Corporate Fraud re Elections? Arbitration?

Issue: Has Corporate Fraud occurred when a Board does all of the following?

(1) requires proxies for the Annual Election to be notarized and emphatically publicizes to members the same for two months before and right through the day of the Annual Election;

(2) about one month before the Annual Election, and in Executive Session with the HOA attorney present, votes to revoke the proxy notarization requirement;

(3) tells no Member of the decision to revoke the proxy notarization requirement;

(4) ten days before the Annual Election, directs the CPA-Election Auditor to accept all proxies regardless of notarization;

(5) at the Annual Election, simultaneous to the Annual Meeting, several members question the notarization requirement. A motion is made to disallow it in the future. The Board President conducts a vote by the members, who overwhelmingly vote to recommend to that the Board not require notarization in the future. The Board President says nothing about the advice of the HOA Counsel and the previous month's Exec Session to revoke the requirement.

(6) a month after the Annual Election, announces to all that all proxies were accepted regardless of whether they were notarized. No explanation of why the Board did this is given.

Additional:
(a) So far, about 5% of all Members say they would have submitted a proxy were it not for the notarization requirement. These Members could not attend in person and so voted neither in person or by proxy.

Upon a group of Members filing a complaint with the HOA about the notarization requirement--
(b) the HOA Attorney revealed that a vote to revoke the proxy notarization requirement had taken place before the Annual Election.

(c) the HOA Attorney said the Board acted in good faith because it believed notarization would help ensure the integrity of the election. Then when the Board voted not to require notarization (on advice of counsel), the Board was still acting in good faith because it recognized the burden of notarization and that this burden could be found unlawful under state statute in a court of law.

(d) the HOA attorney has yet to respond to the Board not telling Members that the Board had revoked the notarization requirement.

(e) the HOA's gov docs have some limited provision for arbitration, with the prevailing party paying all the costs.

Subsequently,
(f) the Complainants asked for the Minutes of the meeting documenting the vote to revoke the notarization requirement, pursuant to the Bylaws and state law regarding record viewing.

(g) the HOA attorney stated that a redacted version of these Exec Session Minutes would be available for viewing when they were available for viewing (sic).

(h) two weeks later, the Board informed the Complainants that the redacted Exec Session Minutes were now available for viewing upon signing a non-disclosure form.

(i) the non-disclosure form requires that the signer agree (i-1) not to use the record for either harassment or disparagement; (i-2) to use the record only for HOA business; and (i-3) not to disclose the record without permission of the HOA; (i-4) to indemnify, release and hold harmless the HOA and the Board from any liability or claims arising from unauthorized use of the record.

Some of the Members want to take the HOA to court over this, trying to get the HOA President to pay all the fees of the HOA Attorney in addressing the in-house complaint. I read an exchange here about piercing the corporate veil. The latter refers to taking away corporate protections from a board member. Other improprieties with elections are alleged. I think they have much merit. Where the Board stands to profit by keeping a stranglehold on the election procedures: The Board is a huge fan of the HOA Manager. But many Members think the HOA Manager is incompetent for doing xyz. As long as the Board maintains a stranglehold on the election process, it will be able to keep this HOA Manager employed. I do not want to be a party to a lawsuit, as necessary as this suit may be, because I do not want to be in personal conflict for month and months. Also I know the HOA attorney will enjoy making a lot of money from this. But in the greater scheme, I think the benefit will outweigh the cost to members, and it could pave the way to a release of the stranglehold of the Board on the HOA in general, as it violates the gov docs, municipal law and state law.

First, thumbs up or down: Do you think this is corporate fraud that would pierce the corporate veil protecting the Board? Would it bother you as a HOA Member?

Second, is there a better way to handle this? Is arbitration better than going to court? Those with experience with arbitration: How do you predict arbitration would go?

