Homeowners May Bring Derivative Claim Against Association’s Board of Directors, Appeals Court Rules

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A group of Chicago condo owners may proceed with a derivative lawsuit against their homeowners’ association’s Board of Directors, the First District Court of Appeal has ruled. In Davis v. Dyson, No. 1-07-2927 (Ill. 1st Dec. 19, 2008), twelve condo owners sued individuals formerly on the board of directors after the board members failed to detect embezzlement by an outside property manager. Furthermore, the homeowners alleged, the former board members failed to get enough insurance or get an attorney's advice on their duty to do so, resulting in losses and out-of-pocket costs of more than $800,000 after the embezzlement was detected.

The homeowner plaintiffs sued for breach of fiduciary duty under two counts -- one derivative claim on behalf of the association and one claim as individual homeowners whose property values were allegedly harmed by the directors' inaction. In response, board members argued that the homeowners lacked standing to sue in both claims -- for the individual claim, because the property value claim did not constitute a separate and distinct harm to the individual homeowners. For the derivative claim, the board members argued that only the board itself may bring a derivative action against third parties. The trial court agreed and dismissed both claims; the homeowners appealed.

In its analysis, the appeals court pointed out that shareholders have an undisputed right to sue their own boards of directors; the question was whether they may file a derivative claim against third parties (in this case, the former directors). The court concluded that they could, pointing out that the right to file a derivative suit puts homeowners into the association's shoes. This means that they are acting on behalf of the association, the opinion said, not usurping its undisputed right to sue third parties. The relevant section of the Illinois Condominium Property Act does not prevent derivative claims by homeowners, the court wrote, so it saw no reason to deviate from caselaw on derivative actions.

However, the individual claims by the homeowners, that their properties' values had declined because of the board's inaction, still failed, the court decided. It found that damage to property values can be separate and distinct even if it's the same kind of damage -- ownership is separate, and thus harm to ownership is separate. More persuasive to the court was the defendants' argument that the damage to the units' value was not direct damage, but an indirect result of damage done to the entire building by the embezzlement. Again relying on caselaw on derivative actions, the court pointed out that shareholders may not sue as individuals when the harm they allege is indirect and shared by all shareholders.

Finally, the court ruled that alleging violations of the Condo Act and the association's bylaws was sufficient to allege breach of fiduciary duty. It also dismissed the defendants' contention that allowing the suit would impermissibly interfere with directors' business judgment, because directors must exercise due care, and whether they did so is a question of fact that should be tried. Thus, the appeals court affirmed the dismissal of the individual claims but reversed the dismissal of the derivative claim and sent it back to the trial court.

With offices in Chicago and Oakbrook Terrace, Illinois, DiTommaso-Lubin represents shareholders, homeowners and others who need help asserting their rights after a board refuses to do so. Our Chicago and Naperville area real-estate trial attorneys handle many different types of real-estate litigation. We handle both individual consumer protection lawsuits and consumer class actions on behalf of clients throughout Illinois, as well as in partnership with firms in other states. If you would like to learn more, please contact us to set up a consultation.