HOA Board Members May Be Held Personally Liable For Their Actions On Behalf of the HOA

On April 23, 2021, Judge Dale Durrer of the Greene County Circuit Court confirmed his decision from October 3, 2019 finding that Mr. Gary Lowe and Mr. Matthew Brown, as directors of the Dogwood Valley Citizens Association (“HOA”), violated several Virginia penal statutes and inferentially possessed an intent to defraud the other homeowners of the HOA. Dogwood Valley Citizen’s Ass’n v. Miller, 2021 Va. Cir. LEXIS 95 at *6-*8 (Greene County Cir. Ct. Apr. 23, 2021); see also Dogwood Valley Citizen’s Ass’n v. Miller, 103 Va. Cir. 194 (Greene County Cir. Ct. Oct. 3, 2019).

In confirming his earlier decision, the Court recognized that the HOA was incorporated as a Virginia non-stock corporation and granted a Certificate of Incorporation by the Virginia State Corporation Commission on or about November 9, 1978. Dogwood, 103 Va. Cir. at 195. As a non-stock corporation, the HOA was controlled by its corporate bylaws and was a legal entity separate and distinct from the members who might compose it. Id. at 202.

According to the Court, the Board of Directors owed the same fiduciary obligations to the HOA that any corporate board of directors would owe to its company. Id. There is an expectation under Virginia law that officers and directors, as corporate fiduciaries, exercise the utmost good-faith and loyalty in their dealings with, and on behalf of, the corporation. Id. When a court examines a board’s actions, “[a] corporate entity should not be disregarded unless the corporation is the alter ego, alias, stooge, or dummy of the individuals sought to be held personally accountable and that the corporation is a device or sham used to disguise wrongs, obscure fraud, or conceal crime.” “[P]iercing the corporate veil is an extraordinary act to be taken only when necessary to promote justice.” Id. at 202-203. Although there is no “single fact or set of facts necessary to pierce the corporate veil,” the Court recognized that “[d]isregarding the corporate entity is usually warranted if a director has controlled or used the corporation to commit an injustice, or to gain unfair advantage.” Id. at 203.

In this case, the HOA’s Articles of Incorporation specified that the HOA’s unitary mission was to provide for the maintenance of the roads and common facilities of the Dogwood Valley Subdivision. Id. at 195. The HOA’s Articles of Incorporation and Bylaws “constitute[d] the contract and solemn obligation between the corporation and its members,” defined the duties of the Board of Directors, and outlined the HOA’s class of membership, annual meetings, and notice requirements. Id. at 195, 203. Nowhere in the HOA’s Articles of Incorporation or Bylaws were the Board of Directors authorized to retain paid legal counsel or pay legal fees. Id. at 195.

This suit arose from alleged failures by Lowe and Brown to abide by the Articles of Incorporation and Bylaws of the HOA. As found by the Court:
A. Dogwood Valley had approximately 320 lots;
B. There were approximately 200 lot owners in Dogwood Valley;
C. Each lot owner was a member of Dogwood Valley Community Association (DVCA) and entitled to one (1) vote for each lot owned;
D. Written notice of a meeting was required to be given to all members by mail or in person;
E. The required quorum for any action was 10% of the votes of the membership;
F. 32 votes were required to be present;
G. Since 2010, only two (2) persons that voted for Lowe and Brown were present themselves, even though each lot owner is entitled to vote;
H. Only Lowe and Brown attended the June 25, 2016 meeting;
I. An annual meeting and an election with only two (2) members of DVCA present was not a valid election;
J. A change in the required number of Board members could, according to the Bylaws only occur through amendment of the Bylaws;
K. The only known version of the Bylaws prescribed that five (5) directors would manage the Association;
L. Five (5) managers were not managing the Association;
M. Since 2010, only Gary Lowe and Matthew Brown had served on the Board of Directors of DVCA
N. There are no provisions in the Articles of Incorporation or Bylaws authorizing payment of legal fees or indemnification of a director’s attorney’s fees;
O. The Board had paid attorney’s fees without any authorization, directly or indirectly, in its governing documents; and,
P. DVCA was not maintaining the roadways.

* * *

A. Lowe and Brown had not kept complete corporate records of DVCA;
B. Lowe and Brown failed to hold annual meetings, and, when held, the meetings only attendees who cast votes were Brown and Lowe;
C. Lowe and Brown failed to keep copies of records mandated by 13.1-932(E);
D. Lowe and Brown failed to have the roads and common areas of the sub-division maintained or repaired;
E. Brown, as secretary, failed to serve notice of the annual meetings of the Board and its members;
F. The approximately 200 lot owners had not been permitted to vote or participate in DVCA business;
G. From 2006-present, none of the elections of board members were conducted congruent with the 1997 by-laws; and,
H. Lowe and Brown failed to send notices out concerning the annual meetings.
I. Only Lowe and Brown attended the June 25, 2016 meeting;

Id. at 196, 204.

