I was recently listening to my 70’s playlist on Spotify, and the Steve Miller Band’s “Fly Like an Eagle” came on. One of the verses we all know form the song suddenly stuck out to me:
Time keeps on slippin’, slippin’, slippin’ … Into the future
Time indeed does slip … into the future. To wit, it’s already 2024 (where did 2023 go? Or 2022, 2021 and/or 2020 for that matter?). As it pertains to the community association world, what exactly is on the horizon for the future – in 2024 and beyond? Let’s discuss some of the emerging technologies in community associations to see how far we’ve come, and what is coming down the road (pun intended, electric vehicle (EV) joke here).
Electric Vehicles
A couple of years ago, I wrote an article for Community Assets entitled “Plug and Play – Solar Panels and Electric Vehicles in Common Interest Communities” (Nov/Dec 2021 issue). It’s still a very hot topic nationally. While there is currently limited pushback related to EV charging in associations with single family detached units (usually related to aesthetics of installing outside of the unit/garage vs. inside the garage), in stacked condominium and townhome communities it’s been a different story.
The debate about EVs in these communities still relates to how and where electric vehicles will be charged if the vehicle is parked away from the unit because, most of the time, the current infrastructure present in older communities will substantially limit the ability to actually install charging stations in common areas, in addition to association-related logistical, legal and technical issues such as the location of the charging stations, use of parking spaces, deeded spaces, limited available parking, insurance, tremendous expense, disturbance of common facilities and common elements, liability, who will pay for the electricity, commercial EV charging providers on the premises, Level 1, Level 2 and Level 3 charging, and more.
The shift to EVs is rapidly accelerating (another EV pun, intended) as the technology evolves and the cost of EVs continues to decrease. Our industry must proactively figure out how to handle EVs – in old communities and in new communities. It will obviously be much easier to deal with this in new communities where the necessary infrastructure required for EV charging stations is installed at the time the improvements are installed in the units, common areas and common facilities.
I am still not aware of any actual EV legislation that has been formally introduced which would impact community associations in Pennsylvania, but I do believe it’s coming at some point soon, in some manner. And when I say soon, I mean, very soon – PA Senator John I. Kane issued a Co-Sponsorship Memorandum on August 31, 2023 entitled “Residential Electric Car Charging Stations.” Pursuant to the Memorandum:
“I am introducing legislation to allow residents of condominiums and common interest communities to install electric car charging stations in their designated parking spaces. Residents will be responsible for the cost of installing the electric car charging stations. The legislation will bar unreasonable restrictions and enforcement against the use and expansion of electric car charging stations as well as the deliberate disregard of applications. Electric Vehicles have major benefits including improving air quality by lowering emissions and creating new jobs in the manufacture and distribution of these products. That is why leading auto manufacturers including General Motors are ramping up production of electric vehicles and are planning to phase out most gasoline or diesel-powered vehicles. My legislation is modeled after New Jersey’s and New York’s efforts to facilitate the expansion of electric car charging stations. Let’s join our neighboring states in their mission to make electric car ownership hassle-free and accessible. It’s time to take important steps to address climate change while also addressing the barriers that may impeded electric vehicle ownership.”
I’ve asked this before for various issues: shouldn’t we be in front of this issue, rather than behind it? Shouldn’t newresidential construction in Pennsylvania be constructed with the necessary infrastructure to support EV charging stations? Yes, it should.
However, for existing communities with old (aging) infrastructure and other limitations, this will be far more difficult, so any legislation requiring existing Associations to allow EV charging in common area parking situations must be carefully reviewed. If a legislator is reading this article and is considering going down this road (pun intended – EV joke # 3) with respect to existing communities, I would recommend that the legislature identify and/or create funding sources (i.e., state energy grants) which community associations could utilize to install the required infrastructure for EV charging. I am happy to discuss this with any legislator that wants to listen.
