Desert Mountain Club Inc. v. Eric Graham, et al., No. 1 CA-CV 17-0100 (April 12, 2018)

The Arizona Court of Appeals issued an opinion earlier this year regarding a dispute between a nonprofit golf and recreation club (“Club”) and two equity membership members in the club (“Members”).  Although this case isn’t specifically about a homeowners association or a condominium, it does provide valuable insight as to how the Arizona Court of Appeals views an association’s governing documents vs. state law.

Under the facts of this case,  the Club and the two Members disagreed on whether specific provisions of the Desert Mountain Club Inc.’s Bylaws or state law applied to a dispute about termination of a club membership.  The Club’s Bylaws outlined four specific ways that a member could terminate their membership to the Club. When a member terminates their membership, the Bylaws provided that he/she must continue to pay dues and fees until their membership is sold to a new member. Upon the resale of that membership, the old member must pay the Club a transfer fee of $65,000 or 20% of the sale, whichever is greater. The Bylaws also had provisions that “gave the Club’s Board discretion on how to enforce delinquent or non-payments, including by expulsion or ‘any and all other remedies allowed by law.”

In 2014, the two Members wrote to the Club that they were resigning their membership and would not pay any dues or assessments. The Club sued both couples for resigning their membership and then failing to pay the assessments that they owed. The trial court granted summary judgment in favor of the Club and the members appealed.

On Appeal, the members argued that ARS §10-3620 allowed them to resign at any time without payment obligations and that the bylaws did not specifically address “resignation.”   ARS 10-3620 states in relevant part,

  1. A member may resign at any time, except as set forth in or authorized by the articles of incorporation or bylaws.
  2. The resignation of a member does not relieve the member from any obligations the member may have to the corporation as a result of obligations incurred or commitments made prior to resignation.

The Arizona Court of Appeals held that ARS §33-3620 “does not guarantee a member of a non-profit the right to resign without obligation. By its terms, the statute allows articles or bylaws to restrict the default right of resignation.” Therefore, the Court looked at the four ways to terminate membership outlined in the Bylaws and stated that even though the process is “burdensome and expensive” it is a contractual agreement between the members and the Club.

Next, on appeal the Members also argued that the Club violated ARS §10-3610, which provides, “all members have the same rights and obligations with respect to any other matters, except as set forth in or authorized by the articles of incorporation or bylaws.” The members argued that the Club’s Board was treating members differently who didn’t pay dues.  In some cases, the Board extended a settlement offer, while in others the Board expelled the members, and in this case the Board filed a lawsuit.   The Court further held that ARS §10-3610, “like §10-3620(A), makes the non-profit’s bylaws the higher authority.” “The Club therefore had discretion to redress some members’ delinquent payments with expulsion, and others’—like the Members’—with a lawsuit to collect its dues and transfer fee.” Therefore, while the Board’s discretion must be used reasonably and not arbitrarily or capriciously, the Board’s discretion was protected in the bylaws and there was no showing of an abuse of the discretion.

What are the key takeaways from this case for HOA and condo boards?  Associations need to look at the plain language of the association’s documents vs. state law regarding rights and responsibilities of owners and associations.  If the language of the state law defers authority on a subject to the association’s documents, the association’s documents should be followed (and vice versa).  For example, the language under state law for the removal of a board member from office indicates that state law trumps an association’s documents if the association’s documents conflict with state law regarding the procedure to remove a board member from office.  The bottom line is that when there are conflicts between an association’s documents and state law, it is always a good idea for an association to consult with legal counsel to determine what provision should be followed.  And, the way to make that determination is to look at the plain language of both to see which one trumps the other.

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