FORHA bylaws may be at odds with state statutes

Dana Krone | Guest Commentator

Overview

The review below is conducted without a view of the independent Members’ proposed ByLaws provisions. As such this is a review of the FORHA proposed changes as written and their compliance with Texas statute and reasonableness as to operationalization. It should be noted, however, that 80% of the FORHA ByLaws changes would equally apply to the independent Members’ proposed ByLaws provisions as they are solely based on the Texas Property Code 209 which would still govern both whether they were or were not documented in either set of ByLaws.

Of the 20% attributable to the BRC/Public input only five additions are of any meaningful substance. Specifically, they are:

  • Article IV (b), “Term of Office”: This seems to be a very Member focused addition and, I am sure, quite popular. The difficulty, however, is that this provision is in direct violation of Texas statute and the Board was advise by the previous FORHA counsel of that fact.
  • Article VII (a) (8), “Proxies” This provision places limits on the Members relative to the use of proxies at Members’ meetings and limits the power of Members at Members meeting. Both attempts appear to be in violation of Texas statute. I would categorize this provision as a Board control focused insertion.
  • Article X (e) (1), “Uniform Rate of Assessment” This provision empowers the Board to make deals with developers relative to the payment of assessments once the development is platted. This, when combined with the fact that developers have an equal vote as the rest of the Membership, opens a conflict of interest on the part of the Board for which no solution is proposed. I would mark this one as in favor of the Board.
  • Article X (g), “Commencement and Collection of Special Assessments” The BRC added a new special assessment provision that must have a defined purpose and a limited duration and included in the 10% assessment capped previously added, a definite win for the Members. However, the BRC also added that the Board was not bound by the 10% limit in the event of an “act of God”. This essentially gives the Board open access to the Members’ checkbooks in a time of disaster. The fact that the BRC inserted language providing an uncapped liability on the Membership after the uproar of last summer makes this a win for the Board.
  • Article XVI, “Amendments” The BRC is raising the quorum required for ByLaws changes from 10% to 25%. The effect of this change makes it much more difficult for the Membership to amend the ByLaws which, in all honesty, limits the powers of the Membership. Another win for the Board.

Looking at the effect of these principle actions of the BRC I would score one of them for the benefit of the Membership (although it is not permitted by statute) and the balance are to further empower the Board at the expense of the Membership. More detail is found in the balance of the analysis.

The legal opinions expressed here have been confirmed by multiple qualified HOA attorneys.

 

General Observations

  • Approximately 80% of the changes to the current ByLaws consist of 209 related changes. The remainder are either Member, BRC, or general administrative corrections/changes.
  • Some changes that should have been picked up in 209 changes were not changed. For example:

Article I of the current ByLaws permit the Board to schedule meetings anywhere in the State of Texas. The Texas Property Code (“TPC”), specifically §209.0051 (c) (c-1) stipulates that (…a board meeting must be held in a county in which all or part of the property in the subdivision is located or in a county adjacent to that county.

Article II (7) of the current ByLaws and remaining in FORHA’s proposed ByLaws this remains unchanged. The current TPC (§209.002 (6)) provides similar language relative to the deed holder but also provides that the Owner may name a Personal Representative which would have the same rights as the Owner or such rights as the Owner. As this has been the subject of some discussion between the Board and select Members, bringing the TPC definition of “Owner” forward to the proposed changes would have been useful. That said, the TPC has precedence over the ByLaws and any changes missed would still be applied via the current TPC provisions.

The TPC changes that were made appear to be cut and paste changes. The entire document was not reviewed for other deficiencies.

  • It appears from the Board’s communication as to the format of the released FORHA proposed bylaw changes that the red or blue changes are the only modifications to the currently effective ByLaws. That does not appear to be true, but, in most cases, the impact is trivial. Again, I did not scan this line-by-line, but here are two of such instances.

In Article V (a) of the current Bylaws in the last sentence there are the words “…shall in its discretion determine,…” that should be in the FORHA proposed draft and should be crossed out. It is not there.

In Article X (3) you will see that section marked out. In fact, that provision is not in the current ByLaws. This was a proposed provision inserted in this redraft process that was ultimately removed. This section should not have appeared in the FORHA proposed version at all.

There are other examples, but, in my review, I did not find anything material.

Principle Concerns

  • New Provisions that conflict with Texas statute.
    • Article IV (b) “Term of Office”: FORHA’s proposed amendment has added a provision which, candidly, I support, term limits. This, however, conflicts with TPC §209.00591 (a) which says, “Except as provided by this section, a provision in a dedicatory instrument that restricts a property owner ’s right to run for a position on the board of the property owners ’ association is void.” In talking to previous Board members I was advised that FORHA’s previous attorney had provided an opinion to the Board that term limits could not be set.

This was questioned at one of the public BRC sessions. The rationale put forward was two-fold. First, the idea was that this wasn’t actually a restriction, they only had to sit out one term. That explanation reminded me of President Clinton’s deposition statement many years ago, “it depends on what the meaning of the word “is” is.” The second rationale was provided by the FORHA attorney and was along the lines of it would cost anyone to litigate that point $100,000 so who would?

  • Article VII (a) (8), “Proxies”: This particular provision has two areas of concern.