Solar Energy
Currently, 29 states (including neighboring New Jersey and Delaware) and the District of Columbia have laws which serve to prohibit association covenants or restrictions from applying to homeowners who seek to install solar panels and associated devices on their homes. Twelve more states have laws that protect easements and their establishment on a legal contractual basis without having an express solar rights law in effect. While Pennsylvania currently has no such solar law(s) in effect, solar panel legislation which would impact community associations has previously been introduced multiple times: Senate Bill 1039 – Residential Rights to Solar Energy (2017-2018 Session); Senate Bill 436 – Removing Obstacles to Residential Rights to Solar Energy (2019-2020 Session); and Senate Bill 826 – Ensuring All Residential Homeowners have Access to Solar Energy (2021-2022 Session). The common theme exhibited in the first two Senate Bills is that community associations would not be permitted to prohibit or restrict the installation or use of a solar energy system on a detached unit.
Senate Bill 826 (from the 2021-2022 Session), took it one step further to provide that Associations would not be permitted to prohibit or would not be permitted to prohibit or restrict the installation or use of a solar energy system on a detached roof or a townhouse unit. Currently, in the 2023-2024 Session, similar legislation has been introduced – Senate Bill 31 and House Bill 1759 – Solar Energy Systems. This legislation, as proposed, provides that a community association may not prohibit or restrict the installation or use of a solar energy system on a detached roof or a townhouse unit for which the repair of the of the unit is an owner responsibility and not the responsibility of the community association.
Thus, all of the bills that were previously introduced, as well as the current session’s bills, focus on preventing community associations from prohibiting or restricting the installation or use of a solar energy system on units in the community association. If solar is indeed the future, why are legislators still focusing on preventing associations from acting in some way? Because most community associations (the Boards and/or the owners) still do not want solar in the community and/or do not want to deal with solar issues in any way. Just like the EV issue we just discussed – shouldn’t we be in front of the issue, rather than always behind it? Community associations must begin to reconsider how they look at solar issues because it’s coming, and there will be no looking back.
Management Software
I know, I’m the community association attorney – what do I know about management software? We work with manymanagement companies in representing the interests of our mutual community association clients all over Pennsylvania, and we see that management software solutions have been evolving, and rapidly. Using the latest software solutions, community association managers and staff can:
Take payments electronically;
Perform site visits and issue violation notices, with photographs, immediately from their smartphones;
Communicate directly, and instantaneously, with all of the unit owners in the community via a communication portal and/or email blast; and
Communicate with vendors regarding association issues.
Management is also able to offer mobile apps to end user unit owners to be able to view their owners portals and communicate directly with the management regarding their accounts, and notify management of any complaints, issues or violations. Board members can also utilize mobile apps to view and conduct Board business, which was unheard of only a few years ago.
Technology is therefore allowing management to do its job better – and faster – than ever before. Expect to see even more positive changes happen in this area in 2024 and beyond.
Electronic Voting and Meetings
At some point, electronic voting and meetings in community associations will be the norm, not the exception, in Pennsylvania. While we still need to work out the wrinkles statutorily for existing communities in Pennsylvania, the Bylaws that are being drafted for new communities in Pennsylvania already reflect the change to allow emerging, electronic technologies to be utilized for voting and/or meetings (Board and/or association). These technologies, as they exist today, were not really being utilized in community associations even just five years ago – yet, today, they have become the norm.
Social Media
In a nutshell, to say that social media has changed the community association landscape is an understatement, and to say that the use of social media in community associations has drastically changed (whether good, bad, ugly or indifferent) is an even bigger understatement. Social media can be used by community associations in a positive manner, and it can also have negative implications (i.e., unofficial social media pages/online presences which are not run by the association). At the end of the day, social media use in community associations is not going away.
I have been discussing social media issues for well over a decade, and one thing that is clear is that social media issues continue to evolve. To say that media has changed the community association landscape is an understatement, and to say that the use of social media in community associations has drastically changed (whether good, bad, ugly or indifferent) is an even bigger understatement. Social media can be used by community associations in a positive manner, and it can also have negative implications (i.e., unofficial social media pages/online presences which are not run by the association). At the end of the day, social media use in community associations is not going away. Be prepared for it, and handle it appropriately.
– Edward Hoffman, Jr., Esq., CCAL
* This Blog post by the author was originally published in the Jan/Feb 2024 issue of Community Assets Magazine, a publication of CAI’s Keystone Chapter.
