A recent decision by the Minnesota Court of Appeals holds the individual member of a developer LLC liable for failure to protect unit purchasers when making decisions on behalf of the developer LLC. The holding goes far beyond past decisions in holding a principal of a developer liable for decisions made on behalf of the developer.
The case involved Lakeview Lofts, a 40-unit, mixed-use condominium developed by Lakeview Lofts, LLC. Todd Frostad was the sole member of Lakeview Lofts, LLC, and was also a director and the President of Lakeview Lofts Homeowners’ Association. The applicable Minnesota law requires a developer-appointed officer or director of a homeowners’ association to act in a fiduciary capacity in serving as an officer or director of the homeowners’ association.
The Court ruled that Mr. Frostad’s obligation to act as a fiduciary was not limited to his actions as an officer and director of the homeowners’ association, but extended to his actions as the sole member and a governor of the developer LLC, and the Court upheld a finding of personal liabilty against Mr. Frostad for actions he took as a governor of the developer LLC.
The case highlights the danger of a principal of a developer serving as an officer and director of a homeowners’ association. While that common arrangement always carries with it a degree of risk, the new Court of Appeals decision greatly expands the scope of liability to include actions taken on behalf of the developer, as well as actions taken on behalf of the homeowners’ association.