The Business Judgment Rule, A Protection for Volunteers . . . But With Limits
Kelly G. Richardson, Esq., CCAL Richardson | Ober, LLP
The Business Judgment Rule (“BJR”) ,
found in most governing documents and also in the
California Corporations Code, protects directors from personal liability if the board errs and the association suffers damage. To fall within the BJR, a board must be acting in good faith, in the interests of the association as a whole, and with reasonable care, including reasonable inquiry (due diligence). Courts have repeatedly given deference to decisions made within the BJR, but that deference is not unlimited.
TERMITES AND DISCRETION
Courts normally defer to HOA boards so long as the BJR is followed. The State Supreme Court said so in 1999, while deciding Lamden v. La Jolla Shores. In the Lamden case, a homeowner contended the board should have responded to a termite problem with fumigation instead of spot treatment. The board had received advice from its termite control vendor that spot treatment would be an adequate approach. The court held that so long as the board followed the BJR, “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 discretion not to pursue an architectural rule violation it deemed not worth the effort.
Associations also have reasonable discretion in the manner in which they deal with CC&R violations, such as unauthorized patio extensions, under the 2007 ruling in Haley v. Casa Del Rey.
DISCRETION IS NOT ABSOLUTE
However, the BJR 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 Board did not comply with the BJR.
THE LAW CONTROLS, NOT WHAT THE BOARD SAYS
In 2010’s Dover Village v. Jennison, the board determined a drainpipe that served only one unit was “exclusive use common area.” The governing documents were silent on this issue and
did not characterize the drainpipes as exclusive use common area. The HOA contended the court must, under the Lamden case, 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.” The court found that the BJR does not protect a board’s decision to label an item as exclusive use common area if it is not supported by the law or the governing documents. Continued on page 26
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