Title: Lake Monticello Owners' Assoc. v. Lake

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Carrico, C.J., Compton, Stephenson, Lacy, Hassell, 
Koontz, JJ., and Whiting, Senior Justice 
 
LAKE MONTICELLO OWNERS' ASSOCIATION 
                                             OPINION BY 
v.   Record No. 950256 
SENIOR JUSTICE HENRY H. WHITING 
                                            November 3, 1995 
JARED L. LAKE 
 
 
FROM THE CIRCUIT COURT OF FLUVANNA COUNTY 
 
F. Ward Harkrader, Jr., Judge 
 
 
This appeal involves the validity, construction, and 
application of bylaw provisions of a nonstock corporation that is 
subject to the Property Owners' Association Act. 
 
Lake Monticello, a large residential community in Fluvanna 
County, is an essentially self-controlled community with its own 
private utilities, roads, security force, and common amenities, 
including a lake, golf course, swimming pool, and tennis courts. 
 Access to the community is controlled by private security 
officers at the main gate and by magnetic cards at other gates. 
 
Control of these facilities is vested in Lake Monticello 
Owners' Association (LMOA), a nonstock corporation that is 
subject to the provisions of the Property Owners' Association 
Act, Code §§ 55-508 to -516.2.  By its very terms, this Act has 
restricted and limited application. 
 
The Act does not apply  
 
to the (i) provisions of documents of, (ii) operations 
of any association governing, or (iii) relationship of 
a member to any association governing condominiums 
created pursuant to the Condominium Act ([Code] § 55-
79.39 et seq.), cooperatives created pursuant to the 
Virginia Real Estate Cooperative Act ([Code] § 55-424 
et seq.), time-shares created pursuant to the Virginia 
Real Estate Time-Share Act ([Code] § 55-360 et seq.), 
or membership campgrounds created pursuant to the 
Virginia Membership Camping Act ([Code] § 59.1-311 et 
seq.). 
 
 
 
 
 
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Code § 55-508(B).  Additionally, this Act does not apply "to any 
nonstock, nonprofit, taxable corporation with nonmandatory 
membership which, as its primary function, makes available golf, 
ski, and other recreational facilities both to its members and 
the general public."  Id.
 
LMOA's corporate purpose is set out in the various documents 
that create and regulate LMOA and the community it controls.  The 
declaration provides that LMOA "shall operate and maintain the 
club, lake, roads, parks, and other recreational facilities."  
The declaration also subjects each lot owner, as a member of 
LMOA, to LMOA's "Articles [of Incorporation] and By-laws, 
including the payment of such charges and levys as may properly 
be made by the Association." 
 
The articles of incorporation charge LMOA with 
responsibility for the "common welfare and safety of the 
residents of Lake Monticello."  The bylaws charge LMOA to 
"provide for the necessary operation, administration, and 
government of Lake Monticello . . . and . . . to provide 
machinery for the interpretation, application, administration and 
enforcement of certain restrictions and covenants affecting all 
lots."  LMOA's published "policy manual" contains its rules, 
regulations, and policies and states that "LMOA Rules and 
Regulations are defined in LMOA Documents (Covenants and 
Restrictions, Articles of Incorporation, By-Laws, Policies, Rules 
and Regulations). "Pursuant to LMOA's articles of incorporation 
 
 
 
 
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and bylaws, each lot owner is a member of LMOA with voting rights 
in the election and removal of directors and in the amendment, 
alteration, or repeal of its bylaws.   
 
Additionally, the Property Owners' Association Act vests in 
a majority of LMOA members, as members of a property owners' 
association, the right to "repeal or amend any rule or regulation 
adopted by the board of directors" if such rule or regulation has 
been adopted by the board "with respect to use of the common 
areas [or] such other areas of responsibility assigned to the 
association by the declaration."  Code § 55-513(A).
1  There is no 
similar statutory right given to shareholders, under the Virginia 
Stock Corporation Act, Code §§ 13.1-601 to -800, or to members, 
under the Virginia Nonstock Corporation Act, Code §§ 13.1-801 to 
-980.  See Code §§ 13.1-624, -662, -823, and -846. 
 
