DEERFIELD RESORT HOA LITIGATION
Deerfield News Connection
February 26, 2024
Fact-Checking Facebook: Dispelling Myths and Rumors
Part 3
A review of Facebook posts indicates that there may be some misunderstandings related to the Deerfield Resort HOA lawsuit. Below, are questions or statements made on Facebook, with clarifications. There are two Facebook page accounts from which the questions or statements were pulled, Deerfield HOA Collaborative (formerly Team Deerfield HOA Collaborative) and Deerfield Resort on Norris Lake Homeowner Group. The time period examined runs from June 9, 2023 through January 17, 2024.
In a derivative lawsuit any damages awarded will be paid to the corporation - in this case Deerfield Resort Homeowners Association, Inc.
Numerous posts claim that greed is the primary motivation behind the Plaintiffs actions.
The Plaintiffs did not pursue legal action in which they could receive a direct benefit, as they filed a derivative lawsuit. In a derivative lawsuit, a shareholder or member sues on behalf of a corporation to recover damages suffered by the corporation as a result of the actions of its directors or officers. Any damages awarded are paid to the corporation (i.e., Deerfield Resort Homeowners Association, Inc.). In a direct lawsuit, a shareholder sues to recover damages for harm directly caused to them, with damages awarded directly to the individual. Under Tennessee law, derivative lawsuits may be initiated by shareholders or members on behalf of a corporation alleging breaches of fiduciary duties by officers or members of the board of directors. The objective is not to seek personal benefit but rather to hold the corporation accountable to its shareholder/members and enhance its governance, policies, and financial management.
Tennessee law prohibits the use of corporate funds (i.e. HOA fees collected) and assets to pay the legal expenses of individual defendants involved in a derivative lawsuit.
This means these fees may not be passed along in HOA dues.
There were several posts about the growing expenses incurred by Deerfield Resort residents through the HOA due to the lawsuit. A sampling of quotes, includes: “… [Fields attorney] indicated the election may cost upward of $20,000. Keep in mind, the community has already paid $25,000 toward this process.” “Additional monies may also be owed to [the Receiver] for his services.” “Failing the ability to collect past due funds will most likely result in a homeowner assessment.”
Tennessee law prohibits the use of corporate funds (i.e., HOA fees collected) and assets to pay the legal expenses of individual defendants involved in a derivative lawsuit. The law provides that "a director or officer of a mutual benefit corporation shall not use the assets of the corporation to pay the legal expenses of the director or officer in a derivative action." This provision applies to all derivative actions. Furthermore, Tennessee law provides that a director or officer of a mutual benefit corporation who uses corporate funds to pay for legal expenses is liable to the corporation for any damages resulting from the violation.
Additionally, according to Tennessee Code, if a receiver has been appointed by the court to oversee the HOA corporation's funds and property during litigation, then the developer would not be permitted to use HOA staff to assist in their legal defense. The receiver has full control over the HOA's assets and is responsible for preserving these assets for the benefit of the HOA and its members. Using HOA employees and their time to work on preparing information for the Defendant’s case could be seen as interfering with the receiver's authority and a violation of the receivership estate. It would be more appropriate for the developer to utilize their own staff and funds to prepare court filings and exhibits or respond to court orders, rather than relying on the HOA's receiver-controlled resources during the lawsuit. Therefore, the coffers of the HOA should not be impacted by the defendant’s legal expenses, as these expenses may not be paid from HOA resources – either funds or staff time.