Chapter 10 BOARD OF DIRECTORS AND OFFICERS

JurisdictionNorth Carolina

10 BOARD OF DIRECTORS AND OFFICERS

§ 10.01. In General

Planned communities and condominiums are run by board members and officers. Generally, the board is elected by the membership and the officers are selected by the board. Under both the PCA and the Condominium Act, board members stand in a fiduciary relationship with their members.1 Meetings of board members and their election are governed by various statutes and the legal documents for the particular association. In an effort to encourage member participation in the governance of their communities, the PCA and Condominium Act require that board meetings be open at regular intervals for members to discuss their concerns with the board. To encourage good, qualified owners to serve as board members and officers of the association, there are a number of indemnification and immunity rights board members and officers have related to claims against them connected with their service for the association. Further, while their election may be hotly contested and their actions criticized by the members, board members and officers usually are not considered public figures (nor the matters they debate issues of public concern), so they do not voluntarily agree to be subjected to the same ridicule as our publicly elected officials.2

§ 10.02. The Board of Directors

All nonprofit corporations must have a board of directors.3 The board of directors for a homeowners association or condominium association is the governing body of the association that manages the month-to-month affairs of the association. The board is how business gets conducted and how most, but not all, powers are exercised in the name of the association. All of the provisions in the PCA relating to board members are inapplicable to pre-1999 communities, except for the requirement that the association publish the names and addresses of all board members of the association within 30 days of their election.4 Even though the better part of the provisions related to directors are inapplicable to pre-1999 communities (or those communities that have not opted into the PCA), the power, rights, duties and liabilities of board members for all associations are still regulated by the Nonprofit Act since most associations are incorporated. As for condominiums, all of the provisions in the Condominium Act relating to board members are applicable to pre- and post-1986 condominiums.5

With respect to condominium board members and planned communities formed after January 1, 1999 (or those opting into the PCA), the executive board may act in all instances on behalf of the association.6 This means that the board is given wide latitude to unilaterally negotiate contracts with vendors, negotiate and settle claims for and against the association, retain professionals, enforce covenants, fine owners, hire employees, maintain the common elements, insure the common elements, make improvements to the common elements and exercise other powers of the association. The only limitations in both the PCA and Condominium Act for the board acting unilaterally are in (a) amending the declaration; (b) terminating the condominium; (c) electing members of the executive board; or (d) determining the qualifications, powers and duties, or terms of office of executive board members other than filling vacancies.7 In these instances, the membership is entitled to participate in the decision making process. The board cannot act unilaterally on things that require a vote of the membership either by virtue of the association's governing documents or relevant statutes.8 In addition, no action of the board can alter or conflict with any decision made by the membership, and any such action by the board may be null and void.9 Beyond these restrictions, a homeowners association or condominium association generally "acts" through its board.

§ 10.02.01. Election of Board Members

Electing board members is a fundamental right of members in a homeowners association or condominium association. It is the way in which the members express their thoughts, opinions and desires with respect to roads, pools, clubhouses, landscaping and even the maintenance of their own homes. The legislature recognized this when they specifically determined that a board could not act unilaterally in determining the qualifications, powers and duties of executive board members.10 Unfortunately, many members decide not to vote for board members or run for the board themselves, but simultaneously are outspoken critics of the current board's decisions and actions. As a general proposition, all nonprofit corporations (which includes most associations) must elect all the directors at annual meetings, unless the articles of incorporation or bylaws provide some other time of election.11 Election of directors by ballot at the annual meeting is expressly recognized by the Nonprofit Act.12 The ballot is a simple document that should state how many positions are open, the number of directors running and sufficient blank spaces for nominations from the floor of the annual meetings. Occasionally, ballots will be more detailed and contain biographical information on candidates however this is not necessary or required by any statute. In the event there are the same number of candidates as there are available positions, then after ensuring that there are no further nominations, the chair of the meeting declares that the nominee is elected by unanimous consent or acclimation.13

For condominium board members, the Condominium Act imposes maximum time periods for control of the board by the declarant. The statute requires that not later than 60 days after conveyance of 25% of the units to owners other than a declarant, at least one member and not less than 25% of the members of the executive board must be elected by unit owners other than the declarant.14 Not later than 60 days after conveyance of 50% of the units to unit owners other than a declarant, not less than 33% of the members of the executive board must be elected by unit owners other than the declarant.15 Not later than the termination of any period of declarant control, the unit owners have to elect an executive board of at least three members, at least a majority of whom must be unit owners.16 The purpose of this is to provide for a gradual transfer of control of the association to the unit owners from the declarant. As the Official Comments to the Condominium Act indicate, "such a gradual transfer is preferable to a one time turnover of control since it assures that the unit owners will be involved, to some extent, in the affairs of the association from the relatively early date and that some unit owners will acquire experience in dealing with association matters."17

For planned communities, not later than the termination of any period of declarant control, the lot owners must elect an executive board of at least three members, at least a majority of whom shall be lot owners.18

§ 10.02.02. Powers and Duties of Board Members

Like the associations they manage, board members have powers and duties. These are typically broken down explicitly in the bylaws for the association. Typical examples of powers a board may have include, without limitation, the following: adopting and publishing rules and regulations for the association,19 suspending the rights of membership privileges or levying a fine against an owner,20 employing a manager or firm to manage the business and property of the association, and employing attorneys and other professionals when necessary. Typical examples of board duties may include, without limitation, the following: fixing the amount of the annual assessment and forming a budget for each fiscal year,21 causing a complete record of all the board's acts and corporate affairs to be maintained,22 procuring and maintaining property and liability insurance,23 and causing the common area to be maintained.24

In exercising their duties, both the PCA and Condominium Act require board members to carry out their duties (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.25 This section of the Nonprofit Act addresses the level of performance expected of every director entering into the service of a nonprofit corporation and undertaking the role and responsibilities of the office of director.26 Although this section does not deal directly with liability — liability will usually result from a failure to honor the standards of conduct required to be observed in this section.27 At the core of this section's mandate is the requirement that, when performing director duties, a director shall act in good faith coupled with conduct reasonably believed to be in the best interest of the corporation.28

Although the word "fiduciary" is not used in the PCA, additional principals of law supplement the statutes and the long standing rule in North Carolina is that directors have a fiduciary duty to the corporation.29 In North Carolina, it is settled law that board members of planned communities owe their members a fiduciary duty.30 Outside of North Carolina, it has been held that a board for an association does owe a fiduciary duty to the owners.31 This duty does not require perfect decision-making, rather reasonable and informed decision-making. In making their decisions, the board members can and should rely on information, opinions, reports and statements from professionals it engages for advice. The Nonprofit Act specifically contemplates boards relying on legal counsel, accountants or "other persons as to matters the director reasonably believes are within their professional or expert competence."32 So, for example, the board may rely on an opinion from an engineer that the clubhouse roof must be replaced because of significant tornado damage. The board may rely on an arborist...

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