Jared L. Lake and some other members in LMOA were 
dissatisfied with a number of the bylaws, rules, regulations, and 
policies adopted by LMOA's board of directors and contained in 
LMOA's policy manual.  Section 4.08 of the bylaws gives LMOA 
                     
     
1Code § 55-513(A) provides in pertinent part: 
 
 
 
 
The board of directors of the association shall 
have the power to establish, adopt, and enforce rules 
and regulations with respect to use of the common areas 
and with respect to such other areas of responsibility 
assigned to the association by the declaration . . . . 
 A majority of votes cast, in person or by proxy, at a 
meeting convened in accordance with the provisions of 
the association's bylaws and called for that purpose, 
shall repeal or amend any rule or regulation adopted by 
the board of directors. 
 
 
 
 
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members the right to make proposals "appropriate for member 
action" for inclusion in the proxy statement and notice for an 
annual meeting.  Acting pursuant to this bylaw provision, Lake 
and those other property owners filed a number of proposals to 
amend certain of LMOA's bylaws, rules, regulations, and policies 
at the next annual meeting of LMOA members. 
 
A summary of the proposed amendments pertinent to this 
appeal follows: 
 
 
1.  Repeal of a requirement that a lot owner's 
invitee obtain a guest card or pass before entering the 
subdivision, even though they possess one of the lot 
owner's magnetic cards. 
 
 
2.  Imposition of a limitation on the boards' 
discretion in fixing annual green fees by exempting 
property owners who do not play golf from payment of 
such fees, and by specifying the minimum green fees to 
be fixed by the board. 
 
 
3.  Repeal of a provision for LMOA's compliance 
committee's assessment of "penalties, including the 
assessing of charges and similar sanctions," by 
transferring that function to the courts. 
 
 
4.  Repeal of a provision authorizing the 
appointment of members of LMOA's security force as 
special policemen under the provisions of Code § 15.1-
144. 
 
 
 
 
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5.  Amendment of provisions restricting access by 
prospective purchasers of properties in Lake Monticello 
by providing for a two-hour pass to be issued by the 
guards at the main gate. 
 
Bylaw § 4.08(c)(1) and (6), respectively, provide that a 
member proposal "may be disqualified" from inclusion in LMOA's 
proxy statement and notice of meeting if "it is not a proper 
subject for action by members" or if "it deals with a matter 
relating to the ordinary business operations of the Association." 
 Relying on these bylaw provisions and on other bylaw provisions 
which LMOA has since waived, the board ruled that the proposals 
"d[id] not qualify for inclusion on the LMOA proxy/ballot" and 
refused to include them in the proxy. 
 
Lake filed this action as a motion for declaratory judgment 
seeking a construction of the provisions of Code § 55-513 and 
§ 4.08 of the bylaws and a declaration that the proposals were 
proper for inclusion in LMOA's proxy statement.
2  Following an 
ore tenus hearing, the trial court invalidated the provisions of 
§ 4.08(c)(1) and (6) because they were "overly broad, arbitrary 
and in violation of [Code] § 55-513."  Thereafter, the court 
ruled that the association members were entitled to have these 
proposed amendments included in the proxy statement for 
                     
     
2LMOA stipulated that Lake was a proper party to bring the 
action. 
 
 
 
 
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appropriate action at the next LMOA members' meeting.  We granted 
LMOA an appeal.
3
 
LMOA contends that the trial court erred in invalidating 
§ 4.08(c)(1) and (6) of the bylaws.  Specifically LMOA argues 
that those provision are not inconsistent with Code § 55-513.  We 
agree. 
 
