Dear Benny: In the course of refinancing our mortgage on a vacation home I learned that our condo association does not have a master flood policy on the various buildings that form our community, even though the bylaws state that the board shall obtain and maintain flood insurance.
I asked the board president how the board justifies ignoring a clean mandate spelled out in the bylaws.
After several months of evasive answers, a board member who is an attorney wrote me as follows: “Under Delaware law a board is permitted to deliberate and make decisions under the business judgment rule. You have presented an issue and this volunteer nonprofit board is taking the steps necessary to make an informed reasoned decision. I think you should be mindful of the doctrine of the law of unintended consequences,” i.e., increased dues.
I am not an attorney but the implication of the statement seems to be that a Delaware board can ignore bylaws as long as it is deliberating about those bylaws.
The board has had 10 years since its inception to obtain flood insurance as required by the bylaws. How much deliberation does it need?
The reference to unintended consequences seems irrelevant to me, as the bylaws are pretty clear and do not allow for unintended consequences.
My interest in this is financial. If the entire association is under one flood policy and the cost of that flood policy is equally divided among owners, my cost will be substantially less than paying for an individual policy as I now do as required by my mortgage holder.
Is there anything I can do short of going to court? That’s an expenditure I’m not willing to undertake.
The status quo poses a hazard to all owners: Those owners who do not have a mortgage are not required to carry flood insurance.
Let’s say there are two such owners in a six-unit building and there is a serious flood. It’s very doubtful that those owners could come up with their share of the repair costs out of pocket, leaving the other owners to either pony up or abandon the building. –Albert
Dear Albert: There are two legal concepts governing boards of directors.
In some states, the business judgment applies. This started in Delaware, where your association is, in order to protect those who serve on corporate boards. Oversimplified, those courts that have accepted this concept take the position that unless a board member or the entire board is doing something illegal or unethical, the courts will not interfere, even if the board is making a mistake.
In other states, such as in the District of Columbia where I practice law, the courts have rejected the business judgment rule and instead have adopted a “reasonableness test.” In other words, was the action of the board reasonable under all of the circumstances?
So in those states that have adopted the business judgment rule, it is possible that a board can ignore a clear directive spelled out in the bylaws. It’s not a good idea, but some courts throughout this country have allowed this.
However, if, for example, the association budget contains a line item for the flood insurance, and there is money available to pay that line item, I think that a good argument can still be made that the board should abide by its bylaws.
Clearly, this is a slippery slope: If the board can get away with not paying the flood insurance even though it is mandated in your bylaws, what else can they get away with?
In a state where the reasonableness test applies, the court will have to review all of the facts in order to decide whether the board had the right to ignore the bylaws. So if there is enough money in the budget – and if you are in a flood zone – I suspect the court will find the board’s decision unreasonable.
Bottom line: Condominium owners must vigilantly monitor their board’s decisions.
If you don’t agree with their decisions, mount a campaign with as many fellow owners as you can and call for a special meeting of the association. Your bylaws spell out the procedure for this process.
Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.