As to the proxies themselves; with this provision FORHA is attempting to restrict the Owner from the use of any proxy other than a FORHA approved one or risk the vote not being counted. The FORHA Board at the August 6th Board meeting passed a Proxy policy that provided for the same restrictions being sought in the ByLaws. During the week of September 9th the Board received a letter from a Member’s attorney which said in part, “The Proxy Policy is invalid, made-up set of rules for proxies of members of the Association. The only requirements that the law establishes for proxies for meetings of property owners’ association are that, unless the proxies provide otherwise, they are revocable and expire eleven months after the date of execution, and they cannot be irrevocable for longer than eleven months. See Section 22.160(c), Texas Business Organizations Code. Neither the governing documents for the Association nor applicable Texas law provides authority for the Board of Directors for your Association to dictate ·the form of proxies by adoption of a resolution. Any attempt to require compliance with the Proxy Policy would violate the rights of owners to exercise their vote by proxy, thereby exposing the Association to liability.”

The Board called a Special meeting on September 23rd to revise the policy and approved a revised policy that did not require Owner use of FORHA approval o a proxy form. The more restrictive version still remains in the FORHA proposed ByLaws.

The second half of that same section establishes a voting procedure when proxies are used. Specifically, it states ”Whenever a proxy is used, it must contain each proposed action that is going to be voted on, and if a meeting is held and any amendments and/or changes are made from the floor, then the vote on those amendments and/or changes must be postponed so that notice of the amendment and/or changes can be provided to all of the Members.

From a Texas statute perspective this appears to run afoul of two sections:

  • TPC §209.00592 (b), regarding voting by absentee or electronic ballot, subsection (3) “may not be counted on the final vote of a proposal if the motion was amended at the meeting to be different from the exact language on the absentee or electronic ballot.”
  • TPC §209.00592 (c), regarding a vote by absentee ballot, subsection (3) “the following language: “By casting your vote via absentee ballot you will forgo the opportunity to consider and vote on any action from the floor on these proposals, if a meeting is held. This means that if there are amendments to these proposals your votes will not be counted on the final vote on these measures. If you desire to retain this ability, please attend any meeting in person. You may submit an absentee ballot and later choose to attend any meeting in person, in which case any in-person vote will prevail.

These constraints on absentee and electronic ballots recognize that any variance from the exact wording of the motion, amendment, or any other action, other than the election for the Board, will render those votes on those motions, amendments or other actions invalid. That strongly suggests to me that the State of Texas does not anticipated that a Membership meeting is empowered with the ability to delay voting on items proposed at the meeting because the ByLaws wish to circumvent these provisions. What is proposed does not seem consistent with the TPC provisions.

From a practical standpoint, it is almost impossible to operationalize what is proposed in FORHA’s ByLaws. At a Members’ meeting all it takes is a motion and a second from the floor and a variance has occurred that would trigger the proposed change. Now all of the electronic and absentee ballots are no longer valid on the motion or motions that that were changed, and the Members must recast their vote. Any specific proxies on those motions are invalid and have to go back to the member for instructions. Another Members’ meeting needs to be scheduled and the process starts again.

The other concern is misuse. As we all learned last August, the Board had an unrestricted, unilateral right to raise assessments. They chose to exercise that right to finance the Parks and Trails vision. This process could be used to by Members to delay a vote on a motion or, prevent a vote on a motion. At one of the meetings with the BRC public meetings the BRC admitted that this could happen with this provision. Similar to the Board’s decision on the assessments last year, the Members would simply be exercising their rights under the ByLaws for something they believe in. I don’t know why we would want to create a vehicle that could give rise to further discontent in the community.

  • Owners’ Rights
    • Document Access: The BRC inserted language in Article VI (b) stipulating that the Board would provide access to all documents provided to the Board during the open portion of the meeting. I applaud that addition. I would suggest, however, that any document that will be reviewed by the Board in an open meeting should be made available to the Membership for comment 72 hours prior to the meeting to permit the membership the time to comment. That permit additional input from the Membership that could head off issues on documents being passed that may present an issue.
    • Article X, Association Membership; Many of the Members may not know that some years ago the TPC added a provision that permitted developers in Fair Oaks Ranch who agree to join FORHA have voting rights. The BRC added a provision n subsection (e) (1) that allows the Board to enter into contracts with developers that can modify the billing arrangement for those developers. I support the concept but having such a provision seems to present a conflict of interest for the Board members and it is unclear as to how that is to be managed and communicated to the Membership.
    • Article X (g), “Special Assessments”: The inclusion of Special Assessments is a welcome addition to the ByLaws. As a reference, there was an addition in Article II, “Definitions” for this that establishes that Special Assessments are clearly defined and of limited duration. In practical application, this type of assessment would have been used to fund capital improvements for Parks and Trails in lieu of a regular assessment that requires board action to remove.
    • More problematic in the area of Special Assessments is an insertion in the last paragraph of the section which says that the combination of Assessment and Special Assessments cannot exceed 10% without Membership approval, “.other than a Special Assessment required as a result of an act of God.” My personal experience with “acts of God” tell me that the financial impact is, most likely, quite high. Is it appropriate to give the Board a blank check to access your bank account for an unlimited amount of money without approval of the Membership?
    • Finally, in Article XVI, “Amendments” of FORHA’s proposed ByLaws, specifically subsection (a) an insertion was to made to increase the quorum required to pass amendments to ByLaws from 10% to 25%. A higher threshold seems reasonable when it comes to ByLaws, however, when the BRC was queried as to the data that supported a move up to 25%, no explanation was provided.

The issue is this: There are, including homes and undeveloped lots, almost 4,000 members in FORHA. Historically, meeting a 10% quorum requirement could prove to be a challenge. If 25% is set as the quorum requirement and it is traditionally out of reach, it would seem that it would make it difficult to adjust or make changes to the ByLaws going forward. That does nothing to benefit the Association.

 

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