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Lunch with Mulcahy: What are the Legal Ramifications of Board Inaction?

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What happens when the association fails to file for nonprofit corporation status; does not follow the Arizona open meeting law, does not hold board meetings or annual meetings, does not have an annual …

What happens when the association fails to file for nonprofit corporation status; does not follow the Arizona open meeting law, does not hold board meetings or annual meetings, does not have an annual audit conducted, procure adequate insurance for the association or follow state laws. These issues and more plus the Top 10 Things you need to Know about Community Association Law.


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  • 1. LUNCH WITH MULCAHY Welcome! M We are glad you have joined us! Mulcahy Law Firm, P.C.
  • 2. Please join us in the Pledge of Allegiance
  • 3. What are the Legal Ramifications of Board Inaction? Thursday, February 06, 2014
  • 4. WHAT HAPPENS WHEN? The association fails:       To file for non profit corporation status To follow the Arizona open meeting law To hold board meetings or annual meetings To have an annual audit conducted To procure adequate insurance for the association or To follow state laws
  • 5. Important Arizona Common Law Cases on Enforcement of Association Documents
  • 6. GFELLAR V. SCOTTSDALE VISTA NORTH TOWNHOMES ASSOCIATION Arizona Court of Appeals ruled that the Association had a duty (and not just a right) to enforce a restrictive covenant requiring owners to not interfere with drainage.  Use of “shall” vs. “may”  If documents use the word “shall” then enforcement is likely mandatory (“The Board of Directors shall have the right and duty to enforce…”) 
  • 7. JOHNSON V. POINTE COMMUNITY ASSOCIATION Arizona Court of Appeals ruled that a Board’s decision to not enforce a requirement to obtain approval by the DRC/ACC for an exterior alteration to a property can be challenged by an owner in the Association  Court held that the Board’s decisions are not entitled to deference if the Board doesn’t follow the Association’s CC&Rs in the first place. If the CC&Rs give the Board discretion to enforce or not enforce (“may”) then the Court will defer to the decision of the Board. 
  • 8. THE IMPORTANCE OF MAINTAINING NONPROFIT CORPORATE STATUS  One major benefit: Protection of the association’s officers, directors and members from personal liability for the corporation’s debts and liabilities
  • 9. WHY FILE AN ANNUAL REPORT?  Pursuant to Arizona Law (A.R.S. Section 1011622), all nonprofit corporations must prepare and file an annual report on a form provided by the “ACC”  A $10.00 filing fee must be paid to the ACC each year on or before the due date assigned  New online reminders are available
  • 10. IMPORTANT CONTACT INFORMATION     For the status of your corporation: Phone (602) 542-3026 For information on filing documents: Phone (602) 542-3135 For information about your annual report: Phone (602) 542-3285 Corporate Records: Phone (602) 542-3026
  • 11. ARIZONA OPEN MEETING LAW  Pursuant to Arizona Law, all board of directors and regularly scheduled committee meetings are required to be open to all association members or their representatives and held in the State of Arizona  Members or their representatives:  Are allowed to attend and speak at appropriate times within reasonable time restrictions  Must be permitted to speak before the board takes formal action on an item under discussion
  • 12. ARIZONA OPEN MEETING LAW The board may close a portion of a meeting to the members and go into executive session to discuss:  1. Legal advice from an attorney for the board or the association. On final resolution of any matter for which the board received legal advice or that concerned pending or contemplated litigation, the board may disclose information about that matter in an open meeting except for matters that are required to remain confidential by the terms of a settlement agreement or judgment;
  • 13. ARIZONA OPEN MEETING LAW 2. Pending or contemplated litigation; 3. Personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association, including records of the association directly related to the personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association;
  • 14. ARIZONA OPEN MEETING LAW 4. Matters relating to the job performance of, compensation of, health records of or specific complaints against an individual employee of the association or an individual employee of a contractor of the association who works under the direction of the association; and 5. Discussion of a member's appeal of any violation cited or penalty imposed by the association except on request of the affected member that the meeting be held in an open session.
  • 15. ARIZONA OPEN MEETING LAW  Homeowners are also permitted to tape and/or video record open board meetings
  • 16. ANNUAL MEETINGS   MUST be held once a year Requirements for an annual meeting are typically set forth in the bylaws  Purpose of an annual meeting: Elect directors  Conduct other business i.e. – approval of budgets, proposed amendments to associations documents, etc.  Discussion and input by members 
  • 17. ANNUAL MEETINGS: PLANNING AND EXECUTION  Establish nominating committee and solicit candidates  Provide notice 10-50 days in advance of meeting  Create formal tally sheets, sign-in sheets and log mail-in ballots Have personnel to tackle problems before they arise: Greeter, registrar, troubleshooter, etc. 
  • 18. ANNUAL MEETINGS: PLANNING AND EXECUTION  Conduct voting in an appropriate manner:    Establish independent “inspectors of election” to oversee voting process and tally votes Inspectors should not have an interest in the election results Ensure quorum is obtained to lawfully conduct business
  • 19. ANNUAL AUDIT, REVIEW, COMPILATION  The board of directors is required to conduct a financial audit, review or compilation of the association annually  Completed no later than 180 days (6 months) after the end of each fiscal year  Made available to the members within 30 days of completion
  • 20. D & O INSURANCE  Directors and Officers Liability Coverage (D&O) 1. Typically covers the board of directors 2. Common claims: board’s failure to adhere to governing documents, challenges to assessments, breach of fiduciary duty, etc. 3. Choose a policy that includes indemnity coverage for the cost of defending actions against the association and specifies that the coverage limit does not include
  • 21. D & O INSURANCE 4. D&O coverage typically offered to community associations may not cover non-monetary claims 5. Mono-line (stand alone) policy is more expensive, but it may cover these non-monetary claims
