Declarant past Class B status, won't hold meetings, show accts, etc.

State of North Carolina - Our Declarant/Developer filed By-laws & CC&R's on 1/7/08. We purchased home in 2012. (Class B period ended 1/6/13) Homeowners now own 50% + 1 homes. His only right that can't be terminated by the Board is that to appoint people to an Advisory Committee, although the Board CAN with cause remove people from the AC. We'd like him to cede his power per the CCR's & By-Laws we all signed. Declarant says he can appoint the entire Board (He and his non-owner wife) because he is the "Class B Member" per section 3.3 of the By-Laws, however he is 3 years beyond the Class B Control Period and is now a Class A member per Article 3.02(b)(2) of the CCR.

So far Declarant/Developer has:

1) Never held a meeting of the members in spite of multiple requests;

2) Continues to act as President without election and has named his wife (not an owner and not a holder in his Corporation) as Treasurer;

3) Never paid an assessment on his own lots (CCR 9.02 below); ($16,000 past due, plus late fees & 16% interest per CCR)

4) Deposited Assessment checks into his Development checking account;

5) In 2014 opened a checking account in RA's name with only he and his wife as signators, and pays for the general upkeep of his own lots & construction right of ways out of that checking account (I am the bookkeeper for his grounds maintenance man, I see the checks, I know this is so);

6) Never held an election in spite of multiple requests;

7) Never provided an accounting in spite of multiple requests;

8) Has no minutes of meetings because "It's just me and my wife and we know what we said" (per email response to requests);

9) Raised assessments with the justification of minutes from a Board meeting held at another property in another state 7 years prior, & when called on it wrote to me that he had really raised the assessment because " I am bombarded with nitpicky questions."

10) Claims both that the Builder owes no dues because the builder is separately defined from Owner in CCR 1.02, AND

11) Claims the Builder has a vote because the Builder holds the record title of lots he is building on (CCR 1.16)

12) Holds no insurance in the name of the RA, has no D&O insurance, claims that his Bond protects us.

Some CCR & By-Law tidbits (which have not been Amended since filed) to help inform answers:

From By-Laws:

2.3 Annual Meetings: The first meeting of the Members of the Association, whether a regular or special meeting, shall be held within thirty (30) days after the date upon which the Class B Member shall no longer have the right to appoint all members of the Board so as to occur on or within 60 days after the close of the Associations fiscal year on a date and at a time set by the Board of Directors.

2.13 Action without a meeting: Any action required or permitted by law to be taken at a meeting of the Members may be taken without a meeting, without prior notice and without vote, if written consent specifically authorizing the proposed action is signed by or on behalf of all Members entitled to vote on such matter. Such consents will be filed with the minutes of the Associtaion and shall have the same force and effect as a unanimous vote at a meeting.

3.3 Selection of Directors

(a) Initially all members of the Board shall ve appointed by the Class B Member {there is no longer a Class B Member} acting in it's sole discretion, shall serve at the pleasure of the Class B Member and may be replaced by the Class B Member at any time.
(b) At such time as 75% of the Property subject to this Declaration is owned by Persons other than Declarant or a Builder, or such earlier time that Declarant shall elect in writing all appointees of the Class B Member shall resign. At such time, the directors shall be elected by vote of the Members at a special meeting called for such purpose.
(c) Directors may be appointed or elected to serve any number of consecutive terms.

6.6 Amendment

(a) Prior to the conveyance of the first Unit by Declarant to a Person other than a builder, the Class Be Member may unilaterally amend these by-laws... So long as the Class B Membership exists, the Calss Be Member may unilaterally amend these By-Laws for any other purpose, provided the amendment haws o material adverse effect upon any right of any Member.

From CCR:

Article 1 - Definitions

1.05 Builder: Any Person which purchases on or more lots for the purpose of constructing improvements for later sale to consumers or purchases one or more parcels of land within the Property for further subdifvision, development and/or resale in the ordinary course of such person's business. (See article 3.02 - Membership)

1.16 Owner: One or more Persons who hold the record title to any lot, but excluding in all cases any party holding an interest merely as security for the performance of an obligation.

1.07 Class B Control Period: The period of time during which the Class B Member is entitled to Appoint a majority of the Members of the Board of Directors as provided in Section 3.3 of the By-Laws.

