RE: bylaws/lenders/consensus -bylaws advice
From: Jean Pfleiderer (pfleiderer_jWIZARD.COLORADO.EDU)
Date: Wed, 24 Aug 94 11:52 CDT
>Rob wrote:

>I would be very interested in hearing about anyone who has had 
>consensus in their condominium association bylaws or declarations, 
>which have gotten a favorable review from FNMA.  We were told by our 
>attorney, that consensus would NOT be approved by FNMA and advised that 
>2/3 majority vote was the standard "super majority".  Thus our legal 
>documents which were reviewed by FMNA say 2/3 majority vote.
>So what.  We have never made a decision by any kind of majority vote 
>yet.  Consensus means a 100% majority and all of our "votes" have been 
>unanimous.  Almost everything that matters about how your community 
>will operate and function will have nothing to do with what is on the 
>legal paperwork.  For example our condominium bylaws state the order of 
>business of the annual meeting.  Have we ever run our annual meeting by 
>that order? Of course not.  There are no Bylaws police which check up 
>on you.  You can arrange your voting in what ever way you wish, you can 
>have as many or no people on the "board" as you wish.  The bank is not 
>going to check up on you.
>Two bits of bylaws advice I have heard from 3 attorneys now and will 
>pass on to those contemplating crafting bylaws. Include language in 
>your bylaws which covers indemnification ( that means if a 
>representative of the community acts in good faith in the bet of thier 
>knowledge,  without willful or intentional misconduct, they shall not 
>be held liable if they screw up)
>Also cover Abrogation. This means No condition, obligation, or 
>provision contained in the bylaws is abrogated or waived by reason of 
>any failure to enforce same, irrespective of the number of violations 
>or breaches which occur.  This means that if you create a rule and 
>don't enforce it, the rule doesn't lose validity and you can enforce it 
>whenever you want.  Having this language can keep you from being 
>charged in a lawsuit of unfairly applying standards.
>Rob Sandelin
I just wanted to say that what Rob suggests is essentially what Nyland has
done, and it works reasonably well, provided that the group really does have
its own process worked out in advance.  There are some potential problems,
however, which it is important to keep in mind.  

The reason the bank doesn't play bylaws cop is because it really doesn't
care how you arrive at decisions, so long as the "right" decisions get
made--i.e., decisions that maintain or increase the value of the property.
Why does it insist that you have rules for decision-making, and that they
conform to a standard model even when that model has nothing to do with how
you are actually going to make decisions?  The answer is, it wants assurance
that each homeowner within the group (including, potentially, the bank
itself in the case of a foreclosure) has the RIGHT to DEMAND that things get
done in an orderly way of the kind the bank understands.  So, if you want to
assure yourselves that you never have to live by these rules, you had better
plan how the community will make sure no one ever goes under financially,
and you had better make sure that your process for bringing in new people
weeds out anyone who might ever think of going to court to insist that the
community do business by its own established, written, recorded rules!

And having rules about abrogation will not keep you from being sued for
unfairly applying standards, it will only allow you to retain the right to
apply the rules as written later on, even though you aren't applying them
now.  I'm assuming you are talking about a structure similar to the
condominium structure under which we have had to organize Nyland.  If so, I
think any legal entity, such as a "housing association," that you may form
to conduct the legal business of the community is going to have to treat
each member evenhandedly, or be open to such lawsuits.  For instance, we
briefly considered having an official Nyland Community Association fund
available for loans or even outright gifts to members having trouble paying
their association dues, until we realized that would leave us open to
charges of failing to meet our responsibility to the community as a whole,
which is precisely to collect that money, not to give it away or loan it
out.  This kind of bind needs to be watched out for, not because banks or
government are interested in coming in from outside, but because it only
takes one disgruntled member realizing that what you are doing is, strictly
speaking, not in line with your legal capacity, to take down the whole thing. 

Because you are being more inclusive, rather than less, you don't have a
problem with enforcing a decision truly made by consensus.  Where you could
get into trouble, though, is when the group has not yet come to consensus
about a decision that needs to be made.  Again, one disgruntled member who
thinks the majority will agree with his/her position could insist that a
decision be made by vote, and have the majesty of the law to back him/her
up.  You may also run into the membership issue.  By law in Colorado,
"member" of a housing association is defined as a property owner, and no one
else.  We include people who rent as well as members of households who are
not formally included on the deed of trust in our decision-making process,
but again, one disgruntled member whose desires were being thwarted by a
group of renters, say, could insist that their point of view not be paid
attention to.

What you get with standard bylaws is the "right" to do better than that.
But it's up to your group to develop your cohesiveness well enough so that
you actually have the CAPACITY to do better than that.  And, however good
you may be in the beginning, you have no way of knowing now what it will be
like later, after the population has begun to change. An argument, I think,
for very thorough "initiation" procedures for potential newcomers.

So far, nothing has happened at Nyland to warrant all this concern on my
part, by the way.  I just can't help it.  I'm a lawyer.


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