Condo Law Watch

Water Damage Issues Create Liability for Boards Under Breach of Fiduciary Duty Theory

In Schuh v. Plaza Des Plaines Condominium Association, No. 1-13-1999 (Ill.App.Ct. July 24, 2014), an Illinois appeals court affirmed a ruling that a condominium association breached its fiduciary duty to a unit owner by failing to promptly address a water infiltration problem that resulted in extensive mold damage to the unit.

The plaintiff, Mary Ann Schuh, an elderly woman, owns a unit in Plaza Des Plaines Condominium in Des Plaines, Illinois.  The condominium is managed and maintained by the Plaza Des Plaines Condominium Association (the “Association”).

In August 2010, after a hard rain, Schuh discovered water coming from an electrical outlet in her unit.  She notified the management company about the water infiltration by telephone, voice mail and e-mail messages.  When Schuh finally spoke with a management company employee by phone, she was told the association “was working on it.” A number of months later, the management company sent an inspector to Schuh’s unit, 11 other units and the roof.  The inspector noted water infiltration at the living room window, a six-inch water stain on her wall and buckling paint.  He also observed that the balcony door was wet.

The inspector’s findings indicated the problem had gone on in some areas since as early as 1996, and he noted it is common for brick facades to require full-wall re-pointing every 25 years due to the climate.  The test findings listed several likely sources of the water infiltration.  The inspector recommended that an exterior restoration company inspect exterior elements and that roofers regularly inspect the roof to ensure proper storm-water dispersal and to determine whether mold might be present.

In June 2011, Schuh hired a company to test her unit for mold because the management company was taking too long to address possible mold in the building.  The mold tests indicated toxic mold was present in the unit, and the testing company recommended remediation.  The testing company indicated that toxic mold is most problematic for children and the elderly.

Schuh arranged for mold remediation at a cost of $2,187.14.  She also retained a home remodeling company to repair damage resulting from the remediation process.  The work included replacing insulation and drywall, painting the living room ceiling, reinstalling the electrical outlet and removing debris.  This work cost $1,900.  Schuh also replaced damaged carpet at a cost of $2,000. When Schuh asked the association to reimburse her remediation costs, she received a response from the association’s attorney, stating, “The association remains unconvinced about the exact nature of the alleged damages and the work that was actually performed.”

In February 2013, Schuh sued the association, alleging it breached its fiduciary duty to her.  The trial court awarded damages to Schuh of $27,497 ($5,497 in actual damages, $12,000 in attorney’s fees and $10,000 in punitive damages).  The trial court held that the association’s delay of nearly two years to address water infiltration in Schuh’s unit showed indifference to her rights.  The trial court found Schuh to be extremely credible, concluded that mold was in the unit and that Schuh had obviously suffered.  The association appealed.

The association challenged the trial court’s award of punitive damages.  The association did not believe it had breached its fiduciary duty so severely that an award of punitive damages was warranted.  In reviewing the punitive damages award, the Appellate Court considered three questions:  (1) were punitive damages available for this type of claim; (2) did the evidence support a finding that the association acted fraudulently, maliciously or in a  manner that warranted such damages; and (3) did the trial court abuse its discretion in imposing punitive damages?

The Appellate Court found the evidence showed a pattern of neglect and a reckless indifference on the association’s part toward Schuh, to whom it owed a fiduciary duty.  The association ignored Schuh’s repeated requests to inspect and repair her unit from August 2010 until May 2011.  It refused to reimburse her expenses to repair the damage.  When she hired an attorney and incurred legal fees in order to demand reimbursement, the association still refused to reimburse her costs.

The association argued that the punitive damages award conflicted with its business judgment.  Under the business judgment rule, “absent evidence of bad faith, fraud, illegality, or gross overreaching, courts are not at liberty to interfere with the exercise of business judgment by corporate directors.”  The rule protects directors who have been careful and diligent in performing their duties from being subjected to liability for honest mistakes of judgment.  However, the Appellate Court pointed out that is not what occurred in this case, where the association was neither diligent nor careful but instead chose to ignore Schuh’s plight.  The association did not inadvertently make an honest mistake of business judgment, but simply failed to do its job, something not protected by the business judgment rule.

Finally, the association argued that there was no breach of fiduciary duty because the condominium governing documents required Schuh to obtain prior written approval before making changes to her unit, which she failed to do.  The Appellate Court held this argument to be meritless and affirmed the judgment of the trial court.

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