There’s a chance that we might fall apart before too long
(We Can Work It Out, The Beatles)
In my career as a community association attorney, I can’t begin to count the number of times I have heard from clients that life in a community association is akin to life in paradise … no muss, no fuss, no bother. Now that I have your attention, let’s talk turkey. Life in a community association is just like life in the rest of the world … while it can be wonderful and rewarding, it can also be challenging to say the least. The distinction is that challenges and disputes that arise in a community association have as their genesis not only ordinary societal issues (including differing attitudes, disagreements and a divided country), in a community association, disputes often arise as a result of non-compliance with the community’s governing documents, covenants and restrictions.
A couple of years ago, I authored a piece entitled “Peace of the Puzzle” which discussed best practices in avoidingconflict in community associations (Common Ground, May/June 2021 issue). But what happens when conflict cannot be avoided and it results in a dispute that needs to be resolved? We will discuss dispute resolution as it applies to community associations in this article.
Communication
Communication by and between the disputing parties is critical to resolving the dispute. Time and time again, I have witnessed parties engaged in a dispute actually stop communicating with one another. A practical question arises as it pertains to this strategy: how in the world will ceasing communication between the parties actually help resolve the conflict? The simple answer is: it won’t. In fact, it will generally make things worse. For clarification, I am not suggesting that parties who are engaged in a dispute where one party is abusing, intimidating or harassing the other (or a situation of such mutual behavior) should attempt to talk it out. I am suggesting (and recommending) that when parties can discuss their dispute professionally and in a civil nature, they should. This may actually lead to resolving the dispute, or may assist in getting to a resolution faster than if the parties were not communicating.
From the perspective of a community association being a party to a dispute with a unit owner (unrelated to the collection of delinquent assessments), I generally recommend that the association (through its Board and/or with a Community Manager) seek to meet with the adverse unit owner either formally or informally to discuss the dispute and try and resolve the matter.
Similarly, a unit owner battling with his or her community association or with another unit owner should strongly consider meeting with representatives of the association or with the other unit owner, as may be applicable, to attempt to resolve their dispute. Communication by and between any of the adverse parties can be worth its weight in gold.
Exhaustion of Internal Remedies
In virtually every community association in every jurisdiction, the governing documents and/or the controlling common interest community statutes will provide that when the association is enforcing its governing documents against a unit owner for a violation, the association must provide notice of the violation to the unit owner, and an opportunity to be heard (due process) on the violation to the unit owner prior to issuing the violation against and/or assessing a fine to the unit owner. (Statutes vary by jurisdiction, but the gist is the same; check with your community association attorney to ensure the required steps are being handled correctly). Following this process correctly would serve to exhaust all of the required internal remedies as it relates to the violation, and, if need be, would permit the association to move forward with further action(s) if the unit owner disputes the violation and relief from the court or some other remedy, such as a form of Alternative Dispute Resolution (ADR), such as mediation or arbitration, is sought to resolve the dispute.
As part of the internal remedy procedure, some states (like New Jersey, where I am licensed to practice) statutorily require that community associations affirmatively offer ADR to unit owners prior to going to court on all, or some, issues. Other states, such as Pennsylvania (where I am also licensed, and primarily practice) statutorily provide for voluntary ADR as part of the internal remedy procedure. The Pennsylvania statutes provide that: (1) All parties must agree to ADR; (2) ADR is not mandatory; any party may seek a private cause of action or other relief; and (3) Costs for ADR (excluding attorneys’ fees) are to be assessed equally against all parties to the dispute.
The common interest community statutes and/or association governing documents in many jurisdictions also permit a unit owner to file a complaint against the association for violations (generally for allegedly failing to enforce the covenants and restrictions) and/or for other disputed issues. In many jurisdictions, the statutes and/or the governing documents also require a unit owner to exhaust internal remedies as may be required prior to filing an agency complaint or taking the association to court on all or some issues. For example, Pennsylvania’s statutes permit a unit owner in good standing to file a complaint with the Pennsylvania Office of Attorney General’s Bureau of Consumer Protection for a limited number of issues (meetings, quorums, proxies, voting and association records). However, before a unit owner can file a complaint with the Pennsylvania Attorney General, all existing internal remedies must first run their course, and, if the association’s governing documents provide for internal ADR to first occur, a unit owner can’t file with the Pennsylvania Attorney General until ADR is exhausted and no resolution results, or one-hundred days have passed with no resolution. A unit owner can immediately file a complaint with the Pennsylvania Attorney General if the governing documents do not contain ADR provisions or if the governing documents provide for ADR but the association refuses to agree to engage in ADR with the unit owner.
