The Fiduciary Duty and Confidentiality Among Umbrella/Master Association and Sub-Association Common Trustees
Under New Jersey law, an association’s Board of Trustees has a fiduciary obligation to its members similar to that of a corporate board to its shareholders. See Kim v. Flagship Condo. Owners Ass’n, 327 N.J. Super. 544, 550, (App. Div. 2000). A fiduciary relationship arises between two parties when one party (the fiduciary or agent) is under a duty to act for or give advice for the benefit of another (the principal) on matters within the scope of their relationship. See F.G. v. MacDonell, 150 N.J. 550, 563 (1997).
As to community association trustees, this fiduciary relationship requires that Boards act consistently with the New Jersey Condominium Act, the New Jersey Non-Profit Corporation Act, their own governing documents, and that the Board (and its members) actions be free of fraud, self-dealing, or unconscionability. See Kim v. Flagship Condo. Owners Ass’n, 327 N.J. Super. 544, 554 (App. Div.) certif. denied, 164 N.J. 190 (2000).
Part and parcel with a Board’s fidcuary duty is the duty of loyalty. See F.G. v. MacDonell, 150 N.J. 550, 564, 696 A.2d 697, 704 (1997); see also Restat 3d of Agency, § 8.01 (“An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.”). The duty of loyalty requires trustees to:
Put the interest of the association and its members ahead of their own personal or financial interests.
Refrain from using their position for personal gain or to benefit a business in which they have an interest.
Disclose any potential conflicts of interest and recuse themselves from any vote or decision in which they have a conflicting interest.
Not engage in any conduct that would compromise their independence or integrity, and
Not use confidential information obtained through their position for personal gain or to benefit a business in which they have an interest.
See Restat 3d of Agency, §§8.01; § 8.05.
Entwined with the duty of loyalty are of conflicts of interest. The New Jersey Nonprofit Corporation Act (the “Act”) governs the formation and operation of nonprofit corporations in New Jersey, including nonprofit community associations and condominiums. These laws outline the requirements for registering a nonprofit corporation, such as filing articles of incorporation and obtaining tax-exempt status, as well as the responsibilities and duties of the corporation’s board of directors and officers. Section 15A:6-8, of the Act, titled, “Effect of common trusteeships and trustees’ personal interest,” addresses circumstances, as indicated in the Section title, dealing with “common trusteeships.” The Act provides:
a. No contract or other transaction between a corporation and one or more of its trustees, or between a corporation and any domestic or foreign corporation, firm, corporate business entity or association of any type or kind in which one or more of its trustees are trustees or directors or are otherwise interested, shall be void or voidable solely by reason of the common trusteeship or interest, or solely because the trustee or trustees are present at the meeting of the board or a committee thereof which authorizes or approves the contract or transaction, or solely because the trustee’s or trustees’ votes are counted for that purpose, if the contract or other transaction is fair and reasonable as to the corporation at the time it is authorized, approved or ratified and either:
(1) the fact of the common trusteeship or interest is disclosed or known to the board or committee and the board or committee authorizes, approves, or ratifies the contract or transaction by unanimous written consent, provided at least one trustee so consenting is disinterested, or by affirmative vote of a majority of the disinterested trustees, even though the disinterested trustees be less than a quorum; or
(2) the fact of the common trusteeship or interest is disclosed or known to the members, if any, and they authorize, approve or ratify the contract or transaction.
b. Common or interested trustees may be counted in determining the presence of a quorum at a board or committee meeting at which a contract or transaction described in subsection a. of this section is authorized, approved or ratified.
c. The board, by the affirmative vote of a majority of trustees in office and irrespective of any personal interest of any of them, shall have authority to establish reasonable compensation of trustees for services rendered to the corporation as trustees, officers, or otherwise. The approval of the members shall be required if the bylaws so provide.
N.J.S.A. §15A:6-8. Under New Jersey’s Nonprofit Corporation Act, there is no per se prohibition on a single member serving in the capacity of a trustee for two overlapping, and perhaps conflicting, organizations so long as appropriate steps, as outlined in the Act, are taken to avoid potential or actual conflicts.
Notwithstanding this, a common trustee owes each respective group of members (the Umbrella members and the sub-association members) their undivided loyalty and to act in the best interests of each. See Restat 3d of Agency, § 8.03 cmt. b. (“As a fiduciary, an agent has a duty to the principal to act loyally in the principal’s interest in all matters in connection with the agency relationship. . . an agent who acts on behalf of more than one principal in a transaction between or among the principals has breached the agent’s duty of loyalty to each principal through undertaking service to multiple principals that divides the agent’s loyalty.”).
The common trustee’s fiduciary duty to each respective group does not waiver or become diminished simply by being a common trustee. In fact, it is in these situations where the duty must be unwavering and strongest. Where decisions must be made that would create a potential or actual conflict between the common trustee’s obligation to one or the other association, the common trustee must follow the strictures of disclosing the conflict pursuant to the New Jersey Nonprofit Act, as set forth above, or otherwise risk breach their fiduciary duty to one or both organizations.
Attendant with a fiduciary’s duty of loyalty is that of confidentiality. A trustee on the board of a community association has a fiduciary duty to act in the best interest of the association and its members, and to place the interests of the association above their own personal interests. When serving as a common trustee, this fiduciary duty is complicated by the potential for conflicts of interest. As discussed above, a trustee must disclose any potential conflicts of interest, and must not use their position or access to confidential information for their own personal gain, which could include using information obtained in the course of one trusteeship for the benefit of the other organization. A trustee must be diligent in avoiding any actions that would be detrimental to one association because of their relationship with the other association.
Confidentiality is an important facet of the duty of loyalty. A fiduciary cannot disclose information obtained in the course of his or her duty. For example, an individual who serves as a director for both the developer and the association may be aware that water pipes used during development are substandard. To meet the duty of loyalty to the association, the director should disclose such information. However, to do so would result in a breach of duty of confidentiality and loyalty to the developer. As a result of the director’s duties to separate entities, the direct faces an actual conflict of interest.
See Tonia C. Sellers, Esq. and Jay S. Lazega, Esq., Conflicts of Interest: How Community Associations Leaders Honor Their Duties, A Guide for Association Practitioners, CAI Press 2016. The Restatements, Agency, 3d Ed., similarly provides that “[a]n agent has a duty (1) not to use property of the principal for the agent’s own purposes or those of a third party; and (2) not to use or communicate confidential information of the principal for the agent’s own purposes or those of a third party.” Restat 3d of Agency, § 8.05 (emphasis added).
Therefore, a common trustee’s fiduciary duty to his or her respective associations, whether that be the Master association or sub-association, requires their undivided loyalty, to act in the best interests of each, and that the trustee keep information confidential obtained in their capacity through the respective trustee positions, and not use the information for the benefit of one to the disadvantage of the other.