McNally v. Sun Lakes Homeowners Ass'n 1, Inc.

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
COLETTE MCNALLY, an individual, Plaintiff/Appellant,
v.
SUN LAKES HOMEOWNERS ASSOCIATION #1, INC., an Arizona non-
profit corporation, Defendant/Appellee.
No. 1 CA-CV 15-0744
FILED 10-13-2016
Appeal from the Superior Court in Maricopa County
No. CV2014-009496
The Honorable James T. Blomo, Judge
REVERSED AND REMANDED
COUNSEL
Cheifetz Iannitelli Marcolini PC, Phoenix
By Steven W. Cheifetz and Jacob A. Kubert
Counsel for Plaintiff/Appellant
Grasso Law Firm PC, Chandler
By Robert Grasso, Jr. and Stephanie L. Samuelson
Counsel for Defendant/Appellee
OPINION
Presiding Judge Andrew W. Gould delivered the opinion of the Court, in
which Judge Peter B. Swann and Judge Patricia A. Orozco joined.
McNALLY v. SUN LAKES
Opinion of the Court
G O U L D, Judge:
¶1 In September 2013, the Board of Directors of Sun Lakes
Homeowners Association #1 (the “Association”) passed a motion
excluding Colette McNally, a duly-elected member of the Board, from
attending the Board’s executive sessions. McNally filed an application for
a preliminary injunction seeking to compel the Board to allow her to attend
its executive sessions. The superior court denied McNally’s application.
We conclude the Board lacked authority to exclude McNally from its
executive sessions, and therefore reverse.
FACTS AND PROCEDURAL HISTORY
¶2 The Association is a non-profit corporation that maintains
and operates a community restaurant, golf course, and other facilities for
the residents of Sun Lakes. The Association is managed by a seven-member
Board. Members of the Board are elected by Association homeowners for
three-year terms. The Board’s meetings are open to residents, with the
exception of its executive sessions, which are closed to residents.
¶3 In 2011, McNally was elected to a three-year term on the
Board. In August 2013, Jeannie Martens, a former Association employee,
sent McNally and three non-Board members an e-mail. In her e-mail,
Martens accused Association General Manager Clint Warrell and Human
Resources Manager Roberta Laird of misconduct. The next day, McNally
forwarded Martens’ e-mail to Rick Schwartz, Board President. McNally
also sent an e-mail to Schwartz alleging additional misconduct by Warrell
and Laird; she demanded they resign or be dismissed.
¶4 The Board met in two special executive sessions to discuss
Martens’ email and McNally’s allegations. At both sessions, Schwartz
advised the Board that he had discussed Martens’ e-mail with Charles
Maxwell, the Association’s attorney. According to Schwartz, Maxwell
recommended the Board (1) take no action on Martens’ e-mail, and (2) avoid
any further publication of the e-mail. As a result, during the September 4,
2013, executive session, the Board adopted a resolution disavowing “any
approval of or responsibility for any of [] McNally’s emails maligning Clint
Warrell,” and stating that if Warrell sued the Board or the Association, “the
[A]ssociation will make the resolution available to the judicial system to
reduce or eliminate liability and place it upon the responsible party.”
¶5 Following the September 4 executive session, the Board
reconvened in open session. During the open session, McNally began
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Opinion of the Court
reading Martens’ e-mail to the Association members in attendance.
Schwartz asked McNally to stop reading the e-mail, but when she refused,
he abruptly adjourned the meeting.
¶6 A week later, the Association’s attorney sent McNally a letter
stating that her conduct during the September 4 open session violated her
duties of confidentiality and loyalty to the Association. The attorney also
stated he was recommending the Association exclude McNally from
participating in future executive sessions.
¶7 On September 20, 2013, the Board approved a motion banning
McNally from all executive sessions for the balance of her term. McNally’s
term ended in February 2014, but she was re-elected to a second term
expiring in February 2017. After McNally’s re-election, the Board offered
to allow McNally to participate in executive sessions if she agreed to keep
matters discussed in executive sessions confidential; she refused.1
¶8 Following her re-election, McNally filed a lawsuit against the
Association, asserting claims for declaratory/injunctive relief, breach of
contract, defamation, false light, and punitive damages. In her prayer for
injunctive relief, McNally sought an order compelling the Association to
comply with applicable open meeting laws and allow her to participate in
executive sessions. See Ariz. Rev. Stat. (“A.R.S.”) section 33-1804(A) (stating
that board meetings for homeowners’ associations must be open to
association members).
