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Subject: Lawsuits and Membership Approval
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NicoleC5
(Arizona)

Posts:23


05/14/2020 4:00 PM  
I am currently on the BOD of my association. I would like the Association to pursue litigation against former board members for breach of contract and breach of fiduciary duties.

According to our CCR, if I am interpreting it correctly, The BOD would need 50% membership approval from the community. We would also need to special assess for attorney fees, and would need 2/3 membership approval or 60%.

If we get 50% approval for litigation and only 50% agree for special assessment, can we still pursue litigation?
MarkW18


Posts:1168


05/14/2020 4:05 PM  
You're on the Board of your HOA and want to sue your former board members and your governing docs say you must meet certain requirements and you can't but you want to know if you can still proceed?

Did I miss something?
PaulJ6
(New York)

Posts:940


05/14/2020 4:08 PM  
Posted By NicoleC5 on 05/14/2020 4:00 PM
I am currently on the BOD of my association. I would like the Association to pursue litigation against former board members for breach of contract and breach of fiduciary duties.

According to our CCR, if I am interpreting it correctly, The BOD would need 50% membership approval from the community. We would also need to special assess for attorney fees, and would need 2/3 membership approval or 60%.

If we get 50% approval for litigation and only 50% agree for special assessment, can we still pursue litigation?




Let's make this easier.

If the Association sues the board members, get a lawyer who will handle it on contingency--meaning that legal fees are paid out of winnings. Does that require 2/3 or 60% approval?

You, as an individual, can sue the former board members through a "derivative suit": you send a "derivative demand letter" to the board, demanding that it sue the former board members. When the board does not do so, then you step into the shoes of the HOA and can sue them. Winnings go to the HOA, though. So you can have your lawsuit without having to get these approvals.

I sent a "derivative demand letter" to a HOA board, which got very angry about it.
NicoleC5
(Arizona)

Posts:23


05/14/2020 4:17 PM  
Posted By PaulJ6 on 05/14/2020 4:08 PM
Posted By NicoleC5 on 05/14/2020 4:00 PM
I am currently on the BOD of my association. I would like the Association to pursue litigation against former board members for breach of contract and breach of fiduciary duties.

According to our CCR, if I am interpreting it correctly, The BOD would need 50% membership approval from the community. We would also need to special assess for attorney fees, and would need 2/3 membership approval or 60%.

If we get 50% approval for litigation and only 50% agree for special assessment, can we still pursue litigation?




Let's make this easier.

If the Association sues the board members, get a lawyer who will handle it on contingency--meaning that legal fees are paid out of winnings. Does that require 2/3 or 60% approval?

You, as an individual, can sue the former board members through a "derivative suit": you send a "derivative demand letter" to the board, demanding that it sue the former board members. When the board does not do so, then you step into the shoes of the HOA and can sue them. Winnings go to the HOA, though. So you can have your lawsuit without having to get these approvals.

I sent a "derivative demand letter" to a HOA board, which got very angry about it.




Our ccr say “anywhere we become a plaintiff or join in a lawsuit” we need 50% membership approval.

I’m familiar with derivative demands, but I if you can’t find an attorney on a contingency basis, the funds need to come from somewhere and common element assessment dues can not be used for attorney fees.
PaulJ6
(New York)

Posts:940


05/14/2020 4:35 PM  
Posted By NicoleC5 on 05/14/2020 4:17 PM
Posted By PaulJ6 on 05/14/2020 4:08 PM
Posted By NicoleC5 on 05/14/2020 4:00 PM
I am currently on the BOD of my association. I would like the Association to pursue litigation against former board members for breach of contract and breach of fiduciary duties.

According to our CCR, if I am interpreting it correctly, The BOD would need 50% membership approval from the community. We would also need to special assess for attorney fees, and would need 2/3 membership approval or 60%.

If we get 50% approval for litigation and only 50% agree for special assessment, can we still pursue litigation?




Let's make this easier.

If the Association sues the board members, get a lawyer who will handle it on contingency--meaning that legal fees are paid out of winnings. Does that require 2/3 or 60% approval?

You, as an individual, can sue the former board members through a "derivative suit": you send a "derivative demand letter" to the board, demanding that it sue the former board members. When the board does not do so, then you step into the shoes of the HOA and can sue them. Winnings go to the HOA, though. So you can have your lawsuit without having to get these approvals.

I sent a "derivative demand letter" to a HOA board, which got very angry about it.




Our ccr say “anywhere we become a plaintiff or join in a lawsuit” we need 50% membership approval.

