Lack of Annual Meetings Doesn’t Deprive Board of Authority
Community associations often struggle to achieve the quorum required to elect new board members at their annual meetings. But does that mean the board members who carry over lose the authority to act? A Michigan Court of Appeals recently said it means no such thing. Channel View East Condominium Ass’n, Inc. v. Ferguson (Mich. App. 2019)
The Challenge to Authority
The association in the case was incorporated in 2001, and the developer appointed the first board of directors a few months later. The articles of incorporation didn’t provide for a term for the first board, stating only that, after the first board was elected, directors would be elected according to the bylaws.
The bylaws required the association to hold annual membership meetings to vote on the election of new directors, but the association never held any meetings or voted on new directors.
In 2003, an owner began construction of a house; the bylaws required that he complete construction within 12 months. In September 2005, the association notified the owner that his continuing construction violated the bylaws and scheduled a hearing. The owner didn’t appear, so he was found in violation.
The association imposed monthly fines until the violation was remedied, which still had not occurred when it filed a lawsuit in 2016. By then, about $135,000 in fines and interest had been assessed. The lawsuit sought foreclosure and sale of the owner’s property to satisfy the debt.
The owner argued that, because the association didn’t comply with the bylaw requirements for annual board elections, it couldn’t take valid actions, including levying fines and filing lawsuits. The trial court agreed and dismissed the case.
The association wisely appealed, though, and ultimately prevailed. The Michigan Court of Appeals held that the original board of directors, appointed back in 2001, carried over and retained the authority to act on behalf of the association.
It acknowledged the failure to hold the required member meetings but found that nothing in the bylaws required a member vote before the association could file a lawsuit. That power, it said, “is given solely to the board of directors.”
The court also cited the state Nonprofit Corporation Act, which states that the failure to hold an annual meeting or elect a sufficient number of directors doesn’t affect other valid acts by a nonprofit corporation such as an association.
Implications for Associations
“What the court clarified here is that the lack of an election isn’t a defense to a bylaw violation,” says Kevin Hirzel of Michigan-based Hirzel Law, PLC, who represented the association in the case. “Most state statutes say that a board that can’t hold an election because it doesn’t have a quorum continues until the next annual meeting.”
If board members didn’t retain the authority to act on behalf of their associations, the associations couldn’t enforce restrictions, collect assessments, file taxes, contract with vendors, or take other vital actions.
Dan Artaev, a senior attorney at Fausone Bohn, LLP, in Northville, Mich., has seen similar circumstances among his clients. “I’ve had the defense asserted that, because the association wasn’t strictly following the corporation requirements in the law, it was without the power to file a lawsuit and enforce its deed restrictions.
“It’s more common than you might think because associations often are run by owners who either don’t know they must follow certain requirements in the law or just a lack of interest in people to be on the board.”
In Artaev’s case, the association had fallen a couple years behind on the requirement to file an annual statement with the state Corporations Division. The result was the same as in Hirzel’s case.
“If you read the Nonprofit Corporations Act, the policy is clear that you have to follow these corporate forms, but an association that doesn’t follow the strict corporate form can still sue and be sued. It doesn’t lose the power to enforce deed restrictions, nor is it immunized from suit.”
That last point is important. Otherwise, a board could do as it pleased, without fear of lawsuits, as long it didn’t hold meetings.
The outcomes in these cases were favorable for the associations, but it’s still better to comply with the bylaws’ election requirements. So how can your clients increase the odds of getting a quorum at meetings for elections?
“Even 35 percent quorum requirements are difficult to meet for many community associations due to the apathy of most members,” Hirzel says. “Some of my clients do giveaways at the meeting to increase attendance, or they say they’re going to discuss capital projects.
“Some boards basically say the fact that people don’t show up means things are going well and no one has objections — but that can lead to problems down the line.”
Artaev notes that associations that have fallen short on any corporate requirement can and should remedy the deficiencies ASAP. “If an association is behind on its meetings, or minutes, or whatever requirement, the law makes it relatively easy to correct that going forward.
“In my case, where the association hadn’t filed its annual statements, I just had it retroactively file for the missing years, and then I could argue in court that we fixed it.” But, he says, it’s better to meet the requirements on a timely basis than to try to fix them after the fact.
Artaev also cautions against misinterpreting these cases as permission to ignore requirements. “The court in the most recent case even says its ruling shouldn’t be read as giving carte blanche to ignore bylaws.”
Indeed, under the bylaws, any owner could have filed a lawsuit to require the association to comply with the bylaws or to compel elections, and the association may have ended up liable for the owner’s attorney fees. Fortunately for the association, no one ever did. And, according the Hirzel, the association finally held an election after the Court of Appeals’ ruling.