Disgruntled unit owners love to review their association documents and then demand every document that they think they might be entitled to. In this case, the court made clear that reasonableness and discretion will play some part in what must be provided.
In December of 2014 the Plaintiff sought to inspect the Associations records, including the:
- December 2012 and 2013-2014 bank statements;
- General ledger from 2013-2014;
- Specific 2013 and 2014 invoices;
- Official communications between the Association board members and the New Mexico Office of the State Engineer (OSE);
- 2012 and 2014 end of fiscal year and year-end balance sheets;
- 2012 and 2014 profit and loss reports;
- December 2014 accounts receivable aging report; and
- December 2014 open invoices report.
The Association was incorporated in 1973 in New Mexico. Plaintiff wanted to inspect the records because she was concerned over the increase in unpaid dues owed the Association and the Board’s financial reporting.
The Board produced most of the records, but “did not produce for inspection the bank statements, the general ledger, invoices, the accounts receivable aging reports, an open invoice report, and communications between board members and the OSE.”
Plaintiff brought suit for breach of contract (breach of the bylaws) for refusing to allow her to inspect the withheld records. “Plaintiff alleged the Association breached the bylaws by: (1) failing to provide for the inspection of books and records as required by Article IX, which grants members the right to inspect ‘[t]he books, records, and papers of the Association’, (2) failing to ‘[c]ause an audit of the Association[’]s books every three years or sooner at the [B]oard’s discretion’ as required by Article VI, Section 2(g); and (3) failing to ‘cause and prepare a review of the Association books to be made at the completion of each fiscal year or at the completion of his/her term’ as required of the Treasurer by Article VII, Section 8.”
Plaintiff asked the court to order the Board to allow inspection of “the records under the HOAA (Homeowners Association Act) and also specific performance under the contract requiring the Board to allow inspection of the Association’s books, records, and papers and to conduct the required audits and reviews.”
The trial court found that all of the Association information that needed to be produced for inspection has been made reasonably available either for inspection or through the Association’s website, and therefore the Board had not breached any obligation to the Plaintiff. Of particular relevance were these findings by the District Court:
- The Association can redact “personal adverse financial information” from records it produces for inspection; and
- The terms “audit” and “review” are interchangeable when interpreting the bylaws, and that the Association had not breached its duties under the Bylaws of performing an annual review and an audit every 3 years.
The Appeals Court affirmed the decision of the District Court finding:
- The District Court properly interpreted the Bylaws.
- The Bylaws are a contract and the primary objective in contract interpretation is to “ascertain the intention of the parties;”
- The Board’s interpretation of the phrase “book, records and papers” as being limited to how the phrase “financial records” is defined in the HOAA (Homeowners Association Act) “is consistent with the bylaws as a whole, which grant the Board the power to interpret…;”
- The conclusion of the Board to “withhold disclosure of personal adverse financial information … is consistent with the language [in the bylaws] granting broad policy-making powers to the Board…;” and
- The fact that the Board did more than was required by performing an audit every year (as opposed to every three years) was not a breach of the Bylaws as “the Board is free to exceed the duties set out in the bylaws.”
- A board needs to comply with the requirements of the association or risk suit, which will be expensive for the association, win or lose.
- Owners should not get too caught up in what they perceive as the duty of their board or association to produce for inspection EVERTYHING, as a court will likely not view the association document in the same way, allowing various protected information under other laws to be excluded (think about HIPPA and Fair Debt Collection Practices Act), especially since Federal law likely preempts (is superior to) State law.
- The word “audit” has a particular meaning for accountants, but may not for associations. Presumably the goal is to make sure the funds of the association are accounted for and properly spent, this may be accomplished by means that may not be an “audit” within the accounting world, but might be an “audit” as that term is used by others.
- To avoid the risk and costs of a suit because of the words “audit” or “review” or “books and records” consider amending your documents to clearly define what the association’s duties are.
Star v. Sierra Los Pinos Property Owners Association, 2019 WL 3766506, New Mexico, not reported in Pacific Reporter