3.02 Membership: The Association shall have two classes of membership, Class A and Class B.

(a) Class A - The Class A Members of the Association shall be the Owners.
(b) Class B - The sole Class B Member shall be declarant. The Class B membership shall terminate and become converted to Class A membership upon the earlier of

1) the date that 75% of the Units are conveyed to Members;
2) five years from the date of the Declaration;
3) recordation in the Registry of an instrument executed by Declarant terminating the Class B membership and converting it to Class A Membership.

9.02 Declarant's Obligation for Assessments: During the Class B control period, Declarant may Annually elect either to pay regularly assessments on that portion of the Property which it owns, notwithstanding the commencement date for assessments set for in Section 9.08, or to pay the difference between the amount of assessments levied on all other property subjecto to assessment amd the amount of actual expenditures by the Association during the fiscal year. Unless Declarant otherwise notifies the Board in writing at least 60 days before the beginning of each fiscal year, Declarant shall be deemed to have elected to continue paying on the same basis as during the imediately preceding fiscal year. Delcarant's obligations hereunder may be satisfied in the form of cash or by "in kind" contributions of services or materials, or by a combination of these as determined by Declarant. AFTER TERMINATION OF THE CLASS B CONTROL PERIOD, DECLARANT SHALL BE OBLIGATED FOR ASSESSMENTS ON THAT PORTION OF THE PROPERTY WHICH IT OWNS IN THE SAME MANNER AS ANY OTHER OWNER.

Can we get rid of him? Thoughts? Thank you so much for your insight on this.

Thanks - It's been confirmed that he recorded no Amendments prior to 1/6/13 - or after for that matter. About 8 of us have contacted an attorney who has drafted a Letter of Demand for Records of the Association. (There likely won't be any.) I'd like to get as many on board with it as possible in the next week before we send it, and there are some vocal "but what if he gets mad and does something terrible to us?" types in the group. We'll approach the entire ownership (obviously not the Developer) after the Developer responds to the Letter of Demand.

We get confused about the variations in language in the CCR, especially within single articles referring to "Class B Member shall appoint officers" AND "until 75% of lots are sold". There is no Class B Member anymore, so does that override the 75% clause? We really don't want to put a lot of money into attorneys fees if he will maintain control until he has 75% sold regardless of his Membership status. It's a 51 lot development, he's sold 26, and (his personal friend) the Builder has 4.
So my questions really are:

Given the CCR & By-Laws listed above

Is the "Builder" an "Owner" and therefore a "Member" and if so does he have a vote AND pay assessments?

Does the developer have the right to appoint all Board Members until he sells 75% of the lots given that he no longer holds "Class B" status?

If so and he's found to be "self-dealing" can he maintain control with no restrictions?

Thanks again!

The clauses in your docs that reference class B become inoperable when Class B ends. When Class B ends, many HOAs rewrite their docs to eliminate all of those clauses - so that they become intelligible to read when only one class exists.

Thank you. As to recovery of money he spent on his own lots, in a "true accounting" he has to show us the invoices to match the checks he paid, and since I made the invoices I know that they specify which lots were maintained and how much we paid for each - mostly his and a small patch of common ground with no buildings, trees, etc - a 20' x 150' patch of grass. Nearly 60% of the checks he writes is for "lawn maintenance", including an agreement he made with a neighboring landowner to maintain an easement that he might use as ingress/egress during construction.

CCR's state that

Section 11.21 Lawn Maintenance: Lawns shall be maintained in a neat and tidy manner. In particular (but not without limitation) grass shall not be allowed to grow to more than six inches in height. If an owner permits the grass on his Lot to exceed six inches in height, the Association may deliver a written warning {I sent him a request to maintain his lots with my dues check in 2013} to the Owner. If the Owner does not cut his grass to a height of six inches or less within five days after the warning, then, in addition to any other remedies it may have, the Association may enter the Lot and cut the grass, without being guilty of trespass, and to charge the owner $100 fine.

