How Is The Business Judgment Rule Applied To Board Actions?

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The Business Judgment Rule can be a great protection for condo and HOA boards—but only if the board is following the documents.

Facts.  The Declaration for an HOA stated that the Board had the discretion to raise the “maximum annual assessment” without a vote of the homeowners as long as it was “in an amount equal to 150% of the rise, if any, of the [CPI] for the preceding month of July.” Higher increases required the vote of the homeowners. The Association’s Bylaws contained a formula for calculating this “maximum annual assessment” raise, but the formula allowed the Board to accumulate the CPI increases year over year in calculating the maximum assessment. The Board followed the Bylaws formula, and owners sued, contending (1) that the increase to the maximum annual assessment was higher than the Board had authority to do under the Declaration; and (2) that the Bylaws formula conflicted with the Declaration. The HOA Board argued that it exercised good Business Judgment in following the Bylaws formula.

Court Rulings. The Court rejected the HOA’s argument and found that the Business Judgement Rule did not protect the actions of the HOA Board because they acted beyond the Board’s powers. Because the Declaration controls over the Bylaws when there is a conflict in terms, the Court found the Board, in following the Bylaws formula and assessing the owners more than the allowed amount in the Declaration (without an owner vote), acted outside of its authority.

Lesson. Condominium and HOA Boards consist of volunteer owners, who oftentimes are not lawyers who specialize in condo law! This case highlights the importance of Boards leaning on and relying upon professionals, like condo and HOA lawyers, to help them navigate and interpret their governing documents.  If you see potential conflicting language between your Declaration, Bylaws, and Rules and Regulations, bring it to the attention of your attorney and ask for a legal opinion on it.  Boards can rely on their attorney’s opinion and stay out of trouble—unlike the unfortunate Board in the case above.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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