It is therefore strongly recommended that parties determine if their governing documents and/or respective jurisdiction’s statutes require ADR or some other dispute resolution mechanism to occur prior to engaging in other dispute resolution efforts or litigation. A final note: the required internal remedies that we have discussed invariably may lead to – you guessed it – some form of communication occurring between the parties that are engaged in the dispute … which, as we know, is better than no communication.
Actively Working to Resolve the Dispute Outside of Court
If communication and the exhaustion of internal remedies do not resolve the dispute, it’s time to seek other options. I generally recommend exploring if a formal or informal meeting with/between the party/parties to try and resolve the dispute is possible (even if attempted in the initial communication phase) – after all, it can’t hurt to try. The best case scenario is that the dispute gets resolved.
If a formal or informal meeting doesn’t work, or simply doesn’t happen, then the parties should explore formal Alternative Dispute Resolution (ADR) using a third party for a non-binding or binding mediation and/or arbitration based on the agreement of the parties (of course this need not be utilized if the parties were required to engage in ADR in exhausting the administrative remedies and it was not successful. The parties can attempt a second ADR session if they so choose at this point, which may or may not be successful). ADR is a popular and often much less expensive choice for associations who seek to resolve disputes without the need for full-blown litigation in court.
The two most popular types of ADR utilized by associations are mediation and arbitration. Mediation is generally heard by a sole mediator and is more of a “summary” proceeding where the parties and the attorneys submit information (usually mediation memoranda) to the Mediator (ahead of time and/or at the mediation) and discuss their cases with the mediator and/or with the mediator and one another without the need for evidence/actual testimony to be introduced/taken at the mediation). The mediator issues a recommendation for resolution at the conclusion of a non-binding mediation that the parties may choose to accept or turn down, or in the situation of a binding mediation, the mediator issues a mediation order which the parties agreed to abide by (sometimes the mediation order gets filed with the court and a judge enters an order, unless the mediation proceeding and/or the result is to remain confidential).
Arbitration is generally a more formal and technical proceeding that can be performed by a sole arbitrator or a panel of arbitrators. Arbitration memoranda are typically submitted by the attorneys prior to the proceeding, testimony is taken and evidence is introduced at the proceeding. The arbitrator or arbitration panel issues a recommendation for resolution at the conclusion of a non-binding arbitration that the parties may choose to accept or turn down, or in a binding arbitration, the arbitrator or arbitration panel issues a binding arbitration order which the parties agreed to abide by (sometimes the arbitration order gets filed with the court and a judge enters an order, unless the mediation proceeding and/or the result is to remain confidential).
I am typically a bigger fan of a non-binding mediation session over a binding ADR session, whether it is a binding mediation or arbitration, except in rare situations where a binding, final outcome is the best available option for the particular dispute. Being a non-binding session allows the parties to attempt to formally resolve the dispute with the assistance of a mediator who is a third party with no vested interest in the outcome (aside from his/or her fee). I have been involved in complex, multi-party litigation where multiple mediation sessions were required to resolve a dispute with finality, but even three, four or five mediation sessions is vastly cheaper and more efficient than participating in a four to six week trial which would be subject to appeal.
The Last Straw: Going to Court
Sometimes, despite our best intentions and attempts at resolving a dispute outside of court – we end up in court – because we have to. While cases often settle on the courthouse steps and/or during the trial itself, cases need to be prepared to go the distance, which is time-consuming and expensive for the litigants. A few thoughts about going to court are as follows:
When to go to court. This seems obvious, but sometimes it isn’t. Court is not just the “last resort” option when all else fails. Parties can actually spin their wheels for a long time attempting to resolve a dispute, where one party is purposefully leading the other party down the primrose path. In this situation, going to court sooner, rather than later, may be more beneficial and actually end up being more cost effective.
Focusing on What’s Important and Picking our Battles. I often tell clients, don’t sweat the small stuff, sweat the big stuff. In other words, focus on what’s important and pick your battles when identifying your litigation strategy – look at what the desired end result, and work to achieve that instead of getting lost in the weeds battling over minutiae.
