North Carolina Lawyers Weekly
Although the plaintiff-property owners have not made a showing sufficient to overcome the business judgment rule when it comes to their community’s voluntary road-paving project, the court cannot rule as a matter of law for either party with respect to the individual defendants’ involvement in the nominal defendant-property owners’ association’s purchase of real property for an emergency-access road and for green space.
The parties’ cross-motions for summary judgment are denied, except as to the paving project. On that claim, the court enters summary judgment for defendants.
Background
The only road accessing the parties’ community occasionally flooded and prevented emergency access to the community. Defendant Warren, president of the property owners’ association (POA), bought land across which he granted the POA an easement for an emergency access road. Part of the servient property was a lot in the community, and the POA granted Warren a three-year moratorium on dues for that lot.
The easement also ran across an 18-acre tract. The POA paid for construction of the road.
Defendant Bath, a member of the POA board, invested in Warren’s company, which intended to develop the property over which the POA’s easement ran. The company also bought a 23-acre tract adjacent to the community and sold the POA 20 acres for greenspace while retaining the only buildable three acres.
Discussion
G.S. § 47F-3-118(c) is specific to planned communities and provides, “In addition to the limitations of Article 8 of Chapter 55A of the General Statutes, no financial payments, including payments made in the form of goods and services, may be made to any officer or member of the association’s executive board or to a business, business associate, or relative of an officer or member of the executive board, except as expressly provided for in the bylaws or in payments for services or expenses paid on behalf of the association which are approved in advance by the executive board.”
The court is not persuaded that the legislature intended to tie a planned community board’s hands so tightly as to preclude its ability to approve an interested-director transaction that clearly advances its interest, so long as it does so after being fully informed. In fact, § 47F-3-118(c) expressly contemplates that such transactions may be approved by a planned community’s bylaws.
Here, the POA’s bylaws provide that the board can amend them. Section 47F-3-118(c) is silent as to whether a board can retroactively amend bylaws in order to achieve the equivalent of ratification pursuant to G.S. § 55A-8-31.5 50. An overly strict bright-line rule could work against a planned community’s interest by discouraging a director to take action in the face of an emergency—such as, for example, personally incurring expense or liability on the community’s behalf in a weather-related emergency when any hope of repayment would be barred because exigent circumstances did not allow for advance board approval.
The uncontested record demonstrates that the board’s approval of the transactions with Warren related to the emergency access road would satisfy the statutory safe harbor requirements of G.S. § 55A8-31(a)(1). The board was aware of Warren’s interest when approving both the dues moratorium and the easement agreement.
The critical issue, then, is whether the transactions with Warren concerning the community lot he purchased are prohibited by § 47F-3-118(c), which imposes restrictions beyond those imposed by G.S. Chapter 55, Article 8. These transactions were not for “goods or services,” even though the board approved them in advance. However, the court has been unable to discern any provision in the POA’s bylaws that contemplated these transactions.
While the board attempted to ratify the transactions, it does not appear it did so by considering a retroactive amendment of the POA’s bylaws. Absent such an amendment, the transactions are not permitted by § 47F-3-118(c).
In connection with the 23-acre tract, plaintiffs contend that defendants breached their fiduciary duties by “[creating] a private LLC[,]” “rather than conducting business as the Board … to purchase additional greenspace,” had a “personal financial interest” in the transaction, and “unilaterally withheld the most valuable piece of the … Tract for their company and have attempted to profit off of it.” Defendants contend that the POA’s purchase of the tract was both approved by the board before the purchase was closed and was ratified after the fact.
There are unresolved questions of fact as to whether a disinterested board was fully informed before voting to approve the POA’s purchase of its portion of the 23-acre tract. Furthermore, while Warren disclosed his interest in the tract to the board, Bath did not.
Additionally, the record does not compel a finding that board members were fully informed either that Warren’s business entity withheld three acres of the tract or, if they were so informed, as to the relative value of those three acres to other portions of the tract.
As to the validity of the transaction pursuant to § 47F-3-118(c), the court again notes that it is unable to discern any provision of the POA’s bylaws, in place at the time of the transaction or added thereafter, that authorizes this transaction. Contested material issues of fact preclude summary judgment in favor of any party as to this transaction.
As to the board’s decision to allow Warren to secure a bank loan to pay for an otherwise unfunded portion of a paving project, plaintiffs have not overcome the business judgment rule presumption that the board members acted with due care and in good faith.
Summary judgment for defendants in part; otherwise, motions denied.
Holland v. Warren (Lawyers Weekly No. 020-090-20, 28 pp.) (James Gale, S.J.) Thomas Thurman and Alexander Warner for plaintiffs; Meredith FitzGibbon Hamilton and Patrick Flanagan for defendants. 2020 NCBC 90
