Unity in the Community: It Starts with Effective Board Members
For any newly-elected Board member, the responsibilities and obligations of the job can be daunting. Taking those responsibilities and obligations seriously is important, not only because it's the "right thing to do," but also because doing so is in the best interests of the Association and better ensures an amicable relationship between the Board of Directors and the Association membership.
The members of the Board of Directors of a homeowners association have a great responsibility to the association's members to govern the association properly and appropriately. The legal obligations of a Board of Directors apply to all Boards, regardless of the size of the community and regardless of whether a community is professionally managed or self-managed. Ignoring those obligations-or even simply being unaware of them-can contribute to discord within a community and, sometimes, a lack of trust in the Board by the homeowners.
Be Familiar with your Governing Documents:
- Board members must be familiar with their community association's governing documents: the Articles of Incorporation, Declaration, Bylaws and any Rules and Regulations. Of course, no one Board member is expected to understand all the many nuances of the governing documents, and the Board members may rely on the services of appropriate professionals to interpret and guide the Board in making decisions. Board members should be wary of seeking advice or input from members of other associations, since those associations' governing documents may contain different provisions than those of the association at issue.
- In particular, Board members must be familiar with and understand the maintenance responsibilities and the allocation of those responsibilities between homeowners and the association. It is important that Board members not simply rely on the premise of "this is how we've always done it." Many associations create a maintenance chart or matrix, identifying various maintenance issues and the party responsible for that maintenance. While certainly helpful, such charts are not foolproof. Sometimes assumptions made are carried forward on such charts, serving only to perpetuate errors in the allocation of maintenance responsibilities.
Act in Accordance with your Governing Documents: Board members must act in compliance with their community's governing documents and applicable state law. While such a duty seems obvious, it is far more difficult to meet the duty in reality than in concept. Board members should refer to the documents frequently to ensure that the Board is following policies and procedures that are stated in those documents. For oft-repeated tasks (e.g., calling meetings, providing financial data, providing notice of violation/right to a hearing, etc.), the Board may wish to make a "flow chart" or "checklist" based on the provisions of the governing documents.
Consider these real-life examples of issues that can easily "trip up" a Board:
- If the Bylaws require the annual meeting to be held on the third Saturday in November, the meeting must be held on that date-even if the membership is amenable to holding the meeting on a different date. Unless the Bylaws are amended to change the date on which the meeting is to be held, it must be held on the date stated in the Bylaws.
- If the Declaration absolutely prohibits leasing of homes in the community, then the Board of Directors must enforce that prohibition without exception. Unless the terms of the Declaration give the Board discretion to grant waivers of a general prohibition, the Board does not have any such discretion, and must enforce the provisions of the Declaration as written, no matter how sympathetic the Board may be to a homeowner's plight.
- If the Declaration/Bylaws requires assessment payments be made monthly or quarterly, the Association must collect payments as stated in the governing documents, even if the members would prefer to make them according to an alternate schedule. If the membership wishes to make payments according to a schedule other than as stated in the governing documents, the association must amend the appropriate document (Declaration or Bylaws-or both, if necessary) to so provide.
- If the Bylaws or Declaration require that a certain procedure be completed or a certain report be provided to all homeowners, then it is inappropriate for the Board to ignore such mandates--even if "we've never done it that way before."
- If the Declaration states that it is the responsibility of the association to perform the maintenance of the decks, then, irrespective of whether the cost can be passed on to owners of units with decks, the association must perform that maintenance.
Monitor Your Vendors (including your management company): Some Board members may be under the mistaken impression that, if they have engaged vendors to "take care of everything," they have shifted the responsibility for ensuring completion of those tasks identified to the vendors. Not true. Most associations' bylaws include language that says, for example, even though the association may delegate a given officer's functions to a managing agent, such delegation does not relieve that officer of the ultimate responsibility for the his or her duties. This is most especially true for the duties of the Treasurer. The Board of Directors is ultimately responsible for the actions of its vendors. Granted, there may be legal action that can be taken against a vendor that breaches its contract with the association, but, nonetheless, it is the Board that answers to the association members, and the Board that is responsible for the operations of the association. Choose and monitor your vendors carefully.
Keep Appropriate Records: Minutes should be kept for all Board meetings, committee meetings and association meetings. Bear in mind that minutes are a record of what was done, not what was said. Minutes need not be-and should not be-a transcript of the meeting. Rather, minutes should reflect topics discussed at a meeting (thorough detail of the discussion may be omitted), votes taken and the results of those votes.
Use Meetings and E-Mail Appropriately
- Under the Minnesota Common Interest Ownership Act (MCIOA), all Board meetings must be open to all members, except when the discussion involves certain sensitive matters. Association members are entitled to attend Board meetings but may not participate without Board authorization. They are, in effect, an audience for the Board meeting.
- Since association members are entitled to "watch the Board in action," a Board who acts via e-mail may indeed be violating the open meeting provisions of MCIOA. Board members may e-mail one another to exchange ideas, etc. (so long as the "presence" of two Board members does not constitute a quorum). However, if a quorum of Board members were to engage in an online chat room not available to all homeowners, or discuss issues and conduct votes via e-mail, such conduct may violate the open meeting law. The purpose of the law is to allow association members to be present when the Board discusses an issue or votes on that issue. Engaging in discussions and votes via e-mail circumvents that purpose.
- Of course, emergency situations occur from time to time. In the event of an emergency, a quorum of Board members could use e-mail for discussion and voting on the issue creating the emergency.
