« CORPORATE COMPLIANCE NOTICES - A SHAM OR A BRILLIANT MARKETING PLOY?? | Main | Manager Training and Designations - Who Does It? Where Do You Find Them? »
January 7, 2006
Apathy - The Continuing Saga - and Worse Case Scenario
The questions about what to do when no one will serve on the Board or come to Board meetings are common. One reader recently asked "What happens when an association hold [sic] its 'annual meeting' and there are no candidates or nominees and there are now only 2 board member [sic] out of 5 position [sic]. And only six people showed up for the meeting out of 116 units."
I would say that this association is very likely headed for trouble. Unforetunately it is up to the 2 remaining board members serving to get out and "recruit" board members, or take the Association down the path to receivership. Incidentally, even one remaining board member has the power and authority to appoint board members. This is one exception to the need for majority approval for Board actions. The documents may prevent 2 out of 5 from making valid decisions or taking action. If that is so, then any action taken by these 2 can be found to be either void, for failure of a quorum, or "ultra vires" (outside the corporate authority) except for the appointment of additional board members. These remaining board members should be concerned about personal liability and about the future of the Association, having assumed the positions.
If no owners are willing to serve, the worst thing (but not that uncommon) for these remaining board members to do is resign and leave no one in charge. This is what can happen (and has, in my experience representing clients). There are lots of possible events that can occur. Eventually, someone tries to sell and there is no one to fulfill the Association's duty to provide seller/buyer requested escrow documents. People start asking questions and the realtors and the seller come to the conclusion there is no "active" association. Lenders will no longer finance the units. That's getting into the end run-worse case scenario.
Of course, there are many interim problems likely to occur. No one collects assessments; no one pays the bills. If this is a condo the water may be turned off. The landscaping fails either because the water is off, or the gardeners have quit for failure to get paid, or both. The buildings and/or common area fall into disrepair. The insurance protecting the Association, the Association members, and the Board members lapses and there is therefore no insurance protection to pay for the defense of the board members breach of fiduciary duty. Chances are the governing documents protect the board members through "indemnification" clauses so the Association owners may pay any claims out of pocket, or if the "indemnification" clause fails because the Board members' leaving was considered "gross negligence" or because they are no longer Board members, then the Board members are subject to being sued individually, and they may end up paying the bulk of damages or losses.
And ... people may start constructing otherwise prohibited improvements; people may stop following parking rules or restrictions, and people may stop honoring pool rules. Some things that happen may be irreversible.
There is a host of potential problems, but the worst brunt of things may fall on the last remaining or two remaining board members, for abandoning ship.
The choices left to Board members who are burned out or owners who determine there is no longer a board include the right to petition the court to have a "receiver" approved. Whether and where the money is raised or put forth for these actions is a question for legal counsel.
Sometimes this hopeless scenario can be resolved with a letter to the owners warning of the dire consequences of not having anyone willing to step up and serve. The letter can explain that going into receivership is no picnic, and not the best choice for the Association. The members will have to pay the cost of a receiver, and before falling into this catch-22 situation, should be given the option of paying for association management instead. Good management can relieve Board members of the heaviest portion of the burden of volunteer service, and that may encourage more service.
To be continued... the new elections laws that take place July 1 require the offer of absentee voting to the members and some say this could discourage meeting attendance. It is important to consider this, and try to counter any effects by generating a meeting scenario (perhaps a social??) that people will attend - because it is often from these meetings that interest in serving (or opportunity for "recruiting") occurs.
Posted by Beth Grimm at January 7, 2006 9:39 PM