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Illinois
Condominiums

Davis v Dyson, 387 Ill App 3d 676, 900 NE2d 698, 326 Ill Dec 801 (1st D 2008).

Facts:While acting as property manager, Larson Property Management, Inc.'s principal, Warren Larson, allegedly embezzled over $550,000 from the Granville Beach Condominium Association (Association). Evelyn Davis and other property owner members of the Association brought two suits against former directors for breach of fiduciary duty: (1) a derivative claim on behalf of the Association for taking insufficient action to prevent or limit the embezzlement losses; and, (2) an individual claim for lost property values because potential buyers would be wary of the Association's now-tarnished reputation. The former directors moved to dismiss both claims for lack of standing. The trial court granted that motion.

Holding:Affirmed in part, reversed in part, and remanded. The appellate court recognized Davis's standing for the derivative claim but not for the individual claim.

In a traditional derivative suit, shareholders "step into the shoes" of their corporation to sue third parties when the directors refuse to act. The court held that Association members had standing for such a suit against the current directors or any party who the Association could sue. The directors asserted that Davis could not bring a derivative suit unless the directors violated the business judgment rule by acting with "bad faith, fraud, illegality or gross overreaching."Fields v Sax, 123 Ill App 3d 460, 467, 462 NE2d 983, 988, 78 Ill Dec 864 (1st D 1984). However, Davis asserted that the directors failed to use due care in making those judgments, and in such circumstances the business judgment rule would be inapplicable.

The court also held that Davis had no standing to bring an individual claim for direct loss because the alleged breach of fiduciary duty primarily injured the Association as a whole and only indirectly affected each member of the Association.

The directors argued that even if Davis had standing, she could not state a breach of fiduciary duty claim because she did not specifically allege that the directors failed to act in the Association's best interests. However, Davis alleged that the directors violated the Condominium Property Act (Condo Act), 765 ILCS 605/1et seq., and the Association's bylaws, both. The court held that those allegations alone stated a claim of breach of fiduciary duty. Furthermore, the directors' failure to purchase proper insurance for the Association's embezzled money was a violation of the Condominium Act, and such an illegal act negates using the business judgment rule as a defense to breach of fiduciary duty.

[Last update: 6-11-09]