01.23.25

ISSUE # 108

CIC Info Bytes 01/23/25

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Regulation by Enforcement

• “Regulation by enforcement” is a concept that many homeowners wish existed for the common interest communities.

…The main reason that the SEC brings cases like these, and one of the main reasons I write about them, is that they form the contours of legal financial conduct; they tell you what you are and are not allowed to do. If there is an SEC case against a firm for doing X, then that is a way of informing the financial industry that you are not allowed to do X; each big published enforcement action expands the law a bit, telling the world not just “this firm did a bad thing” but also “this thing that a lot of people were doing? It’s bad.” Compliance officers and law firms will send out memos to their clients, saying “hey after the SEC case last week, you are not allowed to do X.”...

The SEC Was Busy Last Week (free 🔗) — Matt Levine | Bloomberg Opinion | January 21, 2025

Increasing Assessments

• Condos, co-ops and HOAs issue mandatory assessments, NOT fees.  Property ownership is expensive and assessments generally increase every year.  Also reference Issue# 103 and Issue# 81.

HOA Fees Are Rising—and Getting Harder for Homebuyers To Avoid — Keith Griffith | Realtor.com | January 15, 2025

• California: Observe the increase in wildfires and damage from wildfires.

How to Read This Chart: California Wildfires — Phillip Bump | The Washington Post | January 11, 2025

…The real story of the wildfires isn’t about malice or incompetence. It’s about well-intentioned policies with unintended consequences.

Take insurance—a trillion-dollar industry built to identify risks, particularly from disasters such as wildfires. Insurance companies communicate this risk to homeowners through higher premiums, providing them with useful information and incentives. People may think twice about moving to a fire-prone area if they see the danger reflected in a fee.

But in 1988, California voters passed Proposition 103, arbitrarily reducing rates by 20 percent and subjecting future rate increases to public oversight. Nobody likes high premiums, of course. But the politicization of risk has been a catastrophe. Artificially low premiums encouraged more Californians to live in the state’s most dangerous areas. And they reduced the incentive for homeowners to protect their houses, such as by installing fire-resistant roofs and siding materials.

Decades of worsening climate risk alongside suppressed premiums have prompted many insurers to drop coverage altogether. Just last summer, State Farm dropped 1,600 home-insurance plans in Pacific Palisades. Earlier this week, most of the neighborhood was burning.

Many Californians in high-risk areas have been forced to depend on the California FAIR Plan—a public insurer of last resort. In 2023, the plan covered an estimated $284 billion in home value. In 2024, that exposure increased by 61 percent. Within the next few years, California taxpayers could be on the hook for more than a trillion dollars. The state insurance commissioner is scrambling to bring insurers back. But it may be too little, too late.

Artificially low premiums have also spurred new housing production in fire-prone regions on the edges of cities like Los Angeles. From 1990 to 2020, California built nearly 1.5 million homes in the wildlife-urban interface, putting millions of residents in the path of wildfires. Policy didn’t just pull Californians into dangerous areas. It also pushed them out of safer ones. Over the past 70 years, zoning has made housing expensive and difficult to build in cities, which are generally more resilient to climate change than any other part of the state…

How Well-Intentioned Policies Fueled L.A.’s Fires — M. Nolan Gray | The Atlantic | January 11, 2025

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A check on California's wildfires and the costliest US natural disasters.

…“It is plausible that the Palisades Fire in particular will become the costliest fire on record, period. Not just in California, but in general,” said Daniel Swain, a University of California Los Angeles climatologist, in a briefing on Wednesday.

Long before the Palisades erupted in flames, the multimillion dollar homes in the area had become a concern to major insurers. That’s because the homes are both extremely expensive and tightly packed together, which makes it easy for fires to jump from one property to another. The neighborhood is also located along steep canyons, which makes it less accessible for firefighters.

