Can You Pay Directors and Officers of a Michigan Condominium or Homeowners Association?
It is common for a condominium association’s master deed and bylaws or a homeowners association’s declaration to address compensating board members. Usually, such a provision will either expressly disallow any compensation or only allow compensation if approved by a specified percentage of the community association’s members. Apart from the general notion that board members should be made up of volunteers that are interested in helping the condominium or subdivision, why is it important or desirable for an association’s directors and officers to be volunteers? This article addresses the liability protections that a community association’s directors can benefit from, as well as offering cautionary advice for keeping directors and officers as the primary volunteers “employed” by an association.
An association’s governing documents, whether it be the condominium bylaws or corporate bylaws of a homeowners association, will typically address whether directors or officers can be compensated. In most cases, the bylaws will indicate that directors must serve without compensation. However, the governing documents for some homeowners associations permit board members to be compensated. HOA bylaws that permit director compensation may require an owner vote to approve compensation as well, so it is important to comply with any such requirements prior to compensating directors, if the community association opts to go this route.
The Michigan Nonprofit Corporation Act, MCL 450.2101 et seq., which applies to condominium associations and homeowners associations that are incorporated as nonprofit corporations, contains two sections that help provide protection to volunteer directors and officers in three ways. But it is important to keep in mind that the protections discussed in this section only apply to volunteers, which are defined as “an individual who performs services for a corporation, other than services as a volunteer director, who does not receive compensation or any other type of consideration for the services other than reimbursement for expenses actually incurred.” MCL 450.2110(1). The Michigan Nonprofit Corporation Act also provides a slightly more expansive definition of “volunteer director” to mean “a director who does not receive anything of more than nominal value from the corporation for serving as a director other than reasonable per diem compensation and reimbursement for actual, reasonable, and necessary expenses incurred by a director in his or her capacity as a director.” MCL 450.2110(2). Under these definitions, a director who receives nominal payment, or is reimbursed for expenses while acting as a director, may still benefit from the protections offered by the Michigan Nonprofit Corporation Act.
One relevant section of the Michigan Nonprofit Corporation Act, MCL 450.2209(1)(c), allows a community association to include a provision in its articles of incorporation that limits or eliminates a volunteer director’s or officer’s liability for actions or inactions that the director or officer takes on behalf of the association. Under MCL 450.2209(1)(c), an association’s articles of eliminate or limit a director’s or volunteer officer’s liability for money damages unless the director or volunteer officer received a benefit they were not entitled to, intentionally inflicted harm on the corporation or its members, declared an improper distribution, committed an intentional criminal act, or was liable for attorney’s fees and costs as a result of a bad-faith derivative action. By taking advantage of the protection offered by this section, an association may be able to avoid the time and expense of litigation by having either individual claims, or even the entire lawsuit, against the whole board or individual board members dismissed.
The Michigan Nonprofit Corporation Act provides an additional defense for directors and officers to use in the event of a lawsuit—the business judgment rule. The business judgment rule is codified in MCL 450.2541(2), which states:
(2) In discharging his or her duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by any of the following:
(a) One or more directors, officers, or employees of the corporation, or of a domestic or foreign corporation or a business organization under joint control or common control, whom the director or officer reasonably believes to be reliable and competent in the matters presented.
(b) Legal counsel, public accountants, engineers, or other persons as to matters the director or officer reasonably believes are within the person’s professional or expert competence.
(c) A committee of the board of which he or she is not a member if the director or officer reasonably believes that the committee merits confidence.
The concept behind the business judgment rule was explained by the Michigan Court of Appeals as follows:
Ordinarily, the decisions made by a condominium association board should be reviewed by a court using the same business judgment rule that governs decisions made by other types of corporate directors. The business judgment rule limits the judicial review of decisions made by a condominium’s board of managers to whether the board’s actions are authorized, and whether the actions were taken in good faith and in furtherance of the legitimate interests of the condominium. It can be gleaned from the case law that so long as a condominium board acts for the purposes of the condominium, within the scope of its authority and in good faith, the courts will not substitute their judgment for that of the board’s. [MJ Dev Co, Inc v Inn at Bay Harbor Ass’n, unpublished per curiam opinion of the Court of Appeals, issued February 23, 2017 (Docket No. 330496).]
