Matt St. Martin
An issue that many homeowners associations must face at some point is how to deal with directors who do not play by the rules or who otherwise act inconsistently with their duties. The solution to this issue depends on the Arizona Homeowners Association Laws or provisions within the association’s governing documents and the authority that they grant to the board of directors.
McNally v. Sun Lakes
In 2016, the Arizona Court of Appeals provided authoritative guidance on a board’s ability to disqualify a director. In McNally v. Sun Lakes Homeowners Association, a Director sued the Association after the Board excluded her from executive sessions for sharing confidential Board information with non-director members. On appeal, the Court held that the Board could not exclude the Director from executive sessions because neither Arizona law nor the association’s bylaws authorized the Board to do so.
The Mcnally decision is supported by Arizona Revised Statute § 10-3802, which provides “the articles of incorporation or bylaws may prescribe qualifications for directors.” Read together, Mcnally and A.R.S. § 10-3802 permit a board of directors to disqualify a director from the board pursuant to the association’s bylaws and articles of incorporation. For example, an association’s bylaws may provide that a director must be a member of the association to be on the board, thus disqualifying tenants/non-owners from serving on the board. The same provision would serve to automatically disqualify a director if they sell their property to the Association because the sale would strip them of their status as a member.
Although a board may be empowered to disqualify a director, there are distinctions and processes that a board must keep in mind if they wish to do so.
Removal vs. Disqualification
It is important to know the difference between removing a director and disqualifying a director. Disqualification occurs when a director does or does not do something that is set forth in the articles or bylaws. Removal refers to a process governed by Arizona HOA statutes by which a board, or members, act to remove a director from their position. Under the removal process, members typically vote to remove or keep a director. As you can see, the two are very different but the end effect is the same – a position on the board becomes vacant.
In other words, disqualification prevents anyone from serving on the Board if they fail to meet qualifications set forth in the governing documents. This applies to potential directors who desire to run for a board position, as well as directors currently serving. For example, if the bylaws provide that no director can serve on the board if they are in violation of the governing documents, then a member that is in violation of the documents cannot run for the board. Additionally, in the example of the director who sells his home in a community that requires directors be members of the community, that director would be disqualified from remaining on the board. The moment that a director is disqualified their seat on the board immediately becomes vacant.
Removal is a procedure set forth in the articles of incorporation or bylaws, or Arizona law, by which a sitting director may be removed from the board. If the articles of incorporation or bylaws do not provide for a removal procedure, then a director may only be removed pursuant to A.R.S. § 10-3808(B). Among other things, § 10-3808(B) provides that members can remove a director with or without cause unless the articles of incorporation provide otherwise, and directors elected by members be removed at a meeting with proper notice. A director cannot otherwise be removed.
Rules vs. Bylaw Amendments
Governing documents usually permit a board to adopt rules and regulations. However, A.R.S. § 33-1243(B) makes it clear that a board for a condominium association may not establish qualifications for directors. McNally and A.R.S. § 10-3802 are specific in providing that qualifications of directors must be in the bylaws. The method of amending the bylaws is typically set forth in the bylaws themselves. A board of a planned community may create rules to clarify or define provisions in the bylaws, but it is still unclear whether disqualification may be grounded in a rule. For example, if the bylaws provide that directors must be current in all assessments to serve on the Board, the Board may promulgate a rule that clarifies the date by which a potential director must be current or any other caveats. However, it is less certain whether the Board may adopt a rule requiring directors to be current in all assessments where the bylaws are silent on such.
The important thing to remember is that qualifications for directors must be set forth in the governing documents. Arizona courts have expressly provided that the bylaws may serve as the basis for disqualification for either a planned community or a condominium association, and statutes are clear that boards’ of condominium associations may not establish director qualifications. But, the picture becomes less clear when the basis for disqualification in a planned community is board-created rules alone.
Conclusion
Homeowners associations have relatively broad authority to implement qualifications for directors. However, that authority must be grounded in the bylaws, articles of incorporation, or Arizona law to withstand a legal challenge. It is yet to be seen to what extent rules in a planned community may create qualifications, and as such the best way to protect an association is to amend the bylaws to include specific qualifications.
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