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What are the Legal Ramifications of Board Inaction?

Thursday, February 06, 2014

WHAT HAPPENS WHEN?

The association fails: To file for non profit corporation status To follow the Arizona open meeting law To hold board meetings or annual meetings To have an annual audit conducted To procure adequate insurance for the

association or To follow state laws

Important Arizona Common Law Cases on Enforcement of Association

Documents

GFELLAR V. SCOTTSDALE VISTA NORTH TOWNHOMES ASSOCIATION

Arizona Court of Appeals ruled that the Association had a duty (and not just a right) to enforce a restrictive covenant requiring owners to not interfere with drainage.

Use of “shall” vs. “may” If documents use the word “shall” then

enforcement is likely mandatory (“The Board of Directors shall have the right and duty to enforce…”)

JOHNSON V. POINTE COMMUNITY ASSOCIATION

Arizona Court of Appeals ruled that a Board’s decision to not enforce a requirement to obtain approval by the DRC/ACC for an exterior alteration to a property can be challenged by an owner in the Association

Court held that the Board’s decisions are not entitled to deference if the Board doesn’t follow the Association’s CC&Rs in the first place. If the CC&Rs give the Board discretion to enforce or not enforce (“may”) then the Court will defer to the decision of the Board.

THE IMPORTANCE OF MAINTAINING NONPROFIT CORPORATE STATUS

One major benefit: Protection of the association’s officers,

directors and members from personal liability for the corporation’s debts and liabilities

WHY FILE AN ANNUAL REPORT?

Pursuant to Arizona Law (A.R.S. Section 10-11622), all nonprofit corporations must prepare and file an annual report on a form provided by the “ACC”

A $10.00 filing fee must be paid to the ACC each year on or before the due date assigned

New online reminders are available

IMPORTANT CONTACT INFORMATION

For the status of your corporation:Phone (602) 542-3026

For information on filing documents:Phone (602) 542-3135

For information about your annual report: Phone (602) 542-3285

Corporate Records:Phone (602) 542-3026

ARIZONA OPEN MEETING LAW

Pursuant to Arizona Law, all board of directors and regularly scheduled committee meetings are required to be open to all association members or their representatives and held in the State of Arizona

Members or their representatives: Are allowed to attend and speak at appropriate

times within reasonable time restrictions Must be permitted to speak before the board

takes formal action on an item under discussion

ARIZONA OPEN MEETING LAW

The board may close a portion of a meeting to the members and go into executive session to discuss: 1. Legal advice from an attorney for the board or the association. On final resolution of any matter for which the board received legal advice or that concerned pending or contemplated litigation, the board may disclose information about that matter in an open meeting except for matters that are required to remain confidential by the terms of a settlement agreement or judgment;

ARIZONA OPEN MEETING LAW

2.  Pending or contemplated litigation;

3.  Personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association, including records of the association directly related to the personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association;

ARIZONA OPEN MEETING LAW

4.  Matters relating to the job performance of, compensation of, health records of or specific complaints against an individual employee of the association or an individual employee of a contractor of the association who works under the direction of the association; and

5.  Discussion of a member's appeal of any violation cited or penalty imposed by the association except on request of the affected member that the meeting be held in an open session.

ARIZONA OPEN MEETING LAW

Homeowners are also permitted to tape and/or video record open board meetings

ANNUAL MEETINGS

MUST be held once a year Requirements for an annual meeting are

typically set forth in the bylaws Purpose of an annual meeting:

Elect directors Conduct other business i.e. – approval of budgets, proposed amendments to associations documents, etc. Discussion and input by members

ANNUAL MEETINGS: PLANNING AND EXECUTION

Establish nominating committee and solicit candidates

Provide notice 10-50 days in advance of meeting

Create formal tally sheets, sign-in sheets and log

mail-in ballots Have personnel to tackle problems before they

arise: Greeter, registrar, troubleshooter, etc.

ANNUAL MEETINGS: PLANNING AND EXECUTION

Conduct voting in an appropriate manner: Establish independent “inspectors of election”

to oversee voting process and tally votes Inspectors should not have an interest in the

election results

Ensure quorum is obtained to lawfully conduct business

ANNUAL AUDIT, REVIEW, COMPILATION

The board of directors is required to conduct a financial audit, review or compilation of the association annually

Completed no later than 180 days (6 months) after the end of each fiscal year

Made available to the members within 30 days of completion

D & O INSURANCE

Directors and Officers Liability Coverage (D&O)

1. Typically covers the board of directors

2. Common claims: board’s failure to adhere to governing documents, challenges to assessments, breach of fiduciary duty, etc.

