PALM II. What You Need to Know!

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1 PALM II What You Need to Know! Penland & Hartwell, LLC. 1 N. LaSalle St., 38 th Floor, Chicago, IL (312) dhartwell@penhart.com

2 Penland & Hartwell, LLC Penland & Hartwell, LLC provides legal representation to community associations. Its experienced and sophisticated practice is dedicated to serving common interest properties and cooperatives. Penland & Hartwell, LLC contributes to the Community Associations Institute (CAI), the Association of Condominium, Townhouse, and Homeowners Associations (ACTHA), and several other organizations. Penland & Hartwell, LLC is at the forefront of pertinent legislation to condominium associations, and it is pleased to assist condominium associations, both large and small. Community Association Law... It s What We Do.

3 David C. Hartwell, Esq. Principal Penland & Hartwell, LLC David has fifteen (15) years of legal experience in counseling and guiding community Associations on all aspects of association governance, corporate administration and litigation. Representing several hundred associations, David and the other experienced lawyers of Penland & Hartwell, LLC are recognized for their knowledgeable and skillful excellence in representing their clients.

4 PALM II Gary Palm sued his condominium Association, the Board of Directors collectively and certain Board Members individually in 2000, case number 2000 CH Gary Palm initially sued to obtain records the Association and alleged that the Board violated Condo Act by discussing condominium business and taking action on matters in closed meetings, making decisions by mail/ , failing to vote in open meetings and taken action in executive sessions/working sessions. Palm I the Appellate court ruled that the stricter provisions of the Chicago Municipal Code controlled and an Association had three (3) business days to turn over certain documents.

5 Perfect Storm Gary Palm was a unit owner and lived in the building Gary Palm was a prior Board member Gary Palm is an attorney and he filed the appeals himself 2800 Lake Shore Drive refused to turn over documents to Gary Palm 2800 Lake Shore Drive was not operating consistent with its declaration or the Illinois Condominium Property Act

6 Rule of Law Palm II is now a published opinion and may be used as precedent. Palm II is now considered common law in the State of Illinois and it now pertains to all condominium associations. Individuals will be able to search for and find this case on the internet. Palm II does not apply to Co-Ops or Community Associations organized under the Community Association Act. Boards need to act consistently with their governing documents and statutes.

7 2800 Lake Shore Drive s Declaration The Appellate Court looked to 2800 Lake Shore Drive s Declaration and the Illinois Condominium Property Act to determine the controversy. Each Association s declaration is unique and will control for issues such as: What determines a quorum What is proper notice/delivery of Board meetings Board authority to assign certain duties to property managers such as entering into vendor contracts

8 No More Closed Workshops or Executive Sessions The Court noted that Section 2(w) of the ICPA defines meeting of board of managers as any gathering of a quorum of the members of the Board of Managers *** held for the purpose of conducting business 765 ILCS 605(2)(w) Section 18(b)(9) of the ICPA provides in relevant part: meetings of the board of managers shall be open to any unit owner, except for that portion of any meeting held (i) to discuss litigation pending or that is probable or imminent; (ii) consider appointment, employment or dismissal of an employee; or (iii) discuss violations of rules and regulations or unit owner s unpaid share of the common expenses; and that any vote on these matters shall be taken at a meeting or portion thereof open to any unit owner.

9 Open meetings required The court in Palm II concluded that not only must all board voting occur at meetings open to unit owners, so must all board discussion or consideration of association matters, except for discussion or consideration of the three specified exceptions (litigation, employment, rule violations and unpaid assessments). Reasoning To conduct business means to direct or take part in the operation or management of a business, which might encompass voting on business matters but is not limited to such voting. One cannot direct or take part in the operation or management of a business unless one also discusses and considers that business before making decisions/voting on that business.

10 Board Meetings to be Open This ruling expands the customary definition and understanding of conducting business and will compel many boards to review and likely alter how they do business. The impact of the ruling, by way of example, now precludes a quorum board members (typically 3 or more) from gathering to have preliminary discussions regarding potential contractors for capital improvement projects, meeting in various areas of the property to discuss renovation, or any other matter related to the association. Except for Board discussions of litigation, employment, rule violations and unpaid assessments. Does this apply to committees?

11 Quorum of the Board Anytime Board members discuss Association business, this must be done so at an open board meeting subject to the notice provisions. Except for Board discussions of litigation, employment, rule violations and unpaid assessments. 765 ILCS 605/18(a)(9) The rules on quorum and the Board votes are specific to individual association s declaration.