Further, as found by the Court, Lowe and Brown were consistently the only two members of the HOA notified of and present at the HOA’s annual meetings. See Id. Despite not having a quorum, Lowe and Brown held unauthorized elections of the HOA’s Board of Directors and were the only individuals to vote in such elections. See Id. When other lot owners asked about how to join the HOA’s Board of Directors, Lowe stated that it would cost $5,000.00 to join the HOA’s Board. Lowe and Brown also told others that they were the only persons who could allow residents to serve on the Board of Directors. Id. at 198. In fact, at least one lot owner believed that Lowe and Brown were synonymous with the HOA. Id. at 197. Eventually, Lowe announced that $300,000 could purchase the entire HOA from Lowe and Brown. Id. at 197-198.

In addition to misleading members of the HOA, Lowe and Brown failed in their duties as directors. Multiple lot owners testified that the roadways were not maintained by the HOA, despite having paid their annual dues, and that they had to pool together personal funds to repair and maintain the roads. Id. at 197-198.

Despite their personal failures, Lowe and Brown, on behalf of the HOA, retained legal counsel to file and pursue approximately 20 lawsuits in the Greene County Circuit Court between 2004 and 2019, including 17 such lawsuits between 2016 and 2019. Id. at 203. These lawsuits were not sanctioned by the Articles of Incorporation or the Bylaws, and Lowe and Brown comingled personal funds with HOA funds in order to pay counsel retained to litigate these unauthorized lawsuits. Id.

In conclusion, the Court found that “Brown and Lowe disregarded any sense or corporate formality” by “electing themselves to board positions inconsistent with the bylaws;” failed to maintain the “records of the non-stock corporation consistent with Virginia law . . . [such as by failing to maintain] any indicia of accounting, including, without limitation, income and expense statements;” paid unnecessary and unauthorized legal fees; and failed to maintain the roads and common facilities that the HOA was tasked with maintaining. Id. at 203-205.

Because of Lowe and Brown’s failure and violations, the Court ordered that Lowe and Brown must “account for and disgorge all monies and property usurped, misapplied and wasted within six (6) months” and must pay “restitution and refunds of funds received that were wasted, usurped, lost or misapplied.” Id. at 205-206.

Following the October 3, 2019 decision, the HOA filed a Motion for Reconsideration, which was heard and denied in April 2021. In denying the Motion for Reconsideration, the Court confirmed and found that: (1) “witnesses specifically asked Brown and Lowe to describe the process for serving on the DVCA board. Brown and Lowe attempted to sell DVCA board memberships for $5,000 and the DVCA for $300,000;” (2) such attempted sales rose to the level of a violation of several criminal statutes; (3) “Brown and Lowe prominently represented the alter egos of DVSA; (4) “Brown and Lowe comingled personal funds with DVCA funds, including, without limitation, the payment of attorney’s fees from Brown’s personal checking account;” (5) “absolute control of DVA by Lowe and Brown [was] uncontested;” (6) “Brown and Lowe also disregarded the observance of any corporate formalities;” (7) “both Brown and Lowe inferentially possessed an intent to defraud the other homeowners of DVCA;” and, (8) “Defendant’s evidence demonstrate[d] that there [was] probable cause to believe that Brown and Lowe violated several Virginia penal statutes, including, without limitation” obtaining money by false pretenses, solicitation/attempt to commit embezzlement, and money laundering. Dogwood Valley Citizen’s Ass’n v. Miller, 2021 Va. Cir. LEXIS 95 at *2-*8.

Courts in Virginia always are hesitant to pierce the corporate veil and hold directors personally liable for the debts and obligations of a corporate entity. As stated by the Supreme Court of Virginia, “piercing the corporate veil is justified when the ‘unity of interest and ownership is such that the separate personalities of the corporation and the individual no longer exist,’ and the shareholder ‘controlled or used the corporation to evade a personal obligation, to perpetuate fraud or a crime, to commit an injustice, or to gain an unfair advantage.’” Id. at *5 (quoting O’Hazza v. Exec. Credit Corp., 246 Va. 111, 115-118, 431 S.E.2d 318, 9 Va. Law Rep. 1471 (1993)). However, it is hard to argue against the Greene County Circuit Court’s decisions in Dogwood. Lowe and Brown were found to have committed many significant violations during their time on the HOA Board of Directors such that it seems appropriate for the Court to hold them personally liable for their actions. Retaining knowledgeable counsel can help avoid such drastic and devastating outcomes and ensure that the lines crossed by Lowe and Brown are avoided.

For more information about this and other similar cases, please contact Larry Dickenson, Esq. or Daniel Laws, Esq. of MMR.