Use of “Reply All” in Light of the Palm v. 2800 Lake Shore Drive Condominium Association Decision

While much consternation has taken place over the past few months regarding the recent Illinois Appellate Court for the First District, Fifth Division case Palm v. 2800 Lake Shore Drive Condominium Association, et. al. (2014 IL App (1st) 111290), one question we have received from multiple board of directors is whether or not the Palm decision means that board members may no longer hit “reply all” when communicating via e-mail with each other. While the Palm decision certainly has some potentially significant implications for many associations, the Palm decision should not prevent board members from communicating via e-mail and copying all board members on e-mails between a board member and the association’s property manager, attorney, accountant, etc. This article will address the use of “reply all” in relation to Palm. For our complete summary of some of the major issues and implications of the Palm decision, please see the link on our webpage, www.keaycostello.com.

In Palm, the court reviewed the definition of what constitutes a board “meeting” in the Illinois Condominium Property Act (765 ILCS 605/1 et. seq., the “Condo Act”) and ruled that meetings of the board are required to be open to owners, except in three (3) limited circumstances set forth in the Condo Act (765 ILCS 605/18(a)(9)) and that owners need to be provided notice prior to board meetings. Specifically, the Condo Act (765 ILCS 605/2(w)) defines a “meeting” of the board of a condominium association as “any gathering of a quorum of the members of the Board of Managers or Board of the Master Association held for the purpose of conducting board business.”

While not at issue in Palm, the Illinois Common Interest Community Association Act (765 ILCS 160/1-5, “CICAA”) contains the same definition for board meetings as the Condo Act in addition to a similar open meeting requirement (Section 1-40(b)(5)). Additionally, for associations not subject to either the Condo Act or the CICAA, the Illinois General Not for Profit Corporation Act (805 ILCS 105/108.21, the “NFP Act”) contains an open meeting requirement as well as a definition for board meetings which defines a “meeting” as “any gathering of a quorum of the members of the board of directors held for the purpose of discussing business of the homeowners association”.

The court in Palm addressed some board communications that take place via e-mail. Specifically, the defendant board members, according to the court, had engaged in “voting” via e-mail on at least one occasion. The Palm court held that this practice violated the requirement within the Condo Act (which also exists in the CICAA) that all votes of the Board must take place at an open meeting. Thus, Palm made it clear that, in the court’s opinion, no “voting” may take place by board members outside of an open board meeting.

However, for the purpose of determining whether the use of “reply all” in a discussion thread within a series of e-mails between board members and/or between board members and a property manager, attorney, accountant, etc. is appropriate, the court in Palm did not make a direct ruling on this issue since this was not an issue in the Palm case. Therefore, in addressing this matter, one key phrase that is used in the definition of a board “meeting” in the Condo Act, CICAA and NFP Act is “gathering of a quorum” of the board members.

Merriam-Webster’s online dictionary defines a “gathering” as “an occasion when people come together as a group” and also as an “assembly; meeting”. (http://www.merriam-webster.com/dictionary/gathering?show=0&t=1406150377). In other words, the definition of “gathering” contemplates board members physically getting together. This does not take place where one board member sends an e-mail and copies the other board members on this e-mail. Even if the definition of “gathering” is stretched to include some type of online get together, like a “google hangout” or online “chat” function, where board members could communicate electronically in real time, this would still not cover a situation where a board member sends an e-mail and copies the other board members on the e-mail.

A board member sending an e-mail and copying the other board members, or hitting “reply all” in response to an e-mail from a property manager, attorney, accountant, etc., is no different in practice than a board member who mails a physical letter and makes copies of that letter and mails the copies to each of the other board members. In that scenario, no “gathering” has occurred. The fact that an e-mail can arrive to the other board members within a few seconds, rather than within a few days like a mailed letter would, does not transform this means of communicating into a “gathering”. Without a “gathering”, no “meeting” of the board has occurred according to the definitions outlined above from the Condo Act, CICAA and NFP Act.