¶9 Following her complaint, McNally filed an application for a
preliminary injunction seeking to compel the Board to allow her to
participate in executive sessions. The court denied the application after an
evidentiary hearing. McNally timely appealed.
DISCUSSION
¶10 McNally argues the superior court erred in denying her
application for a preliminary injunction. Specifically, McNally contends the
Board did not have the authority to exclude her from executive sessions,
and that by doing so, it constructively removed her from the Board.
1 McNally testified she was unwilling to accept the Board’s offer
because it included a requirement she admit to wrongdoing regarding
Martens’ e-mail.
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¶11 We review a court’s decision to deny a preliminary injunction
for an abuse of discretion. Shoen v. Shoen, 167 Ariz. 58, 62 (App. 1990)
(citations omitted). “We defer to the court’s factual findings unless clearly
erroneous, but review its legal decisions de novo.” IB Prop. Holdings, LLC
v. Rancho Del Mar Apartments Ltd. P'ship, 228 Ariz. 61, 64, ¶ 5 (App. 2011).
A court abuses its discretion when, in exercising its discretion, it commits
an error of law. Grant v. Ariz. Public Service Co., 133 Ariz. 434, 456 (1982).
¶12 The superior court abused its discretion in denying McNally’s
application for a preliminary injunction. Neither Arizona law nor the
Association’s bylaws authorized the Board to pass a motion excluding
McNally from all executive sessions. To the contrary, by passing the
motion, the Board prevented McNally from performing her duties and
responsibilities as a director.
¶13 As a member of the Board, Arizona law requires McNally to
participate in managing the affairs of the Association. A.R.S. § 10-3801(B);
see also A.R.S. § 10-801(B) (“All corporate powers shall be exercised by or
under the authority of and the business and affairs of the corporation shall
be managed under the direction of its board of directors.”). Additionally,
the Association’s bylaws require McNally to participate in managing the
affairs of the Association. Cf. A.R.S. § 10-2064 (stating the “bylaws [of a
homeowners’ association] shall set forth the rights and duties of members
and directors”).
¶14 Participating in executive sessions was critical to McNally
performing her duties as a director. Pursuant to A.R.S. §§ 33-1804(A)(1) -
(5), directors of a homeowners’ association are permitted to discuss a wide
variety of important matters in executive session, including: legal advice
from an attorney; pending or possible future litigation involving the
association; personal, health, or financial information about association
members, employees, or contractors; and job performance, compensation,
health, and complaints regarding association employees. Indeed, during
McNally’s term, the Board frequently held executive sessions to discuss
important matters such as the Association’s budget, members’ code of
conduct, remodeling projects, creation/elimination of staff positions, and
hiring a general manager. However, based on the Board’s motion, McNally
was not allowed to participate in any of these discussions.
¶15 McNally’s duty and right to attend all Board meetings,
including executive sessions, is protected by the notice requirements
contained in A.R.S. § 10-3822(B) and the Association’s bylaws. Under the
bylaws, when special meetings of the Board are called, “[n]otice of such
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meetings shall be given to all Directors not less than twenty-four (24) hours
before the meeting time and shall state the purpose of the meeting.”
Additionally, A.R.S. § 10-3822(B) requires that all directors of nonprofit
corporations be notified of special meetings two days prior to the meeting,
unless otherwise provided by the articles of incorporation or bylaws.
¶16 These notification requirements also serve a practical
purpose: they guarantee the participation of all board members in
managing the affairs of a corporation. As one commentator has noted,
“Notice to all directors is required because when a number of directors are
elected to manage the affairs of the corporation, it is contemplated that the
corporation shall have the benefit of the judgment, counsel and influence of
all of those directors.” 2 William Meade Fletcher et al., Fletcher Cyclopedia of
Law of Corporations § 406 (perm. Ed., rev. vol. 2014). Thus, “A special
meeting held in the absence of some of the directors and without any notice
to them, is illegal except in those cases where the articles of incorporation,
bylaws, or established custom so provide, or where it is impossible or
impractical to give notice.” Id.
