Eeny, Meeny, Miny, Moe?: Finding a Better Framework for Decision-Making by a Board of Directors.
Homeowners and condominium associations in Georgia are usually established as nonprofit corporations pursuant to the Georgia Nonprofit Corporation Code (“Nonprofit Code”). The board of directors is the decision-making body of any community association and must manage and operate the association and all of its assets and enforce any applicable covenants. The governing documents of any community, such as the declaration of covenants and the bylaws of the association, usually allow the board of directors some amount of discretion in making the various decisions that arise. These decisions may involve consideration of whether to approve proposed exterior modifications in the community, how association money is spent, how certain common expenses are allocated among the members, whether and how to enforce covenants in certain situations, whether to allow exceptions to a leasing cap contained in a declaration of covenants, and when and how to perform the association’s maintenance obligations. With each decision of the board comes the potential for challenge by a homeowner who may be adversely affected or who otherwise disagrees with the decision. Although a community’s governing documents may allow discretion in decision-making, they do not address the standard by which a decision would be judged should their decisions be challenged. Fortunately, Georgia statutes and case law give some guidance into this process.
Section 14-3-830 of the Nonprofit Code sets forth the general framework for a director’s actions: “A director shall discharge his or her duties as a director, including his or her duties as a member of a committee: (A) In a manner the director believes in good faith to be in the best interests of the corporation; and (B) With the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Board members of homeowner-controlled community associations are volunteers with other obligations and generally have a finite amount of time and energy they are able to dedicate to their duties. The Nonprofit Code authorizes directors to rely on information, opinions, reports, or statements, including financial statements, in coming to decisions, if prepared or presented by officers or employees of the association or by professionals engaged by the association, such as legal counsel or a certified public accountant. In relying on information and/or documents given by individuals who are not on the board, a director must believe such individuals to be reliable and competent and must not have knowledge contradictory to the information presented.
The standard for judicial review for any discretionary action taken by a board of directors pursuant to a declaration of restrictive covenants, that is, whether a court will allow challenges to such an action to be considered by a jury, was established by the Georgia Supreme Court in the context of a homeowners association: “Where… the declaration delegates decision-making authority to a group and that group acts, the only judicial issues are whether the exercise of that authority was procedurally fair and reasonable, and whether the substantive decision was made in good faith, and is reasonable and not arbitrary and capricious.” Saunders v. Thorn Woode Partnership, 265 Ga. 703, 704 (1995). This standard has also been applied by the Georgia Courts in the context of condominium associations. See Atlanta Georgetown Condo. Assoc., Inc. v. Chaplin, 235 Ga. App. 460, 461 (1998).
Since the standard for review for discretionary action taken by a board of directors was first articulated, Georgia courts have allowed homeowners to challenge decisions made by a board of directors where the homeowners offer evidence that the decision is “procedurally unfair and substantively arbitrary and capricious”, for example if an association is not enforcing its covenants uniformly throughout the community, and the homeowners association offers no evidence to the contrary. See Southland Owners Assoc., Inc. V. Myles, 252 Ga. App. 522 (2001). Although there is no method of predicting whether a court in Georgia would find a particular decision made by a board of directors to a proper exercise of discretion or an “unreasonable, arbitrary, and capricious” decision subject to challenge, a homeowners association will not be able to adequately defend a decision made by its board of directors unless it offers some kind of evidence supporting the board’s decision. See King v. Chism, 279 Ga. App. 712 (2006) and Wright v. Piedmont Prop. Owners Assoc. Inc., 288 Ga. App. 261 (2007). Therefore, it is critical to keep good minutes of meetings at which decisions are made. The minutes should reflect the various points of view expressed and show that a vote was taken.
In conclusion, the governing documents of homeowners and condominium associations usually grant the board of directors discretion in how the association and the community are operated and managed. In coming to decisions regarding the community, board members may rely on outside information and documentation. For any decision made by a board of directors pursuant to discretionary authority granted under a community’s governing documents, the board should examine why it is coming to its decision and should record its reasoning in well documented minutes so that, in the event that challenge is made, there is sufficient evidence to defend the board’s actions. Of course, each decision of the board is distinct and may present unique challenges. A board of directors may want to consult with the association’s legal counsel for assistance in establishing a general procedure the board can follow when coming to decisions regarding the community and reflecting those decisions in the association’s records.