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.).
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
1
Code § 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
2
LMOA 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,
3
Lake 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
4
To 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.
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