¶17 The Association argues, however, that the Board had the
authority to screen McNally from its executive sessions by creating a special
committee pursuant to A.R.S. § 10-3825. Under this statute, a board of
directors may create “one or more committees,” and authorize such
committee members to “exercise the authority of the board of directors.”
According to the Association, the Board’s motion excluding McNally
effectively created a special committee, consisting of all Board members
except McNally, to discuss privileged matters in executive session.
¶18 There is no evidence in the record showing the Board created
a special committee pursuant to A.R.S. § 10-3825. Moreover, even if the
Board had created such a committee, it could not have done so for the sole
purpose of excluding McNally from its executive sessions. A board’s
authority to create special committees under A.R.S. § 10-3825 must be
interpreted in light of its place in the relevant statutory scheme. See Hosea
v. City of Phoenix Fire Pension Bd., 224 Ariz. 245, 250, ¶ 23 (App. 2010)
(citations omitted) (holding that statutory provisions are construed in light
of their place in the statutory scheme, so that provisions may be
harmonious and consistent). A.R.S. § 10-3801, which is contained in the
same chapter as A.R.S. § 10-3825, provides that a director has a legal duty
and obligation to manage the affairs of a corporation. However, under the
Association’s interpretation of A.R.S. § 10-3825, A.R.S. § 10-3801 is rendered
meaningless, because a majority of a board could simply strip a director of
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her ability to manage the corporation’s affairs by creating a special
executive session committee.
¶19 The Association also contends that because McNally refused
to keep executive session information confidential, excluding her from
executive sessions was the “only practical option available,” and therefore
a reasonable exercise of its discretionary powers. See Tierra Ranchos
Homeowners Ass'n v. Kitchukov, 216 Ariz. 195, 201-02, ¶¶ 24-28 (App. 2007)
(holding that members challenging discretionary decisions of a
homeowners’ association are required to show the association’s actions
were unreasonable). We disagree.
¶20 Because McNally is a duly-elected director, the Board did not
have the discretionary power to exclude her from all of its executive
sessions. Instead of resorting to an unlawful self-help remedy, the
Association could have taken other courses of action to protect confidential
information. For example, the Association could have sought to remove
McNally from the Board by filing a judicial removal action. See A.R.S. § 10-
3810(A) (an action to remove a director may be commenced “either by the
corporation or by its members . . . if the court finds . . . [t]he director
engaged in fraudulent conduct or intentional criminal conduct with respect
to the corporation. . . [and] [r]emoval is in the best interests of the
corporation.”).2 The Association also could have sought an injunction
prohibiting McNally from disclosing confidential information discussed in
executive session. Cf. State ex rel. Moore v. State Bank of Hallsville, 561 S.W.2d
722, 725 (Mo. Ct. App. 1978) (holding that a court may temper a bank
director’s right to inspect bank records by imposing conditions designed to
avoid unreasonable or oppressive interference or disruption of corporate
business); Hyman v. Jewish Chronic Disease Hosp., 15 N.Y.2d 317, 322-23, 206
N.E.2d 338, 339 (1965) (holding that order enforcing hospital board
member’s right to inspect hospital records may be coupled with necessary
safeguards and protections to avoid disclosure of confidential information).
¶21 Next, the Association argues that McNally was barred from
seeking injunctive relief under the doctrine of “unclean hands.” Smith v.
Neely, 93 Ariz. 291, 293 (1963) (internal citations omitted) (stating the
2 A.R.S. § 10-3808(A) also provides that a director may be removed
“pursuant to any procedure provided in the articles of incorporation or
bylaws.” Based on the Association’s amended bylaws adopted February
21, 2011, the Board does not have the authority to remove Board members;
rather, Board members may only be removed pursuant to a recall election.
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McNALLY v. SUN LAKES
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doctrine of unclean hands bars a party from obtaining equitable relief for
an act “of unconscionable conduct” that relates “to the very activity that is
the basis of [its] claim.”). Specifically, the Association claims that McNally
had “unclean hands” because she read the Martens e-mail in open session
“in knowing and willful disregard of the advice of the Association’s general
counsel, contrary to the consensus of her fellow Board members, and to
serve her own personal interests.”
¶22 In its ruling, the superior court did not reach the issue of
whether McNally’s application was barred by the doctrine of unclean
hands. However, even if McNally had unclean hands, this would not have
provided grounds to deny the preliminary injunction, because the Board
did not have lawful authority to pass a motion barring her from all of its
executive sessions. See supra, ¶¶ 12-16.
