What Is Association Law?
Associations law refers to the laws governing the relationships, roles, responsibilities, and rights participating in business organizations. In essence, it establishes parameters for organizations (associations) created through the formal participation of members. Depending on the size and scope of those organizations, North American association law can be quite expansive. However, there are three primary types of organizations that are most affected by this type of law is associations for business, professional organizations, and standards-setting organizations.
The first standard for determining participation in a business association hinges on the interest participants have in the affairs of that association. Some association law experts, however, are careful to note that the interests of the parties must be economic in nature. Applying that standard, association law would not apply to organizations formed simply for social or charitable purposes . In addition to interest, association law standards require that the parties participate together as associates. Again, there are differing opinions as to precisely what constitutes association. While some requirements are nebulous, association law does make broad requirements as to things like the existence of organization leaders, purposes, finances, and operations. Some proponents of association law actually argue that it is now the most basic form of business organization.
Association law basically covers all forms of organizations, though, as noted, the most association-heavy formats exist in business associations. Unlike corporations, associations are not tax-reporting entities and in tax brackets. They are technically considered partnerships. Participating members in business associations are typically last in line in the event of bankruptcy or demand for damages in the event of a successful lawsuit against the organization.
Varieties of Associations Protected Under Association Law
Association Law encompasses a broad array of association types and organizations. While some are for-profit, charitable or otherwise tax-exempt, and others are for non-profit purposes or in the nature of condos and cooperatives, they all share certain common characteristics in terms of the control, management and regulation by, and in accordance with, governing documents.
Common and mutual interest ownership associations (CIOAs) are those organized for the benefit of members who share a common interest in property. CIOAs include neighborhood associations, condominium associations, maintenance associations, townhome associations, country club associations, cybersecurity cooperatives, trading groups, and mixed use owners and operators. Under certain circumstances, CIOAs can require members of a community, be it a homeowners’ association or a condominium or cooperative, to pay assessments and adhere to rules that generally regulate the community’s common areas; regulate the uses of the community’s common space; coordinate the community’s maintenance, security, and organizational needs; and/or enforce the community’s rules and regulations.
Trade associations like the American Bar Association, the ABA, as a voluntary association of lawyers formed to promote or protect certain common interests of individual members and their clients, as well as the public, within the legal profession qualify as an association within Association Law.
Professional organizations of varied purposes which generally are designed to improve a certain discipline or profession, such as the American Medical Association, and generally serve its members with a variety of services and benefits, including education and certification of practitioners in a particular field.
Other organizations qualifying as an association are nonprofits, a corporation, a charity or foundation that is charitable in purpose and qualifies as charitable and/or nonprofit under Internal Revenue Code section 501(c), entitling the organization to benefit from state and federal tax benefits. Potentially, almost any group of individuals can organize and form an association as a nonprofit corporation in order to obtain the tax benefits associated with nonprofit corporations.
Associations and nonexempt organizations including trade associations engage in activities intended to influence government policy and legislation to its benefit. These advocacy tax rules apply to any organization including any association that is seeking to influence legislation to its benefit and applies to non-profit as well as for-profit organizations. However, exempt organizations have more restrictions than non-exempt organizations. An association or an organization must demonstrate that its lobbying activity is an "appropriate" part of its regular business.
Essential Characteristics of Association Law
While the specifics of association law can vary by jurisdiction and the type of association, certain general principles apply broadly across the legal landscape. Central to these principles is the concept of fiduciary duty. This is the legal obligation of an association’s board of directors to act in the best interests of its members in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, in good faith and in the interests of the association. The fiduciary duty doctrine encompasses two distinct, although interrelated, obligations: the standard of care and the duty of loyalty. The duty of loyalty requires that board members make decisions that benefit the association and its members, not themselves or any third parties. The duty of care requires directors to act with the degree of diligence and care that an ordinarily prudent person would exercise under similar circumstances; effectively to act in good faith. Failure to meet these duties can result in civil liability to individual board members and to the association. If the directors act in bad faith, or for their own individual benefit, and the association suffers any damages, they will likely be liable without any further showing of wrongdoing on their part. Statutory provisions that limit or eliminate liability for an association can vary tremendously between locales and types of associations, and can be quite complex.
