By Justin Bayer, Caretaker Landscape
T he idea of an HOA board member going rogue and compromising the integrity or the future of a community is not uncommon. Going “rogue” can refer to various actions, including but not limited to; making impactful decisions without consulting others on the board, acting in an uncivil manner with other board members, using volatile language or behavior toward other board members, or utilizing their position as a board member or board officer to make personally beneficial decisions. Oftentimes these power struggles or bullying through personal agendas can lead to attorney involvement and litigation, avenues that can be fiscally damaging for an HOA and its respective membership.
While there are certainly times when a lawsuit is the only action left to take against a particularly difficult or tyrannical board member, avoiding this result completely is typically a more desirable route. That being said, taking the proper steps in the early stages of this situation can be confusing and stressful.
What rights do board members have when facing a rogue board president? What if that president is newly elected? How can the board deal with a board member who is hiring contractors behind their back? This article will aim to concisely address questions like these and bring to light a board’s rights, as well as proper steps to follow when faced with a difficult situation involving a rogue board member.
While a seemingly innocuous call to action, a simple conversation can go a long way. This type of correspondence can be behind closed doors if preferred, which can be especially effective for enlightening a board member who is beginning to “go rogue.” If board members are not comfortable with an off-the-record conversation, utilizing the structure of the board meeting forum can be especially helpful. By stating issues or questioning decision making within the boundaries of an official meeting, the concerned board members can ensure that their points will be officially logged in the meeting’s minutes.
Oftentimes it is power over fellow homeowners that can get to a rogue board member’s head. They threaten the sanctity of their position by acting out on their own accord, a clear and direct violation of their commitment to the association. This sort of behavior can derive from a position of power on the board, one they were most likely elected to prior to this behavior. Rather than waiting for their term to expire (an option, to be sure, though a lengthier process in most cases), a board has the ability to remove an officer. This process typically only requires a majority vote, though many board members are unaware of this course of action.
If removal from a position of power is not enough (or the offending member refuses to step down on their own), there is the option of removing this person from the board entirely, although this can prove to be a bit more challenging. In most cases, the process of complete removal from an HOA board takes the vote of every member on the board. It should be noted that this is the bare minimum it would require to remove a member completely. As with any process that has serious legal and fiscal ramifications, it is best to become educated in the common interest-related state and federal laws that apply to your community. For Colorado, these laws can be found on the Colorado.gov website, on the Department of Regulatory Agencies (DORA) page.
If the rogue board member has already acted on their own accord and for their own interest or gain, it would be wise to notify all vendors and other community business partners that the board as a whole makes the purchasing decisions for the community. If action regarding third party businesses are not handled in a timely manner, the board could be forced to suffer the monetary consequences of the rogue member’s decisions.
In a 2016 article for HOALeader.com, Bob Kmiecik, a partner at Kaman & Cusimano LLC, advises that “You should contact contractors and say the president doesn’t have the authority to sign contracts himself and therefore those vendors don’t have a reasonable basis to rely on that authority in contracting with the association.”
A final step to ensure that the board is being properly represented legally is to involve the community’s legal representation in all emailed correspondence regarding the behavior of a rogue board member. This action can be of great importance if the decision making of a rogue board officer comes back to adversely impact the board or the community
There are instances where mediation is both beneficial and unavoidable. If the board determines that this rogue board member has acted in a manner outside his or her scope, the association may bring forth a lawsuit, and the court will likely mandate that the parties participate in mediation. The parties would participate in mediation either with or without their own respective legal counsel.
Mediation would involve both parties working toward an agreement while a neutral third party oversees and facilitates the process. All conversation and possible settlement terms in mediation are confidential and cannot be presented as evidence in a later court proceeding. This helps to ensure open negotiations. If the parties are able to come to terms and settle the dispute they would then sign a settlement agreement.
The process of mediation is non-binding, meaning if both parties are unable to come to an agreement during the process, the neutral third party cannot force the parties to reach a settlement.
Mediation varies from arbitration in that the latter is usually binding. During arbitration, instead of a neutral third party, there is an arbitrator or a panel of arbitrators who hear the arguments from both parties then make a decision as to who is right and who is wrong. The process is like a mini-trial and the arbitrator’s decision is enforceable by law.
While there is no perfect way to handle these extremely difficult situations, being well prepared and knowledgeable about the rights and authority of your board as a whole is invaluable. Always consult the proper channels of legal representation before proceeding with any action that may result in fiscally damaging or detrimental conduct to the community
By Candyce Cavanagh, Orten Cavanagh & Holmes, LLC
If you are a volunteer member of your association’s board of directors, it is in your best interests to ensure your association maintains a comprehensive directors and officers (“D&O”) liability policy. A claim against board members may or may not be justified, but defense may be an expensive undertaking and in some instances awards for damages may be substantial.
