Directors vs. Officers

There is often confusion about the difference between directors and officers in condominium and homeowner associations.  Much of the confusion stems from the corporate world. In large corporations, the board members of a corporation are often different individuals than the officers.  For example, IBM has 13 individuals on its board of directors and nearly 20 different individual officers. In other words, there is no overlap between the directors and the officers.

In community associations, however, the individual board members are usually the same individuals who serve as officers.  Members of the association vote for and elect individuals to the board of directors. This is done at the annual meeting of the membership.  Once the board members are elected, the board members (without a vote of the owners) appoint individuals to fill officer positions.  The officer positions consist of a president (or chairperson), secretary, and treasurer. Some association bylaws authorize the appointment of additional officers.

There are differences between the roles and obligations of directors vs. officers.  First, under Oregon law, directors must be owners or co-owners of a condominium unit or planned community lot. (ORS 100.416 & ORS 639). If the unit or lot is owned by a corporation, limited liability company, or similar form of ownership, then an employee, member, or manager of the entity may serve on the board.  There is no similar statutory requirement, however, that officers must be owners or co-owners.

Second, board members are almost always elected by a vote of the association's owners and (usually) may only be removed or recalled by a vote of the owners.  Officers, on the other hand, are commonly elected or appointed by the board members, without a vote and without the input of the ownership.  Most governing documents provide that officers may be removed by a majority vote of the board members-without a vote of the ownership.

Third, you may have heard that the president or chairperson of the association only votes in the event of a tie. This is true-especially in the corporate world.  However, at an association board meeting, the board members are voting in their capacity as board members, not in their capacity as officers.  Board members have a fiduciary duty to vote on association matters.  The owners elect directors because they trust and value the director's judgment. Assuming the president or chairperson of the association is also a board member, the chair has a duty to vote!

Lastly, many governing documents outline specific duties of board members and officers. In most cases, there are significant differences between the authority of directors and the authority of the officers. Review those provisions carefully and look for differences between the roles.

Robert's Rules & Small Boards

Robert’s Rules of Order is designed to keep control of large groups or assemblies.  Members must stand and be recognized by the chair, motions must be seconded,  and members may not speak out of turn.  However, sometimes that level of formality isn’t needed, especially when the assembly is a small number of board members. RRO contains special procedures that small boards may utilize. (Robert’s Rules of Order, Newly Revised, 11th Edition, Section 49)  A “small” board is 12 or fewer members.  Here are some of the informal procedures for small boards:

- Board members do not have to stand or be recognized by the chair in order to speak or make motions;

-Motions need not be seconded;

-A board member may speak any number of times on a question (not just two) and motions to close or limit debate are generally not permitted;

-A motion does not have to be pending in order to discuss a subject informally;

-Votes can be taken by a show of hands;

-If a proposal is perfectly clear to everyone it may be voted on even though no formal motion has been made;

-In putting a question to a vote, the chairman need not stand.

An additional exception to the formal rules is that “the chairman can participate and vote.”  However, in most community associations, the chairperson (an officer position) is also a member of the board of directors.  When a vote is taken all board members in a community association should vote—in fact, there is a fiduciary obligation to vote.  Thus, when the chairperson votes on an issue, he or she is voting in their capacity as a board member, not as an officer.

If your board desires to use the procedures for small boards, adopt a policy stating that board meetings will be conducted in accordance with Robert's Rules for small boards.

Board Member Conflicts of Interest

Suppose the board of directors is considering hiring a new landscape company.  The owner of the landscape company happens to be the cousin of one of the board members. May the board consider hiring the landscape company? And does the board member who is related have to abstain from voting on the matter? Conflicts of interest often arise in community associations.  In general, a conflict of interest arises when a board member has a self-interest (or will receive a financial benefit) from the outcome of the decision.  Another way to describe a conflict of interest is: putting your own interests ahead of the best interests of the association and members.

