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!

The North Carolina Court of Appeals Says… Not Much in its Recent HOA Cases

As homeowners’ association and commercial real estate attorneys, we typically hold our breath when the North Carolina Court of Appeals issues new opinions (“opinions” is the term it uses to refer to its case decisions). While the judges are all smart, accomplished and well-meaning former attorneys, most are former litigators who unfortunately have little if any real estate or community association law experience.

For this reason, they seem to miss the point or simply get it wrong in a lot of the cases they hear involving real estate or HOA issues. In the most recent HOA cases, they have said very little, so in our mind that’s a small positive – at least they did not make something up or get something wrong altogether.

In the interest of keeping you up to date, and because there are still some "teachable moments" involved, we’ll review them anyway. The cases are Radcliffe v. Avenel Homeowners Association, Inc. and Kimler v. The Crossings at Sugar Hill Property Owner’s Association, Inc. 

Radcliffe v. Avenel Homeowners Association, Inc.

The only exciting thing about the Radcliffe case is its facts. The Avenel HOA is an upscale community located in Wilmington. If you think that you have bad neighbors, then you should read the allegations of Ms. Radcliffe in this case to feel much better about your circumstances.

Entry to Avenel HOA

Allegedly, members of the HOA’s board of directors made it their personal missions in life to cause Ms. Radcliffe to move out of the neighborhood.  Not only that, but they also tried their hardest to derail her career in the local Methodist Church. According to the Court’s opinion, their alleged reign of terror included threatening her, chasing her, assaulting her, and driving their cars at her. Her lawsuit was a textbook case for the legal cause of action known as “Intentional Infliction of Emotional Distress,” which involves a victim being subject to actions that no person living in a civilized society should have to endure.

The legal issue in the case affecting HOAs was whether the HOA corporation could be liable on these claims, or whether they were only the responsibility of the individual defendants and board members who performed these acts. Could their individual misdeeds be ascribed to the HOA?

The Court ruled that Ms. Radcliffe’s causes of action against the HOA were barred by the three-year statute of limitations applicable to these types of claims, and for that reason the Court did not explore the extent to which the individual defendants’ egregious actions were attributable to the HOA corporation, which actually would have been interesting had the Court gotten to it.

To what extent an HOA is responsible for the actions of board members is interesting legally because, generally, a company is liable for the actions of its employees and officers which are made in the course and scope of their duties. And in the case of an HOA, the HOA’s insurance will usually come in and defend a case brought against the HOA and/or its officers. But certain types of egregious actions, like fraud, intentional infliction of emotional distress, or overtly criminal acts, are typically held to be outside the course and scope of an officer’s or employee’s duties, since they are not usually part of the job description. Therefore, those types of actions usually are not ascribed to the HOA itself, the HOA would not be liable for them, and the HOA’s insurance often will not step in to defend the HOA or the individuals at fault. But the HOA could be responsible if it is found to have permitted, encouraged or facilitated such bad behavior.

Bottom line: Unless you want to find out exactly which bad actions your HOA can be held legally responsible for, and to do so potentially on your own dime with no insurance coverage, try to be nice to the members of your HOA, and don’t let board members treat members disrespectfully. Unpredictable, irresponsible or offensive people should not serve on an HOA board or committee.

Kimler v. The Crossings at Sugar Hill Property Owner’s Association, Inc.

The Kimler case dealt with the issue of amendments to a community’s declaration of covenants, conditions and restrictions. The original CCRs here were filed in 1996 and they did not include a provision that allowed the documents to be amended by anyone but the declarant. Since the HOA was created prior to the Planned Community Act (which became effective January 1, 1999), the question arose as to how the CCRs could be amended by the members.

The most intriguing thing about this case is the fact that it made it all the way to the Court of Appeals in the first place, because all of the questions that it presented can be answered by reading the statutes. Section1-102 of the Planned Community Act states that certain provisions of it apply to all HOAs, even communities that were created prior to 1999. One of these provisions is Section 2-117, which allows declarations to be amended by a vote of 67% or more of the lot owners in the community, “unless the Declaration or the Articles of Incorporation expressly provide otherwise.” 

The Court ruled that because The Crossings at Sugar Hill’s CCRs were silent altogether as to any amendment process, they did not “expressly provide otherwise”; therefore, the Planned Community Act provisions applied and the members could amend the CCRs with a 67% vote.

Bottom line: Silence in CCRs as to a particular issue will not be construed in the negative. The provisions of the Planned Community Act which specifically apply to all HOAs, even those created prior to January 1, 1999, will apply when CCRs are silent as to a particular issue.

Please give us a call or drop us an email if our HOA law team can assist your HOA or management company with interpretation of your HOA’s governing documents, 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!