May the Association Pay a Director’s Legal Fees to Defend Against an Owner’s Proposed Restraining Order?

It’s Thursday evening and the homeowner’s association president is sitting at home when there is a knock at the door.  The President opens the door to learn that he has just been served with a disgruntled owner’s proposed Restraining Order and must appear in Court to defend against it.  Is the Association obligated to pay the President’s legal fees to defend against the owner’s claims?  The answer – it depends.

As a general rule, if a board member has been sued, and the board member has been made a party to the lawsuit by reason of their being a director, The New Mexico Nonprofit Corporation Act authorizes the association to pay the director’s reasonable attorney’s fees to defend against the lawsuit.  This concept is commonly referred to in the law as ‘indemnification’.  Association governing documents may also separately provide for indemnification as well. 

The law says that a corporation can indemnify a director against reasonable expenses, costs, and attorneys’ fees actually and reasonably incurred by them in connection with the defense of any action, suit or proceeding, civil, in which he or she is made a party by reason of being a director. The law extends this protection to former directors as well as current and former officers of the corporation.  It applies in the context of criminal cases, too.

Indemnification under the Non-Profit Act only comes into play so long as the homeowners association was incorporated as a non-profit corporation (most but not all homeowner’s associations are).  Indemnification under the law is a permissive right of the Association - not a duty. 

Under the law, a director is not entitled to indemnification if they have breached or failed to perform the duties of their office, if the director’s breach or failure to perform rose to the level of willful misconduct or recklessness.   Put another way, if the Association initially fronts the director’s legal defense fees, and later determines that the director was not entitled to indemnification, the association is entitled to reimbursement.

Our experience reveals that directors often are targeted and accused of “harassment” simply because they are on the board and the board is doing nothing more than enforcing the Declaration (‘CC&Rs’) and community’s rules and restrictions.  An owner may perceive the director’s actions as harassing or the owner may actually be harassing the director in order to sway the board in their (the owner’s) favor.  

To successfully obtain a restraining order, the claimant has the burden of proving that the other party is causing them harm and that the harm is likely to continue if the court does not intervene.  This is typically demonstrated through a series of harassing events that would cause a reasonable person to be seriously alarmed, annoyed or harassed and the conduct in fact seriously alarms, annoys, or harasses the person and serves no legitimate purpose.  It is not uncommon for there to be insufficient evidence to prove harassment.   The prevailing party may ask for the recovery of attorneys’ fees, if any.  The judge has the discretion to award such fees.

Board members who are sued (and where there is no insurance coverage providing an attorney for the director who is sued) must meet the requirements listed above (or the provisions of their governing documents), in order to have the association hire an attorney to defend the director who is the target of the restraining order.

For further information, contact attorney Javier B. Delgado.