By Chris Gelwicks, Esq.
From time
to time we receive questions regarding the resignation of directors, term
expiration and what to do in the event of a mass resignation by the existing
board. The North Carolina Planning
Community Act, Condominium Act, and the Non-Profit Corporation Act address
certain issues with regard to directors’ terms and how to fill vacancies. Generally, the remaining board members
appoint a replacement to serve out a resigning director’s term. But what
happens when directors resign and do not appoint their successors, or when
there are not enough remaining directors left to appoint replacements?
Section 55A-08-05(d) of the North Carolina Non-Profit Corporations Act provides that when the term of a
director expires, that director continues to serve until his or her
successor is appointed or elected and takes office. This seems to be in contrast with Section
55A-08-07 which indicates that a director’s resignation is effective upon
communication of that resignation to the board (unless the resignation sets
forth another effective date). The key difference
between the two statutes are the terms “expire” and “resign”. Normally, in either case, the remaining
directors would appoint someone to fill the empty seat unless the bylaws
indicate differently. The board could also choose to hold an election for the
empty seat(s).
Where we
run into problems is where an entire board resigns at once and no successors
are appointed. Pursuant to Section
55A-08-30, directors on boards have a duty to act in good faith, with
reasonable care, and in a manner that is in the best interest of the association. Such fiduciary duties include that directors
enforce the declaration of covenants, collect assessments, and ensure that the
association is run and continues to be run effectively. It is a reasonable conclusion that if an
entire board resigns at once and appoints no successors to fill vacancies, then
the association cannot be effectively run.
Those directors who resigned en masse potentially subject themselves to liability
by not finding and appointing replacements; those directors, by basically
abandoning their posts, could be construed to have violated their fiduciary
duties.
The same could also apply if so
many directors resign that the board can no longer reach a quorum to make a
decision on appointing replacement directors. Keep in mind that the bylaws of your homeowners
association ultimately control and can provide a different procedure than these
North Carolina state statutes. If you
are reading this and are on the board of your association, you may wish to
review your bylaws to determine what they say in these situations and whether
changes might be necessary to provide better procedures, such as stating that
even board members who resign also continue to serve until their successors
take office.
The bottom
line is this: Resignations, vacancies and the like are not to be taken lightly. Directors who resign should always find a
successor if at all possible and submit those names to the remaining board
members. If an entire board intends to
resign – which is an extremely bad idea to begin with and should be avoided at
all costs – they should do so in a manner that allows successors to be
appointed and the association to continue to function. For example, the resignations may be staged
over time to allow replacements to come aboard.
And remember that, at least in North Carolina, board members whose terms
expire continue to serve, and continue to have fiduciary duties to the
association and the members, until their replacements take office.
Failure to appoint successors in a
way that results in a dysfunctional board can result in personal liability to
the resigning directors for breach of fiduciary duty. As always, don’t hesitate to contact us to
discuss strategies, procedures and potential liabilities when dealing with
board matters.
Click here for another of our blog posts regarding board of directors matters.
More good stuff on our HOA Ninjas website.
Follow our HOA Ninjas on Twitter for bite-sized info and tips.
