Six Major Revisions to the Michigan Nonprofit Corporation Act: Should your Condominium Association Revise its Articles of Incorporation and Bylaws?

In Michigan, two primary statutes govern the affairs of a condominium association: the Condominium Act and the Nonprofit Corporation Act.  The last major revisions to the Nonprofit Corporation Act took place in 2008 through Public Act 9 of 2008, which permitted voting by electronic means, amongst other things.  Effective January 15, 2015, Governor Rick Snyder signed into law Michigan Senate Bill 623 [now Public Act 557 of 2014] which made significant changes to the Nonprofit Corporation Act.  This article addresses six major changes to the Nonprofit Corporation Act that could impact your condominium association. [1]

Participation by Electronic Means: Required Unless Prohibited

By far, the biggest change for condominium associations involves participation by Co-owners in membership meetings by electronic means, i.e. telephone or conference call, Skype, Go-To-Meeting, FaceTime, etc.  Under the 2008 Amendments to the Nonprofit Corporation Act, participation in membership meetings was allowed by electronic means only if the articles of incorporation or bylaws specifically permitted such participation.

Under the newly revised MCL 450.2405, unless the articles of incorporation or bylaws specifically prohibit participation in membership meetings by electronic means, the new default position is that a Co-owner may participate in membership meetings by telephone, conference call, Skype, Go-To-Meeting, FaceTime or other means of remote communication.  This is an important change for all condominium associations in Michigan.

Given the new changes, any association that wishes to prohibit electronic participation in membership meetings will need to amend its articles of incorporation or bylaws.  There are certainly some associations who prefer in-person participation, but that decision is left to the discretion of the condominium association.  On the other hand, if an association does not wish to restrict participation by electronic means, the Board of Directors will still need to 1) review and revise its notice procedures for member meetings to allow Co-owners to participate through electronic means, 2) determine if and how votes from electronic means will be taken and 3) determine how votes from electronic means will be verified.  This leads to the second most important change with the new law: voting.

Voting By Electronic Means or at a Polling Place Now Available

In the new MCL 450.2408 and MCL 450.2409, associations have the flexibility to conduct voting for annual and special meetings by electronic transmission or at a polling place (if such voting is permitted in the articles of incorporation or bylaws).  Thus, with the recent changes, an action may be approved by 1) an in-person meeting, 2) signing a written consent, 3) electronic means such as e-mail or an online survey 4) through an in-person polling place with printed ballots or 5) through a written ballot provided to Co-owners and returned not less than 20 days and no more than 90 days after the date the ballot is provided.  Therefore, associations should determine whether e-mail, an on-line webpage or printed ballots are permissible voting mechanisms and, if so, whether the articles of incorporation or bylaws need to be amended to accommodate such options.

Additional Limitations on Director and Officer Liability Now Available

In 1986, the Nonprofit Corporation Act was amended to allow a condominium association the ability, in its articles of incorporation, to limit the personal liability of a director or officer of the corporation, its shareholders or its members for money damages for a breach of the person’s fiduciary duty.  In order for the director or officer to obtain the benefits of the provision, the association had to determine that a specific fiduciary duty was involved.  However, the new MCL 450.2209 allows an association the ability to eliminate director or officer liability for any action taken or any failure to take action [not just limited to the person’s fiduciary duty].  Note: the new statute lists five specific exceptions to these limitations of liability.  Thus, the amended MCL 450.2209 greatly broadens the protections for directors and officers.  Given that directors and officers of condominium associations are volunteers, associations should consider whether such additional protections are desired or appropriate.

Nonexecutive Committees

Previously, the Board of Directors for the condominium association could designate “executive committees” consisting of one or more of the Directors of the association.  Under the amended MCL 450.527, unless otherwise prohibited in the articles of incorporation or bylaws, the Board of Directors—or an individual designated in the bylaws or by the Board—can appoint one or more “nonexecutive committees”.  Importantly, in nonexecutive committees, some or all of the committee members could be directors, officers, members, or shareholders of the association and some or all could be individuals who were not directors, officers, members, or shareholders.