The second important legal principle is that associations must comply with the many laws and regulations that govern them. These include but are not limited to tax laws (both federal and state), employment laws, disclosure and reporting requirements for both for-profit and non-profit corporations and laws dealing with collection and foreclosure procedures for delinquent assessments.
The third key principle relates to the governance structure of associations. While the specifics of association governance are largely unique to each association, all are governed in accordance with their own by-laws, articles of incorporation, policy resolutions or some combination thereof. All good attorneys should be able to review or draft your governing documents that will allow your association to operate within the law while still providing sound direction for your board.
Common Legal Concerns for Associations
While issue-specific association law is interesting for a number of reasons, it is oftentimes the general "theme" in association law that helps explain the association’s law. The following are some frequent legal issues that associations face and how courts typically resolve those issues.
Disputes Over Bylaws
Bylaws do not always clearly address specific events that occur at an association. Some bylaws are merely a restatement of the applicable non-profit corporation statute and do not address specific issues that are peculiar to the association or its members. Other bylaws may appear really ambiguous. A lot of times the bylaws can be interpreted on their face, but sometimes very subtle rules apply. A court will typically read the bylaws as a whole and try to determine the intent of the parties as evinced by the language used in the bylaws. For example, where the bylaws conflict with the statute, courts will read the bylaws so as to effectuate the clear sense of the provision.
Conflicts of Interest
Associations have board members, members of the executive committee and regular members that frequently have outside business interests. They oftentimes own businesses that provide goods or services to the association. The question is how should the association address board members and committee members who clearly have business interests that conflict with the interests of the association? How does a board member or executive committee member divest himself of a business interest that directly affects his or her relationship with the association? If the governing documents do not address conflicts of interest amongst board members and committee members, then the standard statutory provisions would apply. Texas law generally imposes a duty of loyalty on officers and directors of non-profits. Directors and officers may not compete with the corporation or take opportunities away from the corporation. Any profits derived from a conflict of interest would be treated as corporate opportunity. It is important to note that a conflict of interest policy may allow a board member to tender goods or materials to the association. However, a conflict of interest policy will usually prohibit the board member or executive committee member from being paid compensation or profit, other than standard reimbursement of costs and expenses, and reasonable compensation for actual services provided to the corporation. Community association directors are often not paid for their services.
Liability Concerns
Associations obviously have continuing liabilities. Directors fees for lawyers, accountants and the like are common. Some of these fees would be reimbursable by the corporation. Similarly, a not-for-profit corporation has the potential for liability to third parties under the applicable non-profit corporation statutes. Statutory liability in this case includes potential liability to contractors.
Implications of Association Law for Members and Boards
Regardless of whether the Association is incorporated or unincorporated, the law relating to Associations protects both individual members and the Association as a corporate entity. The law provides for the rights of individual members. Individual members have rights to, among other things, fair treatment and equitable access to the resources of the Association. The law also provides for the responsibilities of the Association and the Association’s governing body. The responsibilities of the Association’s governing body include their fiduciary obligations to act in the best interests of the Association as a whole.
Association law attempts to balance individual members’ rights with community interests. As the collective interests of the community requires, Association law also allows for the restrictions of certain member rights in order to promote the common good of the community as a whole . A well drafted set of governing documents for an Association are paramount in balancing individual members’ rights and the overall interests of the community. It must be remembered that even though the Association’s governing documents may provide general legal standards, an Association must still operate its business and own the common area as a reasonable person would in similar circumstances (that is to say, without recklessness). Having reasonable governing documents, and understanding the law applicable to Associations, is important for Association boards in fulfilling their fiduciary duties. However, an analysis of Association law becomes complicated when a dispute arises between two or more members of an Association and such members seek redress from their Association’s governing body for the alleged violation of their rights or the governing documents. Immediately it becomes necessary to understand how Association law balances individual members’ rights and the collective interests of the Association in the entire dispute.