The rise of massive wildfires in the state over the last several years has been exacerbated by climate change. Droughts have become more frequent as temperatures rise. The Los Angeles area has had no meaningful rain for many months, despite the fact that winter is usually the rainy season. The enormous volumes of claims following recent fires has taken a toll on insurers. Seven out of the 12 biggest home insurers have limited their coverage in California over the past two years, driven in part by increased fire risk…

The ‘Costliest Fire on Record,’ Not Just for California — Leslie Kaufman | Bloomberg | January 09, 2025

Is California’s insurance market on the brink?

If you live in California, you’re always bracing for the Big One. This week it arrived in the form of uncontrollable flames...

...“Pacific Palisades really jumps out, even in the context of high-risk areas in California,” said Michael Wara, a senior researcher and wildfire expert at Stanford University. He was a member of the expert group five years ago working to envision nightmare liabilities for state utility companies. “It’s like the bullseye in terms of one of the locations where the insurance industry can lose the most money in 24 hours.”

Risk models identified the Palisades — along with Silicon Valley’s Los Altos Hills and the Moraga and Orinda area east of San Francisco — because of problematic commonalities: the highest value homes, difficult topography for fighting blazes, and increased susceptibility to the kind of windy, dry weather conducive to fires...

...As the fires continue largely unchecked, it’s left many wondering if this event will permanently alter the relationship between climate risk and homes in one of the world’s most valuable property markets. “Could a single event cause insurers to become insolvent? That’s the great fear,” said University of California, Los Angeles climatologist Daniel Swain, an authority on why California seems to be perpetually burning down. “I hope we don’t get there.”...

...It will take weeks to know the full extent of damages from fires that haven’t yet subsided. But already the Los Angeles wildfires threaten to push the fragile California insurance market closer to the brink. Seven out of the 12 biggest home insurers have limited their coverage in the state over the past two years; increased fire risk driven by climate change is part of the reason. 

California Insurance Commissioner Ricardo Lara is intensely aware of the problem and last month issued back-to-back regulations meant to make it easier for insurers to make money in the state. The first allows insurers to use catastrophe models informed by rising temperatures and worsening droughts when setting rates, instead of relying solely on historical data. The second reform allows reinsurance costs to be passed down to customers in their premiums...

...But only the first policy has been fully implemented. Any impact in steadying the insurers may come too late in the face of huge new liabilities, which could push private companies further towards the exit. For some it has raised the prospect of a housing crash...

LA Wildfires Push California Insurance Market to Its Limit

— Leslie Kaufman, Lauren Rosenthal, Michelle Ma and Alexandre Rajbhandari | Bloomberg | January 10, 2025 

Florida: Will California’s wildfire crisis drive Florida premiums higher?

After sympathy, the apocalyptic, fiery scenes from the Los Angeles area are likely to give rise to a question from the other disaster-prone state now paying the country’s highest average premiums: Is this going to affect my insurance rates?  The short answer is no. It is not expected to affect Florida homeowner policyholders — not immediately, anyway.

Luckily for other parts of the country, much of the wreckage from this burning that’s being called one of the most destructive in California history will be borne by local insurance coverage and won't affect the market at large, several insurance industry and reinsurance experts agree.

“The tragic California wildfires will have no impacts on the Florida insurance marketplace, similar to how Florida hurricanes have no impact on the California insurance market,” Mark Friedlander, director for corporate communications for the insurance industry-backed Insurance Information Institute, wrote in an email.  “Risk is rated at the local market level. National insurers typically have subsidiaries that operate in large markets like California and Florida. They rate risk specifically to that market, not across the United States."...

Will the L.A. wildfires heat up homeowners insurance premiums in Florida? — Anne Geggis | The Palm Beach Post | January 11, 2025

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On top of the human tragedy they’re still inflicting, the Los Angeles wildfires are exposing a gap between what people thought their homes were worth and what they’ll actually get from insurance companies when those houses have been reduced to ash. Potentially thousands of homeowners are learning it won’t be nearly enough.

But this isn’t just a Los Angeles problem. From California to Texas, Florida and beyond, parts of the US most susceptible to natural disasters are slowly waking up to an underinsurance nightmare. It’s still ballooning in scope as home values keep rising, people keep crowding onto the front lines of climate change and a heating planet keeps intensifying those disasters.

