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 third-party, non-member 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.
However, our bottom line 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.|
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!