What Can An Incomplete Board Do?

Ryan,

First, in the eyes of the court, and as long as at least one person is willing to serve on a board, describing a boards as, "incomplete" is not accurate.

Second, a one-person board is not by itself unlawful, even when the governing documents specify three to five directors.

Third, HOA attorneys advise HOAs to try to ensure that the specified number of seats is filled. But this does not mean that the directors must appoint anyone who applies. If the director (or directors) feel no one else is qualified, then they do not have a legal obligation to appoint another director.

Fourth, do your governing documents say anything about how to proceed when there is no quorum at the annual meeting and directors' seats need to be filled?

Fifth, review what your governing documents say about calling a Special Meeting to remove directors.

Sixth, review what Arizona law says about removing directors via a special meeting. See Arizona statute 33-1813 at https://www.azre.gov/hoa/documents/Planned_Communities_Act.pdf . At most, only 25% of members need to petition for a Special Meeting to occur.

Seventh, the increase in dues is likely legitimate.

Eighth, should your membership hold a Special Meeting that removes the two board members, then the next question is how to get new Board members when the annual meeting is not scheduled anytime soon. Here I'd say that the Special Meeting can also have on its agenda the election of new directors. You will have to plan for every possibility here.

Ninth, I do not think the two board members are legally obliged to run another election. They should try to find at least one more to serve as a director, but as noted above, they are not required to do so.

Tenth, likely your best bet is to start a campaign to get out the vote via proxies at the next election.

Eleventh, once you get good people on the board, you can ask them to reverse the assessment increase and even lower dues. But I caution you: If you do not understand what a Reserve Study is, and your HOA has had a Reserve Study that recommends an assessment increase, then you need to consider this carefully before pointing fingers. (If you are well aware of this, then pardon my pedantry.)

The citation for the first three is a HOA attorney from years past and general reading on the subject. Here's the scoop as I understand it: Even when the number of directors is less than that the governing documents specify, under the law a HOA still has corporate status, and the covenants still run with the land. The corporation does not simply dissolve. (In fact, dissolution is a big formal deal with many steps.) The only alternative to letting a HOA continue with fewer than the required number of directors, but at least one director, is for a court to appoint a receiver. The court will order the HOA to pay the receiver. It will be extremely expensive to the HOA. Hence when even one person is willing to volunteer as a director, the courts will choose this instead of appointing a receiver.

Also for the third, the typical Bylaw concerning filling vacancies on the board via appointments (by the remaining board members) is permissive: It uses the word "may" instead of "shall." This means the remaining board members do not have to fill the vacant seats. At the same time, the Bylaws typically state something like, 'The number of directors /shall/ be ____... " Consequently, and from general reading, competent HOA attorneys will note there is a bit of a conflict between the two sections of the Bylaws, with one indicating the remaining directors may fill vacancies, and another saying, there has to be a certain number of directors. A second HOA attorney I know said that it is preferable to have all seats filled, but if the remaining directors think it is not in the best interests to fill the seat (because, say, the only volunteer for the seat is not qualified), then it is not necessarily unlawful to leave the seat empty. From my reading and a touch of actual experience, judges will not substitute their judgement for that of directors on a board on something like this. To do so would mean the judge was running the corporation. This is not the judge's job. Nor does the judge have the information that the remaining directors do.

The courts are backed up. My understanding is judges do not want to be bothered and spend taxpayer dollars unless the stakes are high and things have clearly gone south. If, say, HOA member John Doe took Green Acres HOA to court for not having enough directors, I believe the judge would look at HOA member John Doe and ask, "Mr. Doe, I do not have the legal power to dissolve the corporation. Its covenants run with the land and so on. The state's nonprofit corporation act has specific steps that must be taken to dissolve the corporation. I do have the power to appoint a receiver. This will cost your HOA about $75,000 per year. Is this what you want? The alternative is to let Director Jones continue until the next annual meeting or until a Special Meeting is called. You have the option of trying to get enough signatures to achieve that Special Meeting. May I suggest that this will likely be a lot cheaper to you and your neighbors than my appointing a receiver?'