Four years ago, the total difference between harsh reality and what a site like, say, Zillow suggested homes were worth might have been $1.2 trillion, according to one estimate. Now that estimate has grown to $1.7 trillion. Without better foresight and action from policymakers, mortgage lenders, realtors and homeowners, it will keep growing, potentially to $2.7 trillion…

The $2 Trillion Housing Market Nightmare Is Getting Even Worse — Mark Gongloff | Bloomberg | January 15, 2025

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California sought to protect more Los Angeles-area homeowners from potentially losing their home-insurance policies as wildfires continued to ravage the region.

State Insurance Commissioner Ricardo Lara amended last week’s mandatory moratorium on cancellations and non-renewals of residential insurance policies to include neighborhoods affected by the Hurst, Lidia, Sunset and Woodley fires…

California Adds More ZIP Codes to Insurance-Cancellation Ban — Alexandre Rajbhandari | Bloomberg | January 15, 2025

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There’s a truism in municipal debt: Bonds rarely move on natural disasters. That long-tested concept had held up until fires destroyed thousands of properties in Los Angeles last week.

The Los Angeles Department of Water and Power — the biggest American municipal utility — has seen its bonds drop and credit rating downgraded as the blazes continue to burn. A planned debt sale this week is in limbo. While there hasn’t been anything to establish a connection between LADWP’s power lines and the Palisades Fire in its territory, the investor concern is clear.

The disaster has exposed LADWP’s fire preparedness as vulnerable and perhaps inadequate. It didn’t turn off electricity in the Pacific Palisades before the massive blaze erupted Jan. 7 — the type of move power giants PG&E Corp. and Edison International frequently make when extreme winds are forecast. The utility has already been sued by homeowners faulting it for not supplying enough water to fight the flames…

LA Fires Test Bond Market Used to Shaking Off Disasters — Maxwell Adler, Mark Chediak, and Amanda Albright | Bloomberg | January 16, 2025

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A little-noticed rule change last year by California’s insurance regulator will likely shift a large chunk of the cost of the Los Angeles wildfires to homeowners across the state.

Pushed by insurers, the change puts California homeowners on the hook to pay directly toward the cost of rebuilding from very large disasters through even fatter insurance bills—whether they were exposed to the L.A. fire or not…

…The rules change means insurance companies can bill their customers if they are forced to bail out the plan, which has an estimated $200 million in cash and $2.5 billion in reinsurance, according to data it reported last year.

That is likely not enough to cover the Fair Plan’s share of the losses from the fires, forecast at up to $6 billion by analysts at Evercore ISI…

Insurers’ Rule Change Puts California Homeowners on the Hook for L.A. Fire — Jean Eaglesham | WSJ | January 15, 2025

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A shrinking California insurance market will leave Los Angeles-area residents more dependent on a patchwork of federal programs, charitable aid and their own savings to rebuild lives devastated by the most-expensive fire in U.S. history.  

The blaze that swept through one of America’s wealthiest shorelines this past week has racked up more than $50 billion in losses. The recovery will take years, and some residents might simply sell the land beneath their former homes…

Who will pay?  Insurers.  FEMA.  Taxpayers.  Individuals.

Who Pays to Rebuild California When Insurance Falls Short? Everyone Else — Heather Gillers | WSJ | January 11, 2025

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You may live hundreds or thousands of miles away, but the wildfires tearing across Los Angeles and other natural disasters stand to raise your home-insurance bill...

...Insurers have tended to raise rates on homeowners in regions where disasters strike. But researchers say the scale of losses leads companies to tap faraway customers to recoup their money.

A Harvard Business School study found that expensive disasters in some parts of the country affect insurance rates in others, as insurers bump up premiums for homeowners in other areas to help cover big losses.

“It’s spread all over the country, and it spreads in a disproportionate way, where some people are bearing an overwhelmingly higher cost,” said Ishita Sen, a co-author of the study and a Harvard finance professor...

