The Business Judgment Rule: Not a Free Pass

board members c c & rs h o a homefront Oct 10, 2016

The Business Judgment Rule protects directors from personal liability if the board errs. Courts have repeatedly given deference to decisions made within the Business Judgment Rule, but that deference is not unlimited.

Termites and discretion

Courts normally defer to HOA boards so long as the Business Judgment Rule is followed. The State Supreme Court said so in 1999, while deciding Lambden v. La Jolla Shores. In the Lambden case, a homeowner contended the board should have responded to a termite problem with fumigation instead of spot treatment. The court held that so long as the board followed the Business Judgment Rule, “courts should defer to the board’s authority and presumed expertise.”

Judicial deference is essential, enabling boards to govern their associations without being continually in litigation whenever a neighbor disagrees. This includes the decision regarding whether to pursue enforcement litigation, confirmed in the 1977 Beehan v. Lido Isle decision. That appellate court ruling supported the board’s BJR discretion to decide not to pursue an architectural rule violation deemed not worth the effort.

Associations also have reasonable discretion in the manner in which they deal with CC&R violations, under the 2007 ruling in Haley v. Casa Del Rey.

Discretion is NOT absolute

The Business Judgment Rule is not a blank check justifying every association action. In each of the following cases, the board argued the court should be deferential in reviewing the board’s decision, but the court found that the Business Judgment Rule was not met -the board was wrong.

The law controls, not what the Board says

In 2010’s Dover Village v. Jennison, the board determined a leaky sewer pipe under a condominium was “exclusive use”, and thus was the member’s repair responsibility. The HOA contended the court must, under Lamden, defer to its decision. However, the court disagreed, saying, “(t)here is an obvious difference between a legal issue over who precisely has the responsibility for a sewer line and how a board should go about making a repair that is clearly within its responsibility.”

Boards may not ignore CC&R’s

In 2002, a dispute arose in the Marquesa at Monarch Beach HOA. The CC&R’s limited tree height, and the board invoked the Business Judgment Rule to exempt some palm trees. The appellate court in 2008 ruled: “The Board’s interpretation of the CC&Rs was inconsistent with the plain meaning of the document and thus not entitled to judicial deference.” So, boards cannot ignore the governing documents.

Boards cannot ignore law

In Ritter v. Churchill Condominiums, the board argued the Business Judgment Rule protected its attempt to force a homeowner to repair a building code violation (a newly discovered hole in the common area floor structure separating levels of a high-rise tower). The higher court in 2008 disagreed, holding that the Business Judgment Rule does not allow HOAs to ignore common area defects and building code violations.

Board inaction is not discretion

In 2011’s Affan v. Portofino Cove case, a condominium owner had for six years suffered repeated sewage floods from the common plumbing. Each time, the HOA repaired the damage but never tried to determine and repair the cause. When Affan finally sued, the HOA argued the Business Judgment Rule protected it. The appellate court disagreed, noting that “the Association’s inaction was not the result of any deliberative process.”

Boundaries

The BJR’s protection is not unlimited. Boards cannot ignore the law, governing documents, or the problem. That discretion is unreasonable.


Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.