Governing By the Book Deviating From Governing Docs Can Cost You

Governing By the Book

Most newly-elected condo or co-op board members aren’t experts in running a multifamily building or development. They may be eager, enthusiastic, and committed to serving their community. But they also probably have little idea of how to do that until they’ve learned a bit more through experience. Fortunately, co-ops, condos and HOAs all have an established set of governing documents laying out the rules that everyone in the community must follow. 

And while governing documents do act as guidelines for board members, viewing them purely in that light downplays their significance. For all intents and purposes, governing documents are a board’s bible. Everything pertinent to the governance of the community should be included – and the sooner that a board member realizes this the better. Deviating from these foundational documents can result in trouble not only for the board, but for the community at large, depending on the magnitude of the transgression. Mistakes happen, of course, but ignoring or contradicting one’s governing docs – even with good intentions, or for the sake of expediency – only leads to trouble.

Read Those Rules

Getting familiar with governing documents should be the first thing any board member – or resident seeking board membership, or even a resident invested in the operations of his or her building or association – should look to do.

“Unless and until bylaws and rules and regulations of a cooperative corporation or condominium association are changed, a board has a fiduciary duty to uphold and follow that framework for operating the organization,” says Michael T. Reilly, an attorney with Norris McLaughlin P.A. in New York City. “They are not optional guidelines; these are the requirements that must be followed until they’re properly amended, changed or removed from the organizational documents.

“It’s essential for each board member to have a working knowledge of these governing documents when they take office,” he continues. “I suggest that every new board member be provided with a hard and digital copy of all governing documents, and that each board member be provided with a lecture on fiduciary duties when the new board is in place and the officers are elected.”

Of course, there’s a learning curve to becoming an effective board member, and mistakes can be made. Fortunately, the business corporation law (BCL) exists to indemnify members who err with the right intent.

In short, the BCL “is the shield that allows most board members to sleep at night,” says Leni Morrison Cummins, an attorney with Cozen O’Connor in New York City. “When condo and co-op boards take action, those actions are generally protected by the business judgment rule, which mandates judicial deference to board determinations  – as long as the board action is within the scope of its authority, taken in good faith, and in the lawful and legitimate furtherance of the co-op’s or condo’s purpose. In short, this means that boards must follow their own rules and governing documents.”

An attorney can help keep a board on the straight-and-narrow as well. “From legal counsel’s perspective, helping a client focus on legitimate goals helps prevent bad conduct,” says Michael Gelfand, a senior partner at the law firm of Gelfand & Arpe in West Palm Beach, Florida. “As we counsel association directors, we help them keep in mind that they volunteered to do the right thing. In Florida, directors must attend a two-hour class or sign a paper stating that they have read and will uphold their governing documents. When a director reflects on that certification, they invariably fall onto the road of good intentions, especially when they’re reminded that in Florida, most association records are accessible to owners.”

Failure to Adhere

Again, acting outside the rules laid out within an association’s governing documents not only opens up the offending board member to penalties, but can put the entire association at risk.

“When [board members] deviate from their governing documents, it exposes the board to liability,” says Cummins. “Therefore, as an attorney to many condominium and cooperative boards, most of my advice pertains to keeping those boards protected by the business judgment rule. This often means that I am called on to interpret occasionally ambiguous governing documents, or to amend governing documents.

“But one of the biggest pitfalls that I see occurs when boards ignore issues rather than face them,” she continues. “Ignoring an issue and failing to make a decision of any kind on it also exposes a board to liability. The business judgment rule protections only apply when a board actually makes a decision. Therefore, even if an issue will undoubtedly be voted down, it is important for boards to consider and vote on all issues that come before them.”

Additionally, while apathy can certainly be an issue in any association, boards are hopefully acting under the watchful eyes of an engaged community of residents. “Human nature is such that the owners who are not on their association board often feel an imperative to scrutinize the board, and to assume that anything they haven’t been informed of is a nefarious plan in the making,” says Gary Daddario, a partner with the law firm of Marcus, Errico, Emmer & Brooks, P.C., which has offices in Massachusetts and New Hampshire. “In light of that, unit owners are typically familiar with provisions of the documents having to do with open meetings, the availability of records, when financials are supposed to be distributed, etc. One of the biggest mistakes I see boards make is not following their documents and missing such an event. Again, in the absence of information to the contrary, owners will often assume that the board is up to no good.

“Other common trip-ups include the failure to properly handle the association’s ‘administrative’ details,” he adds. “If an association is a corporation and they do not keep up their filings with the state, the corporation can be involuntarily dissolved. Or, a vote on an important issue might be challenged if something was lacking in the meeting notice. Another example would be that an amendment could be challenged if the formalities [for making that amendment] were not complied with. This includes not just the proper voting, but the proper execution of the document by the proper parties.”

Of course, rule violations occur on a sliding scale, and not every overstep amounts to a high crime. “There must be a balance between threatening the proverbial wrath of the gods, punishment for transgressing legal thresholds, and reminding of [the state’s] recognition in the community association context that volunteers should not be held to a standard stricter than the business judgment rule,” says Gelfand. “If you constantly threaten that aforementioned wrath for every transgression, then no one will volunteer, because even the most studious follower of the documents will be concerned with making an error and being held liable. Additionally, the term ‘volunteer’ for most directors is not entirely appropriate; they are not paid, but they are usually drafted in a manner that makes them feel as if they cannot refuse without being perceived as abandoning their community.” Gelfand goes on to say that some residents agree to serve on the board because the only other alternative is having no one serve (and a court taking over), or having less-than-competent people on the board who will make whatever challenges or issues the community is facing significantly worse.

Actions and Consequences

When board members deliberately abuse their powers, they can face consequences that make whatever gains they’d hoped to get out of their position seem hardly worth it.

“Selective enforcement of the documents may result in shareholder or unit owner unrest, and possible action to remove a board member for cause,” warns Reilly. “These are all distractions for corporations and condominiums that detract from the hard work that volunteer board members put in each month to help run their communities. If a building or a community develops a reputation for not having consistent enforcement of its rules and regulations, that may negatively impact the sale and transfer of apartments and homes in that community. Additionally, board members could find themselves facing jail time if they are found to be engaging in self-dealing conduct or kickback schemes.”

Occasionally, a board member will violate the rules in an effort to appease demanding residents. This rarely works out well.

“A fundamental problem is that everyone eggs on board leaders to spend as little as possible and to keep assessments low,” says Gelfand, adding that part of the issue may be people’s tendency to balk at paying for intangibles. “Sometimes it’s effective for legal counsel to point out to an association’s directors, as well as the membership, that they really do not want to live in a community that has the smallest budget and lowest assessments.

“We have had high-rises next to one another, governed by their individual associations,” he continues. “One had residents who were willing to pay for upgrades on a regular cycle. The other had residents there for decades who did not see why they ever needed to do anything different from what they’d always been doing, because everything looked fine from their point of view. Observing the buildings side by side, one appeared sleek and modern while the other appeared to be crumbling from disrepair. As a result, resale prices were substantially different!”

Whether a board member bends the rules in an effort to seem magnanimous, or does so solely to line his or her own pockets, deviating from community governing documents is always a bad idea. Those particular rules are laid out for good reason, and following them in good faith is a solid strategy for avoiding most serious trouble. When it comes to association governance, the cool kids are the ones who dutifully follow all of the rules.

Mike Odenthal is a staff writer/reporter with New England Condominium

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