I’m familiar with derivative demands, but I if you can’t find an attorney on a contingency basis, the funds need to come from somewhere and common element assessment dues can not be used for attorney fees.




The HOA is not party to a derivative lawsuit and wouldn't be paying legal fees so no approvals should be necessary.
AugustinD


Posts:3467


05/14/2020 4:57 PM  
Posted By NicoleC5 on 05/14/2020 4:00 PM
I am currently on the BOD of my association. I would like the Association to pursue litigation against former board members for breach of contract and breach of fiduciary duties.


I see your queries in December 2019 at https://www.hoatalk.com/Forum/tabid/55/forumid/1/tpage/1/view/Topic/postid/274860/Default.aspx

-- You posted then about being on the board of a 41-unit condominium, formed in 2006. Are we talking about the same condominium here in this new thread?

-- Do you have a dollar figure estimate of the damages that these prior board members did? Can this be supported by concrete, exact evidence? The courts have strict rules about calculating damages. If a dollar figure can only be guessed, then there are no damages. No damages means a lawsuit would be thrown out. No damages means an attorney will not take this case. As a corporation, chances are high that the Condo Association would be required to use an attorney. And for now, forget about punitive damages. That's another huge, complicated subject that demands an attorney's input.

-- Has either your board or you run this past a competent HOA attorney?

-- Do your covenants say that the losing side in a lawsuit pays the winning side's attorney's fees? The Arizona Condo Act is silent on the point. Contrary to what was posted earlier, it is not all that common for a statute or covenant to exist that requires a judge to order the losing side to pay the winning side's attorney's fees.

-- Are you aware that these former directors are likely eligible for insurance through the HOA insurer? Said insurance would pay for their legal defense.

-- It's way too early to start talking about a "derivative lawsuit." Besides, this would be an instance where the corporation is suing individuals directly. Before even looking at Arizona statutes on the subject, on its face, I do not think the claims would be derivative.
PaulJ6
(New York)

Posts:940


05/14/2020 5:10 PM  
Derivative would be if the HOA refuses to sue, so an individual steps up to the plate and sues the individuals on behalf of the HOA.

OP, you might want to check your insurance policy and see what is covered and what isn't covered, and tailor the lawsuit so that the individuals are sued for things that the insurance policy won't cover. As always, AugustinD makes great points.
MelissaP1
(Alabama)

Posts:9408


05/14/2020 5:13 PM  
A court can only make one whole. So how much monetary damage was done? Was there a crime involved? If it was criminal then why you suing? Going to wrong court. Call the police or District Attorney.

Spending money in a lawsuit not going to make money just a point makes no sense...

Former HOA President
PaulJ6
(New York)

Posts:940


05/14/2020 5:25 PM  
Unfortunately the police often ignore most everything other than violent crime. Criminal statutes often allow an individual to sue the crook in civil court, and some states allow an individual to pursue a "private prosecution"--stepping into the police's shoes and prosecuting the person.

Thanks to my old HOA board and its antics, I know these things now.

Please file the lawsuit(s). Thanks.
TimB4
(Virginia)

Posts:16801


05/14/2020 5:29 PM  
Nicole,

IF the Association is able to pierce it's own corporate shield (doubtful), it's likely that the former board members are indemnified by the Association. Therefore, the Association would need to cover both attorney's fees.

If they did something criminal, turn it over to the State.

If they did something questionable, it's going to take a lot, a lot of money to resolve.

My advice, let it go, learn from the past and put policies in place to keep the issue from happening again.
NicoleC5
(Arizona)

Posts:23


05/14/2020 6:18 PM  
Here is a ton of information:

This is the same association that was formed in 2006.

The BOD that was judiciously removed engaged in a lawsuit without membership approval and incurred $112,000 in legal debt.

They decided to sue the prior BOD to them, for embezzlement within 6 days of being elected, with no evidence. They put liens on a total of 9 units that belonged to the BOD that was accused of stealing, and his family members that also own units in the building all under rumor control also know as "upon information and belief."

The BOD that was accused of stealing refused to turn over any records, including all our financial documents. The BOD that was judiciously removed, demanded that all owners prove they paid their dues for the past 6 years or however long they have been an owner.

One of the relatives of the gentleman accused of stealing circulated a petition to remove them. At the time the association had no bylaws, they were missing, and no owner up to that point in time knew of them.

Out of 41 units in the complex, 23 units wanted to have them removed. Owners did not agree with the embezzlement lawsuit or their demand for owners to prove payment, and/or some did not want the headache or uncertainty of litigation.