Colorado law address indemnification of directors and officers. Association bylaws sometimes also address indemnifying committee members or other volunteers. However, without D&O liability insurance to fund the indemnification obligation, an association is faced with the prospect of funding defense as an association common expense of the association.
What are the most common types of D&O claims? This past month at the CAI Luncheon, Adam Collins with Ian H. Graham Insurance identified the following claims as the most common: breach of fiduciary duty; failure to adhere to bylaws; challenges to assessments; failure to properly notice elections or count votes; improper removal of board members; challenges to architectural review decisions; Fair Housing Act discrimination claims; challenges regarding easements and variances; board’s failure to maintain common areas; defamation by the board of a member; and failure to properly disburse funds. This list represents the most common claims, but there are many other types of claims an association may face.
All directors and officers policies are not created equal. In general, there are two types of policies: package policies and stand-alone policies. Package policies often limit coverage to monetary claims and may only cover lawsuits, but not administrative proceedings (i.e., fair housing claims before state civil rights division) or alternative dispute resolution proceedings (i.e., mediation or arbitration). Additionally, insured persons may be only directors, officers and the association. The policy may not cover committee members or the association’s manager.
Stand-alone policies typically cover monetary and nonmonetary claims and also cover administrative proceedings and alternative dispute resolution claims as well as lawsuits. Further, insured entities typically include not only the directors, officers and association, but also employees, committee members, volunteers and community association managers.
Even stand-alone policies are not created equal. Types of coverage the board may consider when reviewing D&O policies include the following: defense for breach of contract; defense outside policy limits (i.e., attorneys’ fees included within or above the coverage limit); third party employment discrimination and harassment; employment practice liability; cyber liability, lifetime reporting period; full prior acts coverage; defense for libel and slander; defense for failure to maintain insurance; employees recognized as a claimant (i.e., standard insured vs. insured exclusion would not apply); and coverage extended to a spouse or partner. Basic definitions such as the definition of a claim may not be the same on every policy and can have a substantial impact on coverage. If you do not know why these types of coverage are beneficial for your association or why policy definitions are important, then do not hesitate to ask questions.
How do these differences in coverage play out in the real world? Here is a real world example. A single mother moves into a community of primarily age 55+ residents, but the community is not a 55+ community under the terms of federal law. The board adopts a rule prohibiting play structures and after receiving a complaint, the board modifies the rule to prohibit play structures that can be seen above the fence line. The single mother files a complaint based on discrimination against families with children. After the complaint is filed, the rule is rescinded, but the discrimination action proceeds. The D&O insurer provides a defense, but this association’s D&O policy only covers defense costs and not damages in the event of a finding of discrimination. Ultimately, two fines of $15,000 each for each of the two rules are imposed and damages of $28,000 are awarded to the claimant. Although the association had its legal defense costs covered, it was uninsured for a total of $58,000. If this association had a policy that covered the damages award, the policy premium difference would have been well worth the investment.
In addition to administrative claims, there are also lawsuits that could be covered by D&O insurance. For example, the Colorado Court of Appeals ruled in 2015 on a case involving validity of a rule limiting short term leasing (Houston v. Wilson Mesa). The owner filed an action to contest two $500 fines for violating a short term leasing rule. The court ruled that short-term leasing is not a commercial use and the minimum lease term had to be in the declaration because the lack of any minimum term in the declaration means that there is no restriction and a rule cannot amend the declaration. We do not know if D&O insurance was involved in this case, but ideally the association had D&O insurance that covered non-monetary claims. If not, the association would have to pay its legal fees for the trial court and appellate court actions out of association funds.
The costs for claims that may be covered by D&O policies can be substantial, whether defense costs or awards for damages. It is important for boards to ask questions of their insurance professionals and not automatically select the least expensive policy without comparing available coverage offered on policies in the marketplace. Boards may also consult with their legal counsel if they have D&O policy questions.
Candyce Cavanagh is a founding member of Orten Cavanagh & Holmes, LLC, a law firm that advocates a preventive approach in providing legal representation to community associations. Candyce is long time member of CAI and also a fellow in CAI’s College of Community Association Lawyers.
By Lee Freedman, Feldmann Nagel, LLC
Whether ‘tis nobler in the minds of the community to live with governing documents that were the creation of the developer or to suffer the slings and arrows of the expense of amending the governing documents to fit the current makeup of the community. That decision many times is the ultimate question a Board of Directors for and owners in a common interest community must make.
Owners, board members, and managers should understand that most community associations are created by developers who do not have any intention to live in the community for many years. However, the developers create communities based on their own interest, and not the future interests of the owners that eventually will buy into the community. The interests of the owners may differ substantially from those of the developer either immediately or over time. As such, the needs of the community also change over time from the needs of the original development.
To effectuate their interests, the developers create governing documents that suit their needs, and likely do not suit the future needs of the community.