The purpose of nonexecutive committees is to assist the Board of Director’s affairs and to provide for the creation of one or more subcommittees of any nonexecutive committee, if desirable.  By definition, a nonexecutive committee would not be an executive committee and could not execute the Board’s power or authority in the management of the association’s business and affairs.  A nonexecutive committee could, however, perform under the Board of Director’s direction any functions described in the bylaws or as determined by the Board of Directors.

If a nonexecutive committee is approved, the approval must state 1) the purpose of the committee appointed, 2) the terms and qualifications of committee members and 3) the ways in which committee members are selected and removed.  Whether condominium associations are interested in permitting nonexecutive committees is a case-by-case determination given the size, interest and/or needs of the condominium association.

Inspection of Records: New Restrictions Now Available

Under the old MCL 450.2487, a Co-owner could inspect certain records of the association for any proper purposes at a reasonable time and place including the following: 1) the balance sheet at the end of the preceding fiscal year; 2) the statement of income for that fiscal year; and 3) if prepared by the corporation, its statement of source and application of funds for that fiscal year.  In addition, a Co-owner, upon at least 10 days’ written demand, could examine for any proper purpose, in person or by agent or attorney, during usual business hours, the minutes of stockholders’ or members’ meetings and record of shareholders or members.

The new amendments clarify the procedures by which a Co-owner may request the inspection of certain records and what information the Co-owner is not permitted to inspect.  Specifically, the amended MCL 450.2487 provides that if a corporation’s articles of incorporation, bylaws or a resolution by the Board of Directors so states, then no right to inspection exists when doing so would 1) impair the privacy or free association rights of shareholders or members, 2) impair the lawful purposes of the corporation or 3) when opening lists of donors would not be in the best interests of the corporation.  Prohibiting the inspection of certain condominium records is something every condominium association Board of Directors should consider.

Mergers and Dissolutions: New Options for Twenty Co-owners or More

Not often does a condominium association concern itself with mergers or the dissolution of the condominium association.  However, the procedures for implementing a merger or the dissolution of the association have changed with the new amendments.  Previously, a plan of merger or dissolution could be approved if a majority of the Co-owners entitled to vote approved such a measure at an in-person meeting or by proxy.  Now, MCL 450.2703a allows approval of a plan of merger and MCL 450.2804 allows for dissolution of the condominium association both by a majority of affirmative votes from Co-owners present at the meeting, but only if a minimum of twenty (20) Co-owners entitled to vote are present.  Both new statutes permit a greater number of votes if provided for in the articles of incorporation or bylaws.  Every condominium should consider whether the size of their condominium should require a greater number of Co-owners present to effectuate either a merger or the dissolution of the association.

Conclusion

Given the numerous changes to the Nonprofit Corporation Act, condominium associations in Michigan would be wise to review or amend their articles of incorporation and bylaws to adopt the new changes.  The new amendments provide greater flexibility to condominium associations regarding participation at meetings, voting, director and officer liability, the existence of nonexecutive committees, the inspection of records, mergers and dissolution.  Please feel free to contact our office with any questions regarding the changes to the Nonprofit Corporation Act or any additional issues regarding your Michigan nonprofit condominium association, in general.

Joe Wloszek is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on dispute avoidance, condominium law, commercial litigation, commercial real estate, large contractual disputes, and title litigation. He has extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. He can be reached at (734) 261-2400 or jwloszek@cmda-law.com.

[1] While the recent changes to the Nonprofit Corporation Act also affect other community associations including homeowner’s associations, this article focuses on condominiums.  However, please feel free to contact our office if you have any other nonprofit corporation or community association legal needs.

Condominiums and Renters: Does your Condominium Association need a Rental Cap?

With the exception of vacation condominiums or condominium hotels, residential condominiums are created with the intention that the co-owners will be owner occupants.  However, the glut of foreclosures that occurred from 2007 to 2012 led many investors to purchase condominium units for rental purposes.  Moreover, the recovery of the housing market has also led many co-owners to move and rent their units.   Accordingly, the growing number of rentals in condominiums has made “rental caps” a hot topic for many condominium associations.