The removed board did not recognize the petition because their attorneys said everyone was delinquent with assessment due.

The relative, eventually took them to court and won. They were removed and we were elected. We have inherited a number of problems and financial struggle.

They incurred $50,000 in debt to defend the removal lawsuit (hopefully insurance will cover some of this), and $62,000 in the embezzlement lawsuit. The embezzlement lawsuit is still pending currently.

We want to settle the current embezzlement lawsuit. However, the BOD that was removed will probably sue us for breach of fiduciary duties, because they think we should move forward with their bogus complaint that is full of lies.

We are considering taking them to court to pay the attorneys they hired because we never gave them permission to file a lawsuit.

Its a crazy mess.

AugustinD


Posts:3467


05/14/2020 6:54 PM  
-- Thank you for the detail.

-- Did the Bylaws that went missing for years ever re-appear?

-- Can you check your CC&Rs and quote word-for-word what direction, if any, they give regarding a losing party in a lawsuit paying the prevailing party's attorney's fees?

-- I am surprised that the board that filed the lawsuit without permission found an attorney nonetheless willing to represent the HOA and sue someone. The reality suggests to me that, per some aspect of the law, maybe membership approval in fact was not required.

-- The more complicated a lawsuit, the more it will cost all sides in attorney's fees.

-- If a condo member wanted to bring a new lawsuit in a derivative action, Arizona Nonprofit Corporation statute 10-3631 requires 25% of the membership (or 11 units, assuming one vote per unit) to file the derivative claim in court in order for their to be "standing."

-- But in a derivative action (by HOA members, not the board or the HOA), those 11+ units risk paying their own attorney's fees, whether they win or lose. See Arizona statute 10-3636.

-- This situation just begs for arbitration or mediation. I think every judge, Arizona attorney and her sister will say as much. From my general reading about arbitration and mediation, in a situation like that Nicole describes, no side would come out the clear winner. But by using mediation or arbitration (instead of going to court), I think all sides would likely end up with much more money in their pockets than if they continued with this litigation.

-- I think a come to Jesus meeting with an experienced HOA attorney would be worth the few thousand dollars the board would spend to inform its decision-making here. That way, the Board can blame its not filing any further lawsuit on the HOA attorney.

-- I think this scenario is particularly out of scope for this forum. I think the only intelligent advice that may be forthcoming is to get the board to sit down with an attorney.
NicoleC5
(Arizona)

Posts:23


05/14/2020 7:18 PM  
Did the Bylaws that went missing for years ever re-appear?
YES THEY DID. WHILE THE RELATIVE WAS SUING TO REMOVE THE BOARD, AN OWNER SUPPLIED THEM TO OUR ASSOCIATION ATTORNEY THAT WAS DEFENDING THE MATTER, HOWEVER THE BOD WAS ALREADY REMOVED AT THAT POINT. THEY FILED A MOTION TO RECONSIDER, BUT ULTIMATELY THE JUDGE RULED IN HER FAVOR. THE ONLY ISSUE LEFT IN THAT CASE IS ATTORNEY FEE'S.

Can you check your CC&Rs and quote word-for-word what direction, if any, they give regarding a losing party in a lawsuit paying the prevailing party's attorney's fees? IN THE EVENT, THE DECLARANT, THE ASSOCIATION, OR ANY UNIT OWNER EMPLOYS AN ATTORNEY OR ATTORNEY'S TO ENFORCE A LIEN OR TO COLLECT ANY AMOUNTS DUE FROM A UNIT OWNER OR TO ENFOCE COMPLIANCE WITH OR RECOVER DAMAGES FOR ANY VIOLATION OR NONCOMPLIANCE WITH THE CONDOMINIUM DOCUMENTS, THE PREVAILING PARTY IN ANY SUCH ACTION SHALL BE ENTITLED TO RECOVER FROM THE OTHER PARTY HIS REASONABLE ATTORNEY'S FEES INCURRED IN THE ACTION.

I am surprised that the board that filed the lawsuit without permission found an attorney nonetheless willing to represent the HOA and sue someone. The reality suggests to me that, per some aspect of the law, maybe membership approval in fact was not required. ACCORDING TO OUR CCR THE ASSOCIATION COULD INITIATE A LAWSUIT FOR UNPAID ASSESSMENT DUES OR A USE RESTRICTION. HOWEVER THEY DID NOT ASK FOR RELIEF FROM ASSESSMENT DUES (ALTHOUGH THEY PLACED LIENS ON THE UNITS), AND THERE WAS NO USE RESTRICTION. THEY CLAIMED HE STOLE A STORAGE LOCKER ON THE PROPERTY, BUT THE RELATIVE SUPPLIED THE DEED TO THEM (THEY NEVER AMENDED THE COMPLAINT), AND SAID HE USED A UNIT AS A LEASING OFFICE, BUT THE PROPERTIES HAD BEEN VACANT FOR YEARS.