Also, as to back assessments:

Section 9.01 (i) All assessments, together with interest computed from the date the delinquency first occurs, late charges, costs, and reasonable attorney's fees, shall be a charge and continuing lien upon the property of the defaulting owner of each lot until paid, as more particularly provided in Section 9.07. Such assessments, together with interest, late charges, costs, and reasonable attorney's fees, shall be the personal obligation of the Person who was the Owner of the Lot at the time the assessment arose. If any person is, or becomes, delinquent on any Base Assessment, Special Assessment, or Specific Assessment, the Board may accelerate all assessments due for that calendar year in addition to the other assessments owed, and may require that all assessments whatsoever be paid in full immediately.

Section 9.09 Failure to Assess: Failure of the Board to fix assessment amounts or rates or to deliver or mail each Member an assessment notice shall not be deemed a waiver, modification, or a release of any Owner from the obligation to pay assessments. In such event, each Member or Owner shall continue to pay Base Assessments on the same basis as for the last year for when an assessment was made, if any, until a new assessment is mad, at which time the Association may retroactively assess any shortfalls in collections.

I like that. I can't see any language regarding being ineligible to vote, so I will ask our attorney to clarify. That would be a dream come true.

This could work if you have all or most of the property owners (excluding the developer) on your side. Otherwise you could have mess where some owners are paying "your" association, some are paying the developer's association, and others stop paying entirely until the mess is sorted.


I agree 100%. You'll spend more in legal and accounting fees than you are likely to recover. Focus on fixing this and moving forward.

I don't disagree with any of this. However, you can't both chastise me for doing nothing about it for two years and also chastise me for being only one of the few people who wants to educate the neighbors as to what our rights are. No one is talking about starting a separate bank account or a new HOA. We're talking about getting records and making sure that our asses are covered. Let me make this clear - IN 8 YEARS WE HAVE NEVER HAD A MEETING BECAUSE THE DEVELOPER WON'T CALL ONE. Is your advice to do nothing until he goes bankrupt and hope that someone worse than him doesn't buy it? Because this man is only selling 3 - 4 lots a year. I'll be dead before he finishes this development and I'm not that old. Or is your advice to sell out of the neighborhood and lose closing costs and realtors fees from the equity we have?

Barbara here is a website by attorneys with some good info on NC statutes.

http://www.lawfirmrbs.com/FAQs-About-NC-HOA-Condo-Associations-Part-I.cfm

Thank you.

Sorry if you feel I chastised you. I'm just stating that I think your most successful path will be to try to get the associated transitioned to the members, and don't expect to see any of the dues that have been paid to the developer in the past.

It is not unusual for associations under developer control to not have meetings and not be responsive to homeowners. As long as the developer has a controlling vote, it hardly matters what everybody else wants or thinks. If you read a lot of history on this forum, you'll find plenty of people who would recommend never buying into an association still under developer control.

So far it appears you've tried to get support from other property owners to force the transition, that's a good first step. Have you sent the developer a demand letter or just communicated informally? Personally, I doubt that a demand letter from property owners would have much effect anyway. Hiring an attorney to give an opinion on whether your interpretation of the situation seems right would seem to be the next step. Assuming the attorney agrees, the demand letter should come from him/her. This shows you are serious. Nobody here can predict how the developer will react, but my feeling is that the less you demand, the better the chances of having a positive outcome. If you just demand that the HOA is transitioned to the membership I think that has a better chance than if you also demand years of records and a bank account full of money.

Of course, there is still a good chance the developer will not cooperate, so unless your state has an ombudsman or other official to get involved, my reply in post#2 still holds: your recourse is through the courts, with the help of a lawyer.

Just wanted you to know that I admire your courage and willingness to take on this situation of chicken littles on one side and a dictator on the other. Don't want to give the impression that I am trying to minimize anything you are trying to accomplish.

Thanks - it can be difficult to follow who says what. There is a lot of conflicting info about the attorney. Hopefully I'll be able to answer your questions all at once. (Or whoever's questions all at once - not sure who asked what anymore.)

Yes, I personally have written and asked every year for an accounting, minutes of past meetings, a meeting, and a vote, and the Developer has responded in writing every year, "No".

The "Letter of Demamd" that I am speaking of has already been drawn up by an attorney who has seen our By-Laws & CCRs. I will send it after I have a spoken to a few more people to get their support. I'd like to have at least 5 homeowners (out of the 25). This letter is only asking for a full accounting from day one and minutes of any and all meetings.