There are two types of conflicts of interest—actual and potential.  A potential conflict is one in which a board member has duties or interests that conceivably could be at odds at some point in the future. For example, a potential conflict exists every time the board establishes the association's budget. Board members generally have an obligation to propose and establish budgets that meet the financial needs for operating the community. However, the personal interest of most homeowners--including board members--is to pay less, rather than more. While this potential conflict exists, it rises to the level of an actual conflict of interest only when board members choose to disregard the actual needs of their community to minimize their personal expenses.

In contrast, an actual conflict of interest would occur if the board votes to hire a maintenance company which is owned by a member of the board.  By hiring the maintenance company, the board member/owner is receiving a direct financial benefit from the hiring of the maintenance company.

In most cases a board may approve decisions, even if there is a conflict of interest with a board member, if:

 - the board member discloses their interest or the benefit which will be received; and

 - the board member with the conflict of interest abstains from the vote.

In some cases, the best company or vendor in town may have a relationship with a board member.  That doesn’t mean the board must dismiss consideration of hiring the company or vendor.  Here are some steps to follow when conflicts of interest may be present:

1) Disclose - Always disclose to the other board members and the owners any conflicts of interest.  Explain exactly what the relationships are and whether a direct or indirect benefit will be received by a board member.

2) Document - Hiring any contractor or vendor should be documented in the board meeting minutes.  Include the factors which the board relied upon in making its decision.

3) Bid - It’s always the best practice to solicit bids anytime a board begins the process of hiring or engaging professional services.  The bids should be in response to a well-drafted request for bids so that the board may compare costs, services, and terms.

4) Vote - Once all the information has been considered, each board member should exercise their business judgment and vote in a manner which is in the best interests of the association.  A board member with a direct or indirect interest in the outcome should abstain. The vote and abstention should be noted in the meeting minutes.

The board of directors should be sensitive to the potential for conflicts of interest to develop, the duty owed to the membership, and the steps required when a conflict arises. Liability is created not by facing a conflict of interest, but by failing to handle one properly.

Telephones and Board Meetings

[Oregon] There is often confusion about the use of telephones in board meetings.  Let’s start with some preliminary issues.  First, board meetings must be open to the owners for observation.  While there is no right for owners to participate or vote in a board meeting, many boards have an open forum or Q&A session for owners at the end of each board meeting.

The only exception to the open meeting requirement is executive session.  The board may convene in executive session (and exclude owners) to: 1) consult with legal counsel; 2) discuss personnel matters; 3) discuss unpaid assessments; and 4) negotiate 3rd party contracts.

Second, notice of board meetings must be provided to the owners at least 3 days in advance.  Notice must be through a means “reasonably calculated” to inform the owners of board meetings.

Now let’s look at the use of telephones in board meetings.  Oregon law addresses the use of telephones in two different scenarios:

Scenario 1:  There is no physical meeting and all of the directors are using a telephone to communicate and hold a board meeting; and

Scenario 2:  There is a physical board meeting which owners have notice of and may observe, and a single board member calls in to the meeting to participate by phone.

Under Scenario 1, this type of meeting may only occur in cases of emergency.  For example, a pipe bursts on common property and it’s impossible to provide advance notice of the meeting or to convene in person. In such an emergency, the entire board may hold a conference call to make decisions regarding the emergency.

The statute addressing Scenario 1 states:

Only emergency meetings of the board of directors may be conducted by telephonic communication or by the use of a means of communication that allows all members of the board of directors participating to hear each other simultaneously or otherwise to be able to communicate during the meeting. A member of the board of directors participating in a meeting by this means is deemed to be present in person at the meeting. (ORS 94.640(10)(c))

The statute above does not address or prohibit a single board member from participating by phone at a normal board meeting, as described in Scenario 2. In fact, the Oregon Nonprofit Corporation Act provides:

Unless the articles or bylaws provide otherwise, the board of directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through, use of any means of communication[.] (ORS 65.337(3))

It is possible (but not likely) that an association’s governing documents prohibit board member participation via telephone. If that’s the case, follow the provisions of your governing documents.  If there is no such prohibition, there is nothing improper with a board member phoning in to a regularly noticed and open board meeting.  The board member may participate and vote as if they were present in person.

