Under the N.C. Nonprofit Corporation Act, members of North Carolina nonprofit corporations, including incorporated condo associations, have standing to assert the rights of their organizations derivatively. N.C. Gen. Stat. § 55A-7-40(a). That means members of incorporated condo associations upset about perceived construction defects can assert the rights their associations might have against the parties potentially responsible for those deficiencies.
Why would condo members want to assert defective construction claims derivatively, as opposed to individually? Simple answer: prevailing plaintiffs under the Act can recover their expenses in maintaining derivative claims, including their attorneys’ fees. N.C. Gen. Stat. § 55A-7-40(e). That arguably creates an incentive for condo owners to join derivative claims alongside individual claims when suing for defective construction.
But as the N.C. Court of Appeals (“COA”) made clear in its January 21, 2014 decision in McMillan v. Ryan Jackson Properties, LLC, condo owners who want to assert claims for construction defects on behalf of their associations had better get their facts straight before pulling the litigation trigger. Pointing the finger at the wrong guy can lead not only to dismissal of a derivative claim, but also to an award of attorneys’ fees in favor of the defendant.