The board of directors of a nonprofit homeowners’ association may not bar a fellow director from attending executive sessions of the board because she violated confidentiality requests.  An appellate court in Arizona has reversed a trial court decision denying the excluded director’s application for a preliminary injunction to overturn the ban.  (McNally v. Sun Lakes Homeowners Association, Ct. of App., AZ, No. 1 CA-CV-15-0744, 10/13/16.)

Collete McNally, a member of the association’s board who was duly elected by members of the association, received an email in August 2013 from a former employee of the association alleging misconduct by the general manager and human relations manager.  She forwarded it to the association president, who had also received a similar email.

Arizona law governing homeowners’ associations requires the board to meet in open session at which members of the association may be present, except for executive sessions on certain sensitive issues such as legal advice, personal, health or financial information about members, job evaluations, or compensation. 

The board met in two special executive sessions to discuss the employee’s information.  The president advised the board that he had discussed the email with counsel and that counsel had recommended taking no further action and avoiding publication of the email outside the board.  The board decided to take no further action.   At the open meeting of the board following the second executive session, McNally began reading the email to the members.  The president asked her to stop, but when she refused, he abruptly adjourned the meeting.

A week later, the association’s attorney sent her a letter saying that her conduct violated her duties of confidentiality and loyalty to the association.  The board subsequently approved a motion banning her from all executive sessions until the end of her term.  She sued for re-admission.  The trial court denied the preliminary injunction and she appealed.  (Although her term ended in February 2014, the case was not moot because she was re-elected for an additional term until February 2017.)

The trial court “abused its discretion in denying McNally’s application for a preliminary injunction,” the Court of Appeal wrote.  “Neither Arizona law nor the Association’s bylaws authorized the Board to pass a motion excluding McNally from all executive sessions.  To the contrary, by passing the motion, the Board prevented McNally from performing her duties and responsibilities as a director.”

The Court said that Arizona law requires a director to participate in the affairs of the association and that participating in executive sessions was “critical” to her participation.  During her term, the board “frequently” held executive sessions to consider budget, members’ code of conduct, remodeling projects, staff changes, and hiring a general manager, the Court said, but McNally was “not allowed to participate in any of these decisions.”

The Court noted that the statute requires that notice of all board meetings be sent to all, not just some, of the board members.  The statute contemplates that an association will have the benefit of the judgment, counsel and influence of all of the directors, it said, and a special meeting held without notice to all of them is illegal, except in extraordinary circumstances.

The association argued that it had merely established a “special committee” of the board to discuss privileged matters in executive session.  The Court said that there was no evidence the board had actually established a special committee, but that even if it had, “it could not have done so for the sole purpose of excluding McNally from its executive sessions.”

The association also argued that her refusal to keep information confidential was the “only practical option available” and was a reasonable exercise of discretionary power.  But the Court said it could have sought her judicial removal from the board by filing an action to do so, or could have sought an injunction prohibiting her from disclosing information discussed in executive session.  Because she was a duly-elected director, it said, the board did not have the discretionary power to exclude her from executive sessions through “an unlawful self-help remedy.”

The board argued that she was not entitled to an injunction because she had “unclean hands” as the result of reading the emails in open session “in knowing and willful disregard of the advice of the Association’s counsel, contrary to the consensus of her fellow Board members, and to serve her own personal interests.”  The Court said that even if she had unclean hands, it would not be justification to deny the injunction because the board “did not have lawful authority” to bar her from the sessions. 

YOU NEED TO KNOW

The issue of confidentiality of board discussions is often not as clear as many people think it is, especially when directors are elected or appointed to represent certain constituencies.  While there are certain issues, like personal matters or statutorily protected information, that clearly should not be disclosed outside the board, does a confidentiality rule prohibit a director appointed by the archbishop tp represent the interests of the diocese from telling the archbishop about what happened at the meeting?  Are elected directors unable to communicate with their constituents about the policy decisions reached by the board?  Is a majority of the board effectively able to tell a director how that director should fulfill the director’s fiduciary duty to the organization?

The Court in this case suggests several ways a board can deal with breach of confidentiality that involve independent judicial judgment on the controversy.  We recommend a bylaw provision, especially in board-only corporations, allowing a majority of the whole board to remove a director, with or without cause.   It would force a serious consideration of the issue, and probably a public explanation, in a situation such as this.  (See Ready Reference Page: “Bylaws Function as ‘Constitution’ of Nonprofit Corporations”)  

The bylaws of the association in this case provided that elected directors could be removed only by the members and not by the board alone.  It goes back to my favorite question, “whose organization is it?”