Hi Barbara:

Now that had a chance to more thoroughly review your posting here is my thoughts. We are not attorneys and can only give our opinions based on our past experiences and knowledge.


☺ Sorry … you cannot totally get rid of him. He is still an owner and member of the subdivision with the same (and potentially slightly more) rights as any other owner.
• Do I believe he now has less rights than before … Yes
• Do I believe he should no longer control the HOA based upon your statements and info provided … Yes
• Do I believe he still has certain development rights and any right to build what he has already implied and expressed in the governing documents … Yes. And while I myself have had issues with developers I still believe and understand they and their secured creditors have their rights established in governing documents and state laws, even if some may not like some aspects of those rights in any documents. However, I also believe they do not have the right to in any way defraud consumers and their secured creditors. All sides get along better when they understand their should be equal protection on both sides.

Now with regards to some of your statements:

1. Meetings: Your State Law requires annual meetings whether developer controlled or owner controlled. Developers many times tend to not have meetings because most times the homeowners tend to ignore and not demand this happen.

2. Acts as President without election: This is answered in your governing documents per what you posted and clearly states that during the time he was Class B he could appoint anyone no matter who at his sole discretion … this will continue until owners take control.

3.3 Selection of Directors

(a) Initially all members of the Board shall be appointed by the Class B Member acting in it's sole discretion, shall serve at the pleasure of the Class B Member and may be replaced by the Class B Member at any time.

3. Never paid an assessment on his own lots (CCR 9.02 below); ($16,000 past due, plus late fees & 16% interest per CCR): You potentially do not yet know if he has never paid assessments on his lots. You do not yet have copies of any records to determine what money was paid by anyone and what any expenses have been incurred. Section 9.02 which you posted states:

9.02 Declarant's Obligation for Assessments: During the Class B control period, Declarant may Annually elect either to pay regularly assessments on that portion of the Property which it owns, notwithstanding the commencement date for assessments set for in Section 9.08, or to pay the difference between the amount of assessments levied on all other property subject to assessment and the amount of actual expenditures by the Association during the fiscal year. Unless Declarant otherwise notifies the Board in writing at least 60 days before the beginning of each fiscal year, Declarant shall be deemed to have elected to continue paying on the same basis as during the immediately preceding fiscal year. Declarant's obligations hereunder may be satisfied in the form of cash or by "in kind" contributions of services or materials, or by a combination of these as determined by Declarant. AFTER TERMINATION OF THE CLASS B CONTROL PERIOD, DECLARANT SHALL BE OBLIGATED FOR ASSESSMENTS ON THAT PORTION OF THE PROPERTY WHICH IT OWNS IN THE SAME MANNER AS ANY OTHER OWNER.

The bold sections above show that the developer would have two choices and which he is suppose to declare before the beginning of each fiscal year or same continues for next year.

IMPORTANT: The letter your attorney sends needs to request and the Developer should provide to your attorney what choice he made for his portion of the assessments for each fiscal year prior to legal turnover date noted in the CCR’s when the developer then no longer controlled and became a Class A member.

My guess is the developer chose this option: “Pay the difference between the amount of assessments levied on all other property subject to assessment and the amount of actual expenditures by the Association during the fiscal year. In which case the HOA budget should have shown in essence a zero balance for each of those years. If the developer chose this option then those years would be in essence a mute point. The only thing you should concern yourself with would be if an item was supposed to be paid during those years and not paid until after declarant control, then the declarant should be responsible for reimbursing for an item that was his responsibility during his Class B option.

Now you stated supposedly the Declarant owes $16,000 in past dues plus interest. You have not stated how you came up with the amount, nor for what period of time. However, if you think the developer will have to pay this amount to the Association you need to understand this is most likely NOT going to happen. If you take into account all HOA dues for the time period and subtract any expenses for the HOA (LOL … developers generally do not include a line item for a reserve account, unless required by state laws) then the balance each of subsequent years should be zero or very little left over (unless developer has been charging excessive assessment fees). This is most likely why NpS and others have stated it would not be worth pursuing and which I also potentially would agree. You do not want to spend $10,000 in attorney fees to gain $3,000 in assessments from the developer. Choose your battles wisely …

4. Deposited Assessment checks into his Development checking account: Depending on which option the developer chose under above item 3 that possibly may not be an issue worth pursuing.

