From: Community Associations: A Guide to Successful Management
Authors: Stephen Barber, CPM® and Vickie L. Gaskill, MPM®, CPM®
Sometimes the Board of Directors is entrusted to make some very serious and controversial decisions for the association. If faced with the potential of a lawsuit over an unpopular decision they may be able to rely on “the business judgment rule”. Simply stated, when the Board of Directors has acted in good faith, exercised honest judgment and acted in the best interests of the association the courts will tend to treat the Board they same as they would any other corporate director making the business decision for the organization. The business judgment rule serves to protect the decisions of the board when those decisions are not arbitrary and illogical.
When making decisions for the association the Board of Directors want to:
• Stay informed. Oftentimes the Board does not have the background or training to completely understand the complexities of a matter. Relying on experts such as attorneys, professional property managers, and contractors will assist them in making informed decisions.
• Consider alternatives. The courts like to see that before the final decision was arrived at, the Board looked at all angles and came up with what they believed to be the best.
• Document everything. As the Board is making decisions they should write them down and provide the reasons for those decisions. Most of the time this is done through the meeting minutes, however, even when something may appear to be rather incidental a short written note can serve as a mind refresher in the future if necessary.
• Establish good hearing and due process procedures. Everyone deserves an opportunity to be heard. Even when the Board knows that the confrontation might be a difficult one they should have some sort of policy and procedure in place to hear all sides to the issue.
In 1997,the Washington Supreme Court summarized the law on the “Business Judgment Rule” in Riss v. Angel, 934 P.2d 669, 131 Wash. 2d 612,632 . To paraphrase the Court:
1. Directors will not be held liable for honest mistakes.
2. Condominium directors have a fiduciary duty to exercise ordinary care.
3. The decision of the homeowners associations must be reasonable.
4. The court will not substitute its judgment for that of corporate directors unless there is evidence of fraud, dishonesty, or incompetence.
5. A director must act with such care as a reasonable prudent person in a like position would.
Similar court decisions have been made in New York (Levandusky v. One Fifth Avenue Apartment Corp.), California (Lamden v. La Jolla Shores Condominium Association), and Colorado (Colorado Homes, Ltd, v. Loerch-Wilson)