Else I see that Arizona Statute 33-1813(6) mandates a Special Meeting for the purposes of filling empty board seats when a majority of the board has been removed at a prior Special Meeting.

I understand you want the two current directors gone. You want three of the five who were ready to take the job appointed somehow to the board. You want the assessment increase removed. You want these things done yesterday. But when you joined the HOA, you had notice that the covenants required a quorum to conduct elections; that such-and-such happens if there is no quorum; and that your recourse is xyz if you do not like the such-and-such. So practice the xyz.

Lastly, in my opinion your Bylaws could stand an amendment on how the HOA is to proceed when there is not a quorum. If you ever get people you like on the Board, you might urge them to take steps to put an amendment of the Bylaws to a membership vote. Nationwide many HOAs' bylaws address this situation as follows: Another election must be held within 30 days, but now the required quorum is half the previous required quorum. And so on. This repeats until quorum is met and new directors are elected.

AugustinD,
Thanks again for your reply, very informative.

I understand what you posted and I don't disagree with most of it. But I would like to posit another theory that I had which may or may not have any realistic legal basis.

My first response is that I think realistically, the chances that there are no qualified potential board members in an HOA is remote and a very rare occurrence. Motivated? Probably not. But qualified? yes. To be an HOA member one has to presumably be an owner of real estate which usually entails some level of competency. The exception being inheritance and the recipient is a complete imbecile, and what are the odds that the entire membership except for the 1 (or more) board members is comprised of members like this? Of course there may be tiny HOAs with 3 or 4 units where that is probably more likely but again we are talking about real corner cases and not the norm... I say all of this because to be a board member it really doesn't take much more than a pulse. Note that I'm not talking about being a great board member, just a board member capable of making basic decisions (ie voting) along side other presumably more capable existing board members.

My theory is that an HOA with an "incomplete" board is a board operating in a purgatory. Legally, along the lines of what you said I would suggest that such a board could continue to operate the association in a consistent ongoing manner without issue. Any new business, such as increasing dues or changing services or service levels would technically be illegal to do, but if no one says anything who cares and if they do say something, then join the HOA and complete the board because the complainer obviously cares to at least a minimal degree. Much like running a red light when no one is around, while technically illegal and maybe a little dangerous, such violations have no impact or consequences.

I also disagree that you would sue an HOA for not having enough directors. First, if you care enough to sue, you should probably run to fill any vacant seats. But aside from this, you wouldn't sue for lack of directors, you would sue to un-do whatever business was conducted without a full legal board. If the dues weren't raised legally, you would perhaps pay the previous (legal) dues amount, and then legally contest any late fees or collections attempts on the difference. And if there is a good reason to raise the dues, the lone board member or members need to go plead their case to the other members and appoint someone to fill the board and vote for the increase. Otherwise the dues increase attempt should fail and be illegal as it is not supported by the membership.

As a real estate agent I have encountered HOAs that have dissolved. I don't know what happens in those cases but I would just assume that deeds to common areas get turned over to the state and auctioned off (in most cases worthless for anyone to own) and remaining funds disbursed to owners. In these cases the common area real estate is tiny strips of land along the edges that have no value and no potential for use. I'm sure there are situations where entire subdivisions get abandoned during economic down turns and this happens then as well.

You are correct about your assertions about wanting the 2 gone and the 3 replacements installed. I am not complaining and fully understand that we should have done things differently. Thing escalated recently and changed and we were of course a little ignorant about how things worked. But we are looking for and evaluating options. One option is finding a legality or technicality to pursue and the other is using the state law or bylaws and the director removal procedures. I have been able to determine that while there might be a legal or technical angle, it is risky and not a clear or quick path to the objective while the director removal procedure is a little more clear cut and certain. Still, we are doing our homework before proceeding.

It would be nice to ammend the association documents but I think that takes a 3/4 majority. Not impossible, but it takes some real motivation to get those things done.