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This Old House - Do-it-Yourself

When Disaster Strikes: What Is An Emergency In Your HOA?

Written by Posted On Wednesday, 11 July 2018 12:13
When Disaster Strikes: What Is An Emergency In Your HOA? Pixabay.com

Question: I am the President of our 98 unit condominium. Every so often, (and usually in the middle of the night) I get a telephone call from a unit owner (or our property manager) telling him that something has happened that needs immediate approval. For example, the other evening during a heavy thunderstorm, all the lights in our complex went out. The property manager wanted permission to bring in a generator (at a cost of $800) so as to maintain lighting in the parking lot. I was reluctant to spend this money, but was also concerned about having no security lighting in the area.

How do I determine when there is a bona fide emergency, and what authority do I have to spend association moneys under these circumstances.

By the way, I own a company that would provide the generator.

A: Several years ago, the Court of Special Appeals of Maryland, addressed an important issue which should be highlighted periodically to all Board of Directors.

In a case known as Black v. Fox Hills North Community Association, Inc., the Court made it quite clear that the so-called "business judgment rule" applies to community associations.

Under this rule, the Courts will not interfere in the internal affairs of a corporation (in this case a community association). The Court defined this rule as follows:

This rule requires the presence of fraud or lack of good faith in the conduct of a corporation's internal affairs before the decisions of a board of directors can be questioned...If the corporate directors' conduct is authorized, a showing must be made of fraud, self-dealing or unconscionable conduct to justify judicial review...Although directors of a corporation have a fiduciary relationship to the shareholders, they are not expected to be incapable of error. All that is required is that persons in such positions act reasonably and in good faith in carrying out their duties...Courts will not second-guess the actions of directors unless it appears that they are the result of fraud, dishonesty or incompetence.

Thus, as the court said, you can make an error in judgment, so long as it was an honest and fair decision.

To my knowledge, the "business judgment rule" applies to many community associations throughout the country.

Let us analyze your question in light of the "business judgment rule". You are the President of your Association. As you well know, it is a thankless -- and unpaid -- task. I am sure you have more interesting things to do, including sleeping all night through.

When you are confronted with the question of whether there is an emergency, use your common sense. Is it really an emergency, or can the matter wait a day or two (or at least until morning) at which time you can confer with your fellow directors?

If you believe there is a real emergency, don't be afraid to make a decision. I might add, as it relates to lighting and other security issues, it is always better to act than to take no action at all.

In your example, if you believe there is a security problem which can be avoided by emergency lighting, authorize the expenditure. Clearly, $800 is a lot cheaper than having a problem because you did not spend the money.

Obviously, if you own the company that rents the generator, this could be considered self-dealing, and perhaps improper. But even under those situations, it "ain't necessarily so." If there are no other generator companies open -- or if you honestly believe you can get the generator quickly into operation -- this might still be considered a "business judgment" which will not be challenged by a court.

In the final analysis, you have to do what you think is best -- under the circumstances. You are permitted to make mistakes, so long as you can demonstrate that you (l) had the authority to make decisions, (2) truly believed there was a real emergency, and (3) acted in what you perceived to be the best interests of your community.

It should be pointed out that after you make such a decision, you should immediately advise the other Board members, in writing or electronically, of the situation and your decision.

Regarding your owning the generator company, it would make sense for you to have the minutes of a Board meeting reflect that you advised the Board of your involvement at an early date; this way, if there is an emergency which requires the use of your generator, you will at least have been on record, and up front with your association.

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Benny L Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of KASS LEGAL GROUP, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

kasslegalgroup.com

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