The Importance of Lawyers in Association Law
Legal experts play a crucial role in advising associations on a variety of governance matters. For starters, by helping associations navigate legal complexities, legal professionals allow their clients to focus on their core mission. Additionally, legal professionals with experience in Association Law can provide advice on the drafting and revision of Bylaws. Bylaws, also known as constitution and rules, are the laws that govern the association. They outline the organization’s purpose, membership requirements, membership rights, procedures for meetings, and procedures for electing and removing members from the organization.
In addition to assisting in drafting and revising Bylaws, legal professionals give advice when it comes to disputes arising between members. Disputes often arise over issues such as election procedures, eligibility for membership, and the interpretation of bylaws. During my years of practice, I have had to represent both associations and their members in disputes that have ranged from the eligibility of their young child in T-Ball to allegations of fraudulent actions by officers of an association. It is vital to know that legal professionals representing associations are obligated to give disinterested advice to their clients. This means that they should not advise the association in a manner that allows their clients to take advantage of a member or take an adversarial position against a member without a justification for such action based on law or facts.
The relationship between associations and members is a special one. Members join because they believe in the good work of the organization. They are motivated by that belief to be active participants and/or to volunteer their time and resources to further nail the goals of the associations. Because of this special relationship, legal disputes – when they arise – often take on a heightened emotional dimension. Legal professionals who specialize in Association Law should treat such relationships with care and be prepared to give disinterested advice at all times. Legal professionals can also help associations with compliance with federal and state laws. Federal laws, such as the Americans with Disabilities Act and Title VII of the Civil Rights Act of 1964, require associations to consider certain factors with regard to their organizational rules and the hiring and treatment of their employees.
The Next Generation of Association Law
As our society continues to evolve technologically and socially, association law must also adapt to these changes. The frequency and speed at which change occurs in the law can be staggering, and associations must be vigilant to ensure compliance with the most current laws.
Technological advancements may be the largest influence on the future of association law. In just the last few decades, the emergence of e-mail, listservs, and websites have allowed for an immediacy in communication between an association and its members that did not previously exist. Many associations now conduct their elections by electronic ballot, and although existing laws do not recognize electronic ballots, that is not the case in many foreign jurisdictions. This may cause uncertainty in the application of foreign laws to ballots cast electronically. A further challenge may present itself when an association is faced with a request for documents beyond what is publicly available on the association’s website. Associations must be mindful of the various rules and regulations when responding to such requests, including analyzing whether disclosure is appropriate based on the type of document requested. It may be reasonable to release certain board minutes while withholding other minutes indicating a deliberative process subject to privileged protection . Similarly, associations often receive requests for access to specific portions of a membership roster without disclosing all of the information. In some communities, owners have been able to obtain e-mail addresses compiled from notices sent by the association, and therefore, the association may have to balance the legitimate need for this information with the privacy concerns of all of the community’s owners.
As the range of technologies continues to expand, the law in this area must also expand. In addition to the use of e-mail, listservs, and websites, associations must also be sensitive to any safeguard requirements. For example, e-mail addresses are often considered personal information under federal laws such as the federal CAN SPAM Act of 2003, which regulates commercial email, and can create conflicting obligations. As a result, associations must stay current with emerging technologies and the law as it evolves in order to ensure compliance.
The exponential growth in the number of homeowner associations has also created a growing body of case law. As court cases are decided addressing the many issues associations face, rules are created and precedent is provided. As such decisions are written, we will look to the courts for guidance in the future. Emerging trends in association law will inform boards and members as they seek to navigate applicable laws and regulations.