Caselaw Update!
The North Carolina Supreme Court, in a decision filed on March 2, 2018, REVERSED the Court of Appeals' decision discussed below. You can read the Supreme Court's decision here. As we discussed in our blog post below, which we posted on December 14, 2016, we disagreed with the Court of Appeals' reasoning, and thankfully the Supreme Court did also. The Supreme Court confirmed the longstanding rule that only members of an association can contest whether the board properly followed its own internal procedures in making the decision to bring a lawsuit - failure to follow the bylaws or other requirements cannot be used by the defendants to claim that the association did not have standing to bring the lawsuit. In this case, two Charlotte-area homeowners associations can now proceed with their lawsuit against the City of Charlotte for approving a rezoning which would allow lower-income housing next door to the two associations. Of course, our takeaway below still stands - while it may sometimes be a pain to follow board meeting and voting procedures, a cavalier attitude can come back to bite you. In this case, years of litigation and many tens of thousands of dollars in legal fees were wasted due to the failure to follow simple procedural steps. Don’t let that happen to your HOA.
-----------------------------
-----------------------------
 |
| An unused meeting table does not do your HOA much good. |
There are times in the practice of homeowners’
association law when courts make rulings with which we as attorneys disagree
but where an underlying principle or best practice is affirmed. A prime example is the N.C. Court of Appeals’
opinion of November 1, 2016 in the case of Willowmere
Community Association Inc. and Nottingham Owner’s Association Inc. v. City of
Charlotte and Charlotte-Mecklenburg Housing Partnership. As is generally
the case whenever an HOA case reaches the North Carolina appellate courts, the
HOAs lost.
The two associations filed suit to challenge the
rezoning of land that was approved for the development of moderate-income multifamily
housing adjacent to their single-family subdivisions.However, the Mecklenburg
County Superior Court never reached the merits of the
challenge, instead ruling that the HOAs did not have legal standing to bring
the challenge at all. It stated that the
associations “did not have standing to bring the action because they failed to
follow the requirements in their respective bylaws with regard to their
decisions to initiate this litigation.”
Without “standing”, generally regarded as the
plaintiff’s having suffered sufficient individualized harm from the actions of
the defendant, the court system does not have jurisdiction to hear the
plaintiff’s plea at all. Standing is
designed to ensure that cases are grounded in actual, specific disputes and
deter the filing of cases based upon theoretical or conjectural wrongs. Since
lack of standing “bars the door to the courthouse” for the plaintiff and can
prevent valid legal claims from being adjudicated, courts typically use great
care in throwing a case out due to lack of standing.
In this case, the N.C. Court of Appeals agreed with
the trial court, focusing on the failure of the two HOAs’ boards of directors
to follow proper procedures in making the decision to sue. Both boards had determined to sue via email or
telephone discussions, without formal board meetings or even written and signed
consents to action without a meeting by the board members.
Willowmere HOA argued that its board unanimously
authorized the lawsuit through a chain of emails, and that this satisfied the N.C.
Nonprofit Corporation Act which allows a board to take action without a meeting
through “unanimous consent”, but the Court ruled that even if this were true, the
Willowmere bylaws also required “an explanation of the action taken to be
posted at a prominent place within the Common Area within three (3) days after
the written consents of all the Board members have been obtained.” Unfortunately for Willowmere, there was no
evidence showing that an explanation of the action was posted in the Common
Area.
The Nottingham HOA board did not call a formal board
meeting to discuss filing a lawsuit and did not act via unanimous written
consent. Rather, a few of the board members
conducted a telephone conversation with the management company and did not
refer to the basic requirements of the bylaws regarding the power to initiate a
lawsuit. They did not deliberate and
make a decision in a formal meeting or unanimously in writing.
The Superior Court judge inquired into the standing
issue on his own motion – neither of the defendants had argued that the HOAs
lacked standing to bring the challenge.
But North and South Carolina courts are generally disposed to rule
against HOAs, and in this case the failure to follow the basic requirements in
the bylaws and statutes for conducting business gave the Superior Court all the
ammunition it needed to find that neither association had standing to bring the
lawsuit, and the Court of Appeals agreed.
We question the judges’ reasoning on the standing
issue. It would appear that the HOAs could have suffered significant and
specific damages had an improper rezoning been approved adjacent to them, which
should have been enough to confer standing.
A failure to follow corporate formalities would typically be something
for which an association member could sue or take other action to attempt to
rescind the decision, but it has not to our knowledge prior to this case been
used to actually deny an association its right to be heard in a court of law.
Whether or not a non-HOA member may challenge
standing based on the internal procedures of the HOA since the non-member is
not subject to those procedures, we can agree that an HOA member may make such
challenge to board action if the board does not follow the proper procedures,
so certainly the HOA boards here were at fault to some extent.
Bottom line: Don’t
get in a hurry when making decisions. HOA boards must follow the requirements
of both the governing documents and the statutes when taking action, and avoid
taking action by email in any significant matter. Remember, in general, actions taken without a
meeting, like via email, must be unanimous.
(Meetings can be held over the phone provided all board members can
clearly hear one another.) Calling a
meeting is almost always the best option for making decisions concerning serious
matters. The use of the unanimous
written consent procedure is a useful tool if a board is simply unable to meet,
but boards should take great care in preserving the emails documenting the
unanimous agreement. We also recommend
that, at the next board meeting following a decision made without a meeting,
all items approved via unanimous written consent be formally ratified with such
ratification reflected in the written minutes or via formal written resolution. Finally, adherence to additional procedures
such as the posting of an explanation, as with Willowmere, is required to ensure
that the action will withstand a subsequent challenge on procedural grounds.
While it may sometimes be a pain to follow these
procedures, a cavalier attitude can come back to bite your board. In this case, years of litigation and many
tens of thousands of dollars in legal fees, not to mention the opportunity to
challenge an unwanted development next door, were wasted due to the failure to
follow simple procedural steps. Don’t let that happen to your HOA.
Please give us a call or drop us an email if our HOA law team can assist your HOA or management company with your corporate procedures, or if we can be of assistance in any other way regarding
legal issues facing your community. Please be aware that we represent HOAs only
– we do not represent homeowners in disputes against their HOAs. We appreciate
your reading our HOA law blog and encourage you to share it with others who may
be interested. Thank you!
