Actions taken by directors of a community association in good faith, that are within the powers of the association, and that reflect a reasonable and honest exercise of judgment, are valid actions.
The business judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation, in this case, a not-for-profit corporation or homeowners association.
Given that the directors cannot ensure success, the business judgment rule specifies that the court will not review the business decisions of directors who performed their duties (1) in good faith; (2) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner the directors reasonably believe to be in the best interests of the corporation.
The business judgment rule along with directors and officer’s insurance will cover you as a board member for any decisions you make. However, the big caveat is that you must follow the spirit of the rule.
Did you act in good faith? In other words, did you deal with homeowners, vendors, and management in an honest and fair manner. Did you utilize care? In other words, did you read the board packet and understand the information in it prior to the meeting when making your decisions. Finally, did you act in the best interests of the community? This goes back to the fiduciary duty: acting in the best interest of the entire community and not in the interest of your friends, your neighbors or yourself.
The highest ethical and moral obligations and duty of good faith a person is charged with for fulfilling their responsibilities. The board of directors of a community association has a fiduciary responsibility to act in the best interests of the association.
This is a fancy sounding term that applies to the board of directors of a community association. It boils down to trust. The straightforward definition of "fiduciary" alone is stated as: involving trust, especially with regard to the relationship between a trustee and a beneficiary.
In a nutshell, when you are a board member for a community, you need to act for the good of the community as a whole and not for yourself. You have a duty to make decisions for the benefit of all instead of just your home or your friends' homes nearby.
I know of one board member in a condo association who was great friends with one of her neighbors, but that neighbor fell behind in their assessment payments. Even though it might’ve been tempting to look the other way, the board member joined the rest of the board in applying their community association's written collections policy in this situation. This put the community first over the board member’s personal interest and ensured equal treatment of all homeowners.
The declaration, bylaws, operating rules, articles of incorporation or other documents which govern the operation of the association.
The governing documents, sometimes referred to as the CC&R’s (Conditions, Covenants, and Restrictions) is where the HOA and the board get their authority. They will spell out exactly what you can and can’t do when governing the community.
Governing documents are arranged in a hierarchy of descending authority:
The process to amend governing documents as well as the required approval varies. The appropriate amendment process for the Articles of Incorporation, Declaration and Bylaws can usually be found within the documents themselves. Amending a Declaration often requires the approval of a super-majority of the membership (two-thirds or more) while amending the Bylaws may require a majority vote of the Board or members at a membership meeting. If a governing document is recorded, the amendment must be recorded as well. For example, an association’s Declaration and any amendments are recorded with the county’s Register of Deeds. Likewise, the Articles of Incorporation and any amendments are recorded with the Secretary of State. Rules, regulations and resolutions may typically be amended or changed by the Board of Directors.
As a board member, you should actually read these documents and understand the hierarchy of them.
If acting in good faith, decisions made by Board members have some legal protections. Typically, there are provisions within the governing documents protecting Board members - you should always refer to your Association's bylaws in order to familiarize yourself with these provisions.
Additionally, in North Carolina, there are some general statutes which lend protections to Board members by way of covering non-profit organizations.
Your association may take these protections a step further by purchasing Directors and Officers (D&O) Insurance. Board members should discuss this with their insurance carrier. See additional information here.
An association's bylaws typically have language protecting its Board members. A Board member can refer to their association's bylaws for the language that protects them.
For example: "The Association shall indemnify and hold harmless each of the officers and directors and the managing agent from and against all contractual liability to others arising out of contracts made by the officers or the Board of Directors on behalf of the Association unless any such contract shall have been made in bad faith or contrary to the provisions of the Condominium Act, except to the extent that such liability is satisfied by directors and officers liability insurance."
NCGS 55A NC Non-Profit Corporation Act states an association's articles of incorporation may provide indemnification. A Board member can review their association's articles of incorporation for the language that protects them.
NCGS 55A Section 2-02(b)
(4) A provision limiting or eliminating the personal liability of any director for monetary damages arising out of an action whether by or in the right of the corporation or otherwise for breach of any duty as a director. No such provision shall be effective with respect to (i) acts or 4 omissions that the director at the time of the breach knew or believed were clearly in conflict with the best interests of the corporation, (ii) any liability under G.S. 55A-8-32 or G.S. 55A-8-33, (iii) any transaction from which the director derived an improper personal financial benefit, or (iv) acts or omissions occurring prior to the date the provision became effective. As used herein, the term "improper personal financial benefit" does not include a director's reasonable compensation or other reasonable incidental benefit for or on account of his service as a director, trustee, officer, employee, independent contractor, attorney, or consultant of the corporation. A provision permitted by this Chapter in the articles of incorporation, bylaws, or a contract or resolution indemnifying or agreeing to indemnify a director against personal liability shall be fully effective whether or not there is a provision in the articles of incorporation limiting or eliminating personal liability.
Part 3. Standards of Conduct.
NCGS 55A-8-30. General Standards for Directors.
(a) A director shall discharge his duties as a director, including his duties as a member of a committee:
(1) In good faith;
(2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
(3) In a manner the director reasonably believes to be in the best interests of the corporation.
(b) In discharging his duties, a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:
(1) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;
(2) Legal counsel, public accountants, or other persons as to matters the director reasonably believes are within their professional or expert competence; or
(3) A committee of the board of which he is not a member if the director reasonably believes the committee merits confidence.