A settled rule of statutory construction is that "[i]f 
apparently conflicting statutes can be harmonized and effect 
given to both of them, they will be so construed."  Albemarle 
County v. Marshall, 215 Va. 756, 761, 214 S.E.2d 146, 150 (1975); 
Blue v. Virginia State Bar, 222 Va. 357, 359, 282 S.E.2d 6, 8 
(1981).  We think that this rule is equally applicable when there 
could be a conflict between a statute and corporate bylaws, and 
the bylaws may be construed to avoid that conflict.  Thus, in the 
context of this case, we construe the imprecise bylaw phrases 
"proper subject for action by members" and "relating to the 
ordinary business operations of the Association" to limit the 
board's disqualification right to those proposals which relate to 
matters within the exclusive control of the board. 
 
Accordingly, we conclude that the trial court erred in 
holding that Code § 55-513 invalidated § 4.08(c)(1) and (6) of 
LMOA's bylaws.  Since we find that these subsections are valid, 
                     
     
3Lake filed no reply brief and thus did not make an oral 
argument.  Rule 5:33. 
 
 
 
 
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we must now decide whether the proposals were properly 
disqualified by the board. 
 
LMOA contends that we need not inquire into the correctness 
of LMOA's decision since Lake failed to introduce any evidence 
showing that LMOA's board of directors acted in bad faith in 
making its decision.  This, according to LMOA, is a prerequisite 
for judicial review of LMOA's construction of its rule because a 
corporate board's decision is subject to a presumption of 
correctness under the "business judgment rule." 
 
Under this rule, a corporate director ordinarily has no 
individual liability for business decisions made "in accordance 
with his good faith judgment of the best interests of the 
corporation."  Code § 13.1-870(A); see Izadpanah v. The Boeing 
Joint Venture, 243 Va. 81, 83, 412 S.E.2d 708, 709 (1992) 
(transfer of corporate assets); Giannotti v. Hamway, 239 Va. 14, 
24, 387 S.E.2d 725, 731 (1990) (payment of compensation to 
corporate officers and directors).  And in an action to review 
the directors' business decision, the decision itself is also 
entitled to the same presumption.  Gottlieb v. Economy Stores, 
199 Va. 848, 857, 102 S.E.2d 345, 352 (1958) (expulsion of member 
of nonstock grocers' cooperative marketing corporation for 
misleading advertising reflecting upon integrity of corporation); 
Penn v. Pemberton & Penn, 189 Va. 649, 661, 53 S.E.2d 823, 829 
(1949) (continuance of corporate existence). 
 
As the name implies, a necessary predicate for the 
 
 
 
 
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application of the business judgment rule is that the directors' 
decision be that of a business judgment and not a decision, such 
as that in this case, which construes and applies a statute and a 
corporate bylaw.  In the latter instance, a trial court reviews 
the decision just as it would review a similar decision by any 
other party.  See Gottlieb, 199 Va. at 857-58, 102 S.E.2d at 352-
53 (even under business judgment rule, action of corporation must 
be in accordance with law and corporate powers); cf. Bank of 
Giles County v. Mason, 199 Va. 176, 181-82, 98 S.E.2d 905, 908 
(1957) (court determines whether shareholder's exercise of 
common-law right to inspect corporate documents is made in good 
faith after corporation rejects request). 
 
Therefore, we reject LMOA's contention that the presumption 
set forth in the business judgment rule should be applied when 
deciding whether LMOA properly construed its bylaws in 
disqualifying the proposals.  This brings us to a consideration 
of the correctness of LMOA's construction of § 4.08(c)(1) and (6) 
in disqualifying these proposals.  In deciding this issue, we are 
not concerned with the advisability or wisdom of the proposals, 
but only with whether Code § 55-315 and § 4.08 of the bylaws give 
Lake the right to submit these proposals to a vote of his fellow 
members of LMOA. 
 
LMOA asserts a number of contentions in support of its 
argument that its board correctly rejected these proposals.  For 
the reasons which follow, we find no merit in any of these 
 
 
 
 
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contentions. 
 