Condominium associations often adopt rental caps for a variety of reasons.  The most popular reason to adopt a rental cap is to ensure that an association remains eligible to receive FHA Certification.  FHA Certification increases the potential pool of purchasers which often results in increased unit values.  In order to be eligible for FHA Certification, at least 50% of the total units in the condominium project must be owner occupied. Similarly, many associations adopt rental caps in order to maintain the original character of the development.  Many associations believe that landlord/co-owners do not have a vested interest in the condominium as they do not actually live there.  The same would hold true for the renters who do not have an ownership interest in the condominium.   Detractors of rental caps often claim that the rental cap forces owners into foreclosure and that they are unduly restrictive.  However, a well drafted rental cap would grandfather existing rentals and create exceptions if co-owners are required to move for medical reasons, employment reasons or other extenuating circumstances.  Accordingly, rental caps can be drafted to prevent investors without unduly restricting co-owners that may experience a hardship.

Condominium associations that desire to adopt rental caps should do so before the number of rentals becomes too high. In Michigan, MCL 559.190 requires 2/3 of the co-owners to approve an amendment to the condominium bylaws.  MCL 559.190a also requires 2/3 of mortgagees to approve an amendment to the bylaws that imposes a rental cap.  While 2/3 of the co-owners must affirmatively approve a rental cap, the failure of a mortgagee to respond to a vote to impose a rental cap constitutes a “yes” vote.  Accordingly, the enactment of a rental cap is largely dependent on whether or not 2/3 of the co-owners will affirmatively vote to institute a rental cap.   As such, once 1/3 or more of the units are rented, it is unlikely that a rental cap will be approved.  Accordingly, it is recommended that rental caps allow for no more than 20% of the units to be rented and that a rental cap be proposed well before 1/3 of the units are rented.  While every association is different, and some associations have now become largely become “rental associations” controlled by investors, condominium associations that are controlled by owner occupants should consult with a condominium attorney to enact rental caps before it is too late.

LEGAL UPDATE: Michigan House Bill No. 4038 Would Allow Eviction Notices By E-Mail, Facebook or Other Social Media

On March 18, 2015, the Michigan House of Representatives passed House Bill No. 4038 (the “Bill”), which allows landlords to e-mail eviction notices to tenants or to notify tenants via social media such as Facebook, Twitter, etc.

At present, MCL 600.5718 permits service of a “demand for possession” [a/k/a an eviction notice] by personally delivering the written demand to the residence or by first-class mail.  The Bill modifies MCL 600.5718 to allow electronic eviction notices if the tenant consents.  If the Bill becomes law, landlords in Michigan will add lease provisions to include such electronic notifications.  Importantly, the Bill prohibits a landlord from refusing to enter into a lease because a prospective tenant declines to consent to an electronic eviction notice.

If approved by the Michigan Senate and signed by Governor Snyder, the Bill would take effect 90 days after enactment.

Joe Wloszek is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on dispute avoidance, condominium law, commercial litigation, commercial real estate, large contractual disputes, and title litigation. He has extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. He can be reached at (734) 261-2400 or jwloszek@cmda-law.com.

Religious Freedom and Community Associations: How does the Religious Freedom Restoration Act Impact Condominium and Homeowner Associations?

In 1993, the federal government enacted the Religious Freedom Restoration Act (“RFRA”).  The purpose of the RFRA was to allow a person to avoid complying with any law that interfered with the exercise of their religious freedom unless there was a compelling governmental interest behind the law and the least restrictive means of furthering that compelling governmental interest was utilized.  In City of Boerne v Flores, 521 US 507 (1997) the United States Supreme Court held that the RFRA could not be applied to the states, although it has subsequently been upheld as constitutional as applied to the federal government. Gonzales v. O Centro Espirita Beneficente Uniao do Vegetal, 546 US 418 (2006).  Accordingly, after City of Boerne v Flores, approximately twenty (20) states enacted a version of RFRA .  Sixteen (16) states, including Michigan, proposed RFRA legislation during the 2015 legislative session.

