Virus Check: What do Businesses Need to Know About COVID-19 Liability?

Virus Check: What is Your Liability as a Business?

The current situation we are facing is unprecedented from a legal standpoint. The ability to enforce contracts, loans, leases and all manner of legal relationships is now in question based on financial hardships as well as our court system working at greatly diminished capacity. Reasonableness, negotiation and working cooperatively are now more important than ever before.

Businesses of all types are concerned about being sued. What do you need to know?

Negligence is your first concern.Can a business be sued if an employee or customer were to contract a communicable disease at the employer’s workplace, or from a co-worker or customer? It depends on whether the business took reasonable actions to protect its employees and customers in light of the information available to it – in other words, whether the business was negligent.

Tort law, or the law of negligence, applies in this situation. It holds that a person can be liable to another person to whom the first person owes a duty if the first person commits an act which is unreasonable (or fails to take a reasonably necessary action) which could reasonably be anticipated to cause damage to the second person, and the second person did not help cause the wrongful act or omission.

For example, the Governor of North Carolina had previously prohibited all “mass gatherings” of 50 or more people (since reduced to 10); therefore, it was legal at that time (at least in most counties) to have mass gatherings of less than 50. But would this be reasonable in light of the CDC’s warnings against gatherings of more than 10 people? It depends on the situation, but a strong argument could be made that such would not be reasonable - in other words, we could not assure you that you would not get sued if someone got sick from such a gathering.

You owe a duty of reasonable care to your members, customers and employees; failure to take reasonable care to protect these parties from infection could result in liability. Reasonableness is the touchstone, based upon all the facts and circumstances involved. Failure to abide by local orders or regulations when they are directly intended to preserve public safety, as well as customary standards of care, have been held to constitute actionable negligence in other contexts. Cruise ship operators are already facing numerous lawsuits from those sickened while onboard based on this legal theory. Please contact us if we can help you work through liability issues of concern.

Workplace safety is also obviously very much in play today. In addition to the above negligence standards, workplaces of all types must abide by federal and state occupational health and safety requirements, typically as determined by OSHA. Employers must take efforts to maintain a hazard-free workplace, while still safeguarding the privacy rights of any affected employee.

OSHA requires that employers provide a safe workplace for all employees which is "free from recognized hazards … likely to cause death or serious bodily harm."

OSHA has not adopted specific regulations regarding COVID-19 in the general workplace at this time, but has instead recommended that employers follow CDC guidelines regarding personal safety, as well as any state or local guidelines or requirements - North Carolina's being found here.

The North Carolina Department of Labor, like OSHA, has not adopted specific regulations, but has emphasized the need to follow social distancing guidelines, maintain a clean workplace, and work from home where possible, and has emphasized the importance of proper personal protective equipment. Both the

NC Department of Labor and OSHA have especially emphasized worker safety with regard to respiration - in other words, being sure workers working with the public wear face masks, or more intensive respirators for those in healthcare, janitorial staff working with hazardous cleaning materials, and the like.

OSHA’s "free from recognized hazards" standard places much discretion in the hands of federal and state regulators if they feel an employer has not taken all reasonable steps to provide a hazard-free workplace for its employees. To be safe, employers should also implement procedures designed to promptly identify and isolate potentially infectious workers, per OSHA guidance. Illness or potential illness by employee must be kept confidential to the extent possible per federal ADA requirements; contact us if you run into this issue.

Contract law and force majeure clauses. Many contracts contain a force majeure clause, which translates from French as “superior force.”  It refers to uncontrollable events that are not the fault of any party and which interfere with a party’s ability to complete its end of the bargain or receive what it bargained for in the deal. Common examples are hurricanes, riots, labor stoppages and war. At first blush, it would appear that a pandemic would constitute a force majeure, but the terms of the contract control. You must review the specific language of the contract in question. Language such as “circumstances outside our control” is very broad and will cover the current situation and allow the party benefited by the provision to avoid the contract.  More specific language such as the common “acts of God, war, insurrection, civil strife, riots or labor disturbances” may not be as helpful depending since the list arguably excludes pandemics. If you are facing language which may not cover the current situation, you may have to negotiate and reach an agreement with your opposing party. If you do so, please, please document the agreement. Obviously, we can help. But even an exchange of emails can be sufficient to amend a contract if both parties agree.

Common law force majeure, or the doctrine of impossibility, may also apply if it is impossible or illegal for the parties to carry out the purpose and intent of the contract. Send your contract to us for review if you have issues or concerns. If upon reviewing your contracts, you find provisions which do not suit your needs in the current climate, do not forget that you may amend the current contract or at least change it going forward.  We can quickly supply you with alternative language and have already done so for some of our business clients.

How to Handle HOA/Condo Board Member Resignations

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.

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Failure to Hold Formal Board Votes Dooms Two Charlotte HOAs

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.

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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!

Your Homeowners Association’s Governing Documents: Please Don’t Call Them Bylaws!

Our HOA Ninjas here at Moretz & Skufca have a little pet peeve when it comes to terminology: folks who refer to the governing documents for their community association as “the bylaws.”  So (to borrow from Shakespeare) what’s in a name?  Turns out that when it comes to homeowners association documents, names mean a lot.  There are articles, bylaws, declarations, CCRs, deed restrictions, board resolutions, policies and procedures, and rules and regulations, among other animals.  Help us stop the malapropism trend by understanding these different documents and how they relate to one another.  (Note that while we use North Carolina nomenclature here, these concepts apply to community associations in virtually every state.)