What Wildfires Mean for America’s Home-Insurance Bills — Joe pinsker and Oyin Adedoyin | WSJ | January 10, 2025

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California is a microcosm of what happens when insurance breaks down: Either households face potential ruin, or the public is handed a financial time bomb…

The World Is Getting Riskier. Americans Don’t Want to Pay for It. (free 🔗) — Greg Ip | WSJ | january 19, 2025

• King County, Washington: Cost and sales increased in 2024 compared with 2023.

…The number of closed single-family home sales increased 8% in King County last year. Snohomish, Pierce and Kitsap counties also recorded more sales, a notable shift after two years of decline.

Higher sales volumes show that in some ways “we’ve turned the corner” from a super-sluggish year in 2023, but the data “does still reflect a market where a lot of people are staying put,” Tucker said.

The condo market tells a different story.  In King County, the number of condos listed for sale in 2024 surged 25% from 2023.

Seattle-area housing market remains far from peak years despite pickup — Heidi Groover | The Seattle Times | January 17, 2025

Built Environment

• Singapore: Fewer “shoebox” condominium units can be developed in properties within the Centra Area.

…In Singapore, shoebox condominiums are typically defined as compact residential units with a size of around 500 square feet or less. These units are part of non-landed residential developments, such as private condominiums or apartments.

They generally range from 250 to 500 square feet, and often consist of a single room with an open layout combining the living, dining, and sleeping areas…

The Urban Redevelopment Authority (URA) introduced new guidelines on shoebox apartments in Singapore effective 18 January 2023. These guidelines primarily focused on developments within the Central Area of Singapore, aiming to promote a better mix of housing options and ensure quality living environments.  For condo buyers, those looking for shoebox units in the Central Area may find fewer options available. Larger condo units may be priced higher due to reduced unit density in developments.

At least 20% of dwelling units (DUs) in a development must have a minimum net internal area of 70 square metres (approximately 753 square feet). This aims to cater to families and larger households, ensuring the Central Area remains a vibrant place to live, work, and play…

What happened to Shoebox Condominiums? — Grace Leong | Singapore Home & Decor | January 09, 2025

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Thailand's real estate market continues to attract foreign investors, with a notable increase in condominium unit transfers during the third quarter of 2023, according to a report released by the Real Estate Information Center (REIC) on Wednesday.

• The report revealed a 11.6% year-on-year (YoY) surge in the number of condominium units transferred to foreigners, reaching 3,756 units. The total value of these transactions also climbed by 8.9% YoY to 18.571 billion baht…

• The most popular price range for foreign buyers remained below 3 million baht, accounting for over 50% of all transactions.

• Units ranging between 31 and 60 square metres (1-2 bedrooms) were the most sought-after by foreign buyers.

• Chinese nationals continued to dominate foreign purchases, followed by Myanmar and Russia.

• Bangkok, Chonburi and Phuket remained the top destinations for foreign condominium buyers, accounting for over 74% of all transactions.

Foreign investors continue to pour money into Thai condominiums — Nation Thailand | January 08, 2025

• The rich keep getting richer.

…The 100 largest fortunes combined now exceed $4 trillion — more than the collective net worth of the poorest half of Americans, spread over 66.5 million households. The share of US wealth owned by the top 0.1%, at nearly 14%, is now at its highest point in Fed estimates dating back to the 1980s…

American ‘Oligarchy’ Decried by Biden Gained $1.5 Trillion During His Presidency — Ben Steverman | Bloomberg | January 16, 2025

Inflation and Monetary Policy

• US 10 Year Treasury yields are higher while the US Fed Funds rate is lower.  Monetary policy, tariffs, debt pressures and more all impact bond yields.

For those unsettled by the relentless rise in government bond yields in the US and across much of the world lately, the message from markets is getting clearer by the day: Get used to it.

The world’s biggest bond market and global bellwether is leading a reset higher in borrowing costs, with the prospect of a prolonged period of elevated rates carrying consequences for economies and assets everywhere. 