Cost-Benefit Analysis. Every party in litigation should engage in a cost-benefit analysis as it relates to the desired outcome and the cost to get there. If the cost exceeds the desired outcome, then settlement of the dispute in lieu of trial is likely the best option.
Risk-Benefit Analysis. If the risk of losing at trial is greater than the potential benefit of going to trial, then settlement of the dispute in lieu of trial is likely the best option.
Impact on the Association, Board and Members/Owners. Litigation is expensive, time-consuming and can be emotionally exhausting. The association will need to pay its counsel to go to court and the Board and any impacted members/owners will need to deal with the case from inception through trial – many times this causes Board members to resign and members/owners sometimes move out of communities after being involved in protracted litigation.
After the suit – now what? To the victor go the spoils, or so they say. But is this really true in an association setting where it is association vs. unit owner? While there is a formal “winner” at the end of the litigation, the parties (Board members on behalf of the association and the unit owner) must still live next to one another as neighbors and attempt to coexist amicably. This is tough following a drawn-out court case, but the parties should do their best to put the past behind them and forge a new path moving forward. This is obviously much easier said than done, as human nature and behavior often get in the way. Sometimes the greatest goal following litigation for some parties is that they won’t end up in court again.
Parting Thoughts on Conflict Resolution
I am not trying to sound like a self-help guru, but my advice to association residents would be to keep an open mind, act in good faith and be neighborly – this may go a long way when a dispute arises and a resolution is required. As the Beatles taught us: we can work it out.
– Edward Hoffman, Jr., Esq., CCAL
* Content in this Blog post is also contained in an abbreviated/edited article by Edward Hoffman, Jr., Esq., CCAL, published in the November/December 2023 issue of CAI’s Common Ground magazine, entitled “We Can Work It Out”.
While this is not a Bill which seeks to amend the three Common Interest Community Statutes in Pennsylvania (PA Condominium Act, PA Uniform Planned Community Act or the PA Real Estate Cooperative Act), this Bill, if it becomes law, could have an impact on new construction community associations in some manner related to residential real property improvements owned by the association, or, at minimum, upon unit owners in the community associations in new construction communities. PA HB 377, found here, provides:
If a builder becomes aware of a construction defect in an improvement to real property constructed or facilitated by the builder, the builder shall notify the owner of the real property. The builder shall also notify the owner of any real property for which the builder constructed or facilitated construction of an improvement if the builder has reasonable cause to suspect the existence of a substantially similar construction defect. The following shall apply:
(1) The notification shall include all of the following: (i) A description of the construction defect or suspected construction defect. (ii) The reason that the builder knows or suspects that the construction defect exists. (iii) Contact information for the builder. (2) The notification shall be made within 30 days after the builder knows or has reasonable cause to suspect that the construction defect exists. (3) The builder shall provide the notification by certified mail to the address of record for the owner of the real property. (4) The notification is not required if at least 15 years have elapsed since completion of construction of the defective improvement. (5) The notification shall not constitute evidence of the builder’s liability for the construction defect, nor shall the notification relieve the builder from any liability which may exist as the result of the construction defect. (b) Failure to comply.–A builder who willfully or negligently fails to notify an owner of real property as required by this section shall be liable for the amount of actual damages suffered by the owner as a result of the builder’s failure to notify the owner. This subsection shall not be construed to restrict or expand the authority of a court to impose punitive damages or apply other remedies applicable under another provision of law. (c) Statute of limitations.–An action for damages as the result of a violation of this section must be commenced within two years of the time that the owner of the real property becomes aware of the builder’s failure to comply with this section.
The definition of “construction defect” provides as follows: “A material defect that results from a deficiency in the design, planning, supervision or observation of construction or construction of an improvement to real property. The term includes a material defect that results from the use of defective building materials or from the improper installation of building materials.“
Interestingly, HB 377 provides that notification of the defect is not required after 15 years since the constriction of the defective improvement has occurred; this is greater than the 12 year statute of repose in Pennsylvania for claims related to construction.