Hi Tim, I do not want to post my state at present. I have scoured and know the statutes that apply in my state pretty well. There is no statute either requiring notarization of proxies or disallowing them. There is a statute stating that the right to vote may not be limited except to the extent the Bylaws permit. My HOA's Bylaws prescribe the form of the proxy and how it is to be submitted. The Bylaws have no notarization requirement. The situation is similar to that described in http://caselaw.findlaw.com/ny-supreme-court/1180683.html . My HOA is not in New York, but there is no other controlling law on the point. Even my HOA's attorney came up with only the Brodsky case. He said (a) the situation would be one of first impression in my state (I scoured and, while only a layperson, found the same); and (b) based on other authorities, expected that the right decision was to err in the favor of liberties. Hence the HOA attorney recommended that the board not require notarization.

Regarding a), the complainants have written testimony from several folks (some of whom are part of the group of complainants) that the reason they did not vote is because of the burden of having to find a notary public.

Regarding b) and c), yes, several in the group who submitted the complaint did not attend the meeting or did not submit a proxy because of the burden.

Regarding f) through i), thank you for sharing your opinion. I was feeling like this nondisclosure agreement was not enforceable. I am not going to sign it unless I have an attorney write a letter of demand.

It seems unlikely the outcome of the election would have changed. Which of course is an argument not to push any of this. Specifically: First, it is possible that there would not have been a quorum had the Board not secretly accepted proxies that were not notarized. When a quorum is not achieved, my HOA's Bylaws are clear about how to postpone the election and re-run it. Given what I went through with unlawful suspension of voting rights, others and I may have nominated someone from the floor at the second attempt to run the election. Still, at the original election, there were three board slots open, and only three were running. Hence I tend to think the outcome was not likely to change. At present, 4.5 months after the election, a Member may see the vote breakdown unit-by-unit (with each unit's vote weighted per its floor space) if the member agrees to go to the CPA-Election Auditor's office and pay him for his time. In the past this breakdown was included in the Minutes of the AMOM. But no more.

I appreciate getting your objective opinions on this.

Hi Time, in my response to you I was trying to say that none of us can tell if the outcome would change unless we pay a lot of money to the CPA Election Auditor to see the vote breakdown. Without the non-notarized proxies being counted, the HOA may not have had a quorum and would have had to postpone the election.

NpS is, imo, Augustin, exactly correct in every possible way that we can think about this.

Glad this topic came up. As stated in another thread I am working on revising our by-laws.

Consideration was given to including a notarization requirement with the proxy for
election of Directors.

Now I will have to re-think that requirement.

Wayne

Gave Augustin's situation a bit more thought.

I think he could succeed in a claim to redo the election.

He won't need affidavit from homeowners who didn't vote.

IMO, he has standing all by himself because he was affected by the outcome of a closed election that improperly excluded some. Better of course if he has a friend who joins the suit that didn't vote. But only needs one.

Not sure that's the path that Augustin wants to pursue.

Augustin D :
1 - inconsistent proxy Notarization hurdle : was it fraud, honest error or 'liberalizing access' ? Sincere or not, a credible sounding justification in (c) above. But to appeal & to whom ? Other than non-litigation appeal venues, I wonder how many outcomes did you find in your state, where a HOA/condo election or Requisition meeting was even adjudicated ?

In 2013 a civil court in my jurisdiction actually heard & rejected an appeal by Requisition-unseated Directors against certain outcome-changing proxies being uphelp/ validated. The disputed validations occurred after condo Requisitioners overthrew the appellant Board's chair. Both the Requisitioner's chair ( & subsequently the civil judge ) reviewed proxy by proxy the proxy documents which cited the particular candidates by name ( instead of dual envelope method ).

Not only was the corporate veil pierced but the lawful lack of dual envelope allowed the outcome-changing itself to be confirmed judicially. Management had claimed the critical proxies were disqualifiable for alleged arrears, such disqualifiation actually overturned by the Requisitioners' chair and on this 2013 judicial appeal. Unusual and appealed by unseated Directors, not "what if".

2 - Predicting arbitral outcomes & costs : Whether outcomes are as predictable/unpredictable as conventional litigation, some have found they can be a trip into the Twilight Zone of illegality, as recently was reminded to me after a 3 year property assessment appeal.