- For those associations not governed by MCIOA, only the Minnesota Nonprofit Corporations Act (Chapter 317A) applies. Under that statute, a board may hold meetings via remote communication, provided everyone participating is able to "hear" each other simultaneously (conference call, private chat room, etc.). Since exchanges of electronic mail messages do not allow for simultaneously "listening," an e-mail exchange does not count as a permissible meeting by remote communication. Further, although associations not governed by MCIOA are not required to hold open meetings (unless, of course, their governing documents so require), Boards should endeavor to hold meetings in as open a manner as possible to avoid the perception that business of the association is being conducted "secretly."
Act in Association's Best Interest: The responsibility to act in the best interest of the association is paramount in fulfilling the role of Board member. In a community association, where homeowners pay assessments - often incorrectly called "dues" - to an organization that is responsible for administering the community and safeguarding property values, the need to put the best interests of the community association in first position should be obvious. Homeowners depend on their community association, through its Board of Directors, to maintain, protect, preserve and enhance the common areas and exteriors of the property, which, as a result, safeguards each homeowner's investment.
- Each Director must put aside personal agendas, remembering the legal obligation to act in the best interest of the association as a whole.
- Board members must remember that they must always act as a unit - no individual has the authority to independently make decisions. Homeowners, however, do not always appreciate this fact. Often (particularly when an association is self-managed), homeowners will contact a Board member to seek assistance on a particular issue. The director contacted should advise the homeowner to submit issues in writing for Board consideration. Board members should avoid telling homeowners that they will "go to bat" for them or otherwise champion their cause. Doing so will only cause discord in the event the Board acts in a manner contrary to the homeowner's position, and may call into question whether the Board member is in fact acting in the best interest of the entire community association.
Act Prudently: Upholding the duty to act in the best interest of the community association is not simply a good idea, it is the law. Most community associations are incorporated under the Minnesota Nonprofit Corporations Act, Minnesota Statutes Chapter 317A, which provides that, "a director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances." Minn. Stat. § 317A.251.
- A Board member exercises the required "good faith discharge of duties" by seeking the advice and opinions of its professional advisors - including accountants, attorneys, and management agents - as long as the director reasonably believes that the matter is within the advisor's professional or expert competence. Board members must, therefore, take reasonable steps to ensure that their advisors are well-versed in community associations.
- In making a determination as to whether a director acted prudently, many courts and attorneys look to the business judgment rule, which provides that if board members act in what they believe to be the best interests of the association - in an ordinarily prudent manner, after reasonable inquiry - then those directors are not liable for their decision, even if their decision later proves to be a poor one. The protection afforded by the business judgment rule highlights the importance of documenting the board's actions in conducting a reasonable inquiry.
- If unsure as to whether a proposed action is permitted or advisable, a Board should ask for an opinion before it acts-not after. It is far easier to avoid a misstep than to correct one already taken.
- "Acting prudently" includes abiding by and uniformly enforcing the community association's governing documents. If the Board of Directors makes a business decision against enforcement of a particular provision in the governing documents (often because it is unpopular or will affect a significant number of homeowners), the Board must appreciate the consequences. The Board may unintentionally establish a precedent that makes future enforcement difficult, and may open itself to liability for failing to discharge its responsibilities to the community association. Remember, the fact that a restriction is unpopular does not absolve the Board from its obligation to enforce that restriction.
Consider Board Training. Because serving as a member of a homeowners association's Board of Directors is so important-and so daunting-many boards opt to participate in training and planning sessions for association boards. Such training can help boards conduct effective board and association meetings, facilitate resolution of conflicts, and generally understand their job responsibilities-and limitations-better. Participating in such training and planning can also help directors recognize potential pitfalls and special areas of concern that may need to be addressed, either in the long term or short term. Training also avoids the dangerous "seat-of-the-pants" mode of governance some associations employ.
Consequences of Misconduct
An association entrusts its Board of Directors with the responsibility to act in the best interests of the association. The members of the association rely upon the Board to exercise its discretion and best judgment on behalf of the association-not to exploit their positions for personal gain or advantage. When directors fail to carry out those responsibilities, they may be found to have breached their fiduciary duty to the members of the association.
Clearly, no association can reasonably expect perfection of its Board of Directors. Directors are volunteers, donating their time, talent and wisdom to the association. Mistakes happen. While many directors assume the association's insurance will cover any "misstep," such an assumption may prove dangerous-and, under the right circumstances, financially and/or emotionally ruinous. While insurance and statutory shields offer some protection (see below), a wise Board member seeks to avoid errors and breaches in the first place, rather than relying on the availability of insurance and other liability shields. Even if a claim of breach is an insured claim, the emotional cost and time involved in defending the claim are significant.
Board member protections
Community association directors are protected from liability under statutory law, which includes protections afforded under the Minnesota Nonprofit Corporations Act, as discussed above. In addition, as long as a director does not receive compensation for service (which includes not only direct payment, but also, for example, a reduction in annual assessment payments during a director's term of service), the director is not civilly liable for an act or omission that was made in good faith, was within the scope of the person's responsibilities as a director or officer of the community association, and did not constitute willful or reckless misconduct. (See Minnesota Statutes §317A.257.) While some governing documents include provisions for compensating directors for their service, accepting any compensation eliminates the liability shield provided under the statute. (Directors may be reimbursed for out-of-pocket expenses without jeopardizing their liability shield.)
Serving as a member of an association's Board of Directors can be overwhelming, especially at the beginning of one's term. Such service, however, is also rewarding. Armed with reasonable expectations and an awareness of the responsibilities of the job, a director can make his or her term on the Board a time of building knowledge and building relationships-all while building a stronger, more effective homeowners association.