From time to time we receive questions regarding the resignation of directors, term expiration and what to do in the event of a mass resignation by the existing board. The North Carolina Planning Community Act, Condominium Act, and the Non-Profit Corporation Act address certain issues with regards to directors’ terms and how to fill vacancies. Where it becomes difficult to handle is in the situation where directors resign and do not appoint their successors.
Section 55A-08-05 (d) of the North Carolina General Statutes provides that while the term of a director may expire, that director will serve until his or her successor is appointed or elected. This seems to be in contrast with Section 55A-08-07 which indicates that a director’s resignation is effective upon communication of that resignation to the board. The key difference between the two statutes are terms “expire” and “resign”. Though a director may have a 1-year term, that director’s term, technically continues until his successor is appointed or elected. On the other hand, since a resignation is effective when communicated, that negates the requirement director sit until the resigned position is filled. The remaining directors would appoint someone to fill the resigned director position unless the bylaws indicate differently. Check your bylaws, and if they are unclear, the best practice is to amend them to provide that directors serve until their successors are appointed or elected – this helps avoid the situation of having few or no directors in the case of an en masse resignation.
What if an entire board resigns at once and no successors are appointed? Pursuant to Section 55A-08-30, directors on boards have a duty to act in good faith, with reasonable care and in a manner that is in the best interest of the association. Such fiduciary duties would necessarily include the requirements that directors enforce the declaration of covenants, collect assessments, and ensure that the association is run and continues to be run effectively. It is a reasonable conclusion that if an entire board resigns at once and appoints no successors to fill vacancies, then the association cannot be effectively run. Those directors who resigned en masse are potentially subjecting themselves to liability by not finding and appointing replacements; those directors, by basically abandoning their posts, have arguably violated their fiduciary duties.
The bottom line is this: Resignations, vacancies and the like can present questions to boards and members of associations as to how to proceed. Directors who resign should always find a successor if at all possible and submit those names to the remaining board members. If an entire board intends to resign – which really should never happen – they should do so in a procedurally correct fashion so that successors can be appointed and the association can continue to function. Failure to appoint successors can result in personal liability for breach of fiduciary duty. As always, feel free to contact us to discuss strategies, procedures, and potential liabilities when dealing with board matters.
Please give us a call or drop us an email if our HOA law team can assist your HOA or management company with director resignations, or if we can be of assistance in any other way regarding legal issues facing your community. Please be aware that we represent HOAs only – we do not represent homeowners in disputes against their HOAs. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!