¶23 Accordingly, we conclude the superior court erred in denying
McNally’s application for a preliminary injunction. Because the Board had
no authority to ban McNally from its executive sessions, the court should
have directed the Association to allow her to attend and participate in the
Board’s executive sessions.
¶24 We stress that our holding is limited to the facts and
circumstances of this case. To be clear, a board may, in certain
circumstances, request that a director recuse herself from an executive
session. Additionally, there are situations where a board may be warranted
in obtaining a court order excluding a director from an executive session.
For example, it may be necessary to exclude a director from an executive
session addressing the director’s conflict of interest, alleged misconduct, or
potential litigation involving the director. However, these potential
circumstances have not been presented to us in this case.
¶25 Finally, McNally claims the superior court erred when it
declined to enter an injunction prohibiting the Association from violating
the open meetings law. See A.R.S. § 33-1804(A) (homeowners’ association
open meetings law).
¶26 In her application, McNally requested the court enter an
injunction “allowing her to participate in executive sessions.” Although the
application also requested a hearing regarding McNally’s “claim contained
in Count One of her Verified Complaint,” which included a prayer for
injunctive relief regarding the open meetings law, the court concluded this
request was not properly raised in the application. See Ariz. R. Civ. P. 7.1(a)
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(“[a]ll motions. . . shall be accompanied by a memorandum indicating, at a
minimum, the precise legal points, statutes and authorities relied on….”).
¶27 We find no abuse of discretion. See Schwab v. Ames Constr.,
207 Ariz. 56, 60, ¶ 17 (App. 2004) (court rulings made under Rule 7.1 are
reviewed for an abuse of discretion). The application clearly seeks relief
regarding McNally’s exclusion from executive session; it makes only one
passing, indirect reference to an injunction regarding the open meetings
law. See Blumenthal v. Teets, 155 Ariz. 123, 131 (App. 1987) (statement “in
the last sentence of [appellant’s] response to [appellee’s] motion to dismiss”
requesting leave to amend was not a proper motion to amend the complaint
because it did not comply with the procedural rules; as a result, the trial
court did not err in denying plaintiff’s motion to amend the complaint).
Additionally, McNally is not barred from seeking injunctive relief upon
filing a proper application.
Attorneys’ Fees
¶28 McNally requests an award of attorneys’ fees pursuant to
A.R.S. § 12-341.01 for the preliminary injunction proceedings in superior
court, as well as her fees on appeal. See id. (“[i]n any contested action arising
out of a contract, express or implied, the court may award the successful
party reasonable attorney fees.”).
¶29 Because McNally’s claim arises from a contract and she has
successfully challenged the superior court’s denial of her application for a
preliminary injunction, we grant her request for reasonable fees on appeal.
See Nickerson v. Green Valley Recreation, Inc., 228 Ariz. 309, 320, ¶ 27 (App.
2011) (internal citations omitted) (the articles of incorporation and bylaws
governing a private organization constitute a contract between members
and the organization). However, because the majority of McNally’s claims,
including her multiple claims for injunctive relief, remain unresolved, we
deny without prejudice her claim for fees related to the injunction
proceedings in superior court. The superior court may re-examine this
issue at the conclusion of the case to determine whether she qualifies as the
prevailing party. See Berry v. 352 E. Virginia, L.L.C., 228 Ariz. 9, 13-14, ¶ 22
(App. 2011) (stating trial court has discretion in case involving multiple
claims to determine who is the “net winner” or who is the prevailing party
based on the “totality of the litigation test.”).
CONCLUSION
¶30 For the above reasons, we reverse the superior court’s order
denying McNally’s application for a preliminary injunction, and direct the
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court to enter a preliminary injunction compelling the Association, during
the pendency of this case, to allow McNally to participate in the Board’s
executive sessions. Further, as the prevailing party on appeal, we award
McNally her reasonable attorneys’ fees and costs incurred on appeal.
Finally, we deny without prejudice McNally’s request for fees related to the
preliminary injunction hearing, leaving this matter to the superior court to
determine whether, at the conclusion of this case, McNally qualifies as a
prevailing party.
AMY M. WOOD • Clerk of the Court
FILED: AA
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