[Washington]

Washington associations, unless prohibited by the governing documents, may also allow board member participation in board meetings by telephone.  The Washington Nonprofit Corporation Act states:

Except as may be otherwise restricted by the articles of incorporation or bylaws, members of the board of directors or any committee designated by the board of directors may participate in a meeting of such board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. (RCW 24.03.120)

Board Member Fiduciary Duties

When owners are elected or appointed to the board of directors, it’s critical to understand the importance of fiduciary duties.  A fiduciary is a person “to whom property or power is entrusted for the benefit of another.”  In homeowner and condominium associations, directors are fiduciaries who must act in the best interests of the association and the membership as a whole. Washington law states:

A director shall perform the duties of a director, including the duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. (RCW 24.03)

Oregon’s standard of conduct for directors is similar:

General standards for directors. (1) A director shall discharge the duties of a director, including the director’s duties as a member of a committee:

      (a) In good faith;

      (b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and

      (c) In a manner the director reasonably believes to be in the best interests of the corporation. (ORS 65.357)

There are four key elements to fiduciary duties:

1.  Act in the best interests of the association

Board members must act in the best interests of the entire membership. In other words, directors may not favor particular members because of personal interests, friendships, or financial gain.  This also implies that directors must put their own interests below the interests of the community, even if those interests conflict.

2. Act with care and seek advice

Courts generally review actions of board members and compare those actions with what a reasonably prudent person would have done in the same circumstances.  If directors must make decisions with legal implications, then an attorney should be consulted.  If issues arise involving tax or financial issues, the board should speak with an accountant.  Get expert advice when necessary in order to make informed decisions. Acting with care also requires acting within the scope of the board’s authority.  There must be authority for every action and decision of the board, whether it’s from state law, the CC&Rs, bylaws, or rules and regulations.

3. Act in good faith

Board members are generally protected from personal liability if they exercise sound judgment and fulfill their fiduciary duties.  However, if board members make decisions based on fraud, malice, or discrimination, personal liability may arise because of the failure to act in good faith.

4. Avoid conflicts of interest

Oregon law defines a conflict of interest as: 65.361 Director conflict of interest. (1) A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest.

Conflicts of interest arise when board members make decisions in which they have a personal or financial interest.  If those situations arise, board members must disclose the conflict and (in most cases) recuse themselves from voting.

5 Ways to Invite Lawsuits Against Board Members and Associations

1.  Violating Open Meeting Requirements Board meetings in Oregon (by statute) must be open to the membership. The same is true for Washington condominiums or any community association with open meetings requirements in the governing documents. The purpose of open meeting requirements is to allow the membership to witness the deliberation, discussion, and decision making of the board of directors.

There are exceptions to the open meetings requirements--namely, emergency meetings and executive session. But unless an exception applies, any time a majority of the board convenes and discusses association business, it's likely a "meeting". And if it's a meeting, it requires notice and observation by the membership.

Violating open meeting requirements casts a shadow on board transparency, causes suspicion among the owners, and increasingly, may cause a lawsuit against the association or board of directors.

2.  Failing to Renew Incorporation

Most associations are incorporated as nonprofit corporations. In some cases, it's legally required that the association be incorporated. Incorporation may provide a shield against liability for board members and owners.

In a 2010 Alabama case, a homeowners association attempted to enforce its architectural restrictions against an owner who constructed improvements without approval. The Alabama Court of Appeals held that the association could only enforce the governing documents if the association was incorporated.

Georgia dealt with a similar case in 2007, when an association filed suit against an owner for delinquent assessments. The owner claimed that because the association had become administratively dissolved when it filed the suit, the association was prohibited from collecting assessments. During the course of the lawsuit the association filed the appropriate renewal paperwork and was reinstated with the secretary of state. As a result, the court allowed the association to pursue collections.

