Most of the time, Condominium Board members have the best interest of their fellow Unit Owners at heart. They try to follow the law and do what is in the best interest of the Association. But every so often, there is a bad egg on the Board. Embezzlement of corporate funds, fraud and self-dealing can deplete the Association’s assets and harm the other owners. In this circumstance, individual shareholders may want to sue the offending Board member to recoup the misappropriated funds. However, such a lawsuit is easier said than done.
A lawsuit against rogue Board members by Unit Owners on behalf of the Association is called a derivative action. Before filing a derivative action, a shareholder must first send a 90-day demand letter to give notice to the Board of Directors of the alleged breaches of fiduciary duty to the Association. The Board can then either appoint an independent committee to investigate the claim, do nothing, or reject the claim. If the Board does nothing for 90 days, if they reject the demand before the expiration of 90 days, or if irreparable harm would result from waiting 90 days, then the Unit Owner can file a derivative action against the offending Board member. This 90-day demand letter is a precondition to a lawsuit created by Florida Statutes 617.07401, so any lawsuit filed without the 90-day letter will be dismissed.
Additionally, there is an issue of whether the Unit Owner’s lawsuit is on behalf of the Association or on his own behalf. Cases brought on behalf of the individual Unit Owner do not require the 90-day demand letter for a derivative action. A recent Florida Court of Appeals, First District, case, Iezzi Family Ltd. P’ship v. Edgewater Beach Owners Ass’n., Inc., 254 S.3d 584 (1st DCA 2018), discusses at length the difference between a case brought on behalf of the Association versus a case brought on behalf of an individual Unit Owner. The difference comes down to the injury. If the injury is to every member of the Association, then it will be a derivative action. For example, if the Board of Directors embezzles the reserves for a new roof, all owners would be injured equally, even if all owners are not required to pay the exact same amount towards that reserve fund.
On the other hand, when injuries are to an individual owner, then it is not a derivative action and no 90-day demand letter is required. For example, if the Board Member embezzled the roof fund and thus did not repair the roof, and failure to repair the roof results in water damage that affects a particular Unit and not every Unit, then the individual can sue the Board directly without the need for the 90-day demand letter. Thus the injury to the individual shareholder must be unique from the injuries to other Unit Owners of the Association to avoid having to send the 90-day demand letter.
Finally, even if you can sue the Board member, a Board member will only be liable when his actions amount to fraud, self-dealing, criminal activity, unjust enrichment, and/or betrayal of trust. Ordinary neglect of duties will not do. There must be some evidence that the offending Board member willfully and intentionally veered from his duties to protect the best interests of the Association.
In sum, a derivative action suit can be an effective way to recoup misappropriated Association funds. But members must be careful to follow all preconditions before jumping headlong into a lawsuit.