Finally, a builder who fails to notify an owner, would be liable for the amount of actual damages suffered by the owner and the ability to impose punitive damages under some other law would not be limtied by this Bill if it becomes law.
After another client contacted us inquiring about the Corporate Transparency Act (CTA), we thought it was time to write a brief summary on this law and what it means to community associations.
The CTA was enacted by the United States Congress on January 1, 2021. The stated purpose of the law is to generally address “the disclosure of corporate ownership and the prevention of money laundering and the financing of terrorism”. I know, you’re asking – how in the world does this apply to community associations? The simple answer is, it wasn’t really intended to, and community associations appear to be “stuck in the middle” of it (as is often the case). A *very* brief summary and discussion about the CTA is below.
It appears that associations are “Reporting Companies”, for the most part.
The exemptions listed in the CTA do not appear to apply.
It appears that as of now, Board members would qualify as “Beneficial Owners” under the CTA because in their capacity as Board members (or the governing body as a whole), they exercise “substantial control” over the association as a Reporting Company.
Reporting Companies must provide general information (name, address, tax ID, formation info, etc.) as well as specific information on each Beneficial Owner (i.e., Board member) – name, DL or passport, DOB, etc.
A failure to report may result in civil fines and/or criminal fines for fraudulent reporting or a purposeful failure to report.
Based upon our review of the current iteration of the CTA and agency Rule(s) related to same, we believe that the vast majority of Pennsylvania community associations (especially those registered as a non-profit corporation with the PA Department of State) will likely be subject to the law, as it currently stands. But don’t panic, we still have some time to figure this out – the filing requirement becomes effective on January 1, 2024 (and the report must be filed by 1/1/25 for existing Reporting Companies).
We will continue to monitor the CTA and will update the Hoffman Law Blog as soon as we learn any new information.
Those of you who follow Hoffman Law LLC may remember our post from a few years back reminding you to get your Decennial (i.e., 10 year) Reports filed with the PA Department of State to save your name:
NEWS ALERT – THIS HAS ALL CHANGED – EFFECTIVE BEGINNING IN 2025 AN ANNUAL REPORT IS REQUIRED! What does this mean to your Community Association? The Pennsylvania Department of State has provided the following guidance (in pertinent part(s)):
On November 3, 2022, Governor Wolf signed into law Act 122 of 2022, and the law became effective on January 2, 2023. Among the many changes made by this legislation, Act 122 created an annual report requirement (like that imposed by most states) for domestic and foreign filing associations. The long-time decennial report requirement for these associations has been repealed. The new annual report filing is required for many types of entities, including domestic nonprofit corporations (which includes many Community Associations).
Here is the good news – we have some time. The annual report requirement begins in calendar year 2025. Similar again to other states, failure to file the annual report will subject a nonprofit corporation Community Association to administrative dissolution/termination/cancellation and loss of the protection of its name.
The annual report will include the following:
Community Association Name
Jurisdiction of formation
Registered office address
Name of at least one director, board member, etc., depending on type of Ass’n
Names and titles of the principal officers, if any
Address of the principal office
Entity number issued by the Pennsylvania Department of State
The fee for the new annual report is $0 for nonprofit corporations (which includes many Community Associations) and the deadline for filing the annual report is June 30 of each year.
The Department of State will mail notice to the registered office address of each nonprofit corporation Community Association required to make an annual report at least two months prior to the respective deadline, reminding it of the need to make an annual report. It is critical that affected nonprofit corporation Community Associations keep all information on file with the Department up-to-date, particularly registered office address, to ensure that they receive notice of how and when to make annual reports. Nonprofit corporation Community Associations also have the ability to provide emails for additional notifications. However, failure by the Department to deliver notice to any party, or failure by any party to receive notice, of an annual report filing requirement does not relieve the nonprofit corporation Community Association of the obligation to make the annual report filing.
The new annual report requirement is a significant change for Pennsylvania. Therefore, Act 122 requires that the Department provide nonprofit corporation Community Associations with a transition period before imposing any dissolution/termination/cancellation for failure to file annual reports. Beginning with annual reports due in 2027, nonprofit corporation Community Associations that fail to file annual reports in the 2027 calendar year will be subject to administrative dissolution/termination/cancellation six months after the due date of the annual report.