As exemplified recently in Indiana, the enactment of the RFRA by the states has been extremely controversial.  Proponents of state RFRA legislation argue that individuals should not be forced to take action that is contrary to their religious beliefs.  Detractors of RFRA legislation argue that it provides a license to discriminate and erodes civil rights.  This article will explore the current landscape of the federal and state law that is applicable to the exercise of religious freedom in community associations and then discuss the potential impact that the Federal RFRA and the proposed Michigan Religious Freedom Restoration Act, Senate Bill No. 4 (2015), may have on Michigan community associations.

The Federal Fair Housing Act

42 U.S.C. 3604(b) makes it unlawful “[t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin.”  In interpreting the Federal Fair Housing Act, courts have typically upheld facially neutral bylaws that have interfered with a co-owner’s exercise of the religious freedom. In Boodram v Maryland Farms Condo, 16 F3d 408 (CA 4 1994), the Court upheld a bylaw preventing balcony storage, even though a Hindu co-owner argued that it interfered with the placement of a Jhandee (flag) that he was compelled to fly based upon his religion.  The court reasoned that the bylaw provision was “an altogether typical and reasonable attempt by a condominium association to ensure an attractive and uniform appearance.”  Similarly, in Savanna Club Worship Serv., Inc v Savanna Club Homeowners’ Ass’n, 456 F. Supp. 2d 1223 (S.D. Fla. 2005), the Court upheld an exclusion of all worship services in common areas because all faiths were treated the same.

However, other courts have recognized that the enforcement of seemingly neutral rules could give rise to a Fair Housing Act violation if the rule was intended to discriminate or had a disparate impact on religious beliefs.  In Bloch v Frischholz, 587 F3d 771, 783 (CA 7 2009), the Shoreline Towers Condominium Association adopted a rule that barred the placement of “mats, boots, shoes, carts or objects of any sort” outside a co-owner’s door.  The Association later interpreted the rule to disallow a mezuzah (a Jewish religious symbol).  The Court allowed Bloch to sue the association for violating her religious freedom.  The Court held that a claim for violating the Fair Housing Act could be established in two different ways.  First, the Court held that Bloch could pursue a theory of discriminatory intent.  While the rule itself was neutral, the Court reasoned that discriminatory intent could be demonstrated as the association ordered the removal of the mezuzah, but allowed other tables and coat racks to remain in place, which demonstrated a selective interpretation and/or enforcement of the rule.

Second, the Court held that while Bloch could not pursue a theory of discriminatory impact, that theory was another way a Fair Housing Act violation could be established.  For example, a condominium association may establish a rule that co-owners must present a photo ID to enter the building so the security guard can determine their identity.  However, such a rule may have a disparate impact on Muslim women that wear a burka that do not show their face in public.  It should be noted that the United States Supreme Court is currently considering whether the disparate impact theory is still viable in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. On January 15, 2015, the Supreme Court heard oral argument and an opinion is expected before the end of the summer.  It is this author’s opinion that the Supreme Court will likely do away with the disparate impact theory and instead require actual proof of religious discrimination, based upon intent, to establish a Fair Housing Act violation.

Michigan’s Elliot Larsen Civil Rights Act

In Michigan, MCL 37.2505 forbids a condition, restriction or prohibition that limits the use or occupancy of real property based on “religion, race, color, national origin, age, sex, familial status, or marital status.”  In interpreting MCL 37.2505, the Michigan Court of Appeals upheld a condominium association’s enforcement of its bylaws that required the timely removal of holiday decorations.  Specifically, in  Pointe of Woods Condo Ass’n v Doel, Unpublished Opinion of the Michigan Court of Appeals, Docket No. 236617, 2003 WL 1558086 at *1 (March 25, 2003), the Court held that:

The rule adopted by plaintiff’s board of directors is phrased in neutral terms to apply to all holidays. “The purpose of the … [c]ivil [r]ights [a]ct is to prevent discrimination against persons based on their membership in a certain class….” Bryant v Automatic Data Processing, Inc, 151 Mich.App 424, 430; 390 NW2d 732 (1986). Defendants have failed to show that plaintiff imposed a condition, restriction, or prohibition that limits the use of real property on the basis of religion, race, color, or national origin. MCL 37.2505.