12 Commission or Committee Section of the Illinois Not-for-Profit Corporations Act provides: The board of directors may create and appoint persons to a commission, advisory body or other such body which may or may not have directors as members, which body may not act on behalf of the corporation or bind it to any action but may make recommendations to the board of directors or to the officers. 805 ILCS 105/108.40(d) Boards should be considering use of committees to perform advisory functions. Not subject to the open meeting requirement. Committees should not have a quorum of directors serving.

13 No Canvassing by The facts of the case established that on certain matters the board by itself or through property management used to elicit decisions. The court stated that the practice of canvassing the board to approve certain action is not allowed because such discussion and decision making taking place outside of a meeting open to unit owners. Specifically, voting on a salary increase for an employee and for waiving the right of first refusal on the sale of property were determined to violation Section 18(a)(9) of the Act because the board was conducting business outside of an open meeting with the owners.

14 Now What: Board Meetings Better planning. Boards and property managers will need to make sure all timely issues are on the agenda. Boards will need to be thinking ahead to ensure that issues and matters get resolved in a timely manner. Property management meeting packets will need to be thorough. Decisions must be made at the Board meetings. Boards should not carry on pre-discussions of issues via prior to the open meeting. Boards may hold meetings solely by telephone conference or other medium that provides two way communication for all participants. General Not For Profit Corporation Act of 1986 Section (805 ILCS 105/107.05(d)) and Business Corporation Act of ILCS 5/815(d))

15 Delegation to Property Managers Board s delegate certain perfunctory or ministerial responsibilities to Property Managers (e.g. executing contracts, signing waivers of right of refusal, etc.). In Palm II, the Board entered into a property management contract that authorized the manager to enter into contracts on behalf of the association with concurrence by three board members. This practice was found by the Court found that the declaration did not grant the board the authority to authorize that contractual action be taken by the management company can be approved by less that the entire board. In the absence of a provision in the declaration providing for a commission to the board s business, any business of the board must necessarily be conducted by the entire board. This is specific to the 2800 Lake Shore Drive s Declaration which did not allow the Board to delegate this authority.

16 Delegation to Property Managers Delegation of Board authority is to the Property Manger is still possible under Palm II. Your governing documents will guide your Association in determining if the Property Manager can sign on behalf of the Association. Associations and property management companies may need to review the provisions of the property management contract.

17 Reserves The court in Palm II ruled that the operating revenue surplus should have been returned to Unit Owners rather then applied to the reserve account. Before, an Association preforms a similar action, an Association should review its declaration and consult with its accountant or auditor to determine if the surplus should be returned to Unit Owners. This decision is specific to 2800 Lake Shore Drive s Declaration.

18 Now What: Reserves Your governing documents will guide your Association in how to handle the a surplus. Board will need to draft better annual budgets to account for the fact that any surplus would need to be refunded. Boards may need to consult with auditors/accountants regarding how associations funds should be treated.

19 Litigation Court enjoined the board from authorizing or allowing litigation by the Association (including the prosecution or defense of any action) without approval by a vote of the Board, at a meeting open to any unit owners, for with prior notice is provided to all unit owners, and at which a quorum of the Board is present. Even though discussions between the board and with legal counsel may be conducted in a closed meeting, any decisions must at least be voted on in an open portion of a meeting. Collections lawsuits Does every collection action need to be voted on? Can a resolution be adopted to avoid repetitive meetings?

20 Now What: Litigation What if Board wants to consult with attorney on matters not in litigation or for which litigation is not imminent? Is attorney-client privilege waived?

21 What Next: Overview Boards that are operating inconsistently with the holdings in Palm II should review current procedures and may need to revise existing procedures. Property Managers and Boards will need to plan ahead to have matters that require a vote be voted on at the Board meeting. Boards may need to review their relationship with their property manager. Boards may need to consider utilizing committees as a way of gathering information. Boards may want to consider passing resolutions as a way of addressing continuously occurring issues.

22 Best Practices Always turn over documents to the Unit Owner or Board Member that is making the request. Board meetings should be open to the members. Board votes should be done at open meetings. Boards should refrain from communications amongst themselves. Committees should be created to help with the workload. Contact your legal counsel to determine notice provisions for Board meetings, reserves, and etc.

23 Disclaimer This presentation and handout materials are only meant to provide a general overview and guide to the issues. The materials and comments contained in this presentation do not constitute, and should not be treated as, legal advice. Although every effort has been made to assure its accuracy, the attorneys at Penland & Hartwell, LLC do not assume responsibility for any individual's reliance on the information contained in this presentation. Each invitee and guest should independently verify all statements made before applying them to a particular fact situation. PENLAND & HARTWELL, LLC