Should a nonprofit corporation Community Association discover that it has failed to make a required annual report and has been dissolved or terminated, it has the opportunity for reinstatement, with no limitation on the period of time for such reinstatement. Such reinstatement must be accompanied by the application for reinstatement fee and a fee for each delinquent annual report that was not previously paid (if a fee is then applicable, as it is currently listed to be $0).
During the time of administrative dissolution/termination/cancellation, the nonprofit corporation Community Association’s name is made available to any other entities. If another entity has taken the name of the existing (senior/original) nonprofit corporation Community Association seeking reinstatement, the other nonprofit corporation Community Association that has appropriated the name may keep the name and the existing (senior/original) nonprofit corporation Community Association seeking reinstatement must choose a new name.
IT IS THEREFORE CRITICAL TO FILE AN ANNUAL REPORT BEGINNING IN 2025 TO CONTINUE TO PREVENT DISSOLUTION/TERMINATION/CANCELLATION OF YOUR COMMUNITY ASSOCIATION … AND TO CONTINUE TO SAVE YOUR NAME!
Source for this Blog Post: https://www.dos.pa.gov/BusinessCharities/Business/Resources/Pages/Annual-Reports.aspx
The first question that Board members usually ask is – what is fiduciary duty?
The Merriam-Webster Dictionary defines fiduciary duty as follows:
“A duty obligating a fiduciary (as an agent or trustee) to act with loyalty and honesty and in a manner consistent with the best interests of the beneficiary of the fiduciary relationship (as a principal or trust beneficiary).”
There are various duties associated with fiduciary duty, and depending on the jurisdiction these duties may include:
Duty of Care;
Duty of Loyalty;
Duty of Confidentiality;
Duty to Act Within Scope of Authority;
Duty of Good Faith;
Duty of Prudence; and
Duty of Disclosure.
How does fiduciary duty apply to community associations?
In the context of a community association, a fiduciary duty entails the duty that a Board of Directors (and/or a member thereof) owes the Association (which is typically a non-profit corporation). The Board has a fiduciary duty to act in the best interests of the Association with every decision that it makes.
What standard of review do the courts utilize as it relates to fiduciary duty?
Courts in most jurisdictions utilize some form of the “business judgment rule” (BJR) as it relates to fiduciary duty issues. Under the BJR, board members must make decisions within the scope of their given authority, in good faith, using ordinary care and in the best interest of the Association.
Under the BJR, courts do not substitute their judgment for that of the board of directors and will not interfere with the internal management of the Association unless the acts complained of constitute fraud, bad faith or gross mismanagement, or are unlawful. Kelso Woods v. Swanson, 692 A.2d 1132 (Pa. Cmwlth. 1997), Mulrine v. Pocono Highland Community Association, 616 A.2d 188 (Pa. Cmwlth. 1992).
In order to establish a cause of action for breach of fiduciary duty against an association for actions taken by its board members under the BJR, the party complaining must allege facts which would establish that the actions of the board members were unauthorized, or that the actions had been taken fraudulently, in bad faith, or constituted self-dealing. Lyman v. Boonin, 635 A.2d 1029 (Pa. 1993).
In Pennsylvania, the Non-Profit Corporation Law of 1988, 15 Pa.C.S. § 5101 et seq. (NPCL), addresses the standard of care related to board members of non-profit corporations, which include Associations:
§ 5712. Standard of care and justifiable reliance.
(a) Directors. — A director of a nonprofit corporation shall stand in a fiduciary relation to the corporation and shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:
One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented.
Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such person.
A committee of the board upon which he does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence.
(b) Effect of actual knowledge.–A director shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause his reliance to be unwarranted.
(c) Officers.–Except as otherwise provided in the bylaws, an officer shall perform his duties as an officer in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his duties shall not be liable by reason of having been an officer of the corporation.
15 Pa.C.S. § 5712.
The NPCL also speaks to the personal liability of directors:
§ 5713. Personal liability of directors.
General rule.–If a bylaw adopted by the members of a nonprofit corporation so provides, a director shall not be personally liable, as such, for monetary damages for any action taken unless:
The director has breached or failed to perform the duties of his office under this subchapter; and
The breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.