While there is relatively little case law interpreting MCL 37.2505, it appears that the Michigan Courts, similar to the Federal Courts, will likewise uphold reasonable bylaws and rules, which are facially neutral, so long as there is no discriminatory intent behind the bylaw or rule. This would also be true for most other states that have some form of a civil rights statute or something expressly in their condominium act that prevents discrimination.

Michigan’s Proposed Religious Freedom Restoration Act

Michigan Senate Bill No. 4 (2015) is very similar to the federal RFRA, which bars the federal government from intruding on a person’s religious liberty unless it can prove a compelling interest in imposing a burden on religious freedom and demonstrate that it has done so in the least restrictive way.  Specifically, Senate Bill No. 4 reads as follows:

(1)  Except as provided in subsection (2), government shall not substantially burden a person’s exercise of religion, even if the burden results from a rule of general applicability

(2)  Government may substantially burden a person’s exercise of religion only if it demonstrates that application of the burden to that person’s exercise of religion in that particular instance is both of the following:

  • In furtherance of a compelling governmental interest.
  • The least restrictive means of furthering that compelling governmental interest.

(3)  A person whose religious exercise has been burdened in violation of this section may assert that violation as a claim or defense in any judicial or administrative proceeding and obtain appropriate relief, including equitable relief, against government.

Based upon the above language, it is important to note that it is unlikely that either the federal or any state version of the RFRA would apply to private disputes between an association and a co-owner, unless there was some form of government action involved.  While both versions of the statute define the term “government” as a person acting under “color of law”, the United States Supreme Court has held that action by a private party, pursuant to statute, does not alone qualify a person as a “state actor” or acting under the color of law and that “something more” would be required.  Lugar v Edmondson Oil Co, Inc, 457 US 922, 939  (1982).  However, the United States Supreme Court has found that the “something more” constituting state action could occur when private parties sought judicial enforcement of racially restrictive deed restrictions.   Shelley v Kraemer, 334 US 1, 13-14  (1948).  While Shelley has largely been limited to the facts of that case, it is possible that a Court could find that judicial enforcement of religious restrictions in condominium bylaws constituted “state action.”  However, this issue remains unresolved.

The two most likely scenarios in which the RFRA would be applied are 1) the Department of Housing and Urban Development enforcing the Fair Housing Act and 2) the Michigan Civil Rights Commission enforcing the Elliot Larsen Civil Rights Act.  Similar to its federal counterpart, the proposed Michigan RFRA does not define the term “person.”  However, in the recent landmark decision of Burwell v Hobby Lobby Stores, Inc, 573 US ___ (2014), the United States Supreme Court held that a closely held corporation was a “person” under the Federal RFRA and that a closely held corporation was capable of having religious beliefs that could be interfered with by the government.  As a practical matter, it may be difficult for a closely held corporation, condominium association or homeowner association to hold a religious belief.  However, in the wake of Burwell, it now appears possible that community associations, which are largely nonprofit corporations, could rely on the religious beliefs of their boards and/or members and adopt them as the beliefs of the community association.  Examples of situations where this may arise are as follows:

  1. An association amends its bylaws to prevent devil worshippers from occupying units.
  2. An association amends its bylaws to prevent a single man from living with two (2) unmarried women.
  3. An association amends its bylaws to prevent divorced people from occupying units.
  4. An association amends its bylaws to prevent unmarried couples from occupying units.
  5. An association amends its bylaws to prevent homosexual couples from occupying units.

While many people may find scenario number one acceptable, most people would find the remainder of the scenarios as offensive and/or gross violations of a person’s civil liberties, especially scenario number five, which has become a hot button issue nationwide.  However, based on Burwell, it is at least arguable that the RFRA could provide an association with a defense to a Fair Housing Act violation and force a governmental entity to demonstrate a compelling interest as to why an association should be not allowed to exercise its “religious beliefs” in enacting the bylaws in any of the above scenarios.  Given that the decision in Burwell is relatively recent, it remains to be seen whether a community association will attempt to enact bylaws that many find morally repugnant, in the name of “religious freedom” and later defend what would ordinarily be a Fair Housing Act violation based upon the federal RFRA.