(c) A director is not entitled to the benefit of subsection (b) of this section if he has actual knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (b) of this section unwarranted.
(d) A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section.
(e) A director's personal liability for monetary damages for breach of a duty as a director may be limited or eliminated only to the extent provided in G.S. 55A-8-60 or permitted in G.S. 55A-2-02(b)(4), and a director may be entitled to indemnification against liability and expenses pursuant to Part 5 of Article 8 of this Chapter.
(f) A director shall not be deemed to be a trustee with respect to the corporation or with respect to any property held or administered by the corporation, including without limit, property that may be subject to restrictions imposed by the donor or transferor of such property. (1985 (Reg. Sess., 1986), c. 801, s. 29; 1993, c. 398, s. 1.)
Before any property in a condominium or planned development is sold, the developer forms a Condominium or Homeowners' Association to run it. Each purchaser of property in the development automatically becomes a member of the Association.
The Association is typically created by filing Articles of Incorporation (“Articles”) for a nonprofit organization with the secretary of state where the development is located (although some states allow unincorporated associations).
The articles are usually brief and contain only the basic information about the Association, its name, location, and its purpose. There is ordinarily no need for a buyer or owner to review the Articles.
Once formed, the Association typically adopts a set of bylaws. Bylaws are important: They describe how the Association is run, set out voting rights and procedures, and contain rules for such things as how to call a meeting and how often meetings must be held.
The bylaws may also describe the Association’s rights and responsibilities. For example, the Association is typically responsible to enforce the rules and regulations and to collect assessments. The bylaws may also lay out procedures for creating the annual budget and determining assessment amounts.
Associations are generally run by a board of directors (a “Board”) made up of a certain number of members (owners) elected by the membership at large (all the owners) during periodic elections. The bylaws typically set forth the length of the terms for the Board members and the procedures for elections. If, for example, there’s someone you wish would leave the Board -- perhaps so that you can assume a seat there -- you’ll want to know about the term limits!
It is helpful for an owner or potential buyer to review the bylaws to understand how the Association functions and to be familiar with the powers of, and the restrictions on the Association. You may be surprised to find out, for example that the Association can hold closed meetings or remove a Board member without notifying the owners.
The CC&Rs are the “big Kahuna” of the governing documents. They contain the most comprehensive and probably the most important information about the development and its operation. If there is anything in another governing document that conflicts with a provision of the CC&Rs, the CC&Rs win (and the conflicting provisions are considered invalid).
The Declaration of CC&Rs is typically a lengthy document, setting up the general structure of the development and describing what land is subject to the governing documents, as well as what parts of the development are common areas owned by the Association.
The CC&Rs also contain restrictions on the use of each owner’s property as well as of the common areas. They specify the Association’s authority and obligations and define the rights and responsibilities of Association members (owners). Every owner must abide by all the rules, restrictions, terms, and conditions found in the CC&Rs.
By reviewing the CC&Rs, an owner or potential purchaser can learn about the general restrictions on the use of the property in the development, and about the rights and responsibilities of owners. For example, a review of the CC&Rs may reveal that owners may not have visible satellite dishes or antennas, or that all owners must mow their lawns once a week.
Most CC&Rs also contain procedures for amendments. If the development is older, the CC&Rs may already have a number of amendments revising the original terms.
Most state laws require recording the CC&Rs in the real property records in the county where the development is located. A copy must ordinarily be provided to a buyer prior to making a purchase. If you are an owner or potential buyer and don’t already have a copy of the CC&Rs, get one, and familiarize yourself with its terms.
Although general rules and regulations may be contained within the CC&Rs, the Association typically also adopts separate (usually lengthier and more specific) “rules and regulations.” The Association likely has wide discretion to adopt rules and regulations (provided they do not violate any state or federal law and do not conflict with the terms of the CC&Rs).
Rules and regulations can cover anything from prohibiting broken cars and trash in yards to regulating the height of fences to limiting the number of swimmers in the pool. Because the purpose of the Association is to do what’s best for the common good and value of the development regardless of whether all individual owners agree, the rules and regulations are often the most controversial documents in a development, and the cause of many disputes.
Because the rules and regulations can affect how the property in the development is used, a potential buyer should study them and determine whether they can live with them before making a purchase. For example, you might have second thoughts about purchasing in the development if you find out that you’d have to get rid of your golden retriever, because owners are not allowed to have dogs over ten pounds. Current owners should also be familiar with the rules and regulations and keep up with any changes.
Source of information provided by nolo.com
There are some federal laws that Board Members should be aware of and understand in regard to their Board activities. Please see the link below for more details on each law.
Source of information provided by Homeowner Protection Bureau.
There are some North Carolina state statutes that Board Members should be aware of and understand in regard to their Board activities. Please see the links below for more details on these statutes as pertaining to community governance.
You can find the full text of these NC General Statutes here.
Additional resources regarding laws and statutes governing Community and Condominium Associations in North Carolina:
There are some South Carolina state laws that Board Members should be aware of and understand in regard to their Board activities. Please see the links below for more details on these statutes as pertaining to community governance.
For detailed information on each of the above mentioned titles, please click here.
See below for additional resources regarding laws and statutes in South Carolina: