Davis v. Dyson, 1-07-2927.

• Decision Date: 19 December 2008
• Docket Number: No. 1-07-2927.,1-07-2927.
• Parties: Evelyn DAVIS, John F. Bukacek, Richard Abel, Teodora M. Bermudez, Maximo C. Bermudez, Albert Bowen, Daniel Gilmour, Ewa Grigar, Peter Grigar, N. Chung Kang, Agata Zawierta, and Jan Zawierta, Individually and on Behalf of Granville Beach Condominium Association, Inc., Plaintiffs-Appellants, v. Joe DYSON, Paula Failla, David Hamilton, Michael Jones, Lillian LaPalio, Augustine Marron, Mary Ann Mayfield, Tim Patula, David Siegel, and Anna Skalka, Defendants-Appellees (Granville Beach Condominium Association, Inc., Defendant).
• Court: United States Appellate Court of Illinois

900 N.E.2d 698 Evelyn DAVIS, John F. Bukacek, Richard Abel, Teodora M. Bermudez, Maximo C. Bermudez, Albert Bowen, Daniel Gilmour, Ewa Grigar, Peter Grigar, N. Chung Kang, Agata Zawierta, and Jan Zawierta, Individually and on Behalf of Granville Beach Condominium Association, Inc., Plaintiffs-Appellants,
v.
Joe DYSON, Paula Failla, David Hamilton, Michael Jones, Lillian LaPalio, Augustine Marron, Mary Ann Mayfield, Tim Patula, David Siegel, and Anna Skalka, Defendants-Appellees
(Granville Beach Condominium Association, Inc., Defendant). No. 1-07-2927. Appellate Court of Illinois, First District, Sixth Division. December 19, 2008.

[900 N.E.2d 701]

Lloyd Brooks, The Brooks Law Firm, Dolton, IL, for Plaintiffs-Appellants.

Howard L. Lieber and Lindsay E. Dansdill, Fisher Kankaris, P.C., Chicago, IL, for Defendants-Appellees.

[900 N.E.2d 702]

Justice JOSEPH GORDON delivered the opinion of the court:

Plaintiffs, homeowners in the Granville Beach Condominium Association (Association), brought suit against former members of the Association's board of directors. They alleged that the property manager embezzled more than $550,000 from the Association, and the former directors failed to take proper precautions to protect the Association from such losses. As a result, plaintiffs sought damages against the former directors for this alleged breach of fiduciary duty, both on a derivative basis and as individuals.

The trial court dismissed both claims. With respect to the derivative claim, it found that only the Association itself, not the homeowners, had standing to bring a derivative lawsuit against the former directors. With respect to the individual claim, it found that plaintiffs again lacked standing because they failed to allege any separate and distinct injury. Plaintiffs appeal the dismissal of both claims. For the reasons that follow, we reverse on the matter of derivative standing but affirm on the matter of individual standing.

I. BACKGROUND

Evelyn Davis, John F. Bukacek, Richard Abel, Teodora M. Bermudez, Maximo C. Bermudez, Albert Bowen, Daniel Gilmour, Ewa Grigar, Peter Grigar, N. Chung Kang, Agata Zawierta, and Jan Zawierta (collectively plaintiffs) brought suit against Joe Dyson, Paula Failla, David Hamilton, Michael Jones, Lillian LaPalio, Augustine Marron, Mary Ann Mayfield, Tim Patula, David Siegel, and Anna Skalka (collectively the director defendants), as well as the Association. In their third amended complaint, which was filed on September 22, 2006, and now frames the issues, plaintiffs alleged the following.

Plaintiffs state that they are owners of condominium units at Granville Beach Condominiums, a Chicago, Illinois, property consisting of over 300 units. All unit owners, including plaintiffs, are members of the Association, which is an Illinois not-for-profit corporation. Under the condominium bylaws, the Association is governed by an elected board of directors. The director defendants all allegedly served on the Association's board of directors at some time between 1998 to 2003; none of them remained directors by the time the complaint was filed.

Plaintiffs further allege that from 1998 to 2003, the Association's property manager was Larson Property Management, Inc. (LPI). During this time period, LPI's principal, Warren Larson, allegedly embezzled at least $550,000 from Association funds by forging the signature of director Skalka onto over 100 Association checks. According to plaintiffs, the Association received a checking account statement every month containing a copy of every check presented for payment, including Larson's forged checks. However, the director defendants allegedly never reviewed any of these statements, nor did they order any financial review or audit of the Association's records, nor did they properly supervise the financial dealings between Larson and the Association. Plaintiffs contend that if the director defendants had done any of these things, they would have discovered Larson's embezzlement (or, alternately, that proper supervision might have deterred Larson in the first place). In fact, Larson's fraud was allegedly not discovered until July 2003, when the building's on-site manager reviewed one of the monthly checking statements.