At the present time, the federal RFRA would not provide a community association with a defense to a violation of a state civil rights statute, such as the Elliott Larsen Civil Rights Act.  However, if Senate Bill No. 4 (2015) is passed, or a modified version of the RFRA is enacted into law in Michigan, the Michigan version of the RFRA could arguably act as a defense against a claim brought by the Michigan Civil Rights Commission for violating the Elliot Larsen Civil Rights Act.  However, Governor Rick Snyder has indicated that he would veto the current version of Senate Bill No. 4 (2015), which other states have adopted, unless anti-discrimination measures were added to the bill.  Accordingly, the future of the RFRA in Michigan is uncertain at the present time.

Conclusion

Given that religious freedom in community associations is a rapidly evolving area of the law, community association boards should consult with legal counsel when enacting and/or enforcing bylaws or ruling that could impact the religious beliefs of co-owners.  As a general rule, courts will likely continue to uphold facially neutral bylaws and/or rules that interfere with the practice of religion in community associations, so long as is there is no discriminatory intent behind the bylaw or rule and the bylaw or rule has not been enforced in a discriminatory manner.  However, community associations should be mindful that this general rule may change depending on future court rulings that interpret either federal or state versions of the RFRA, and that issues involving religious freedom are often decided on the specific facts of each particular case.

Updated Guidance on Making Direct Loan Refunds of Cash

The U.S. Department of Education has issued guidance for institutions regarding Direct Loan refunds. Included in the guidance is a reminder that, as of January 1, 2015, the Department no longer accepts paper checks for Direct Loan refunds of cash. To make the most timely and accurate refunds, the guidance generally recommends using the G5 Web Site. The guidance also provides general information about Direct Loan funds and the process for making a Direct Loan refund.

Quick Update: Ferndale considering banning drones tonight

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This evening [April 27, 2015], the City of Ferndale is considering whether to ban drones or unmanned aerial vehicles from flying within the airspace of the city.  There are three proposed exceptions to this rule:

1.  if the drone is operated by an authorized law enforcement agency;

2.  if the drone is operated with authorization from the Federal Aviation Administration; or

3. if the drone is operated only within the boundaries of an individual’s real property.

The meeting begins at 7:00 P.M. at Ferndale City Hall, 300 E. Nine Mile Road, Ferndale, Michigan.  The language of the proposed ordinance can be located here.

(April 28, 2015 Update): Ferndale dropped its proposal to exclude drones.  An article regarding the backlash can be found here.

Third Party Servicer Data Form – Reporting Requirement

The U.S. Department of Education announced it will collect information directly from third party servicers that perform work on behalf of Title IV eligible institutions since the Department determined that “a significant number of higher education institutions failed to report, update, and/or incorrectly report[ed] third party servicer information” as required. Entities that meet the definition of a third party servicer are required to submit a Third Party Servicer Data Form.

Senate Task Force Report on Federal Regulation of Higher Education

The Senate Task Force on Federal Regulation of Higher Education recently released a report entitled “Recalibrating Regulation of Colleges and Universities” in which the Task Force stated that “oversight of higher education by the Department of Education has expanded and evolved in ways that undermine the ability of colleges and universities to serve students and accomplish their missions.” The Task Force includes a bipartisan group of U.S. senators, working with college and university presidents, focusing on three goals: (1) Summarizing the increasing burden of federal regulation on higher education; (2) Identifying regulations of particular concern to institutions of higher education, explaining why they are problematic, and recommending changes to ameliorate them; and (3) Offering longer-term process improvements that would minimize similar concerns about regulations in the future.

Title IX: Resolution Agreement between Princeton University and the Department of Education’s Office for Civil Rights

The U.S. Department of Education’s Office for Civil Rights (OCR) announced that it has entered into a resolution agreement with Princeton University to ensure compliance with Title IX. The action follows an OCR investigation that found that Princeton was in violation of Title IX for failing to promptly and equitably respond to complaints of sexual misconduct, for failing to end a sexually hostile environment for one student, and for instituting policies and procedures regarding investigations of and responses to allegations of sexual misconduct that did not comply with Title IX.