In our recent article, 'Bulk Sales in Chicago’s Condo Market,' (https://chicagocooperator.com/article/bulk-sales-in-chicagos-condo-market ), CooperatorNews Chicagoland examined the unique circumstances governing bulk sales in Illinois. To better understand the realities and real-world repercussions of these bulk sales, we thought it might be instructive to take a closer look at one case study: KAI v. Board of Directors of Spring Hill Building 1 Condominium Association.
Spring Hill Condominium Association consisted of multiple buildings, each its own association under a master association, Spring Hill LLC, which was governed by multiple directors representing the individual building communities. When the community moved to convert from its initial ownership model, the bulk sale was to be made to Mosaic Beverly FMC LLC - which incidentally was controlled by that same group of directors. The sale process began in 2017, with a contract finalized in June of 2018. In 2019, a meeting was convened to review the contract. The contract price turned out to be less than the market value two years earlier. In one of the buildings, the board was unable to attain the 75% vote necessary to approve the contract. They then denied any discussion of the contract offer, or holding a vote. Some of the buildings in the master association had a quorum - they took a vote, but did not permit discussion. Additionally, the contract for the remaining buildings were quickly approved because the seller owned 75% of the units. By October 2019, Spring Hill LLC owned a majority of units in the several buildings.
All of the individual owners sued the boards of several of the associations, the master association, the prospective purchaser, and several board members individually for an array of alleged misdeeds, including breach of fiduciary duty; constructive fraud; recission (letting them get out of the deal); and even civil conspiracy between defendants and buyer to cheat the owners out of the fair value of their ownership interests.
The Decision & Appeal
Sima Kirsch, an attorney in Chicago specializing in community law issues, explains what happened next: “The primary court found the sole remedy to be that which is provided under Section 15 of the Illinois Condominium
Kirsch explains further that one of the plaintiffs’ cases proceeded to the Appellate court, which found that the meetings around the sale were few and short, and that at those meetings where a quorum was present to vote, the vote was taken without discussion. “Further,” she says, “the court indicated the contract did not require Spring Hill LLC to turn its units over to the purchaser, and that it contained a release of personal liability. The court noted that this was obviously done to save money, transfer taxes etc. The Appellate court observed that the overall effect of the contract was to oust the minority unit owners on terms favoring the defendants. The court further noted that ‘In preparation for this sale, [members] used their positions on the defendant boards to approve the use of association funds to pay for the services of lawyers and appraisers. They also could suppress dissent and block other potential buyers from being considered. The defendants additionally argued that nothing in Section 15 bars board members from owning a majority of units, voting in their own interest or forcing a bulk sale, if sufficient votes favor that. The court agreed - however it called them strawmen and opined that no one would dispute that.”
The Essential Question
“In the end,” Kirsch says, “the court noted that, ‘Although these counts assert different legal theories— all of them depend on the application of the law of fiduciary duty. Each claim thus raises the same legal question. Was Section 15 intended to supplant all other causes of action, including those based on a breach of fiduciary duty?’”
According to the Appellate court decision, “The recognition of fiduciary duties (and a cause of action for the breach of those duties) has a centuries-long history in the common law. Defendants ask the court to overlook this duty and rely on Section 15. In essence the defendants argue that the legislature intended the statutory procedure in Section 15 to displace common-law remedies. The rules of statutory construction provide differently. Common-law rights and remedies remain in full force in this state unless expressly repealed by the legislature or modified by court decision. A legislative intent to alter or abrogate the common law must be plainly and clearly stated. 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.’”
Kirsch concludes that “There is no language in Section 15 to indicate an intent to alter the common law of fiduciary duty. The Act itself, in Section 18.4 imposes a fiduciary duty on board members that govern associations to treat the unit owners with the highest degree of honesty, care, loyalty, and good faith prohibiting enhancement of their personal interest at the expense of others. Since Section 15 did not effectuate a change in a board’s duties to its association the common law of fiduciary duty remains in full force and effect. If a bulk sale of condominiums does not involve violations of fiduciary duty like the self-dealing alleged here, Section 15’s procedures would remain the sole remedy available to unit owners.”