Finally, while it is customary, and often necessary for practical purposes, for one officer to communicate with property managers, attorneys, accountants, etc. on behalf of the entire board in most cases, copying all board members on correspondence can help the other board members stay informed on matters concerning the association. Failure to use “reply all” or copy all board members on correspondence with a property manager, attorney, accountant, etc. could create a situation where board members are left out of the information loop on association matters.

In summary, the court in Palm addressed board members voting via e-mail. But, there is no language in the Palm opinion specifically prohibiting board members from corresponding with each other via e-mail, or copying each other on e-mails with third-parties such as property managers, attorneys, accountants, etc.

This is a summary of a recent case many of you may already be aware of, Palm v. 2800 Lake Shore Drive Condominium Association, et. al., a case recently decided by the Illinois Appellate Court for the First District, Fifth Division. The First District Appellate Court initially issued its opinion on March 21, 2014 as a Rule 23 order, which meant the court’s opinion was not binding (except in a few very limited circumstances) on any individuals or entities other than the parties involved in this particular case. Attorneys in our office reviewed the original court opinion within days after it was released. At that time, though, our office did not send out mass “alerts” or other e-mail blasts on this case advising association clients that significant changes in the law had been made as a result of Palm because, legally speaking that was not true. We had also learned that the First District Appellate Court was considering publishing the opinion, and therefore deemed it prudent to wait for the First District Appellate Court to make its decision on publication.

The First District Appellate Court, on May 2, 2014 published its opinion. The case citation is 2014 IL App (1st) 111290. It is therefore important for all associations, and in particular board members, to understand the Palm case and the implications. Please note, that there is still a possibility that this case could be appealed to the Illinois Supreme Court.

The First District Appellate Court’s decision in Palm is a fifty-four (54) page opinion covering numerous issues and containing approximately fifteen (15) pages of facts. It is not easy to read. The case has been pending for fourteen (14) years and appealed multiple times. This summary will address what we consider to be the most pertinent facts as well as the most significant rulings. If you would like a copy of the full court’s opinion in this case, please contact our office and we would be happy to provide it to you.

Facts of the case:

The Plaintiff in the case, Mr. Palm, was a board member for his condominium association for six (6) years. In 1999, while not serving on the board, he requested certain documents from the association related to association management. The board did not produce the documents. This led Mr. Palm to sue the association, the board of directors and the board president. Palm did not seek monetary damages in his lawsuit; rather, he sought declaratory and injunctive relief. In other words, he asked the court to decide certain matters and enter an order directing the association and board members to take certain actions.

With respect to the allegations made by Palm, he claimed the board:

  1. Regularly acted outside of open meetings by conducting business at workshops, conducting e-mail votes, and canvassing for votes via telephone;
  2. Violated the association’s declaration and bylaws by:
    1. making decisions without a majority vote of the board,
    2. making certain expenditures without the required owner approval as set forth in the declaration,
    3. failing to handle reserve funds in the manner provided within the declaration,
    4. transferring excess operating funds to the reserve fund; and
    5. failing to provide proper notice of board meetings.

Decisions by the Appellate Court in the case:

Workshops:

The defendant board members admitted it had been a regular practice for board members to get together in workshops to discuss association and board business. They also admitted the workshops were not open to owners and notices of the workshops were not given to owners. The court reviewed the definition of what constitutes a board “meeting” in the Illinois Condominium Property Act (765 ILCS 605/1 et. seq., the “Condo Act”) and ruled that the workshops were meetings of the board which were required to be open to the owners and for which owners needed to be provided prior notice.

