A recent summary judgment decision issued by the Suffolk Superior Court has endorsed the employment of the business judgment rule in assessing the decisions of a condominium association concerning the amount of insurance maintained. In Joseph Cimino v. Lynn Ornstedt et al., Suffolk Superior Court Civil Action No. 1984CV01991, the Court allowed the condominium association’s motion for summary judgment, dismissing the plaintiff unit owner’s claims for breach of fiduciary duty and negligence.
While not an appellate decision, the Court’s determination to employ the business judgment rule, which preserves board decision making except in matters of bad faith, self-dealing or when there is a conflict of interest, is beneficial for condominium associations.
The case arises out of unfortunate circumstances. In June 2016, a fire began at the 32-34 Hancock Street Condominium (“Condominium”), causing significant damage to the building and units. At the time, the Master Policy provided $4.1 million of property damage coverage, $2 million of liability coverage, and $500,000 of demolition and code upgrade coverage. Relative to the procurement of insurance, the 32-34 Hancock Street Condominium Association (“Association”) had relied upon its property manager, consistent with authorizations granted in the Condominium’s governing documents. The property manager, in turn, worked with a licensed insurance advisor to obtain coverage. The Association’s board members were not aware that there were other options for building code upgrade coverage and had been assured that they had sufficient coverage.
Because the building was constructed in or around 1974, the City of Boston required substantial code upgrades in connection with the restoration work, which upgrades totaled $4.1 million. The total insurance shortfall related to the project totaled $3.6 million, which was to be paid by the Association. The Association levied the unit owners, and the plaintiff unit owner’s share was $326,264. The plaintiff, Joseph Cimino, subsequently initiated suit against the Association, asserting claims for breach of fiduciary duty and negligence. On summary judgment, the Court held in favor of the Association and dismissed Mr. Cimino’s claims.
First, the Court quickly disposed of Mr. Cimino’s claim for breach of fiduciary duty, citing the well-recognized principle that board members of an organization of unit owners owe their duties to the association or trust, itself, rather than any individual unit owner. In support of same, the Court cited to decisions of the Supreme Judicial Court in Office One, Inc. v. Lopez, 437 Mass. 113, 125 (2002), and Cigal v. Leader Dev. Corp., 408 Mass. 212, 219 (1990).
Second, the Court considered whether the Association was entitled to summary judgment on the claim for negligence. In support of its position, the Association argued that its actions should be subject to the business judgment rule, “which grants considerable deference to a condominium board’s decisions and prohibits judicial inquiry so long as the board acted for the condominium, within the bounds of its authority, and in good faith.” After surveying the trial court decisions employing the business judgment rule, the Court concluded that it was appropriate to employ that standard of review in this case. The Court noted that the business judgment rule has been used to assess board conduct in cases involving “financial and management decisions” and, as this case concerned the procurement of insurance, it was appropriate to use the standard.
Upon review of the facts, the Court found that there was no evidence of bad faith, a conflict of interest, or self-dealing and, thus, the Association’s decision making was an exercise of its business judgment. In reaching such conclusion, the Court noted that the Association’s board of managers had employed a property manager to procure insurance and relied on the property manager’s recommendations, in accordance with the Condominium’s governing documents. Board members had inquired as to the sufficiency of coverage, and none of the members of the Board were aware that there was additional coverage available. As the Board members acted in good faith and complied with the governing documents, they did not act negligently.
For good measure, the Court did also assess the Board’s conduct under the reasonableness standard, which Mr. Cimino had argued was the appropriate standard. The Court concluded that the Board had acted reasonably in retaining its property manager, relying on its property manager, and accepting its representation that coverage was sufficient.
While not an appellate decision, the Court’s determination to employ the business judgment rule, which preserves board decision making except in matters of bad faith, self-dealing or when there is a conflict of interest, is beneficial for condominium associations. The case will constitute another arrow in the quiver of association counsel to argue that association actions and decision making should be assessed utilizing the business judgment rule. The case also serves as a reminder that it benefits all associations to confirm that adequate insurance coverage, including building code upgrade coverage, is in place.