Community association governance is a complex web of laws and regulations, which requires boards of directors to perform a delicate balancing act. They must navigate between their fiduciary duties, the community’s governing documents, and the business judgment rule to make decisions that are in the association’s best interest while remaining within legal boundaries.
The Governance Hierarchy
Understanding the community association governance hierarchy is crucial to maintaining this delicate balancing act. Here’s a breakdown:
- Federal law supersedes state law.
- State law takes precedence over local municipal codes.
- Local municipal codes override association governing documents such as the Community Covenants, Conditions, and Restrictions (CC&Rs – also known as the Declaration of Restrictions).
Now, let’s discuss the HOA’s governing documents.
- The Articles of Incorporation hold authority over the Declaration mentioned above.
- The CC&Rs, in turn, surpass the Bylaws.
- The community rules and board resolutions are at the bottom of this hierarchy.
The Business Judgment Rule and Fiduciary Duty
In addition to these legal considerations, boards must adhere to the business judgment rule and fulfill their fiduciary duties. The business judgment rule is a legal principle that protects the decisions of the board of directors when made in good faith, with reasonable care, and within their authority. Fiduciary duty refers to the obligation of trust and confidence imposed on those who manage and control the assets or affairs of the HOA, requiring them to act in the membership’s best interests.
Balancing Conflicting Priorities
Consider the scenario where an association pursues a lien foreclosure on a property that lacks buyer interest, resulting in the HOA acquiring the property with “limited title.” To recoup past-due assessments, the board may opt to rent out the unit until the bank forecloses. While this decision aligns with sound business judgment and fulfills the board’s fiduciary obligation to maintain the association’s financial health, it may conflict with the association’s Bylaws, which limit the percentage of rental units permitted within the association.
To further illustrate, consider the example of Beachside Sub Association (all names are falsified to protect the parties involved). They held an election of directors at the same time the master association did. Three candidates elected by vote of the Beachside Sub Association board members were also elected to the master board. However, serving on both boards at once was not permitted by the Bylaws. Beachside’s Inspector of Elections asked the three members which board they wanted to serve on. They appointed runners-up to fill vacated seats. One elected director was unhappy with this proposition and insisted on serving on both boards. When he was again told he couldn’t, he sued. Long story short, a judge ordered the association to reinstate the board as elected, even though that directly conflicted with the Bylaws and effectively invalidated all collection actions taken by the “appointee board.”
In such cases, the board faces a dilemma: uphold the Bylaws or court order or pursue a course of action that aligns with prudent business practices. Resolving this conflict requires careful consideration and, potentially, legal assistance or other expert advice to determine the course that best balances legal obligations, community interests, and financial viability.
Three Tips to Successfully Navigate Conflicting Priorities
Here are three tips for boards that find it challenging to navigate the inherent conflicts between federal, state, and local laws, the HOA’s governing documents and adopted policies, the business judgment rule, and fiduciary duty.
Ultimately, the path forward for association boards dealing with conflicting priorities is to:
- Thoroughly deliberate,
- Seek expert advice,
- Make informed decisions that balance the various legal and fiduciary obligations.
By doing so, they can navigate the complexities of association governance and lead their communities with confidence and integrity.
Need Help Navigating Conflicting Priorities in Collecting Assessments?
Navigating the intricate landscape of homeowners association collections can often feel like a complex puzzle, especially regarding the delicate balance between fiduciary duty, legal compliance, adherence to governing documents, and applying the business judgment rule. It’s a multifaceted challenge that HOA boards of directors face, striving to fulfill their responsibilities while ensuring their communities’ financial health and stability.
In such challenging times, having a reliable partner who can provide clarity and practical solutions is crucial. Axela Technologies offers just that with a free collection assessment that can illuminate the path forward. Our Easy Collectsystem is designed to simplify the collection process, providing boards with a streamlined, efficient, and legally sound approach to managing assessments. We can provide you with valuable insights and tools to navigate these conflicts with confidence and ease.
Don’t let the complexity of assessment collections undermine your board’s efforts. Contact Axela Technologies todayfor a free assessment and discover how the Easy Collect system can transform your approach to assessment collections.
