Litigation

District Judge Amos L. Mazzant of the Eastern District of Texas issued a preliminary injunction ordering that the entire Corporate Transparency Act (CTA) is enjoined nationwide and that the US government in enjoined from enforcing the BOI Reporting Rule (the final rule implementing the CTA and providing definitions and guidance for the statute) and the Jan. 1, 2025, compliance deadline. Judge Mazzant decided yesterday to reject the government’s motion to reverse himself. It’s difficult to cause a Judge to reverse himself, so the government moved the Fifth Circuit Court of Appeals to take emergency action and reverse Judge Mazzant.

The government’s motion to the Fifth Circuit is pending with a briefing schedule that could result in a decision around Christmas. The government asked the Court to render a decision by December 27th, but it’ll be up to the Court. The government asked for a complete reversal on the nationwide injunction by Judge Mazzant, or at least an order limiting the injunction to the parties involved in that case, or just the members of the organization involved in the case.

If the injunction is lifted by the Fifth Circuit, organizations will have to go back to complying with the CTA and its looming January 1, 2025 deadline. FinCEN has not indicated whether it will extend the deadline if the injunction is lifted.

We will keep you posted of developments. For now, although the nationwide preliminary injunction relieves the immediate obligation – i.e., right now – to file beneficial ownership reports with FinCEN, it would be prudent for non-exempt reporting entities that haven’t yet filed to continue to prepare for their report filing by continuing to gather all information and documents that the CTA requires. If it turns out that compliance is not required, then they don’t have to submit their report to FinCEN, but if they do and FinCEN does not give a reasonable time thereafter for compliance, then reporting companies don’t have to scramble at the last minute to comply before the hefty $591 a day fines kick in.

Here Judge Mazzant’s decision refusing to reverse himself and the government’s motion to the Fifth Circuit.

A recent New York Supreme Court case, Elias v. 36 E. 69 Corp., has underscored the importance of understanding and adhering to lease terms and co-op bylaws in disputes over unpaid maintenance fees. The case centered on a cooperative’s attempt to terminate a resident’s lease and shares due to nonpayment of maintenance fees.

Key Takeaways for Property Managers and Boards

1. Strict Adherence to Lease and Bylaw Terms: The court’s decision emphasizes the necessity of adhering meticulously to the procedures outlined in both the proprietary lease and the cooperative’s bylaws when addressing defaults in maintenance payments. Failure to comply with these procedures, even by a seemingly small margin, can invalidate a termination notice.
2. Limited Grounds for Challenging Termination: The case highlights the limited grounds available for challenging a co-op’s decision to terminate a lease for nonpayment. As long as the co-op follows the prescribed procedures and acts in a non-discriminatory manner, its discretion in enforcing the lease terms is largely upheld.
3. Covenant of Good Faith and Fair Dealing: The implied covenant of good faith and fair dealing exists in contractual relationships, but it does not override the express terms of a lease or bylaws. A co-op’s adherence to the lease provisions generally satisfies the covenant, even if the outcome is unfavorable for the shareholder.
4. Board Discretion in Share Transfers: Co-op boards generally have broad discretion in approving or denying share transfers, as long as their decisions are not discriminatory. This discretion extends to situations where a shareholder in default seeks to sell their shares to avoid termination.

Property managers and boards should regularly review their proprietary leases and bylaws to ensure they are up-to-date and clearly outline the procedures for addressing defaults and terminations. They also should  maintain detailed records of all communications and actions related to defaults, including notices, payment demands, and any discussions with shareholders. Using experienced counsel to make sure that lease provisions and termination procedures are applied properly is critical for a smooth collection process and provides a defense to shareholders who claim that the cooperative acted improperly.

Read the decision.

Community association governing documents offer a framework for board actions, but it’s imperative for boards to carefully follow them to ensure protection and validity of their decisions. Decisions and actions must be supported by the provisions in these documents and other applicable laws.

Key Points and Case Example

• Governing Documents as a Guide: These documents define the board’s authority and outline procedures. Adhering to them minimizes the risk of legal challenges to board actions.
• Interpretation Matters: Provisions may sometimes need careful interpretation. Boards might need to consider past experience and other laws to ensure their understanding aligns with the intent of the documents.
• Staying Within Authority: Boards cannot exceed the powers granted to them. Actions outside the scope of authority leave them vulnerable to disputes, even if well-intentioned.
• Case Example (Zollo v. Adirondack Lodges Homeowners Assn., Inc.): The community’s governing documents (declaration) mandated the Association to maintain a harbor. The court found the Board was justified in using regular maintenance assessments to fund the harbor’s substantial repair, as it fell under their responsibility to maintain the property.

The Court’s Decision

The Zollo case highlights that courts uphold board decisions when they’re anchored in the association’s governing documents. Here, the Board’s actions were supported by the explicit language in the documents outlining maintenance responsibilities. The court refused to overrule a legitimate decision rooted in the Board’s granted authority.

Important Takeaways for Boards

1. Know Your Documents: Meticulously understand the provisions of your community association’s governing documents.
2. Document Support: Ensure every decision has a clear basis in the governing documents to defend potential challenges.
3. Seek Advice: When in doubt about proper interpretation or the extent of authority, consult legal professionals for guidance.