Decisions of the Association’s Board of Directors are Generally Protected by the Business Judgment Rule

November 11th, 2016

Posted in Business & Corporate Law

In a prior blog post, we discussed how the business judgment rule protects community association directors from personal liability absent willful action and fraud, self-dealing, or unjust enrichment.  In other words, the business judgment rule generally protects a director unless he or she derives an improper personal benefit from a particular decision or transaction.

In addition to protecting directors in their individual capacity, the business judgment rule may also protect action taken by the association so long as board acted in a “reasonable manner” in making the decision.  In one case, the association contracted to make repairs to the exterior of the condominium building which required a special assessment to be levied against the membership.  A group of unit owners who did not want to pay the assessment filed a lawsuit against the association seeking to enjoin (prevent) it from contracting for the building repairs and a determination that the special assessment was improper.  The appellate court upheld the trial court’s denial of the unit owners’ request for relief, stating that the business judgment rule will protect a corporation’s board of directors’ business judgment so long as the board acted in a reasonable manner in making the decision and passing the special assessment.  Of particular significance is the fact that the Board obtained opinions from an engineer and legal counsel prior to making the decision to contract for the building repairs and passing the special assessment, which was specifically referenced in the appellate court’s opinion.  The appellate court also stated that if a board acts in a reasonable manner in making the decision, the court will not supplement its judgment for that of the board.  Subsequent appellate decisions have also applied the business judgment rule in the context of community association boards of directors.

A few important points regarding the business judgment rule are worth emphasizing.  First, courts generally review the reasonableness of the board’s decision-making process and not necessarily the reasonableness of the decision.  Accordingly, when the board relies on opinions of experts and legal counsel, its decisions are less likely to be second guessed by a court looking at the decision in retrospect. In addition, even if the board acts in a reasonable manner in making the decision, it must still follow the proper processes prescribed by the governing documents and law, such as providing notice to the membership of the board’s consideration of a special assessment. Thus, condominium and homeowners’ association boards of directors are encouraged to obtain the assistance of experts and legal counsel if they anticipate their decision may be called into question.

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