The Condo Act (765 ILCS 605/2(w)) defines a “meeting” of the board of a condominium association as “any gathering of a quorum of the members of the Board of Managers or Board of the Master Association held for the purpose of conducting board business.” The court decided that all board discussion, consideration of association matters, and all voting by the board must occur at board meetings open to the owners. According to the court, the only exceptions to the open meeting requirement are those found in Section 18(a)(9) of the Condo Act. These are the “executive session” exceptions. Executive session is a closed portion of a board meeting held “(i) to discuss litigation when an action against or on behalf of the particular association has been filed and is pending in a court or administrative tribunal, or when the board of managers finds that such an action is probable or imminent, (ii) to consider information regarding appointment, employment or dismissal of an employee, or (iii) to discuss violations of rules and regulations of the association or a unit owner’s unpaid share of common expenses.” However, the court reiterated that all votes, even for those matters which can be discussed in executive session, must take place at the portion of a meeting which is open to the owners.

[As a note for non-condominium associations, the Illinois Common Interest Community Association Act (765 ILCS 160/1-5, “CICAA”) contains the same definition for board meetings as the Condo Act in addition to a similar open meeting requirement (Section 1-40(b)(5). For associations not subject to either the Condo Act or the CICAA, the Illinois General Not for Profit Corporation Act (805 ILCS 105/108.21, the “NFP Act”) contains an open meeting requirement as well as a definition for board meetings which defines a “meeting” as “any gathering of a quorum of the members of the board of directors held for the purpose of discussing business of the homeowners association”.]

Voting by e-mail and canvassing of board members:

The court determined that the board conducted voting via e-mail by distributing ballots to board members via e-mail on at least one matter. While it was not clear to the court how extensive this practice was, the court reiterated that the Condo Act requires all votes take place at an open board meeting, and any voting that takes place outside of a board meeting is in violation of the Condo Act.

Delegation to property manager

The practice engaged in by the defendant board, and which was memorialized in the management agreement between the association and its property management company, was for the property manager to solicit several bids for projects and then to seek the input from a few, but not all, of the board members. Ultimately, certain association contracts were entered into with the approval of less than a majority of the board. The court ruled this practice violated the association’s declaration.

The court’s ruling on this issue is very specific to the association’s declaration. The declaration contained a relatively common provision that allowed the board to delegate its authority to enter into contracts to the property manager. What the court ruled that the association could not do, though, is delegate its authority to the property manager and then designate a few board members who would have the final say on approving a contract. In reviewing the language of association’s declaration, the court ruled that approval of contracts required a vote of the entire board. Therefore, the board had to choose to either reserve approval on contracts for a vote by the entire board at an open meeting or, alternatively, choose to completely delegate the authority to enter into contracts to the property manager without a further board vote.

Fiduciary duty, business judgment and obtaining appropriate advice

As mentioned earlier, Palm claimed the association board members transferred surplus association income into reserves and commingled reserve funds and operating funds. Palm alleged that both of these practices were prohibited by the association’s declaration and therefore the board members breached their fiduciary duty to the owners by taking these actions. What is relevant from this part of the case for other associations is not the court’s interpretation of the specific language of the association declaration in this case, but rather the procedures board members should follow.

Every board member owes a fiduciary duty to the owners in his/her respective association. Board members must act in a manner reasonably related to the exercise of their fiduciary duty, and if board members fail to do so the board itself, and the individual board members, may be liable to the owners. But, when board members exercise business judgment in making decisions, a certain amount of insulation from claims of breach of fiduciary duty can be achieved. The business judgment rule provides that unless there is evidence of bad faith, fraud, illegality or gross overreaching on the part of board members, then courts will not interfere with the exercise of business judgment. As the court explained, the purpose of this rule is to protect board members who have acted carefully and diligently in performing their duties from being subjected to liability for honest mistakes in judgment. However, as the court also pointed out, if board members fail to exercise due care in making decisions, then they cannot use the business judgment rule to protect them from potential liability.

