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October 16, 2007
Can a Board be Sued for Not Collecting Assessments?
Here is a question that was recently sent to me:
"Can you direct me to any lawsuits filed against directors for not following their delinquency policy and collecting assessments - i.e., lawsuits by owners that are current. Does their failure to do subject them to personal liability? Are they covered by their D&O insurance?"
First of all, I am not aware of any lawsuits that would provide authority for the proposition that a member can prevail against a Board for failure to collect assessments. There is case authority for the proposition that a Board can be sued for failure to follow the CC&Rs (a fence approval case where the Board approved a block fence that was precluded by the CC&Rs when a open "view" fence was required - Cohen v. Kite Hill).
How this would factor into a collection case is not easy to determine. The facts of each case would have to be examined by an attorney to give a definitive legal opinion. There must be reasons why the Board is not moving on the collection items and those would have to be examined. If the Board is simply being noncommittal, or is purposely avoiding collecting assessments because of friendships or threats, there may be some liability exposure. If the Board is not moving forward because it has weighed the consequences and determined it is not cost effective to go forward, it may be protected by another case that stands for the proposition that the Board can make a decision not to sue even when a violation of the documents exists because of financial concerns. (Beehan v Lido Isle).
The bigger concern may be a case that stands for the proposition that if a Board fails to follow its own stated policies and procedures, it's continued right to do so may be jeopardized. (Ironwood case)
These are delicate issues. Since the failure to collect assessments adversely affects all owners that do pay assessments and threatens the budget, and since the board is a fiduciary in charge of the assets of others, the duty to collect assessments is of the utmost importance. In order to escape liability if sued, the board would likely have to show extreme diligence in its attempts to collect.
That's my take on the question. An association board should seek advice on handling collections from its own attorney. Not all attorneys agree on collection methods, and some are more heavy handed than others. There is no question that the assessment stream is the lifeblood of an association and collections should be considered one of the most important tasks with which a board is charged.
As for D and O coverage - it should cover the Board and the Association if the Board lacks diligence in collections, but there are factors that could take a Board member out from under the umbrella of that protection. The facts would have to be extreme, I believe.
Posted by Beth Grimm at October 16, 2007 10:16 PM