  • 22. PROPERTY INSURANCE 1. Property damage claims are more common than liability losses 2. Not uncommon for boards to set insured loss caps intentionally too low to reduce premiums 3. Most policies will include an automatic inflation adjustment provision
  • 23. PROPERTY INSURANCE 4. Community should be periodically appraised and reviewed to insure cost benchmarks are reasonable 5. Add coverage for any additions made after the existing policy was issued
  • 24. FIDELITY INSURANCE 1. Issued in the association’s name with the property manager obligated under association's policy so insurance will cover a theft by the management company principals as well as by the property manager 2. Management company will have its own insurance, but will typically cover the property manager only and not a theft perpetrated by management company’s owners
  • 25. NOTICE OF CONTACT Associations are required to file in the office of the country recorder in the country in which the association is located, a notice stating the following:  Name of association  Name of community  Name of designated agent or management company The date of the recording and the recorded instrument number or book and page for the main document that constitutes the declaration 
  • 26. NOTICE OF CONTACT  If an association’s address, designated agent or management company changes, the association is required to record a new notice with updated information within 90 after the change
  • 27. RECORDS REQUEST All financial and other records of the association shall be made reasonably available for examination by any member or any person designated by the member in writing as the member’s representative. Books and records kept by or on behalf of the association and the board may be withheld from disclosure to the extent that the portion withheld relates to any of the following: 1. Privileged communication between an attorney for the association and the association; 2. Pending litigation; 
  • 28. RECORDS REQUEST 3. Meeting minutes or other records of a session of an executive session board meeting; New legislation in 2006 entitles owners to see association books and records pertaining to “contemplated” litigation. An association cannot charge a member for making books and records available for review. An association has ten (10) business days from submittal of a request by an owner or an owner’s designated agent to make records available or copies of the requested records. The association can only charge 15 cents per page for copies of records
  • 29. RECORDS REQUEST 4. Personal, health or financial records of an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association; and 5. Records relating to the job performance of, compensation of, health records of or specific complaints against an individual employee of the association or an individual employee of a contractor of the association who works under the direction of the association.
  • 30. REMOVAL OF DIRECTORS & BOARD MEMBERS 1. Petition for Removal of Director Requirements: a. Associations with 1,000 or fewer members: a petition must presented to the board for removal of a director that is signed by the number of persons who are entitled to cast at least 25% of the vote or 100 votes, whichever is less b. Associations with 1,000 or more members: petition signed by 10% or 1,000 votes, whichever is less
  • 31. REMOVAL OF DIRECTORS & BOARD MEMBERS 2 . Special meeting: Shall be called, noticed, and held within 30 days after receipt of the petition 3. Quorum: Will be met if at least 20% of the votes, or 1,000 votes, whichever is less, are present t the meeting in person or as other wise permitted by law 4. Percentage required to remove director: A member of the board can be removed from office with or without cause by a majority vote of the members entitled to vote
  • 32. REMOVAL OF DIRECTORS & BOARD MEMBERS 5. Retention of Documents: The board must retain documents related to proposed removal for at least 1 year after the special meeting and shall permit inspection of these records by members 6. Only one removal per term: A petition for removal of the same member of the board shall not be submitted more than once during each term of office for that member
  • 33. DISPLAY OF FLAGS An association cannot prohibit the outdoor display of the American Flag, or an official flag of the United States Army, Navy, Air Force, Marine Corps, Coast Guard by a unit/lot owner on the unit/lot owner’s property if the flag is displayed in a manner consistent with the Federal Flag Code  Associations cannot prohibit the outdoor display of: POW/MIA flag, Arizona State flag, Arizona Indian Nations flag, Gadsden flag (Don’t tread on me)  Planned communities are allowed to limit the number of flags to two (2) and can restrict the height of a flagpole 
  • 34. FINES AND PENALTIES  After notice and an opportunity to be heard, an association or board of directors may impose reasonable monetary penalties on members for certain violations  Associations no longer have the right to record a notice of lien for unpaid fines
  • 35. FINES AND PENALTIES  Associations can enforce payment of fines by:     Filing a lawsuit Obtaining judgment against owner AND Recording judgment with the county recorder’s office Associations can collect judgment through garnishment of wages, rent, or a bank account
  • 36. FOR SALE SIGNS  An association shall not prohibit or charge a fee for the use or placement of the indoor or outdoor display of a “for sale” sign
  • 37. FOR SALE SIGNS  An association or managing agent’s lien rights (as authorized under A.R.S. Sections 33-1256/331807), will be forfeited for a period of 6 consecutive months from the date of violation if an association or agent violates an owners right to have the following:    Temporary open house or for sale signs Open house hours, except before 8:00 AM and after 6:00 PM For lease signs on the owners property, unless the association’s documents prohibit or restrict leasing
  • 38. ARIZONA LEGISLATIVE UPDATE  51st Legislature, Second Regular session  Mulcahy Law Firm, P.C. will provide a summary of the legislative session every Monday regarding community associations bills  Check our website’s Publications Tab and our Legislative Blog  This week’s summary
  • 39. Join us for Lunch with Mulcahy March 6, 2014 Federal Laws: How Do We Comply? M We are glad you have joined us! Mulcahy Law Firm, P.C.
  • 40. If you like what we do… Please fill out one of the Testimonial Cards on your table. Thank You! M We are glad you have joined us! Mulcahy Law Firm, P.C.

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