The Alabama Supreme Court's December 2024 decision in Ex parte Caribe Resort Condominium Ass'n Board of Directors resolved a question that had long created uncertainty in Alabama community association governance: whether members of a nonprofit corporation—including HOA and condominium owners—can bring derivative suits on behalf of their association. The answer is nuanced, the carve-out is narrow, and the implications for owners and association boards are significant. Together with the Alabama Homeowners' Association Act and the Nonprofit Corporation Law, the decision shapes the litigation landscape for ownership governance disputes in the state.
I. The Governing Framework
The Alabama Homeowners' Association Act
Ala. Code § 35-20-1 et seq. governs HOAs formed on or after January 1, 2016, and pre-2016 associations that elect by majority member vote to be governed by the Act. Key provisions include:
- § 35-20-5: Associations must be organized as nonprofit corporations; organizational documents (articles of incorporation, bylaws, declaration, CC&Rs) must be filed with the Alabama Secretary of State.
- § 35-20-7: Addresses board elections and modification of the declaration.
- § 35-20-11: Defines board powers: the board may assess penalties for rule violations (after the member is afforded a hearing and right to counsel before the board), manage common areas, enter contracts, and take other actions authorized by the governing documents.
- § 35-20-13: Records access rights for members.
The Act is notably sparse on governance litigation remedies. It does not create a cause of action for members to challenge board decisions directly and does not specify a standard of review for business decisions. Those questions are answered by the Alabama Nonprofit Corporation Law and the courts.
The Alabama Nonprofit Corporation Law
Associations organized under the Act must comply with Ala. Code § 10A-3-1.01 et seq. (the Alabama Business and Nonprofit Entities Code, Title 10A, Chapter 3). The relevant provision for governance litigation is § 10A-3-2.44, which addresses member rights of action. Unlike the business corporation provisions in § 10A-2A-7.41—which expressly authorize shareholder derivative actions for for-profit corporations—Title 10A, Chapter 3 contains no general authorization of derivative actions for nonprofit corporation members.
II. Ex parte Caribe Resort: The Governing Authority
Facts and Procedural Context
Ex parte Caribe Resort Condominium Ass'n Board of Directors, SC-2023-0624 (Ala. Dec. 13, 2024), involved unit owners at Caribe Resort, a 608-unit condominium in Orange Beach. The owners filed a derivative suit on behalf of the Caribe association against both the board of directors and contractor companies (the "Wireman companies") hired to perform maintenance. They alleged that the board breached fiduciary duties by awarding inflated maintenance contracts to self-dealing related parties and that association funds were wasted.
The board and the Wireman companies moved to dismiss, arguing that Alabama law does not authorize derivative actions on behalf of nonprofit corporations. The trial court denied the motion; the defendants filed a mandamus petition.
The Holding
The Alabama Supreme Court, in an opinion by Justice Sarah Stewart joined by Chief Justice Parker, Justice Mitchell, and Justice Cook, held:
- General rule: Alabama law does not recognize derivative actions for nonprofit corporations generally. The Legislature's decision to expressly authorize derivative actions for for-profit corporations (§ 10A-2A-7.41), LLCs (§ 10A-5A-9.02(a)), and limited partnerships while omitting any analogous provision for nonprofits was a deliberate legislative choice.
- The narrow exception—ultra vires acts: Members of a nonprofit corporation can bring a representative suit against the officers or directors of the nonprofit specifically "for exceeding their authority." Ala. Code § 10A-3-2.44(2). This ultra vires exception applies where the board or officers have acted outside the scope of authority granted by the governing documents or the statute.
- Application: The Caribe members' claims against the board defendants alleged that the board exceeded its authority by approving self-dealing contracts. Those claims fell within the § 10A-3-2.44(2) ultra vires exception and could proceed. The claims against the Wireman companies (third-party contractors) did not fall within the exception because § 10A-3-2.44(2) is limited to suits against officers or directors, not third parties. Claims against the Wireman companies were dismissed.
The Dissent and Its Implications
Justice Will Sellers, joined by Justices Wise and Mendheim, partially dissented. Justice Sellers argued that Alabama law should be read to permit derivative suits against a nonprofit board's unauthorized conduct more broadly—not just ultra vires acts narrowly construed. He wrote: "I disagree that Alabama law totally precludes derivative actions brought by members of a nonprofit corporation against the corporation's board." This three-Justice dissent signals that Caribe Resort's majority holding may be tested in future cases, and practitioners should monitor for any legislative response or follow-on decisions.
III. Direct Claims vs. Derivative Claims
The Distinction
Caribe Resort's holding addresses derivative claims—suits brought by members on behalf of the association to vindicate the association's own rights. Direct claims, by contrast, are brought by members to vindicate their own individual rights. The distinction is material because the Caribe Resort holding affects only derivative claims; direct claims proceed on their own footing.