I think a come to Jesus meeting with an experienced HOA attorney would be worth the few thousand dollars the board would spend to inform its decision-making here. That way, the Board can blame its not filing any further lawsuit on the HOA attorney. WE AGREE, AND ARE GOING TO MEDIATION WITH THE BOD THAT WAS REMOVED, BECAUSE AFTER THEY WERE REMOVED THE SUED THE ASSOCIATION. ALL THE ATTORNEY'S WE HAVE SPOKEN WITH AGREE THE INITIAL LAWSUIT STARTED FOR THEFT SHOULD HAVE BEEN HANDED OVER TO THE AUTHORITIES (GREEDY LAWYERS CHIME IN AND SAY NO NO SUE YOU HAVE A GREAT CASE), AND THE ATTORNEY'S WE CURRENTLY HAVE ARE MORE INTERESTED IN MAKING MONEY THAN SOLVING PROBLEMS.
AugustinD


Posts:3467


05/14/2020 7:40 PM  
All of the disputes appear legally complicated. I forecast that, even if no further lawsuits are filed, settling the disputes will take years.

The shortest path to (relative) peace is to mediate this. No one will be completely happy with the outcome. A number of the main players will die or move. Few will have the wisdom to understand the advantages of mediation. Many will hold a grudge and be angry for years about this. But the hell with anyone not on the board. The directors have a fiduciary duty to stop the hemorrhaging of money thrown away on attorney's fees (at great risk of a negative return on investment) and emotions.

If I were on this board, I would vote against asking members if they wanted to file suit. I would also vote against filing suit. I would motion to assign two directors the task of locating the most experienced HOA mediator in the state, identifying her or his availability and fee. In my experience, any HOA attorney with whom the Board has been working who is not on board with mediation deserves to be given her or his walking papers.

Easy chatter from the anonymous cheap seats of an online forum. Good luck.
AugustinD


Posts:3467


05/14/2020 7:43 PM  
$112,000 / 41 members = $2731 per member. A pittance for some peace.

This may make itself up easily when the member goes to sell and no more lawsuits or debt needs to be disclosed to potential buyers.

Surely this battling has hurt property values.
GeorgeS21
(Florida)

Posts:2784


05/14/2020 8:34 PM  
Wow - dead end likely. Wasted money to attorneys.

Stop already.
NicoleC5
(Arizona)

Posts:23


05/14/2020 8:55 PM  
I agree all of it is a waste of time money and resources. But this other side will not let it go. They have already cost more in attorney fees than what the embezzlement case is all about. I guarantee if we pursued it, none of those board members would survive testimony. Do you move on from not pursuing theft? Can the current BOD vote to “lick our wounds” and move on?
MelissaP1
(Alabama)

Posts:9408


05/14/2020 9:13 PM  
Just counter sue if they do. Problem solved. Costs less money and can be for what damages are. Less legal fees as well as does not take a lawyer to counter sue. Just to represent HOA in court. Suprise lawyer has not mentioned it as an option.

Former HOA President
NicoleC5
(Arizona)

Posts:23


05/15/2020 12:36 PM  
Posted By AugustinD on 05/14/2020 7:40 PM
All of the disputes appear legally complicated. I forecast that, even if no further lawsuits are filed, settling the disputes will take years.

The shortest path to (relative) peace is to mediate this. No one will be completely happy with the outcome. A number of the main players will die or move. Few will have the wisdom to understand the advantages of mediation. Many will hold a grudge and be angry for years about this. But the hell with anyone not on the board. The directors have a fiduciary duty to stop the hemorrhaging of money thrown away on attorney's fees (at great risk of a negative return on investment) and emotions.

If I were on this board, I would vote against asking members if they wanted to file suit. I would also vote against filing suit. I would motion to assign two directors the task of locating the most experienced HOA mediator in the state, identifying her or his availability and fee. In my experience, any HOA attorney with whom the Board has been working who is not on board with mediation deserves to be given her or his walking papers.

Easy chatter from the anonymous cheap seats of an online forum. Good luck.





Augustin,

Thank you for approach to all matters I have posted without any bias. Your help is truly appreciated.
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Forums > Homeowner Association > HOA Discussions > Lawsuits and Membership Approval



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