The Michigan Cooperative Law Primer

State Corporate Law

        The Nonprofit Corporation Act defines the parameters of cor- porate affairs. Of importance are mandatory provisions that all corporations must place in their articles or bylaws, and permissive provisions that corporations may take advantage of by placing them into the articles or bylaws.  An example is the relatively new provi- sions that limit liability on directors and officers, as well as other volunteers – if adopted by the corporation.

        If the articles and bylaws are silent, the Act may furnish direction.  Other mandatory requirements are found in the Act.  For example, filing of the annual report with the State is required in order to maintain corporate status.  Failure to do so in Michigan results in loss of corporate status.  If sued, you do not have a corporate shield to protect the individual members from personal liability.  In addition, some one else may take your corporate name.

        In Michigan, attached to the end of the Nonprofit Corporation Act is a chapter that deals specifically with cooperatives.  It allows a housing cooperative to “opt in?” in order to take advantage of its provisions.  Thus, it is important to know whether your cooperative did so, because it has provisions that are inconsistent with the other sections of the Nonprofit Corporation Act.

Parliamentary Procedure

        While not normally thought of as a “governing document” Roberts Rules has this status since the Bylaws often make it the “fall back” resource to supply parliamentary procedure when the articles and bylaws are silent.  A couple examples of important pro- cedures to know are the motion for reconsideration which may be made by one on the prevailing side – so if you are going to lose a vote because others who support your position are not present, you may want to vote with the majority present in order to preserve your right to bring it up again; and the motion to adjourn, which is always in order and not debatable.  Likewise, a motion to table is not debatable and may be made at any time during the discussion of an issue where a motion is pending.

Federal, State & Local Regulatory Framework

Again, it is important to recognize that cooperatives operate within the broader body of law and even though this is not generally regarded as “governing documents” the articles, bylaws, and other governing documents can be preempted by changes in these laws. For instance, the Michigan Elliot-Larsen Civil Rights Act impacts proxies that limit the right of a married member to appoint only his or her spouse, which is a violation of marital discrimination prohibition.

Contractual & Covenant Framework

        As with federal, state & local laws, the cooperative must operate within the parameters of its contracts and covenants.  Contracts can be breached but if exposes the cooperative to liability for damages.  One example is a covenant which runs with the land, which limits the cooperative as to its use of property; thus, you may not be able to build or use an adjacent lot owned by the cooperative.  Another illustration is if the cooperative refinances, the lender may impose some conditions that must be honored to avoid a default and foreclosure of the mortgage, such as retaining certain reserves.

The Hierarchy of Documents

        The hierarchy of the governing documents is complex, and the interplay between them requires legal expertise.  With the foregoing caveat, the general hierarchy is:

  • Federal, state & local law, including corporate law
  • The HUD Regulatory Agreement and associated HUD laws Covenants & contracts
  • Articles of Incorporation Bylaws
  • Roberts Rules
  • Board Policies
  • Amendments

        To amend the articles or bylaws, the cooperative must follow the process described within these documents themselves.  If HUD is still involved, it must approve of them.  If these documents do not proscribe the process, then you must resort to the State corporate law for direction.

Lessons to Learn

        There are important lessons to be learned about governing documents.  First, although many cooperatives have “boilerplate” clauses, this is misleading and every cooperative must be viewed within its own environment, taking into account the entire universe of applicable governing documents.  Do not assume that your cooperative is governed in the same manner as others.

        Next, remember that the universe of governing documents consists of the “visible” – articles; bylaws; and HUD regulatory agreement – as well as the “invisible” – the State corporate statute; federal, state and local law; and Roberts Rules, etc.

        Make sure you keep your governing documents protected; one of the worse things that can happen is to not have certainty in this area.  Follow the procedures of safeguarding and keeping them in order.

        To be effective, you must recognize the interaction of the various governing documents we have identified.  Qualified legal assistance is required for more sophisticated issues, as they can become quite complex.  There is a hierarchy that must be considered.  For example, if state law prohibits some act, then it preempts bylaws that allow that act.

        Finally, bear in mind that HUD plays a dominant role while the original mortgage is still in effect; once it is gone, so goes the Regulatory Agreement.  This provides you with an opportunity to address problems of the past, eliminate confusing language that will then be obsolete, and consider other options such as moving from limited equity to market rate – if it makes sense for your cooperative.  This is a rather involved decision that requires an analysis of your members’ economics as well as the market conditions of the surrounding area.

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