Incorporated Associations Must Have a Properly Functioning Board of Directors to Conduct Business

State laws and the governing documents for homeowners associations mandate that the business operations of the association be conducted through a board of directors. This means that all corporate powers that are exercised by the association must be exercised by or under the direction of the association’s board of directors. Without a properly functioning board of directors, the association cannot properly conduct business. The prolonged existence of a homeowners association that does not have a properly functioning board of directors will ultimately result in the loss of corporate status, the lapsing of insurance coverage, loss of the ability to commence and defend litigation, and the collapse of the association. Such a situation could expose association owners to potential liability.

Many homeowners associations are under the mistaken impression that the association’s business can be conducted by property managers who are retained by the association. While professional property managers can provide invaluable assistance to a homeowners association, the managers can only provide assistance as agents of the association — they do not have the power or independent authority to actually conduct association business. All actions undertaken by property managers must be under the ultimate direction of the association’s properly functioning board of directors.

A properly functioning board means that the association has no less than a quorum of sitting directors overseeing the operations of the association. A “quorum” of directors means that there is a majority of the total number of directors required by the association’s bylaws acting at a meeting of the directors on a given matter. Thus, if the association’s bylaws require the association to have five directors, there must be at least three of those directors acting together at a proper meeting for those directors to conduct business for the association. Any business that is conducted based on decision making by only one or two of the directors, with the exception of taking action to appoint additional directors, is invalid. If a quorum of directors cannot be established at a meeting of the directors, the meeting must be postponed to a later date when it is anticipated that there will be a quorum of directors present at the meeting.

The appointment of replacement directors by the remaining directors can only be done to fill vacancies on an association’s board. Filling a vacancy means that there is no director for that seat on the association’s board. Thus, a vacancy is not created by a sitting director’s failure to attend a meeting and, if there is less than a quorum of directors present at a meeting, those directors that are present cannot appoint additional directors for the purpose of establishing a quorum at the meeting. The appointment of replacement directors could (and should) be done by the remaining directors when one or more directors have resigned or have been removed from the board.

Because of the importance of having a quorum of directors present to properly conduct association business, to minimize the risk of corporate actions being challenged or set aside due claims that the actions were taken by less than a quorum, it is extremely important to document the presence of a quorum of the directors in minutes of the directors’ meeting. To properly document the existence of the quorum, the minutes of the meeting should contain language that identifies by name the directors who were present at the meeting.

If an association’s board of directors has less than a quorum of directors and the sitting directors do not take action to fill the vacancies on the board, the association membership should call a special membership meeting for the purpose of electing new directors for the remainder of the existing term. In situations where no action is taken to fill vacancies or where there is not a sufficient number of members in the association that are willing to serve as directors, the association should consider taking action to amend its bylaws to reduce the number of directors that are required to conduct business. In the absence of taking such action, the proper way to address the problem is to seek appropriate orders from a court having jurisdiction over the association. Depending upon the circumstances of the case, those orders could include the appointment of one or more interim directors to fill the vacancies, or the appointment of a receiver to take charge of the association. Associations that are experiencing issues involving the conducting of business by less than a quorum of sitting directors should immediately consult experienced legal counsel for direction on the appropriate action to take in order correct the situation.