5. In 2014 opened a checking account in RA's name with only he and his wife as signators, and pays for the general upkeep of his own lots & construction right of ways out of that checking account (I am the bookkeeper for his grounds maintenance man, I see the checks, I know this is so): Potentially there should have been a checking account in the HOA name when initially established. This could be a problem for the Declarant with regards to prior records.

6. Never held an election in spite of multiple requests: This would potentially only apply to recent time after Developer does not have Class B votes. Which I would agree ended five years after the Declaration was filed with your local County Records per the information you provided.

7. Never provided an accounting in spite of multiple requests: Sorry … whether owner controlled or declarant controlled State Laws and governing documents are to be followed.

8. Has no minutes of meetings because "It's just me and my wife and we know what we said" (per email response to requests): LOL … guess he is going to have a difficult time proving some of above noted items. As one attorney joked and told me a while back it is very difficult to fix any a—h--- or “stupid”.

9. Raised assessments with the justification of minutes from a Board meeting held at another property in another state 7 years prior, & when called on it wrote to me that he had really raised the assessment because " I am bombarded with nitpicky questions.": As in essence noted above the developer cannot pocket money … any money assessed and spent must meet or exceed the governing documents. You have not yet stated what your association is responsible for maintaining and improving nor how much those items may cost.

10. Claims both that the Builder owes no dues because the builder is separately defined from Owner in CCR 1.02, AND: This I would take exception to … anyone who purchases a lot becomes an “Owner” including any builder. Unless your governing documents specifically state that any Builder does not owe dues (you did not post verbiage regarding CCR 1.02). From what you have posted your governing documents require even the “Developer” to pay assessments. The overall INTENT of your documents is that all equally share in costs.

11. Claims the Builder has a vote because the Builder holds the record title of lots he is building on (CCR 1.16): I would personally agree with this … however, as noted above I also personally believe builder is to pay same assessments as other owners.

12. Holds no insurance in the name of the RA, has no D&O insurance, claims that his Bond protects us: This is an item you need to check what is required in your governing documents and following any State Laws.

I can understand what you are going through and what you are facing. I am very impressed on what you know with regards to your governing documents and that you are pursuing your rights based on what has been stated. Keep in mind KNOWLEDGE IS POWER !!! Here shortly when get a chance I will give you tips on how best to gain and have certain knowledge to be on top of your future battles. Been there and done that … I have already walked in essence a mile in your shoes.

`

Sound advice.

****s/b "even though he has been self-dealing with our dues"

I do not know if this has been covered/discussed. In my present and last HOA (both in SC) the Declarant did not have to pay dues on a lot until a home was built on the lot and deeded over to a purchaser.

Empty lot or unsold house, no dues.

Hi Barbara:

Per your statement:
Re: 9.02 You are not correct.

I am correct in that I read this section the same way you have. I fully understood that the declarant had two choices regarding assessments during his Class B period and that the declarant after 5 years now becomes a Class A member.

My point was you have asked for records and financial information. In order to make any proper assessment during the declarants Class B membership period you need to know which of the two choices he made.

When the developer became a Class A member on 1/7/13 the members of the association should have immediately pursued their rights at that time. And that can become a BIG issue in a court of law. If this issue ends up in court I foresee two possible outcomes:

1. Because the owners did not pursue this issue back around 1/7/13 then the court could contend the current status quo continues until the owners take control. Some courts look at an issue of you were suppose to be aware and pursue your rights within a reasonable amount of time … your lack of NOT pursuing would mean that the developer could potentially continue as had in the past.

2. The court will take into account all monies owed for assessments since 1/7/13. They will then calculate as follows:

Assessments:
Homeowner Lots + Developer Lots = Total Assessments
Total Assessments – ANY EXPENDITURES = Account Balance

If this continues to a court of law the ANY EXPENDITURES will also include most likely a lot of money for attorney fees for an HOA attorney who the developer (as currently in control) will hire on behalf of the association.

This issue is going to come down to the plain and simple fact that the homeowners should have filed a lawsuit more than two years ago. Courts tend to frown on individuals who wait for an extended period of time in filing a lawsuit. If your attorney can negotiate a somewhat reasonable account balance as I noted in (2) above then I would take the money and RUN!!!