Common Interest Community Statutes — In Pennsylvania, pursuant to both the Uniform Condominium Act, 68 Pa. C.S. § 3101 et seq. and the Uniform Planned Community Act, 68 Pa.C.S. § 5101 et seq., board members stand in a fiduciary relation to the association and shall perform their duties, including duties as members of any committee of the board upon which they may serve, in good faith in a manner they reasonably believe to be in the best interests of the association. See 68 Pa.C.S. § 3303(a) and § 5303(a). Under the Pennsylvania Uniform Acts, Judicial review of board decisions is available even when a condominium or HOA was organized prior to the adoption of the Uniform Condominium Act, 68 Pa. C.S. § 3101 et seq. and/or the Uniform Planned Community Act, 68 Pa.C.S. § 5101 et seq.
Finally, a large percentage of community association Bylaws also speak to board members’ responsibilities and duties, and what standard is utilized to determine if a board member has acted appropriately. To wit, many Bylaws provide for indemnification for actions filed against the board and/or its members and specify when indemnity would apply given how a board member is to act on behalf the association (and at times, Bylaws will specify what actions would lead to no indemnification occurring, i.e., self-dealing, failure to act in the best interest of the association, etc.).
Insurance and claims.
Obtaining appropriate insurance to cover potential breach of fiduciary duty claims is critical for every association. Associations should work with insurance professionals that specialize in association matters in order to ensure that the association is receiving the best possible insurance product and coverage available.
As it relates to fiduciary duty claims, these claims can be brought under many legal theories (and for which it appears that the list of such potential legal theories is constantly growing), including:
Use of association property;
Buying/selling property;
Expenditure of association funds;
Hiring/firing;
Vendor and bidding issues;
Staff issues;
Election issues;
Member issues;
Collections disputes;
Operation of the association;
Self-dealing;
“Out of Control” board or board member(s) and Declaratory action(s) to remove;
Maintenance issues;
Design/Architectural issues;
Defamation;
Premises liability issues for an alleged failure to maintain;
Discrimination;
Failure to hold Annual Meeting;
Business decisions – insurance, reserve issues, FHA mortgage approvals; and
Enforcement of covenants/selective enforcement.
Fiduciary duty claims should be submitted to the association’s carrier for review under the association’s Officers (D&O) Liability Coverage. The D&O coverage part is generally drafted to include a myriad of potential claims, coverage for many of which may include a “wrongful act”. Board members must be considered an “insured” under the policy and required that the “insured” be acting in the scope of their capacity as a board member. There are also exclusions, defense cost issues and other issues pertinent to insurance that must be reviewed. The moral of the story is that D&O policies vary tremendously, so it is crucial that the association review their specific policy with its insurance professional in order to clearly understand their policy terms, conditions and exclusions.
Defense of fiduciary duty claims.
Typically, the threshold issue with the defense of breach of fiduciary duty claims is whether the BJR applies. The BJR is applied, in some form, whether through common law or statute, in the vast majority of jurisdictions. Standing to sue will be analyzed, as will the duties owed (i.e., is the duty owed to the association or is it also owed to individual members/owners?), conflicts/potential conflicts of interest, privilege and immunities and other issues like offers of judgment should be considered.
Claims, threats and suits should be submitted to the association’s D&O carrier so the carrier can make a coverage determination. It is important to notify the carrier as soon as possible so a defense can be provided, if applicable. Carriers will often open a file to “monitor” a fiduciary duty claim in the event the claim escalates and so defense to the claim may be provided to the association by the carrier.
Best practices.
How can associations attempt to avoid claims based upon an alleged breach of fiduciary duty? In a nutshell, board members should: (a) act within the scope of their given authority; (b) act in good faith; (c) use ordinary care; (d) act in the best interest of the association; (e) act reasonably with respect to enforcement of covenants and rules and regulations; and (f) act reasonably when making management and business decisions. Of course, each situation a board will face may be different, but at the day, acting reasonably will go a long way to overcome an allegation of a breach of fiduciary duty.
– Edward Hoffman, Jr., Esq., CCAL
* A version of this Blog post was drafted by Edward Hoffman, Jr., Esq., CCAL and originally included in his portion of the written materials for his presentation at CAI’s 2018 Community Association Law Seminar in Palm Springs, CA.
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