For Oregon associations, visit www.filinginoregon.com to check on the association's incorporation status.

Washington associations can search here: https://www.sos.wa.gov/corps/search_advanced.aspx

3. Failing to Enforce Governing Documents

Board members have an obligation to enforce the provisions of the association's CC&Rs and Bylaws. If a board fails to enforce provisions of the governing documents for an extended period of time, many courts will find that the association has "waived" its right to enforce the same or other provisions.

In an Ohio case, an owner built an addition on his property. The association sued the owner, arguing that the additional building violated the CC&Rs. The court said that because the association had allowed other owners to build unapproved additions, the association couldn't require the defendant in this case to remove the building.

Similarly, some governing documents require the association to make architectural decisions within a certain number of days. The association may waive its right to enforce those covenants if it misses the deadline to respond. In a different Ohio case, the association's documents required the board to respond to architectural applications within 30 days. When the owner didn't receive a response, he proceeded with construction. When the association told the owner he could not proceed, the owner sued and prevailed because the association didn't make a decision within the 30 day window.

4. Violating the Fair Housing Act

There are literally hundreds of court cases involving lawsuits against associations for violations of the Federal Fair Housing Act. Here are some examples:

Auburn Woods I Homeowners Association v. Fair Employment and Housing Comm., 121 Cal App 4th 1578 (2004). A married couple suffered from depression and other disorders. The association's governing documents prohibited all animals. The couple bought a small companion dog to accommodate their mental condition and a lawsuit ensued. The association was found liable of discrimination.

Jacobs v. Concord Village Condominium X Association, Inc., 2004 U.S. Dist. LEXIS 4876 (S.D. Fla., 2004). The court found that the defendant condominium association had violated the Fair Housing Act by refusing to allow a physically handicapped resident to install a ramp so that the plaintiff could freely store, access and charge her motorized tricycle in a storage closet in the condominium building.

Sabal Palm Condominiums of Pine Island Ridge Association, Inc. v. Fischer, No. 12-60691-Civ-SCOLA (S.D. Fla. March 19, 2014). A Florida district court ruled that a condominium association violated the Fair Housing Act by its unreasonable delay in granting a request by a physically disabled resident to keep a service dog.

Hollis v. Chestnut Bend Homeowners Association, No. 13-6434 (6th Cir. July 29, 2014). A Tennessee homeowners association may have violated the Act when it denied owners from constructing an exterior sun room which was designed to accommodate two children with Downs Syndrome.

Board of Directors of Cameron Grove Condominium, II v. State of Maryland Commission on Human Relations, No. 47 (Md. Mar. 28, 2013). A Maryland appeals court ordered a condominium board to pay damages to unit owners who were denied reasonable accommodation of their disabilities. Bhogaita v. Altamonte Heights Condominium Association, Inc., No. 6:11-cv-1637-Orl-31DAB (M.D. Fla. Dec. 17, 2012). A Florida court found that a condominium association's intrusive search for more information regarding a unit owner's medical condition constituted a denial of his requested accommodation under the Fair Housing Act.

5. Filing Incorrect Liens / Collecting Inconsistent Assessments

May lawsuits involve associations levying assessments which are inconsistent with the governing documents. In a 2004 Texas case, an association's governing documents capped assessments at $50 per month. Nevertheless, the board unilaterally raised assessments to $75 per month. An owner sued the association and the court ordered the association to reimburse the owner for the overpaid assessments, plus pay the owner's attorney fees.

In another case, the owner of a commercial condominium unit in Georgia filed a lawsuit when the association levied assessments against the commercial unit to pay for expenses related exclusively to the residential units. The court's review of the governing documents concluded that the association was prohibited from assessing the commercial unit owners for residential unit expenses.

Make sure you read the assessment provisions of your governing documents carefully, and that all assessments are properly apportioned among the owners!