Direct claims that HOA/condo owners may bring directly include:
- Claims that the board violated the owner's rights under the governing documents or Alabama statutes (e.g., improper denial of records access under § 35-20-13);
- Claims that an assessment was improperly levied against the owner specifically;
- FHA or ADA claims based on the owner's disability;
- Claims based on the association's interference with the owner's property rights;
- Breach of the covenant of quiet enjoyment.
Claims that sound in derivative form include:
- Claims that the board wasted association funds;
- Claims that the board awarded self-dealing contracts that harmed the association;
- Claims against third-party contractors for breach of contract with the association.
Where the injury is to the association as a whole (and only derivatively to each member as a pro-rata holder of association value), the claim is derivative. Caribe Resort says those claims can now be brought against directors and officers for ultra vires conduct, but not against third parties.
IV. The Ultra Vires Exception in Practice
What Constitutes "Exceeding Their Authority"?
Under § 10A-3-2.44(2), the question is whether the board acted outside the authority granted by the corporate governing documents or the statute. This is a narrower concept than breach of fiduciary duty. A board that awards a grossly overpriced contract to a related party may simultaneously (a) breach its fiduciary duties (a claim that fails under the general no-derivative-suits rule) and (b) act outside its authority if the declaration limits self-dealing contracts or requires competitive bidding (an ultra vires claim that may survive Caribe Resort).
Practitioners drafting or amending HOA governing documents in Alabama should consider expressly limiting self-dealing, specifying competitive bid requirements, and defining the board's contracting authority—not only to protect the community from overreaching boards but also to create the predicate for ultra vires claims if those provisions are violated.
Demand Requirement
Caribe Resort does not expressly address whether a demand on the association's board is required before filing a representative suit under § 10A-3-2.44(2). Analogous corporate law principles—applied by Alabama courts by analogy in the nonprofit context—suggest that a pre-suit demand on the board should ordinarily be made or its futility adequately demonstrated. Where the directors accused of wrongdoing are the board, demand is presumably futile, and that argument should be pleaded and supported by facts.
V. Business Judgment Rule
Even where a direct or ultra vires claim is properly pleaded, Alabama courts apply the business judgment rule to protect good-faith board decisions. Under the business judgment rule, courts presume that board decisions made in good faith, on adequate information, and within the board's authority are not subject to judicial second-guessing. The rule applies to HOA boards just as it does to corporate directors.
The rule does not protect decisions that are made in bad faith, with a conflict of interest, or that exceed the board's authority—the exact conditions that trigger the ultra vires exception. Practitioners challenging board conduct should specifically identify the authority-exceeding nature of the conduct, not merely argue that a better business decision could have been made.
VI. Practice Notes
For Owners Seeking to Challenge Board Misconduct:
- Post-Caribe Resort, the operative question is whether the board's challenged conduct exceeded authority granted by the governing documents. Review the declaration, bylaws, and Ala. Code § 35-20-11 carefully before characterizing the claim.
- Plead the ultra vires nature of the conduct explicitly in the complaint under § 10A-3-2.44(2). Characterizing the claim as a derivative action generically, without invoking the ultra vires exception, invites a motion to dismiss.
- Direct claims for violations of individual member rights remain available without the Caribe Resort limitation.
- Consider whether the Alabama Attorney General has jurisdiction to investigate and enforce fiduciary duties in nonprofit associations under Title 10A; that avenue may provide remedies where private derivative suits fail.
For Associations and Board Members:
- Caribe Resort provides substantial protection against derivative challenges to business decisions that are within the board's authority under the governing documents, even if the decisions are controversial or financially harmful to the community.
- The protection evaporates for self-dealing, unauthorized transactions, or decisions that violate explicit governing document restrictions on board authority.
- Maintain detailed minutes documenting the information the board considered before major decisions. This evidence supports the business judgment rule defense.
- Conflict-of-interest disclosures and recusals should be documented in writing whenever a board member has a personal or financial interest in a matter before the board.
VII. Open Questions
Caribe Resort's holding applies to claims against officers and directors. The Court did not address derivative-style claims against third parties in depth beyond dismissing them. The doctrinal question of whether members can pursue quasi-derivative claims under other theories (unjust enrichment, constructive trust, conspiracy) against third parties who participated in an ultra vires board scheme remains open.
The three-Justice dissent also creates legislative pressure. It is plausible that the Alabama Legislature will revisit § 10A-3-2.44 to expand member standing in nonprofit governance disputes, particularly after the HOA enforcement concerns that have driven legislative attention to community associations in recent years.
Closing
Ex parte Caribe Resort is a watershed for Alabama community association governance litigation. It forecloses the broad "shareholder derivative suit" model for HOA and condominium owners but preserves a meaningful, if narrow, pathway for ultra vires claims against directors and officers. For the practitioner advising Alabama community association owners, the strategic imperative is to frame governance challenges in terms of authority-exceeding conduct rather than business judgment—and to separate direct claims from derivative claims at the pleading stage.
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Informational only. Not legal advice. No attorney-client relationship is created by reading this post. Consult a licensed attorney in your jurisdiction.