190642 at ¶36.

Therefore, the court affirmed the dismissal of the recission count and reversed and remanded the other three counts.

For more information about condominium law, see CONDOMINIUM LAW (ILLINOIS) (IICLE®, 2016). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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