Defense Digest, Vol. 27, No. 3, June 2021

HOA Living. It Is Not For Everyone

Key Points:

  • HOAs are self-governing entities that enact rules and regulations that each member must follow.
  • There are risks to being a member of an HOA, including litigation.

 

Have you seen that GEICO commercial where “Cynthia,” the over-the-top HOA (homeowner association) board member, advises the new neighbors of certain HOA violations? To correct the violations, Cynthia cuts hanging plants from their home and chainsaws off part of their mailbox because it was two inches over regulation. HOAs are self-governing entities that enact rules and regulations that each member must follow. For example, HOA rules and regulations can restrict the types of fences and sheds that can be erected and limit the color of an exterior door or home. Some homeowners believe that the rules and regulations enacted by HOAs help keep a tidy neighborhood. Homeowners also find associations appealing because they can provide amenities such as a pool, clubhouse, greenspace or a walking trail. While there are perks associated with being a member of an HOA, there can also be risks, including litigation, which can certainly hamper the next neighborhood barbeque.

Litigation commonly arises after a homeowner experiences a dispute with their neighbor that the homeowner does not believe was handled appropriately by the HOA board. The Uniform Planned Community Act (UPCA), 68 Pa.C.S. §§ 5101-5414, governs homeowner associations in townhome and other planned communities, while the Pennsylvania Uniform Condominium Act (PUCA), 68 Pa.C.S. §§ 3101-3414, governs only condominium associations. HOAs are typically governed by a declaration and by-laws.

Homeowners often misinterpret the law in relation to the duties of volunteer board members and name them as defendants under a breach of fiduciary theory. Regardless of whether the board member was appointed by the declarant or elected by the unit owners, board members do not have a duty to an individual homeowner. Instead, their duty is to the association. The UPCA provides that executive board members appointed by the declarant “shall stand in a fiduciary relation to the association ...” 68 Pa.C.S. § 5303(a) (emphasis added). In contrast, board members who are elected by the other unit owners are only required to exercise “ordinary and reasonable care.” 68 Pa.C.S. § 5303, Uniform Law Comments n. 1. The UPCA comments provide that this “lower standard of care should increase the willingness of unit owners to serve as officers and members of the board.”

Moreover, the UPCA provides that any action in tort “alleging a wrong done by the association or by an agent of the association, or on behalf of the association, must be brought against the association.” 68 Pa.C.S. § 5311(2)(1) (emphasis added). Further, the governing documents of each HOA almost always provide for indemnification of its board members unless there was willful conduct. Additionally, some associations are governed by Pennsylvania’s nonprofit corporation law, which provides that a director shall not be personally liable for any monetary damages unless the director has failed to perform his duties and that failure to perform constitutes self-dealing, willful misconduct or recklessness. 15 Pa. C.S. § 5713. Even if a board member fails to adhere to the formalities of the UPCA and/or governing documents of the HOA, such does not constitute a breach of fiduciary duty. Lanzisera v. North Slope III Owners Ass’n, 2019 WL 1471265, at *7 (Pa. Cmwlth. April 2, 2019) (“The UPCA does not set forth a remedy much less mandate a conclusion that a violation is a per se fiduciary duty breach.”).

Pennsylvania courts have explained that individual homeowners lack standing to assert breach of fiduciary duty claims. In Carlson v. Fawn Ridge Estates Homeowners’ Ass’n, 2012 WL 1358573 (Pa. Cmwlth. 2012), a husband and wife sued their homeowners’ association and the director and officer of the HOA. One of plaintiffs’ claims was a breach of fiduciary duty. The trial court held that the plaintiffs could not bring such a claim because they lacked standing. On appeal, the Commonwealth Court explained that, under the Nonprofit Corporation Law, claims for breach of duty against a director or officer may only be brought by the corporation itself or in a derivative action on behalf of the corporation. Carlson, 2012 WL 1358573, at *3 (citing 15 Pa.C.S. §§ 5717, 5782). The court noted that the plaintiffs did not state a derivative cause of action for breach of fiduciary duty because they sought judgment in their favor and not on behalf of the HOA. Thus, the court explained that the plaintiffs could not assert a legally valid breach of fiduciary duty claim.

In Cooley v. Lofts at 1234 Condo. Ass’n, 2020 WL 1231394 (Pa. Cmwlth. Mar. 13, 2020), an individual condominium owner filed a complaint individually and derivatively on behalf of the association against elected board members and the association. In regard to the plaintiff’s individual claims for breach of fiduciary, bad faith and self-dealing, the trial court found that the plaintiff lacked standing to assert them because the executive board member’s fiduciary duty was owed to the association, not to the unit owner individually. The trial court noted that UPCA, 68 Pa.C.S. § 3303(a), provided that “officers and members of the executive board shall stand in fiduciary relation to the association.” Cooley, at *7 (quoting 68 Pa.C.S. § 3303(a)). The trial court also noted that the association’s declaration provided that “the officers and members of the Executive Board shall stand in a fiduciary relation to the Association.” The Commonwealth Court agreed with the trial court and found that the plaintiff’s individual breach of fiduciary duty claim was properly dismissed for lack of standing.

A breach of fiduciary duty claim is meant to enforce the rights of the association against self-dealing or disloyal board members. Under Pennsylvania law, an essential element of a breach of fiduciary duty claim is that the “wrong-doing directors must have been unjustly enriched.” Pink Lady, Inc. v. William Penn Loan Co., 150 A.2d 154, 156 (Pa. Super. 1959). (Emphasis added). Most homeowners who sue under a breach of fiduciary duty theory complain that the board member failed to follow a particular regulation or did not rule in their favor. However, this is simply not enough to meet the elements of a breach of fiduciary claim, as it does not explain how a board member has been unjustly enriched. Another frequent error by homeowners in these suits is a claim of some speculative damage to their property value versus actual damage to the association.

A lawsuit against a HOA board member is different than other litigation because the parties live next to one another. Regardless of how or why the dispute began, it is always beneficial to attempt an amicable resolution with your board-member neighbor. No one ever truly wins in such litigation. Win or lose, litigation will surely lead to awkward neighborhood interactions in the future.

*Estelle is a shareholder and works in our Pittsburgh, Pennsylvania office. She can be reached at 412.803.1186 or ekmcgrath@mdwcg.com.

 

Defense Digest, Vol. 27, No. 3, June 2021 is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2021 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.