To be entitled to protection under the business judgment rule, the court stated that board members must inform themselves of material facts necessary to make decisions. Specifically, the court stated that “if a board seeks legal advice before reaching its decision and relied on that advice in reaching its decision, it will be found to have properly exercised its business judgment.” Based on statements made by the court elsewhere in the opinion, it would appear that had the board members clearly shown they had obtained legal advice and were following this advice when they took the actions Palm complained about, this case may well have turned out very differently.

Notice of meetings

Palm claimed that even when the defendant board members provided notice of board meetings the notice was improper. This is another instance where the court’s decision turned on the specific language of the declaration for this particular association. While Section 18(a)(9) the Condo Act provides that notices of board meetings must be “mailed or delivered,” the court found that the declaration in this case required that meeting notices must be “mailed.” It had been the practice of the association to mail notices to off-site owners, but hand deliver notices to on-site owners. The court decided that this was a case where the declaration required notice via one particular method (i.e. mailing), and therefore providing notice to owners via a method other than mailing was a breach of the board members’ fiduciary duty.

Key points from the case:

  • Board “workshops,” “working sessions” or “planning sessions,” where a quorum of the board members gather for the specific purpose of conducting and/or discussing board business in a closed session without prior notification to owners should not take place.
  • Anytime a quorum of the board members gather for the purpose of conducting and/or discussing board business, that is a board meeting which must be open to owners (except for those three (3) limited executive session exceptions provided by statute) and for which owners must be provided prior notice.
  • All votes by board members must take place at an open board meeting. [As a note, the court did not address the provision of the NFP Act (805 ILCS 105/108.45) which provides that, unless prohibited by the articles of incorporation or bylaws, any action that can be taken at a meeting of the board of directors “may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be approved in writing by all of the directors.”]
  • Board members must understand and follow the provisions of their association’s governing documents as well as Illinois law.
  • If board members obtain advice from a qualified professional on a particular topic, such as the association’s attorney, accountant, insurance agent, etc., as applicable, and the board members subsequently follow that advice, the board members should be protected by the business judgment rule if the board’s decision on that particular topic is challenged by an owner. When obtaining this advice, the board should obtain a specific, written opinion from the individual(s) providing the advice.

Action points for association boards moving forward:

While we are aware that the Palm decision has caused much consternation amongst a number of association board members over the past several weeks, it sets out clear steps for board members to take to protect themselves and their respective associations from liability. As a starting point, every board member, if he or she has not done so already, should become familiar with the terms of his or her association’s declaration and bylaws and any other governing document. Board members are obligated to follow these governing documents. Simply doing something because that is the way it has always been done, or because that is the way it was done when the board member joined the board, is not appropriate if the governing documents contain language to the contrary.

The board members of each association should ask the following questions:

  • Does your board regularly convene “workshops” to discuss board business?
  • Does your board vote on association business?
  • Does your board, without a vote, permit management to enter into contracts on behalf of the association?
  • Does your board transfer surplus funds into the reserve account at the end of the year?
  • Does your board pay reserve expenses from its operating account?
  • Does your association provide proper notice for board and membership meetings?

The above questions relate to issues that were discussed in the Palm case, however, much of this case was decided on the specific terms of the declaration and bylaws for the association involved.  Therefore, if you are uncertain about whether your association is complying with its governing documents and Illinois law, you should obtain a written legal opinion as to whether your association is carrying out its business appropriately.

Based on our understanding of the court’s decision, had the board in Palm obtained a legal opinion from the association’s attorney before taking the actions it did, and had it followed that legal advice it should have obtained, the court may not have found the board members to have violated their fiduciary duties.  Relying on a general summary of the Palm case such as this, or relying on something you may have heard at a seminar or read in the newspaper is likely not a sufficient basis for a board to claim protection under the business judgment rule. Since every association is different, and every set of declaration and bylaws is different, a board with questions on how it should conduct itself should only rely on a specific legal opinion from the attorney for its association.
Should you have any questions related to the Palm case, or should you wish to have one of our attorneys provide your association with a legal opinion related to the way you operate, please do not hesitate to contact us.