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The Michigan Court of Appeals, in a 12 page opinion that was just released, has ruled that an assessment levied by a condominium association was invalid because the board of directors failed to follow the requirements of the condominium bylaws. 

In that case, the board levied an assessment to raise funds to pay for legal fees for a lawsuit against the condominium developer.  However, the board chose to disregard the bylaw provisions which required it to hold a meeting of the Association members and take a vote on whether to file the litigation and whether to approve a proposed litigation special assessment.   The board decided to levy the assessment without the required vote.  Members of the Association who objected to the failure to take a vote and who declined to pay the special assessment had liens recorded against their units.  The Association then promptly filed actions to foreclose the liens. 

While the trial court ruled in favor of the condominium association and upheld the assessment, the Court of Appeals reversed.  The appellate court held that the board was not authorized to levy the assessment in its sole discretion, but instead was required to follow the processes contained in the bylaws.  The court reasoned that the bylaws were in the nature of a binding contract between the association and its members. The appellate court rejected the condominium association's arguments that the bylaw requirements were too onerous or that they purportedly conflicted with the Michigan Nonprofit Corporation Act.  The court also determined that, even if a particular procedural requirement of the bylaws was unreasonable, the trial court could have severed that provision and still give effect to the remaining provisions.

Additionally, the appellate court also reversed the trial court's award of attorneys fees to the Association.  The Association incurred approximately $15,000 in legal fees in attempting to collect the $3,000 assessment.  The Court of Appeals found that since the assessment was invalid, attorney fees and costs were not authorized.

This case underscores the importance of a board of directors knowing what provisions are in the condominium documents and obtaining sound advice and direction from its association counsel. 
Our law firm represented the co-owner in this case because we believed that the board should not have wholly disregarded the requirements in the bylaws. 

Nottingham Village Condominium Association v. Pensom
, Docket No. 319552



 
 
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The Michigan legislature recently enacted significant changes to the Michigan Nonprofit Corporation Act.  Since condominium associations and homeowner associations are typically non-profit corporations, several of these changes impact them.

Here are some of these changes, which may affect community associations:

  • A nonprofit corporation must distribute to its members an income statement, year-end balance sheet and statement of source and application of funds.
  • A nonprofit corporation must have an annual meeting to elect directors and conduct other business, unless the members act by written consent or vote for directors by ballot.  Thus, instead of electing directors at an annual meeting, directors can be elected through a written ballot if authorized by the bylaws or articles of incorporation.
  • Unless otherwise restricted by the articles of incorporation or bylaws, a member, or proxy holder. may participate in a meeting of members by a conference telephone or other means of remote communication that permits all persons that participate in the meeting to communicate with all the other participants.  However, there are certain measures that an association must take before a member can participate in the meeting and vote by a means of remote communication. 
  • A member may give their proxy to authorize another person to vote for them for the election of directors. The proxy may be given by a signed writing or electronically (such as an e-mail).  
  • A member may inspect, for any proper purpose, certain books and records of the association (similar to shareholders in a profit corporation). However, the articles of incorporation, bylaws, or a board resolution may provide that the members do not have the right to inspect certain records if the members or directors that approved the limitation make a good faith determination that:
                     Allowing inspection of certain records would impair the rights or privacy of the members.
                     Allowing inspection of certain records would impair the lawful purposes of the corporation.
  • A member may bring an action in court to establish that the acts of the directors or members are illegal, fraudulent, or willfully unfair and oppressive to the corporation, the director, or member.
  • Ten percent of the members can file a circuit court action to remove a director from office if the director was involved in fraudulent, illegal, or dishonest conduct or gross abuse of authority or discretion, and removal is in the best interest of the association.  Typically, the bylaws of an association specify a procedure which requires that a petition for a special meeting, signed by a certain percentage of the members, be submitted to the board and that a special meeting be called for the purpose of removing one or more directors.
  • An association may eliminate a director's or volunteer officer's liability to the corporation, or its members, for any action taken (or the failure to take action) subject to certain exceptions. Previously, the limitation of liability only applied to a breach of the director’s or officer's fiduciary duty.  The new law permits an association to eliminate liability for any action taken.  Notably, a director does not need to be a volunteer in order to have the benefit of this protection.
       
            Due to these changes, community associations would be wise to have their articles of incorporation and bylaws reviewed to see if any amendments are warranted. 

            This author is a member of the Non-Profit Corporations Committee of the Business Law section of the State Bar of Michigan, and commends those members of the committee and others who contributed to the drafting of the changes, for the many, many hours that they dedicated to it.