Although not necessarily limited to volunteer directors and officers, the business judgment rule can be a powerful defense in a lawsuit, provided the director or officer were taken in good faith and with appropriate discretion by relying on the advice of a qualified professional.
In addition to limiting the claims under which a volunteer director or officer may be liable to the members of the association, MCL 450.2209(1)(e) allows for an association’s articles of incorporation to include circumstances where the association may assume the liability for all acts or omissions of a volunteer director, volunteer officer, or other volunteer. These circumstances are when:
(1) the volunteer was acting or believed they were acting within the scope of their authority;
(2) the volunteer was acting in good faith;
(3) the conduct did not amount to gross negligence or willful and wanton misconduct;
(4) the conduct was not an intentional tort; and
(5) the conduct was not a tort arising out of the ownership, maintenance, or use of a motor vehicle for which tort liability may be imposed under MCL 500.3135.
By having this provision in the articles of incorporation, a community association can help encourage owners to volunteer to be board members or officers. After all, board members and officers are volunteering their time and energy to help run the association, so it makes sense for the association to protect them financially for their service.
It is important to note that the protections available in MCL 450.2209(1)(c) and (e) extend only to directors and officers who are volunteers. The status of a volunteer director and officer should not be an issue if the association’s governing documents prohibits directors and officers from being compensated. But for associations whose governing documents permit directors and officers to receive compensation for their services and the directors and officers are compensated, those directors and officers may not be able to avail themselves of the limitation of liability and assumption of liability protections in MCL 450.2209(1)(c) and (e).
To limit liability and assume the liability of volunteer directors and officers, community associations should consider amending their governing documents to ensure that their directors and officers are adequately protected. The first step in ensuring that volunteer directors and officers are protected under the Michigan Nonprofit Corporation Act is to amend the condominium bylaws or homeowners association’s corporate bylaws to indicate that all directors and officers serve without compensation. The next step is to amend the articles of incorporation to reflect the provisions of MCL 450.2209(1)(c) and (e) regarding limiting liability and assuming liability because such protections only apply if they are present in the articles of incorporation. To avoid any confusion, the articles of incorporation should also define a volunteer director as a director that serves without receiving anything more than than a de minimum value and reimbursement for actual, reasonable, and necessary expenses, and a volunteer officer as an individual who performs services for the community association and who does not receive compensation other than reimbursement for incurred expenses.
Condominium and homeowners association bylaws will likely address whether directors and officers can be compensated. In most cases, the bylaws do not permit compensation. If the bylaws permit compensation, there are consequences for compensating directors and officers that community associations should be aware of. By accepting compensation, directors and officers will likely lose their status as a “volunteer”, which means that they will not have the protections available to them in the governing documents, such as the right to indemnification in the master deed and bylaws or declaration, or the limitation of liability and assumption of liability in the articles of incorporation (if such provisions are included in the articles of incorporation). If the board of directors of a condominium association or homeowners association is concerned about this protection, then the board should contact an experienced community association attorney to further discuss the protections that come with being a volunteer board member. And if the association’s articles of incorporation do not contain provisions that limit the board’s liability and allows the association to assume the board’s liability, then we recommend that the board contact a community association attorney to discuss amending the articles of incorporation.
Michael T. Pereira is an attorney with Hirzel Law, PLC, and focuses his practice on community association law and drafting, reviewing, and amending governing documents. Mr. Pereira received his Bachelor of Arts in Political Science from the University of Michigan and his Juris Doctor degree from the University of Detroit Mercy School of Law, where he graduated second in his class. After law school, Mr. Pereira worked as a research attorney and law clerk at the Michigan Court of Appeals before joining Hirzel Law, PLC. Mr. Pereira can be reached at (248) 478-1800 or email@example.com.