Plaintiffs aver that the director defendants failed to ensure that the Association had sufficient insurance coverage, in the form of a fiduciary bond or a fidelity bond,

900 N.E.2d 703

to adequately protect the Association's funds. This failure, according to plaintiffs, was a violation of both the Condominium Property Act (Condo Act) (765 ILCS 605/1 et seq. (West 1996)) and the Association's bylaws. Plaintiffs also allege that the director defendants failed to obtain advice of counsel regarding their duties with respect to insurance coverage, Association finances, and supervision of key personnel. If they had obtained advice of counsel regarding these matters, plaintiffs state that such advice would have been early enough to limit the Association's losses from Larson's embezzlement.

Plaintiffs state that as a result of the above events, the Association not only lost over $550,000 in embezzled funds, but also suffered out-of-pocket expenses of approximately $200,000 to $250,000, since it had to hire attorneys, accountants, and other professionals to obtain advice and investigate the loss. After Larson's embezzlement was uncovered, the Association allegedly sought indemnification from its insurer, and it also brought suit against Larson and the Association's bank; however, it was only able to recover $60,000 from the former action and $4,000 from the latter, leaving it with nearly $800,000 in outstanding losses.

Plaintiffs therefore seek damages in two counts from the director defendants. Both counts are for breach of fiduciary duty. Count I is a derivative claim on behalf of the Association for the damages the Association suffered as a result of the director defendants' alleged failure to take due care to protect the Association against Larson's fraud. In support of this count specifically, plaintiffs allege that from July 2004 to November 2004, residents of Granville Beach Condominiums, including plaintiffs Davis and Bukacek, requested that the Association's current board of directors file suit against the director defendants. However, the board of directors allegedly refused. According to plaintiffs, not only did they decline to vote on the matter, but they declined to investigate the conduct of the director defendants or form a committee to consider the residents' requests. Plaintiffs further allege that the board's failure to take action against the director defendants is a result of its failure to obtain and consider sufficient information to make an informed decision, which they say is a violation of the business judgment rule.

Count II is a claim made by the plaintiffs as individuals for the alleged lowered market value of their condominium units. In support of this count, plaintiffs allege that due to the losses the Association incurred in connection with Larson's embezzlement, the Association has fallen into ill repute. As a result, according to plaintiffs, the market value of each of their units has declined: numerous members have sought to sell their units, but some prospective buyers have rejected these units due to the Association's ill repute, while others have required substantially cheaper prices than otherwise comparable units within the area are sold for.

Directors Dyson and Siegel filed a motion to dismiss plaintiffs' complaint on October 23, 2006. This motion was subsequently joined by director Patula. In support of this motion, Dyson and Siegel argued that plaintiffs lacked standing for their suit. With respect to count I, the derivative claim, they contended that the Association's board of directors was the sole party with the power to bring a derivative claim against third parties who had wronged the Association. Condominium owners, they claimed, could bring a derivative claim against the board of directors, but not against anyone else. With respect to count II, the individual claim, they contended that plaintiffs had

900 N.E.2d 704

failed to allege any separate and distinct injury to themselves, as required for standing.

Dyson and Siegel also raised several other arguments. The ones pertinent to this appeal are as follows: First, they argued that plaintiffs failed to state a claim for breach of fiduciary duty, since they did not allege that the director defendants acted other than in the best interests of the Association. Second, they argued that the business judgment rule shielded the director defendants from liability, as plaintiffs had failed to allege any fraud, illegality, conflict of interest, or bad faith on their part. Third, they argued that the doctrine of election of remedies precluded plaintiffs' suit, as the Association had already chosen to sue its bank to recover damages from Larson's embezzlement.

The trial court granted defendants' motion to dismiss in an order dated April 26, 2007. (Originally, this order only applied to the three petitioning director defendants; however, the court later expanded it to cover all of the director defendants in a May 31, 2007, order.) The court stated that it agreed with defendants' contentions regarding standing: namely, that under the facts as alleged in their complaint, plaintiffs lacked standing to bring suit against the former directors on either a derivative or an individual basis. The court made no ruling upon the rest of the defendants' arguments.

Subsequently, the court made a finding pursuant to Illinois Supreme Court Rule 304(a) that there was no just reason to delay appeal or enforcement of its dismissal order. Plaintiffs timely filed the instant appeal.

II. ANALYSIS

On appeal, plaintiffs argue that the trial court erred in finding that they lacked standing to bring suit against the director defendants either in a derivative or an...