…The rate on 10-year notes alone has soared more than a percentage point in four months and now is within sight of the 5% barrier last breached briefly in 2023 and otherwise not seen since before the global financial crisis nearly two decades ago...

Global Bond Tantrum Is a Wrenching and Worrisome Start to New Year — Michael Mackenzie and Ye Xie | Bloomberg | January 12, 2025

🎥 VIDEO: What Higher Bond Yields Mean for Markets and Everyday Borrowers — Bloomberg Big Take | January 17, 2025 

Cashing In

• Beware your association’s cash getting swept into low (near zero) yielding accounts.

Wall Street is starting to pay the price for the stingy interest rates it gave some customers for their cash. 

Wells Fargo and Bank of America’s Merrill Lynch unit agreed to pay a combined $60 million to settle Securities and Exchange Commission probes into the accounts that hold cash for some of their wealth-management clients, the agency said Friday. 

Investors often have some incidental cash in their brokerage accounts, including from dividends and interest on their holdings. Many firms automatically put that money into so-called sweep accounts that pay very low interest rates. The settlement over these sweep accounts follows a period when brokerages paid clients minimal interest even when broader rates were rising…

Banks Scrimped on Customer Interest. Now They’re Paying for It — Rachel Louise Ensign | WSJ | January 18, 2025

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…Wall Street is really worried about bonds. It might be time to buy some.

What is spooking markets, however, is that much of the recent rise in yields doesn’t appear to reflect expectations of stronger economic growth. Rather, it might be the result of investors applying a higher discount or “term premium” to hold long-term bonds, estimates by the Federal Reserve suggest. Some analysts attribute this to the possibility of Donald Trump’s promised tariffs derailing the global economy and leading to a jump in inflation, while his tax cuts bloat budget deficits further.

Movements in term premiums are usually strongly correlated across the globe, and the consequences are being felt more starkly in weaker economies overseas, especially in Britain. There, 30-year yields are trading around 5.4%, a 27-year high. U.K. Treasury chief Rachel Reeves, who has made a public pledge to appease bond markets while also attempting to set out some moderate growth ambitions in her latest budget, is under strong pressure…

A Bond Selloff Is Rocking the World. You Might Want to Take the Other Side — Jon Sindreu | WSJ | January 12, 2025

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The Fannie Mae and Freddie Mac saga has been going on for, depending how you count, 16 years, or perhaps many decades. There are strong feelings and a lot of lore. It’s back in the news now, and I thought it might be nice to start with the basics.

In the US, as a matter of policy for many decades now, the federal government wants it to be relatively easy to buy a house. Most people do not have enough money to buy a house, so this policy mostly means that the government wants someone to lend buyers the money on generous terms.  In practice, “generous terms” means something like “a 30-year fixed-rate mortgage with an interest rate not that much higher than Treasury bond rates.”

The Fannie and Freddie Trade Is Back — Matt Levine | Bloomberg Opinion | January 08, 2025

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Issue #106 addressed predictions about monetary policy / interest rates.  See below for reflections on market performance in 2025.

Making Sense of Wall Street’s Dubious Forecasts for 2025 — Walter Frick | Bloomberg | December 22, 2024

The Goose and the Gander

• Johannesburg, South Africa: What’s good for the goose is good for the gander!

…The architectural rules of the Cedar Lakes Estate in Johannesburg state that timber must be used for all garage doors. Should a homeowner wish to utilise a different material or finish, approval must be sought from the HOA. 

A homeowner installed a new garage door with a mirror finish and duly applied to the HOA for approval, which was refused, despite the fact that several other properties in the estate had garage doors that were not made of timber.

The homeowner approached the Community Schemes Ombud Service, which found   no evidence that the HOA had acted unreasonably, and ordered the homeowner to remove the garage door. 

The homeowner appealed the decision to the High Court, arguing that, given the evidence provided of other properties with garage doors of a different finish, the Adjudicator’s order was flawed. The appeal was upheld by the High Court and the order to remove the garage door was set aside.