Open Meetings and Executive Session

Open Meetings Requirement Washington and Oregon require homeowner association board meetings to be open to the membership. (ORS 94.640 / RCW 64.38.035)

First, it is important to understand what constitutes a “board meeting.” Oregon law defines a board meeting as “a convening of a quorum of members of the board of directors at which association business is discussed, except a convening of a quorum of members of the board of directors for the purpose of participating in litigation, mediation or arbitration proceedings”

If a quorum of the board is discussing association business, whether in person or by electronic means, the board communication is considered a “meeting" which must comply with the open meetings requirements as set forth by statute.

In general, all meetings of the board must be open to owners and properly noticed, except for emergency meetings. There is no specific definition of an “emergency,” but it would likely include addressing items such as threats to the immediate health, life or safety of residents or preventing significant or irreparable damage to the common property of the Association.

Board members often ask if it’s okay to communicate with other board members via email. Oregon law addresses this issue: “the meeting and notice requirements in this section may not be circumvented by chance or social meetings or by any other means”.

In other words, alternate forms of communication, such as email, cannot and should not be used for the purpose of circumventing the open meetings requirements. It is crucial to understand the risk that any decisions that the Board makes at, or as a result of, improper meetings could potentially be invalidated.

Executive Session

Oregon and Washington provide an exception to the open meetings requirement. Boards may meet in executive session, outside the presence of the owners, to discuss certain topics.

In Washington, those topics include:

1. Consideration of personnel matters; 2. Consultation with legal counsel or to consider communications with legal counsel, and discuss likely or pending litigation, 3. Matters involving possible violations of the governing documents of the association; and 4. Matters involving the possible liability of an owner to the association.

In Oregon, executive session topics include:

1. Consultation with legal counsel; 2. Personnel matters, including salary negotiations and employee discipline; 3. Negotiation of contracts with third parties; and 4. Collection of unpaid assessments.

Here’s how executive session works: During a normal, open board meeting, any board member may make a motion to convene in executive session. The minutes of the meeting should reflect the motion to convene in executive session. The board members then discuss the relevant issues in executive session.  Once the discussion is complete, the board reconvenes to the open meeting. If any motions or decisions need to be made, they are done so once the board has returned to the open meeting. There are no motions, and no voting, during the executive session.

Remember, the purpose of the open meetings laws is to ensure that owners are able to observe the deliberations, debates and decision making of the board of directors. Open meetings and transparency are critical to a well-run association.

Model Code of Ethics - Condominium and HOA Board Members

 Model Code of Ethics for Community

Association Board Members

Board members should:

Strive at all times to serve the best interests of the association as a whole regardless of their personal interests.

Use sound judgment to make the best possible business decisions for the association, taking into consideration all available information, circumstances and resources.

Act within the boundaries of their authority as defined by law and the governing documents of the association.

Provide opportunities for residents to comment on decisions facing the association.

Perform their duties without bias for or against any individual or group of owners or non-owner residents.

Disclose personal or professional relationships with any company or individual who has or is seeking to have a business relationship with the association.

Conduct open, fair and well-publicized elections.

Always speak with one voice, supporting all duly-adopted board decisions even if the board member was in the minority regarding actions that may not have obtained unanimous consent.

Board members should not:

Reveal confidential information provided by contractors or share information with those bidding for association contracts unless specifically authorized by the board.

Make unauthorized promises to a contractor or bidder.

Advocate or support any action or activity that violates a law or regulatory requirement.

Use their positions or decision-making authority for personal gain or to seek advantage over another owner or non-owner resident.

Spend unauthorized association funds for their own personal use or benefit.

Accept any gifts—directly or indirectly—from owners, residents, contractors or suppliers.

Misrepresent known facts in any issue involving association business.

Divulge personal information about any association owner, resident or employee that was obtained in the performance of board duties.

Make personal attacks on colleagues, staff or residents.

Harass, threaten or attempt through any means to control or instill fear in any board member, owner, resident, employee or contractor.

Reveal to any owner, resident or other third party the discussions, decisions and comments made at any meeting of the board properly closed or held in executive session.