The Michigan Cooperative Law Primer

Chapter Three: Operation of the Cooperative

        As a democratic based organization, the cooperative operates in a manner much like a city or township.  The membership’s authority is set forth in the bylaws. It elects a board of directors.  This is done at an annual meeting.  Members also have the right to petition for a special meeting of the membership in order to remove a board member, or seek an amendment of the articles of incorporation or the bylaws.

        Under the typical bylaws, the board is given broad authority to act on behalf of the corporation.  To the surprise of many, this includes the ability to borrow money and mortgage the property. While there are limits to the board’s authority, those restrictions usually deal with extraordinary events, such as dissolving the corporation, going into bankruptcy and the like.

        To run the cooperative on a day to day basis, a management agent is hired by the board.  This management agent is charged with collecting the carrying charges, paying the bills, preparing a budget for the board’s approval, and dealing with the members and contractors on behalf of the corporation.  An independent auditor is also engaged by the board to perform an annual financial audit of the accounting records and to produce a report for the board and HUD if a relationship with that agency exists.  Finally, a cooperative attorney is engaged by the board to protect the cooperative, to pro- vide legal advice to the board, represent it in litigation, and to han- dle eviction cases.  It is important that the cooperative attorney be independent of the management agent since the board needs such expertise in negotating, drafting and dealing with management con- tract issues.

        There are several important documents that provide legal direc- tion to how the cooperative operates.  The governing documents of your cooperative are the tools of corporate control.  They set the ground rules within which the members and board must operate.  They are the standards by which courts will judge issues.  Ignorance of them and how they work among themselves will leave you defenseless to those who do know how to use them.  It is the difference between winning and losing.

        Here, we provide a survey of the governing documents of the Cooperative. It is not as simple as one would expect. The governing documents include what you normally think: the articles of incorporation and bylaws. But it is really much more expansive than that; to fully understand your governing documents, you need to recognize that there is a much larger universe of documents which govern the cooperative. This list is an attempt to alert you to the general contours of the universe of documents but it is not exhaustive.

The Cooperative’s Own Documents

        The Articles of Incorporation is a document filed with the State and is, therefore, a public document.  It is usually broad and general.  It can be amended by the members only, once the corporation has been formed. Important clauses include the purpose of the corporation; the amendment procedure and provisions regarding the board of directors.

        Bylaws is a document that is not filed with the State.  HUD should have the bylaws.  Under the Regulatory Agreement, HUD is to approve them. They are usually detailed and descriptive.  They can be amended by the members only.  Important clauses include what constitutes quorum for meetings of the members and the board; authority of the board; amendment procedure; and who can call a special meeting of the members.

        Board Policies, while not generally recognized as a governing document are, nevertheless, significant.  They are not filed with the State or HUD. They are adopted and amended by the board.  While relatively easy to change, if ignored it can create a basis for overturning an inconsistent board decision.  For instance, a poorly written policy on fines and rule violations may cause a judge to become confused as to how or even whether a board can evict a member.

The HUD Environment

        There is a Regulatory Agreement when the cooperative has received a HUD-backed loan or other form of assistance.  This constitutes a contract between the cooperative and HUD.  It is not filed with the State. It limits the authority of the board on a wide range of matters, including the need to get HUD’s approval to sue.  It even allows HUD to remove the board.  It exists while original HUD-insured mortgage is in effect.

        Coupled with the Regulatory Agreement is the HUD Handbook.  It is incorporated through the Regulatory Agreement and may be amended by HUD.  It expires to be relevant when the Regulatory Agreement ends.

        The National Housing Act is incorporated through the Regulatory Agreement but sometimes the Articles will incorporate the Act.  It may be amended by Congress.  Its duration depends on how it is incorporated.  If only incorporated through Regulatory Agreement, it ends when the Regulatory Agreement expires.  If incorporated through the Articles, you need to check that language; as it may affect the scope or operation of the cooperative inadvertently, even beyond the existence of the Regulatory Agreement.  Associated with the Housing Act is the Code of Federal Regulations for HUD, as a supplement to the Act, as a means of “fleshing out” the Congressional intent of the Act.

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