Wouldn't a less formal arbitration be likely cheaper than conventional litigation ? One arbitrated condo type outcome ( over minor plumbing & seagull feeding ) shockingly cost $ 198 K in another jurisdiction here several years ago ! One residential noise ADR actually hit $75 K in 2008 - there were noise studies - even before the disturber failed to get the arbitrator's award overturned.

Tim, interesting argument. To me the key phrase is "the inspectors shall be limited to an examination of the proxies...." It seems to me Wayne's HOA Bylaws could be legally amended to require notarization, and that said notarization reasonably could fall within the limits of the inspectors "examination of the proxies." After all, the VA statute does not specify what the for what exactly the inspectors are supposed to be examining.

The Brodsky case refers to another case, West v. the Board of Seward Park Housing Corporation. In the West case, the Bylaws made no mention of proxies whatsoever. Because of this, in West and pursuant to NY law, requiring notarization of proxies was permitted.

It's a good question for a Virginia attorney.

You need to read the whole statute in context.

NpS, I think your argument about members' (my) ability to campaign is a good one. But remaining is that, with only three candidates running; only three slots open on the board, and no nominations from the floor at the meeting itself, the judge would say, 'Come on. Do you know how important this court's time is? Here is an order never to require notarization. Defendants, appeal at your own risk. We are done here.' The judge would be right.

I raised Walter's situation to keep the notion of derivative action vs. direct action on the table here. I think this notion is relevant to this discussion. I am not sure Walter could name the Association. I understand the legal theory of a derivative action is that the corporation sues its own directors for harm the directors did to the corporation. A number of shareholder-members of the corporation nominally represent the corporation in a derivative action. The number that is required varies from state to state.

If Walter had named the Association as a defendant, I am not sure this would make any difference. The HOA, through its board, has a fiduciary duty to Walter not to waste money on depositions (so Walter claimed); the HOA should spend carefully? Yes but what's "carefully" is pretty subjective. I think Walter was right to raise his concern, but he did need an attorney here to ensure procedural rules were followed; phrasing was correct; and so on. I think an attorney might have expanded his complaint and might have been able to prevail.

NpS, I think the following is an academic exercise that may be helpful to some wondering about suing one's HOA.

As quoted in WalterM3's thread, to have standing to sue a nonprofit corporation in a derivative action in Georgia minimally requires the following:

~~~
Georgia Code
PART 4 - DERIVATIVE PROCEEDINGS
§ 14-3-741 - Standing

A derivative proceeding may be brought either by any director or by any member or members having 5 percent or more of the voting power or by 50 members, whichever is less. A director or members may not commence or maintain a derivative proceeding unless the director or members:

(1) Was a director or were members of the corporation at the time of the act or omission complained of (or became a member through transfer by operation of law from one who was a member at that time); or is a director or are members at the time the proceeding is commenced; and

(2) Fairly and adequately represents the interests of the corporation in enforcing the right of the corporation.
~~~

I do not think Walter had standing to sue in a derivative action. Where I live, the law requires a plaintiff suing in a derivative action to use an attorney. For someone pro se, this is another bar to suing in a derivative action.

Regarding better protection with an attorney: Yes in Walter's case. But the New York Times had an article last week that reported a study showing that pro se individuals using a new electronic forms service resolved certain categories of cases in court more quickly and with better results than those who hired an attorney. Just saying. God knows we do not need a bunch of amateurs suing each other. OTOH, some actions are so boiler plate that we should indeed 'kill all the attorneys.'

Generally for HOA lawsuits, I think an attorney is best.

I am not so sure about how not naming the corporation = no corporate insurance available. My understanding is that the agents of the corporation are generally covered under the corporation's insurance policy for much of what they do.

AugustinD(NM)

1 - Whether the notarization/DE-notarization aspect is electoral fraud, stupid or 'liberalizing access', the bottom line is proxy seekers facing uneven hurdles at the doorstep. Could really be serious & deliberate unfairness.