I also in the meantime would get the 10% (or less if your documents allow) of owners (per the link I provided regarding your State Statutes) to call for a “Special Meeting” to elect a BOD and I would have an attorney present. I would have the BOD then set up a new checking account. For this checking account I would require two signatures on all checks. (LOL … wait till you see the feedback on this last statement.)

Some will disagree with the statement of requiring two signatures; however, I have worked for and participated in many non-profit organizations and most have this requirement. Some will state the bank will not check signatures; however, in past I have received telephone calls from the bank stating they are currently holding paying a check as there was only one signature asking if OK to release funds. The important aspect is this is a method to maybe prevent fraud, and one single individual writing and signing a check for their sole benefit. Individuals will think twice about sticking fingers in the pie with this oversight. This will also vary depending on different State Banking Laws. Look for a bank that has experience dealing with large (national) non-profit organizations, as they will be more likely to closely watch those type accounts. Also, if your Treasurer is going to be the individual who receives and deposits money, writes checks, and keeps accounts VS a management company then they should not be a signature on the account. Anyone who can “fix” the financial books should not sign checks.

The overall answer to most of your questions is I would take what money I can get from developer … run … and then move forward.

CORRECTED I HOPE:

I agree - Declarant control is over. Since his control period ended 1/6/13, and our attorney tells me that the NC statute of limitations is 3 years, we are well within the statute to seek restitution but we can't wait another year, which is, I believe what the Declarant plans. We can (and will) hold a meeting AND an election. I simply can not get enough support from the Owners without some independent verification of his malfeasance. The Letter of Demand must go out before the few of us who are invested in this can get the support we need to seek redress through legal means by a truly elected Board of Directors. If there are people who don't want to vote for anyone other than the Declarant, that's their privilege but Declarant can not hold all of the seats on the Board and his wife is ineligible as she holds no stake in his LLC and owns no lots.

I agree that the Declarant's contract with the Builder is not now bona fide and was unconscionable - every home owner has complained about the quality of their home. Declarant has bullied homeowners and engaged in price fixing when other builders were sought out by lot owners. Moreover the Builder has constructed outbuildings well outside the acceptable range of size without permission of Declarant or other owners. CCR's allow remedies including an exlusion of that builder from the properties.

Thank you for citing your sources on this. It is very helpful.

Great response. Just a couple of comments.



If it's a 3 yr SOL, that means you can file a lawsuit as late as 1/5/16. That's nice leverage to have against builder if he raises a ruckus.

He can always transfer a lot to her which would make her eligible.

He could transfer lots, and she could hold a seat, I suppose. It wouldn't change the number of votes he has. The more lots he sells to the public the less votes he has for himself.

BTW, I figured I would ask him for a membership meeting again today. Just for grins and giggles, and to be able to say "I did ask..." should it come up. His response:

"We are having an Advisory Board meeting next Monday and one of the items on the agenda is a possible meeting of the homeowners. It will not be an official Annual Meeting of the Association since that will not occur, per the CCR's, until after I no longer have the right to appoint all of the Members of the Board. You are welcome to attend the Advisory Board meeting. It is at noon at the Sales Model. Please let me know if you have any additional questions."

When he says "Advisory Board" he is referring to his Architectural Standards Architectural Control Committee. They discuss all sorts of things at the one meeting a year that he holds with them, and then he refuses anything they request. Two of them are with me and the Attorney.

I thanked him and told him I couldn't think of any further questions at this time. I'll go and keep my lip buttoned. I'll make notes when I get home.

Indeed - and they're easily confused. I think that his reasoning is that he's going to hold on tightly until next year because he's fully aware that the SOL is 3 years.

Barbara:

Do you have at least 5 members (10%) willing to join with you and call for a special meeting?

The reason we need to hold it will not make people show up to a meeting and vote. They don't want to make waves. They're happy to wait every year until he turns it over, and then wait another. I've got have at least enough people to elect to the board in order to have a meeting that makes a difference. If I send an invite to all owners for a vote - which I must - Declarant will show up with all of his votes and a few toadies and then they'll control the board. Lots of people don't care, houses are isolated and people don't know each other (1 acre lots). The only way to get them to show is to show them that they already have been taken advantage of.

If we show up to a special meeting with 10% and he shows up with his 40% we're in trouble.