This case provides a warning to the managing authorities of communal schemes not only to act in accordance with the applicable rules and regulations, but also to ensure consistency and fairness in their decisions.

Consistency is key for Homeowners Associations — Jaco Lötter | George Herald | January 10, 2025

Quadruple Torts

• Colorado: Fire in Club Valencia stripped over 160 people of their former home.

  • Lawsuit #1  was filed on April 26, 2023 by the Association's property casualty insurer requesting that the court make an adjudication that the insurer's policy does not provide coverage for either of the two fires.

  • Lawsuit #2  was filed on November 3, 2023 by the Association against those responsible for causing the fire that occurred on November 3, 2022.

  • Lawsuit #3 was filed by the Association on February 1, 2024 against those responsible for causing the fire that occurred on February 1, 2023.

  • Lawsuit #4 was filed by State Farm against the Association for the November 3, 2022 fire based on subrogation claims.

Club Valencia Condominium Owners Association - Atty Letter re 4 Lawsuits — January 15, 2025

Discrimination Continues in Texas HOAs led by FSR

• Providence Village, Texas: Fascinatingly, Texas passed updated laws in 2023 aimed at curbing discriminatory housing practices in HOAs, but that hasn’t stopped some associations from pressing forward with workarounds.  FirstService Residential is named as a defendant providing lackluster management while claiming “we’re not responsible for the HOA.”

“It’s a unique situation, in 2025, to have this kind of overt discrimination determination by HUD, and based on overt race-based behavior,” Daniel says.

Lawyers for FirstService Residential Texas, the Providence HOA and the individuals charged did not respond to a detailed request for comment. But according to the HUD complaint, “respondents allege that the rules they enacted were intended to promote well-maintained homes, stabilize property values, and address community concerns regarding crime.” FirstService also told HUD it wasn’t responsible for the HOA’s actions.

The HUD investigation sheds new light on what kind of coordination Providence may have had with other FirstService HOAs. The rental rules were based on ones passed earlier by a nearby HOA called Savannah, and HUD lawyers write that the property manager shared Providence’s rules with “other FirstService-managed communities looking to do something similar.” (The lawyers don’t specify which, or how many.) FirstService Residential manages more than 9,000 residential communities like homeowners associations, condos and cooperatives across the US and Canada…

Texas HOA Charged With Discrimination for Banning Section 8 Renters — Sarah Holder | Bloomberg CityLab | January 20, 2025

North Texas HOA charged with discrimination for trying to kick out low-income renters — Sarah Baharl | The Dallas Morning News | January 15, 2025

Fair Housing Lesson: Expensive Fence

• De Pere, Wisconsin: A family with five autistic kids wanted a fence to ensure that they could play in the backyard “without running away and getting lost.”  A fair housing lawsuit ensued that resulted in injunctive relief allowing the fence to be erected and now a $200,000 judgment against the Nazcr Trac POA.  Some neighbors have paid their $1,350 share of that judgment while others refuse.

🎥 VIDEO: Backyard battle: Fence dispute sparks $200K lawsuit, forcing neighbors to pay up — Karl Winter | NBC26 | January 14, 2025

Don’t Feed the Ducks (Deux)

• Boca Raton, Florida: This is not the first association to pursue legal action for residents feeding wildlife.  View more in our July 14, 2022 issue.

If you feed the ducks, we’re going to sue you. That’s the warning being carried out by the Boca Terrace Condominium Association against owner Lois Blake. The condo association says she is engaged in “illegal and nuisance behavior by feeding ducks and wildlife behind her unit and on the association property which is subject to the association’s declaration.”

According to the complaint obtained by BocaNewsNow.com, the Boca Terrace Condominium Association first sued Bleke back in 2022 seeking injunctive relief and to enforce a previous order obtained during arbitration. The association and Bleke reached an agreement, according to the suit. But Bleke allegedly refuses to comply with the deal she made.