3. Choose a policy that includes indemnity coverage for the cost of defending actions against the association and specifies that the coverage limit does not include the defense costs

D & O INSURANCE

4. D&O coverage typically offered to community associations may not cover non-monetary claims

5. Mono-line (stand alone) policy is more expensive, but it may cover these non-monetary claims

PROPERTY INSURANCE

1. Property damage claims are more common than liability losses

2. Not uncommon for boards to set insured loss caps intentionally too low to reduce premiums

3. Most policies will include an automatic inflation adjustment provision

PROPERTY INSURANCE

4. Community should be periodically appraised and reviewed to insure cost benchmarks are reasonable

5. Add coverage for any additions made after the existing policy was issued

FIDELITY INSURANCE

1. Issued in the association’s name with the property manager obligated under association's policy so insurance will cover a theft by the management company principals as well as by the property manager

2. Management company will have its own insurance, but will typically cover the property manager only and not a theft perpetrated by management company’s owners

NOTICE OF CONTACT

Associations are required to file in the office of the country recorder in the country in which the association is located, a notice stating the following:

Name of association Name of community Name of designated agent or management companyThe date of the recording and the recorded instrument number or book and page for the main document that constitutes the declaration

NOTICE OF CONTACT

If an association’s address, designated agent or management company changes, the association is required to record a new notice with updated information within 90 after the change

RECORDS REQUEST

All financial and other records of the association shall be made reasonably available for examination by any member or any person designated by the member in writing as the member’s representative. Books and records kept by or on behalf of the association and the board may be withheld from disclosure to the extent that the portion withheld relates to any of the following:

1. Privileged communication between an attorney for the association and the association; 2. Pending litigation;

RECORDS REQUEST

3. Meeting minutes or other records of a session of an executive session board meeting;  New legislation in 2006 entitles owners to see association books and records pertaining to “contemplated” litigation. An association cannot charge a member for making books and records available for review. An association has ten (10) business days from submittal of a request by an owner or an owner’s designated agent to make records available or copies of the requested records. The association can only charge 15 cents per page for copies of records

RECORDS REQUEST

4. Personal, health or financial records of an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association; and 5. Records relating to the job performance of, compensation of, health records of or specific complaints against an individual employee of the association or an individual employee of a contractor of the association who works under the direction of the association.

REMOVAL OF DIRECTORS & BOARD MEMBERS

1. Petition for Removal of Director Requirements:

a. Associations with 1,000 or fewer members: a petition must presented to the board for removal of a director that is signed by the number of persons who are entitled to cast at least 25% of the vote or 100 votes, whichever is less

b. Associations with 1,000 or more members: petition signed by 10% or 1,000 votes, whichever is less

REMOVAL OF DIRECTORS & BOARD MEMBERS

2 . Special meeting: Shall be called, noticed, and held within 30 days after receipt of the petition

3. Quorum: Will be met if at least 20% of the votes, or 1,000 votes, whichever is less, are present t the meeting in person or as other wise permitted by law

4. Percentage required to remove director: A member of the board can be removed from office with or without cause by a majority vote of the members entitled to vote

REMOVAL OF DIRECTORS & BOARD MEMBERS

5. Retention of Documents: The board must retain documents related to proposed removal for at least 1 year after the special meeting and shall permit inspection of these records by members

6. Only one removal per term: A petition for removal of the same member of the board shall not be submitted more than once during each term of office for that member

DISPLAY OF FLAGS

An association cannot prohibit the outdoor display of the American Flag, or an official flag of the United States Army, Navy, Air Force, Marine Corps, Coast Guard by a unit/lot owner on the unit/lot owner’s property if the flag is displayed in a manner consistent with the Federal Flag Code

Associations cannot prohibit the outdoor display of: POW/MIA flag, Arizona State flag, Arizona Indian Nations flag, Gadsden flag (Don’t tread on me)

Planned communities are allowed to limit the number of flags to two (2) and can restrict the height of a flagpole

FINES AND PENALTIES

After notice and an opportunity to be heard, an association or board of directors may impose reasonable monetary penalties on members for certain violations

Associations no longer have the right to record a notice of lien for unpaid fines

FINES AND PENALTIES

Associations can enforce payment of fines by: Filing a lawsuit Obtaining judgment against owner AND Recording judgment with the county

recorder’s office

Associations can collect judgment through garnishment of wages, rent, or a bank account

FOR SALE SIGNS

An association shall not prohibit or charge a fee for the use or placement of the indoor or outdoor display of a “for sale” sign

FOR SALE SIGNS

An association or managing agent’s lien rights (as authorized under A.R.S. Sections 33-1256/33-1807), will be forfeited for a period of 6 consecutive months from the date of violation if an association or agent violates an owners right to have the following: Temporary open house or for sale signs Open house hours, except before 8:00 AM and

after 6:00 PM For lease signs on the owners property, unless the

association’s documents prohibit or restrict leasing

ARIZONA LEGISLATIVE UPDATE

51st Legislature, Second Regular session

Mulcahy Law Firm, P.C. will provide a summary of the legislative session every Monday regarding community associations bills

Check our website’s Publications Tab and our Legislative Blog

This week’s summary

Join us for Lunch with Mulcahy

March 6, 2014

Federal Laws: How Do We Comply?

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