MI House bill would nullify condo bylaws with respect to membership vote to commence lawsuits

By Deborah Goonan, Independent American Communities

 

Should a condo board have sole authority to initiate lawsuits on behalf of co-owners of the association?

Specifically, should a condo board be required to obtain a vote of co-owners in the association prior to either:

• suing a member for covenant violations or
• commencing litigation against a developer for construction defects?

That is the controversial issue addressed by Michigan’s House Bill 4446.

 

Lawsuits against co-owners

As introduced, MI HB 4446 would grant a condo board of directors full authority to proceed with a lawsuit against any co-owner with regard to enforcement of Covenants and Restrictions (CC&Rs).

Although it is common practice for a condo board to commence legal action without consulting co-owners, some condo associations have amended their documents to require an association membership vote to approve legal action against a co-owner.

Condo owners tell me that they have amended their bylaws in order to limit the power of the condo board for compelling reasons. Their intent is to prevent a condo board from engaging in frivolous or retaliatory litigation, or using the court system to score a personal vendetta against an owner.

 

Lawsuits against developer

In contrast, with respect to initiating a lawsuit against the developer, HB 4446 proposes that condo documents can require a vote of approval of a majority of co-owners, under the following condition:

THE CONDOMINIUM DOCUMENTS SHALL NOT REQUIRE APPROVAL BY MORE THAN 2/3 OF ALL CO-OWNERS THAT ARE ENTITLED TO VOTE FOR THE INITIATION OF SUCH LITIGATION.

The glaring omission in this section of the bill: it fails to exclude votes of developers, their family members, and affiliates, all of whom may happen to own units in the association. (Thus entitling them to vote!)

A common strategy used by developers to avoid construction defect lawsuits is to maintain ownership of unsold units or hold onto units as rental properties. Condo bylaws — usually written by the developer before the association has been established — entitle all owners, including the “Decalarant” (developer) to cast votes in the condo association corporation.  When the developer holds sufficient voting interests, he or she can easily block any membership vote in favor of litigation.

Some condominium documents also grant weighted votes to unsold developer-owned units.

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Why is HB 4446 proposed?

HB 4446 is apparently written in response to a recent appellate court ruling, as evidenced by the following legal article.  The court ruled that Sawgrass Ridge Condominium Association failed to comply with its own bylaws. The association failed to adhere to its process of obtaining a membership vote before initiation of litigation against an owner, in this case, with regard to the owner’s alleged unauthorized alterations of a deck.

I have highlighted the reference to HB 4446 in bold.

MI Court of Appeals: When condo association’s bylaws require member approval of lawsuits, boards must comply

Court of Appeals Rules against Condominium Association, Strictly Enforces Bylaws “Anti-Lawsuit” Restriction

Posted on January 19, 2018 by ZDFAttorneys

The Michigan Court of Appeals recently rendered yet another decision against a condominium association strictly enforcing a lawsuit restriction contained in the association’s bylaws. In Sawgrass Ridge Condominium Association v Louis and Marilyn Alarie (“Alaries”) the association’s board of directors authorized the filing of a lawsuit against co-owners Alaries for failing to obtain written authorization from the board prior to making alterations to their deck. The Alaries contended that the action must be dismissed because the board failed to properly procure authority to commence the lawsuit under the bylaws, which required the board to first hold a meeting and obtain approval by a vote of a majority of the co-owners. The board admittedly did not follow the procedure set forth in the bylaws prior to commencing the lawsuit. However, the board asserted that its acts were authorized by a majority of the co-owners by adoption of a consent resolution ratifying the board’s acts after the suit was commenced, in which notice and meeting requirements were purportedly waived.

…

The Court of Appeals’ decision in Sawgrass aligns with its recent trend toward strictly enforcing anti-suit provisions in bylaws. As we recently noted, House Bill 4446 was introduced to the Michigan House of Representatives to amend the Michigan Condominium Act. If passed into law, the Bill would nullify any provision in an association’s governing documents that requires a vote of the association members to “assert, defend, or settle claims on behalf of all co-owners in connection with the common elements or the enforcement of the condominium documents” with some limited exceptions. The Bill is undergoing revisions amid concerns that it unfairly favors condominium developers.

Read more:

http://www.zdfattorneys.com/blog/court-appeals-rules-condominium-association-strictly-enforces-bylaws-anti-lawsuit-restriction/

 

If enacted, HB 4446 would override condo docs

Note that HB 4446 is intended to override existing condominium documents unless all three of the following conditions are met: (emphasis added in bold)

5) ANY PROVISION IN THE CONDOMINIUM DOCUMENTS OR ARTICLES OF INCORPORATION FOR AN ASSOCIATION OF CO-OWNERS THAT CONTRADICTS SUBSECTION (3) OR (4) [as explained above] IS VOID UNLESS ALL OF THE FOLLOWING APPLY:
(A) THE PROVISION EXISTED BEFORE THE EFFECTIVE DATE OF THE AMENDATORY ACT THAT ADDED THIS SUBSECTION.
(B) WITHIN 6 MONTHS AFTER THE EFFECTIVE DATE OF THE AMENDATORY ACT THAT ADDED THIS SUBSECTION, THE CONTINUATION OF THE PROVISION IS APPROVED BY A VOTE OF 2/3 OF THE CO-OWNERS ENTITLED TO VOTE.
(C) A DECLARATION EVIDENCING THE RESULTS OF THE VOTE UNDER SUBDIVISION (B) IS RECORDED.

If proposed statute amendments are enacted, how likely is a condo association to obtain a 2/3 vote of co-owners within 6 months?

Given the pervasive problem of voter apathy in association-governed communities, in the vast majority of condo associations, it is highly unlikely.

 

Condo association members who wish to maintain owner control over initiation of litigation — using their assessment money — need to contact their state representatives to express their concerns with regard to HB 4446.

The bill intends to interfere with existing contractual bylaws and CC&Rs of associations, in all likelihood against the wishes of condo owners. If enacted, co-owners would be unable amend the association’s governing documents to limit the powers of the board to sue a co-owner for trivial reasons or vindictive purposes.

Additionally, the bill fails to limit the power of a developer with conflicting interests, making it possible for a developer to block legal action when the association incurs financial obligations as a result of shoddy construction.

All in all, a deeply flawed bill.

 

Read and track MI HB 4446:

http://legislature.mi.gov/doc.aspx?2017-HB-4446

PDF version of HB 4446 as introduced:

https://www.legislature.mi.gov/documents/2017-2018/billintroduced/House/pdf/2017-HIB-4446.pdf