2- I revisited both of WalterM3 GA's topics ( not easy, given the Search function ):

In Walter's more recent Quorum restoration topic; unscheduled death required a fill-in appointment a month later, which delay irked Walter ) http://www.hoatalk.com/Forum/tabid/55/forumid/1/tpage/2/view/Topic/postid/205857/Default.aspx

In Walter's earlier Derivative Lawsuit topic
http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/194675/view/topic/tpage/1/Default.aspx

Walter earlier relates getting advice to "file in Magistrate's Court (Small Claims) an action, not against the Board, but against the corporate officers, for malfeasance." ( maybe not the worst idea, given what I did NOT see in the Georgia statutes as to property & civil rights/ consumer protections )

Walter : ". . I engaged one of those online lawyer services, and he confirmed I can sue in a "derivative action" on behalf of the HOA members to get a judgment not for me, but to force the Board members to repay money to the corporation for 1) using funds wrongly and 2) without getting a majority vote in writing as required by Georgia law, as detailed below :

. . . for harm done to it by the defendants. $1,140.00 of the Association funds . . . to have the Association attorney analyze and attend a deposition for a trial between two members of the Association. The deposition was pursuant to a suit between two HOA residents over a claim of defamation. It had nothing to with HOA affairs. )

He later recounts this was dismissed without prejudice.

AugustinD : 1- Thanks for excellent tip.

2- At least WalterM3's expressed view of his outcome ( his claim dismisssed with prejudice ) is successful. The interesting comments show many were skeptical.

If attorneys who themselves are condo/ HOA owners, suffer losses when suing their condo /corporations ( outside records denial) what should a SRL self represented litigant expect if facing a professional counsel ? Pro se a HOA owning lawyer here has lost 3 of 4 outings against his HOA Building Scheme and has now retained highprofile specialist appeal counsel. Another lawyer who achieved - on balance - a mostly successful outcome suing her condo corporation, retained litigation counsel for the whole 4 year process.

3- An law professor's study underway here of pro se /SRL (non condo/non HOA ) may suggest that congested courts are increasingly allowing pro se litigants to be thrashed summarily upfront. ( upfront motions to dismiss ). The results imply that judicial tolerance levels are dropping.

Thank you for the input, JamesG11. None of the HOA members here want to challenge the election, for the reasons I give above. At this point some of the members want to file a complaint of member-shareholder-voter suppression on several counts. The most recent example is that the Board recently resolved that, at the 2017 annual election, no candidate for the board may be designated as the proxy for a member not in attendance. I am advising these members use an attorney (we have one we all know) and thinking that plaintiffs should agree to mediation the instant the word comes out of the judge's mouth, or get to mediation sooner if the attorney knows a way to do so. I do not want to be a party to the lawsuit (having had enough of same to last a lifetime, at my previous HOA). I think the best thing to do is to take a draft court complaint to the attorney and get his thoughts. He's a straight-shooter, in my experience and hates wasting people's time and money.

AugustinD : Update is appreciated. One would have hoped that as opposed to genuine corporate warfare ( Disney v Disney Co) an Open Book would have been more helpful in a condo/HOA environment.

Wonder if legislators anticipated that property owner disclosuring rights could get sometimes trumped by 'disclosurable only to judicial process IF designated 'confidential'. Hadn't this started with Board/proxy sleight of hand issues/ Minutes issues ?

So digging can be very helpful. Good for you and your neighbour.

The confidentiality-stamping Board : "Your Honour this confidence was defensible because we could have looked like idiots . . . "

The Disney Company : "Your Honour this confidence was defensible because competitors could put our share value at risk or steal our commercial advantage . . . Would have had to liquidate the Parks. . . Mickey & Goofy sent to to peddle drugs . . . "

". . .our Chief Counsel Mr Pinocchio would have been here to argue this to this court, your Honour.

But instead he has to begin treatment for an unusual medical condition . . . ."