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Condo | HOA Lawyers

Association NOT Liable for Loans Made By Developer Related Entity

Facts

David Bagwell was the developer of three homeowners’ associations (HOAs).  David and his wife Susan (the Bagwells), acted as directors of each of the HOAs.  Sister Initiative, LLC (the LLC) loaned money to the HOAs and was owned by Bagwells’ daughters.  Susan Bagwell was the manager of the LLC.  The Bagwells also owned several other businesses that interacted with the HOAs.  In 2010 the LLC loaned the HOAs $120,000, allegedly because of the downturn in the economy.  In 2011 the Bagwells were ousted as directors, and the LLC sued to recover on the loans.  The use of the funds is the heart of the case, as the HOAs argued that the funds were funneled to improper uses.

Trial Court

Declared the loans to the LLC as void and unenforceable.  The LLC and the Bagwells appealed.

Appeals Court
  1. The loans were “not voted on or approved” and did not receive necessary authorization – “the record supports the trial court’s finding that no adequate vote occurred…”;
  2. The Bagwells used the loans from the LLC as means to funnel money to themselves;
  3. The LLC will not recover on its loans.
LESSONS
  1. Developers/Declarants need to honestly treat associations at arm’s length where they control an association or sit on the board of directors (meaning no side deals that benefit them); and
  2. The Court here recognized that the self-dealing by the Bagwells essentially amounted to a breach of fiduciary duty.

Sister Initiative, LLC v. Broughton Maintenance Association, Inc. et. al., 2020 WL 726785 (2020. TX)

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