Many common interest communities deal with governing documents that are either so incomplete, so outdated, or so out of touch with the current makeup of the community, that the communities are having difficulty utilizing them to suit the needs of the community and the community association. However, the expense to modify the governing documents to fit such current needs, and the apathy in a community can make it difficult to obtain the necessary votes to approve such amendments. The governing documents consist generally of the Articles of Incorporation, the Declaration, and the Rules and Regulations (which also include the governance policies and any design guidelines).
To have such governing documents suit the needs of the community, a community would need to change the documents by amendments. Whether to amend or not to amend is not a simple question . Amending just the Declaration can sometimes cost an Association $10,000 or more, depending on whether the community proceeds with wholesale changes to the Declaration or amends just a few of the covenants in the Declaration, how contentious the amendments are in the community, how difficult it may be to obtain approval of the amendments, and how much the community association’s counsel charges.
Before the board of directors for a community association adopts amendments (if they may do so without member approval) or proposes such amendments to the membership, the board should first analyze the sufficiency of the governing documents, the needs of the community, and the difficulty, time and effort necessary, and cost to obtain such approval. Basically, the board needs to determine if such amendments are necessary and whether the time and expense to be incurred is in the best interests of the association and the community.
The Declaration is the covenants governing the community, including any lots, units, common area or common elements in the community. The Declaration is typically the most difficult document to amend. That is why the Declaration should generally contain those covenants that the community wants to clearly maintain in the community for years to come, as they would be difficult to amend in the future. Any needs or requirements that could change over time or from board to board (such as parking restrictions, painting restrictions, etc.) should be in the other governing documents that may be easier to change by board approval or approval of a lesser number of owners.
Generally, except in a few limited situations, the Declaration may be amended by the approval or consent of between a minimum of a majority and a maximum of 67% of the total voting power of the owners in the community, depending on the specific amendment language in the Declaration.
However, the consent of first mortgagees (the holders of first mortgages on the lots or units in the community) may be required for approval of Declaration amendments. Although the Colorado Common Interest Ownership Act (CCIOA) provides a process to make it easier for a community association to obtain such first mortgagee consent without having to actually obtain written consent, it still may be difficult to get the requisite approval where the consent of all or most of the first mortgagees is required or where the amendments negatively impact the rights of the first mortgagees.
The Articles, the governing document that forms the community association, may be amended by approval of the Board or the members, depending on its amendment provision. If by the members, it is important to understand if such approval is by a vote of the entire membership or only those present at a member meeting where quorum is present. Some Articles can be substantially difficult to amend because they require all or nearly all of the owners to approve amendments.
A community association may want to modify the Articles to, among other things, adopt CCIOA, amend the purposes of the association, provide for a range of members of the board of directors, or change the termination provisions (as to the latter, many older Articles provide that they terminate after a specific period of time if not extended rather than having perpetual life).
As with the Articles, the Bylaws, which outline how the community association is to be governed, may generally be amended by approval of the Board or the members, depending on the amendment provision in the Bylaws. However, if quorum at a member or board meeting is to be changed by amendment, such amendment requires the approval of the members. If the Bylaws are silent as to how member approval is to be obtained, then such approval is to be by the vote of the members at a member meeting called for the purpose of obtaining approval of the amendments at which quorum is present.
A community association may want to amend the Bylaws by, among other things, allowing for proxies, changing quorum requirements, changing voting requirements, changing duties or rights of the Board or officers, changing the board election or removal process, or outlining hearing requirements.
The Rules and Regulations, governance policies, and design guidelines, on the other hand, may be adopted and amended by the board of directors unless there is some provision in the other governing documents stating otherwise.
Full scale amendments (typically referred to as “Amended and Restated” documents) are not always required. Community association can choose to address specific, more immediate needs by amending only specific provisions of a governing document rather than amending the entire document. This could save the association expenses, although it does not guaranty an easier approval process nor does it mean that ultimately full scale amendments are not in the best interests of the community.
The board of directors should also consider the appointment of a committee of interested members in the community to participate in the amendment process, even though the Board has the final decision as to whether to propose the amendments to the membership. A committee can help address the true needs of the community, consider questions and comments from other owners in the community, determine appropriate amendments to address the community’s needs, and communicate with the board. Having members with different opinions on amendment may also help sell proposed amendments to the membership as a joint product addressing everybody’s concerns.
To this latter issue, marketing of the proposed amendments is an important step to obtain approval, especially for contentious amendments or where apathy permeates the community. Such marketing techniques may include, among other things, door-to-door discussions, newsletter articles, and member or board meetings at which the proposed amendments are discussed.
Even with such efforts, it could take considerable time and expense to obtain the necessary approvals. However, if done appropriately and successfully, the final amendments should better suit the current needs of the community, make the management and operation of the community, and aid in the compliance with the current law affecting the community.
Lee Freedman is a senior attorney at Feldmann Nagel LLC. He has represented HOAs for 17 years.
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