“To date, Defendant Bleke has failed to comply with the settlement agreement and stop feeding the wildlife” wrote attorneys representing the condo association in the latest filing. “As part of the agreement, Bleke admits to all the allegations of Association’s Complaint filed in the lawsuit and agrees that the Association is entitled to a final judgment of injunction if Bleke failed to refrain from feeding ducks or any other wildlife at any time on or within Boca Terrace.”...

Boca Raton Condo Association Sues Duck-Feeding Resident — BocaNewsNow | January 16, 2025

Glazing - II

• We first covered 1521 v. Viracon in Issue# 89.  23-2-23997-1 SEA was removed to federal court on December 28, 2023.  Here are the causes of action from the amended complaint:

  • Civil Conspiracy to Violate, and Violation of, the Washington Consumer Protection Act

  • Violation of the Washington Consumer Protection Act

  • Fraud (Viracon, LLC)

  • Fraudulent Concealment (Viracon, LLC)

  • Violations of the Washington Condominium Act (Viracon, LLC)

  • Violation of the Washington Product Liability Act (Viracon, LLC)

1521 v. Viracon, et. al — 2:23-cv-01999-BJR

Derivative Suits (Mostly) Disallowed

• Orange Beach, Alabama: As noted in our State Statute Concepts Matrix, Alabama has a relative paucity of state statutes governing CICs.

…Typically, condominium associations handle the management and maintenance of the condominium buildings for which they are organized.  Every now and then, litigation arises about how the buildings or associations are run. Ex parte Caribe Resort Condo. Ass’n Bd. of Directors, __ So.3d__ (Ala. 2024), decided on December 13, 2024, is one such example.

In Ex Parte Caribe Resort, a group of Caribe condominium unit owners filed a “derivative” lawsuit on behalf of the Caribe condominium association against members of the Caribe condominium association’s board of directors and the general contracting companies hired by the board to perform maintenance work at the building.  The unit owners asserted that the board members breached their fiduciary duties to the condo association by hiring the contractor companies, who, the plaintiffs alleged, billed their services to the condo association in excessive amounts and failed to perform maintenance work and services in a workmanlike manner.

In its opinion, without reaching the merits of the unit owners’ lawsuit against the board members and contractors, the Supreme Court addressed the threshold legal issue of whether Alabama law authorizes “derivative” actions in the context of nonprofit corporations.

If you have ever watched television shows like “Billions” or “Succession,” you probably have heard the term “derivative” suit. Basically, a derivative lawsuit involves one or a group of a for-profit corporation’s shareholders banding together to file suit on behalf of the corporation (i.e., in the company’s best interest), against any number of the corporation’s board of directors or corporate officers, often in the context of a board member or officer’s alleged breach of fiduciary duties to the corporation (mismanagement, fraud, etc.). These cases invariably involve complaints about the misfeasance or malfeasance of corporate leadership with regard to the corporation’s finances.

In the context of a nonprofit association, whether a 501(c)(3) nonprofit charity group, homeowners’ association, or condominium association, it is less clear under Alabama’s Nonprofit Corporation Act whether a derivative action is possible.  The Supreme Court of Alabama in Ex Parte Caribe Resort addressed that issue.

In an opinion written by soon-to-be Chief Justice Sarah Stewart, and joined by Chief Justice Parker, Justice Mitchell, and Justice Cook, the Court found that under Alabama’s nonprofit corporation statute, members of a nonprofit association actually have no “general right” to bring a derivative action on behalf of the organization.  The Court did note that there is a limited exception to that general rule under the Alabama nonprofit corporation statute: that is, members of a nonprofit association can bring a derivative action specifically “against the officers or directors of the nonprofit corporation for exceeding their authority.” Ala. Code § 10A-3-2.44(2)). This “ultra vires act” exception would apply where, for example, a nonprofit association’s board of directors is alleged to be engaging in illicit self-dealing…

Alabama Supreme Court issues opinion clarifying the rules controlling nonprofit corp. governance — Tripp DeMoss | Yellowhammer News | January 16, 2025