First, LMOA asserts that the members' right to amend LMOA's 
bylaws is "confined to matters such as conduct of meetings, 
elections of directors and officers, duties of officers and 
committees and other matters of internal concern" and does not 
include "any mundane detail relating to the day-to-day activities 
of the Association" or "the making of corporate policy and 
management decisions (such as, whether the security guards are 
deputized or setting green fees for the golf course.)"  In this 
case, however, we are not dealing with bylaw amendments of an 
ordinary corporation; rather, we are faced with specific 
statutory rights allowing LMOA members to amend or repeal LMOA's 
rules and regulations "with respect to use of the common areas 
and with respect to such other areas of responsibility assigned 
to the association by the declaration."  Code § 55-513(A). 
 
With the exception of the third proposal herein that seeks 
to amend § 10.03 of the bylaws, the remaining proposals all seek 
to amend rules and regulations of LMOA.  These rules and 
regulations either restrict the future conduct of members and 
their invitees in the exercise of their rights in the community 
(guest cards or passes, green fees, and display of their homes 
for future sale) or subject their conduct to the control of 
LMOA's employees or agents (appointment of LMOA's security 
officers as special policemen).  As such, the proposals either 
deal with the members' use of parts of the common area or LMOA's 
 
 
 
 
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responsibilities in enforcing the declaration-imposed obligations 
upon each member to comply with LMOA's articles and bylaw 
provisions or suffer the penalties imposed by LMOA.
4  
Accordingly, we think that Code § 55-513 authorizes members to 
suggest these proposals. 
 
LMOA next argues that some of the proposals seek to amend 
its statements of policy, not its rules and regulations.  
However, if a policy of a governing body is binding upon the 
future conduct of its members, it is treated as a rule or 
regulation.  See Columbia Broadcasting System, Inc. v. United 
States, 316 U.S. 407, 422 (1942) (order promulgating policy 
announcement, accompanied by statement that administrative agency 
would "follow" order is regulation within meaning of federal 
statute); cf. Pacific Gas & Electric Co. v. Federal Power Comm'n, 
506 F.2d 33, 38 (D.C. Cir. 1974) ("A general statement of policy 
. . . does not establish a 'binding norm.' . . . A policy 
                     
     
4To the extent that LMOA's duly adopted rules and 
regulations expressly so provide, Code § 55-513(B) gives LMOA's 
board of directors the right to assess charges against members 
for violation of LMOA's rules and regulations.  Since the part of 
LMOA's policy manual that is in the record contains a schedule of 
charges and penalties for violations of LMOA's rules and 
regulations, we assume that LMOA's rules and regulations provide 
for imposition of such charges and penalties.  
 
 
 
 
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statement announces the agency's tentative intentions for the 
future").  Because these alleged policies bind the future conduct 
of LMOA's members and provide penalties for their violation, we 
conclude that each proposal at issue here seeks to amend a rule 
or regulation within the meaning of Code § 55-513. 
 
Nevertheless, citing Kaplan v. Block, 183 Va. 327, 332, 31 
S.E.2d 893, 895 (1944), LMOA contends that such proposals cannot 
divest the board of its duty of management and control by 
creating a "sterilized board of directors."  Importantly, Kaplan 
is inapposite because it involved a stock corporation, not a 
nonstock corporation that is subject to the Property Owners' 
Association Act.  Moreover, in contrast to Kaplan, the present 
proposals do not create a "sterilized board" in which every 
action of the board has to be approved by the members.  Id. at 
335, 31 S.E.2d at 896. 
 
Given the language of Code § 55-513 and the fact that LMOA 
members must submit to these rules, regulations, and binding 
policies as long as they own homes in Lake Monticello, we think 
the proposals, if enacted by majority vote, would merely impose 
limitations upon the board's powers authorized by this code 
section.  Accordingly, we conclude that the board of directors 
erred in excluding these proposals from the proxy statement.  
Although we will reverse that part of the trial court's judgment 
finding bylaw § 4.08(c)(1) and (6) invalid, we will enter a 
declaratory judgment in favor of Lake consistent with this 
 
 
 
 
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opinion. 
                                              Affirmed in part,
                                              reversed in part,
 
and final judgment.