Articles of Incorporation

An HOA’s articles of incorporation, also known as its “charter”, legally create the corporation when filed with the Secretary of State’s office, and confer upon it all of its legal authority, as well as its non-profit status.  Think of the articles of incorporation as your community association’s Declaration of Independence – the document that creates a new entity out of thin air.  Since a corporation has no legal authority to act in any manner not authorized by its articles of incorporation, the articles are typically very broadly-worded and non-specific in order to avoid inadvertently limiting the corporation’s authority to do business.  Articles for homeowners associations must limit membership to lot owners only and include language specified by the IRS in order to qualify as a non-profit.  Your HOA will almost never deal with its articles once they are filed. 

Bylaws

The bylaws establish a corporation’s internal governance, voting and administrative procedures.  These include details about membership and board meetings, board elections, descriptions of the officers, how they are appointed and their authorities, and other similar matters.  Think of your homeowners association's bylaws as its Constitution – the rules of how the people will elect their representatives and what those representatives can do.  Bylaws need not be filed with the Secretary of State or recorded with the local register of deeds.  (While many HOA declarations have the bylaws attached to them when they are recorded with the register of deeds, this is not legally required.)  You will typically refer to your homeowners association's bylaws only when there are questions regarding elections, special assessments or how other important matters may be voted upon by the membership and/or the board.  Generally, bylaws are fairly boilerplate and should not require a lot of thought or attention by your board or your members unless there are major issues facing your HOA.

This is where our pet peeve comes in.  We often hear folks refer to their declaration of restrictive covenants, or to all of their homeowners association’s governing documents, as “the bylaws” (cringe). Please don’t do this!  The bylaws are a specific document, different from the other documents governing your HOA.  If you need to refer to them all together, the proper term is “governing documents.”  Use the word “bylaws” only when referring to the bylaws themselves.

The most important document for your homeowners association is the declaration of covenants, conditions and restrictions, or, for condominiums, the declaration of condominium (sometimes called a "master deed" in South Carolina) – what we call the “declaration.”  These are also referred to variously as the “covenants”, the “restrictions”, or the “CCRs.”  These are recorded with the register of deeds where the association is located prior to any lots being sold, which causes the provisions of the declaration to “run with the land” and be binding upon all current and future owners of each lot.  The declaration states what can and cannot be done with a lot owner’s land and the homeowners association’s common areas, and provides details as to how the HOA is to be operated.  In this latter regard there can be substantial overlap between the declaration and the bylaws, and this may be part of the confusion we see in terminology.  In general, the declaration controls over the bylaws if they are in conflict.

Deed Restrictions

An aside about deed restrictions.  Some subdivisions have “deed restrictions” in addition to, or in lieu of, a declaration.  The term generally refers to a document which places limits on what can be done with a lot owner’s land, but which does not create a full homeowners association operational structure like a declaration does.  This type of restriction was used primarily in the old days before homeowners associations with detailed declarations became prevalent, but deed restrictions can also be used now to place additional or special restrictions on a subset of lots within a larger HOA, or for small subdivisions where no formal HOA is required.  We avoid using this term except in these limited situations.  Modern declarations include deed restrictions (specific restrictions on what can be done on the owners’ lots) in addition to lots of other details regarding the operation of the community association, so “declaration” is the proper term for modern, detailed declarations of restrictive covenants as opposed to simple limitations on lots.

Everything Else 

The final category of governing documents is board resolutions, policies and procedures, and rules and regulations.  While these different terms are often used based upon type or level of formality, they are all positions formally adopted by the board of directors setting forth how a particular matter or situation will be handled now and in the future.  We refer to them generally as the homeowners association’s “policies.”  Policies serve to spell out in detail matters that may be addressed more generally in the declaration or the bylaws. 

While the articles of incorporation, the declaration and the bylaws ultimately control the governance of your homeowners association (in that order), the board of directors has the legal authority to adopt policies which are in general accordance with the authority granted by those documents.  For example, an HOA’s declaration may restrict leasing to no more than 15% of the homes in the subdivision, but it may not go into specific detail regarding how the leasing restrictions are to be implemented.  The board has the legal authority to adopt a policy describing how a homeowner may apply to lease his or her home, defining who is considered to be a tenant versus a guest, how a waiting list will be maintained, and other similar details.  Conversely, the board could not adopt a policy restricting leasing if such a restriction were not set forth in the declaration.

Policies can usually be adopted by the board acting alone, and need not be recorded or filed anywhere – although the best practice is to make sure they are made known to the members, usually by mailing, newsletter or website.  The board should be sure that the board meeting minutes reflect the research and consideration underlying the adoption of a particular policy, including the board’s consultation with its management company and professional advisors if necessary, and should take care that the policy is well thought out and written down in clear and specific detail.

We hope this discussion has shed some light on the various common HOA documents and the proper terminology for each.  If we can provide further information to assist your HOA, don’t hesitate to contact us.

Please give us a call or drop us an email if our HOA law team can assist your HOA or management company with your governing documents, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!