A Corporate Formality with Significant Implications – Carefully Select your Community Association’s Registered Agent | Lexology
Virginia law related to registered agents is deceptively simple: Every corporation authorized to transact business in Virginia (including incorporated…
Virginia law related to registered agents is deceptively simple:
· Every corporation authorized to transact business in Virginia (including incorporated community associations associations), are required to maintain a registered office and a registered agent within the state;
· Registered agents in Virginia have only one statutory duty – to forward to the business entity at its last known address any process, notice or demand that is served on the registered agent;
· Individuals may serve as registered agents if they are residents of Virginia, are members of the Virginia State Bar or part of the management of the corporation (i.e., an officer or director), and agree to serve as registered agent.
· Business entities that are authorized to transact business in Virginia may also serve as registered agent for another business entity if it agrees to serve in that capacity (even though a business entity may not serve as its own registered agent).
Because of its simplicity, selection of a community association registered agent is oftentimes viewed merely as a corporate formality.
Initial convenience, cost and inadvertent inattention to the implications of selecting a registered agent have lead many community associations to select a community association volunteer leader (i.e., an officer or director) to serve as registered agent. Appointment of a community association volunteer leader as registered agent has significant risks, outlined below, which must be understood and addressed by community associations.
Risk 1: Registered Agent appointment and contact information will become stale.
Community association volunteer leaders are, by their nature, temporary positions. Volunteer leader positions are subject to term lengths and, in some circumstances, term limits. Community association volunteer leaders serving as registered agent might move out of state, resign from their positions, or fail to be re-elected or re-appointed. Each of these events could disqualify the individual from serving as registered agent and would force the association out of compliance with Virginia law.
Risk 2: Registered Agent will mishandle (or disregard) service of process.
The sole statutory duty of a community association registered agent in Virginia is to forward to the association, at its last known address, any process, notice or demand that is served on the registered agent. But, registered agents are not infallible. In addition to their duties as officers and directors, community association volunteer leaders have other obligations and distractions, including work or family obligations. These distractions, especially when combined with a lack of understanding of the significance of service, could cause a registered agent to mishandle (or disregard) service of process.
Anecdotal evidence suggests this has occurred in Virginia (we are not aware of specific examples in Virginia), and a review of case law from other jurisdictions illustrate the possibility. See, for example,Goodman Associates, LLC v. WP Mountain Properties, LLC, 222 P.3d 310 (Colo. 2010); Danny’s Sports Bar Chicago Style Pizza v. Schuman, 2015 Ind. App. Unpub. LEXIS 1; Gutierrez v. G&M Oil Company, Inc., 2010 Cal. App. LEXIS 640.
Risk 3: Registered Agent will not be available to accept service.
When community association directors or officers serve as registered agents, there is a significant risk that the registered agent will not be available to accept service. Virginia’s statutory scheme contemplates that the registered agent will be available at the registered office to accept process and notices for a business entity during normal business hours.
Unsuccessful attempts to serve a Virginia registered agent allow the plaintiff to use substituted service, serving the documents on the Virginia State Corporation Commission. Service through the Virginia State Corporation Commission will cause delays in actual receipt of service of process, cutting into an association’s timeframe to respond to a suit.
Using an individual director or officer as registered agent may have more significant implications. In 2016 the Code of Virginia was amended to allow substituted (posted service or delivery to a family member over the age of 16) if the registered address of the corporation is a single-family residential dwelling. By using a director or officer’s home address for service, service can be effected merely by affixing the court documents to the director’s front door or by handing it to the director’s 16-year-old son or daughter. If a director or officer is away from their home for an extended period, there is significant risk that the association will not respond timely to a lawsuit.
Risk 4: Registered Agent will not mishandle (or disregard) corporate documentation requests and filing requirements.
In addition to mishandling of service of process, individual registered agents may also mishandle or disregard requests for annual reports, even if inadvertent. Each Virginia corporation is required to file an annual report in the Office of the Clerk on or before the last day of the 12th month after it was incorporated or issued a certificate of authority. The annual report form contains certain corporate information of record in the Office of the Clerk.
If a community association fails to file an annual report, the corporate status of the association will lapse. If an association’s corporate status is purged for a period of more than five years, the corporate status will be purged and cannot be reinstated or restored. The purging of an association corporate status can have significant implications on an association’s ability to enforce the governing documents.
Risk 5: Registered Agent will become adverse to the Association.
In some circumstances, individual directors may become adverse to the association (whether legally adverse or otherwise). Certain directors and officers (or former directors and officers) may file suit against the association or be the defendant in a suit, making it is easy to see how that individual’s service as registered agent could complicate the litigation process.
Even if directors are not legally adverse to the association (by being a party in a lawsuit against the association), directors may still be adversarial. If an individual becomes disgruntled during their service to the association, or frustrated from dealing with association issues after their service to the association is completed, that director may simply stop forwarding documents.
Risk 6: Registered Agent may be named in a lawsuit.
It is not uncommon for litigants (particularly pro se plaintiff’s) to name a registered agent as a defendant in a lawsuit along with the association. And, while there is unlikely to be liability in those circumstances, the registered agent may incur costs of defense in being extricated from the suit.
The prevalence of these actions (inappropriately naming registered agents as defendants) has caused many management companies to refuse to serve as a registered agent. The risk of being named in a suit is simply too high for the management company. A similar risk applies to having an officer or director act as registered agent.
Risk 7: Registered Agent may create personal liability.
Finally, serving as a registered agent may create personal liability for a community association volunteer leader. In at least one instance, a Virginia registered agent was arrested and led in handcuffs from his law office because he was listed as a registered agent for a business that skipped a court hearing over an unpaid tax bill (see the March 2017 unpublished opinion of the U.S. Court of Appeals for the Fourth Circuit in Ryu v. Whitten, et al. here).
Serving as registered agent for an association is generally outside the scope of responsibility for a director or officer, and failure by a registered agent to comply with statutory duties might not be covered by all directors and officer’s liability policies. Similarly, limitations on liability and requirements for indemnification may not extend to the additional responsibilities a director or officer assumes as registered agent, creating the potential for personal liability for that individual.
Because of the significant risks (outlined above) involved in the appointment of a registered agent, association legal counsel is best situated to mitigate those risks. Association legal counsel can react quickly and effectively to lawsuits, bankruptcy and other legal notices, and requests for documentation from the Virginia State Corporation Commission.
Because many of the documents received by a registered agent would be forwarded to counsel in the normal course of business already, naming association legal counsel as registered agent can create efficiencies in addressing legal matters.
Law firms, or their related registered agent service companies, should have established processes in place to ensure records are kept and notices are timely-forwarded. Internal procedures will minimize the risk that process will “sit” on a desk somewhere after service and, if mistakes are made, there may be insurance coverage to mitigate the association’s loss.
*Jeremy Moss is an attorney with Vandeventer Black LLP, with offices in Norfolk and Richmond, Virginia, Kitty Hawk, North Carolina, and Hamburg, Germany.
Through its affiliate, VB Business Services LLC, Vandeventer Black provides registered agent services for over several hundred community associations, and other businesses, in Virginia.
Jeremy is Chair of the Virginia Legislative Action Committee of Community Associations Institute, a fellow of the College of Community Association Lawyers, Secretary/Treasurer of the Virginia Bar Association Real Estate Section Council, and Chair of the Virginia State Bar Real Property Section Committee on Common Interest Communities.
This article is intended to bring awareness to this topic and is not meant to serve as legal advice.