#369-O, Ramsay v. Bel Pre Recreational Association, Inc. (May 18, 1998) (Panel: McCabe, Huson, Goodman)

The homeowner (HO) filed a complaint against his homeowner recreational association (HOA) claiming that it failed to enforce its governing documents, charged fees from non-members for the use of its facilities, conducted meetings without a quorum, failed to collect assessments, failed to purchase liability insurance for its officers, and improperly used assessments to establish a reserve fund.

The evidence at the hearing showed that the HO had requested that the governing documents be amended but that the board of trustees refused to do so, although it did not attempt to prevent the HO from pursuing a referendum of the members.  The HOA has intentionally not enforced certain architectural rules, resulting in several nonconforming sheds and fences in the community as well as low assessments.  The HOA justified this policy in that it kept assessments low, it was the established practice, and it was difficult to get a majority of the board to agree to take action against violations.  The HOA collects assessments and denies pool privileges if they are not paid by May of each year; it also established a reserve account from the assessments, but the HOA failed to charge interest on overdue assessments as required by its rules.  The governing documents require a quorum of 10% of the members and provide that if a quorum is not obtained, a new meeting can be held within 30 days, at which the quorum required is 5%; the actual practice of the HOA in a case where it did not have a 10% quorum was to call the second meeting within 15 minutes of the first and reconvene with a quorum of 5%.  The HOA charges admittance fees to its pool from non-members although there is no specific rule that allows it to do so; however the rules grant a general authority to impose a fee for the operation and maintenance of the common elements.  The rules require liability insurance, which the HOA has, but it incorrectly defines the HOA as a "condominium".  The HOA made a claim under this policy for its costs in defending this complaint but the insurer denied the claim because the complaint to the Commission did not request damages.

The hearing panel rules that: 1. the HOA has no duty to propose amendments to its governing documents;  2. the HOA does have the duty to enforce its rules, and "the failure to enforce restrictive covenants can lead to a piecemeal abandonment or waiver of the various provisions of the covenants if enough violations are allowed to exist.  This situation in turn, could, if allowed to continue lead to a breach of fiduciary duty by the Board of Trustees." 3. the HOA has not yet breached its fiduciary duty because its inactivity appears to reflect the consensus of the community; 4.  the HOA has the authority under Maryland Corporation laws to levy charges for the use of its facilities because non-members do not have any easement entitling them to enjoy the common areas;  5. the HOA has the authority under its own rules to establish a reserve account as part of its obligation to maintain the common areas; 6. the HOA violated its rules, which require notice of meetings, when it held a second meeting within 15 minutes of a meeting at which it lacked the necessary 10% quorum, because the second meeting was called without the mandatory notice.  The notice used to call the first meeting failed to state, as required by the rules, that a second meeting could be called with a smaller quorum and also failed to give the date, time and place of the second meeting.  If the first notice were properly drafted, no additional notice of the second meeting was required. 7. The HOA violated its rules which required a fee of 6% per year on unpaid assessments 8. The HOA complied with the rules on liability insurance by acting to correct the clerical mistake misidentifying the nature of the HOA and there was no evidence that insurance was available that would cover the HOA's legal fees in an action like this one where there was no request for damages.  9. The HOA had the right to hire an attorney to advise and represent it in this matter and to use HOA funds for that purpose.  "The authority to hire and pay for counsel is one which reasonably and naturally flows from the charge to implement the purpose clause for which the assessments are collected...Volunteer board members should not be expected to or be called upon to handle" legal matters like those involved in this case.

The panel denied the HO's request for damages on the grounds that he did not prove any breach of fiduciary duty.  The panel denied the HOA's request for attorney's fees against the HO on the grounds that he acted in good faith and presented his case as fairly and concisely as possible.

The panel ordered the HOA to survey its members on whether they wanted the HOA to be more active in enforcing its architectural rules, and then call a general meeting to discuss the results.  The panel further ordered the HOA to change immediately its meeting notices and practices on obtaining quorums, and to begin charging 6% interest on unpaid assessments