Business judgment rule
Written by Alexa Jackson

Last month, (June 2016) the Utah Supreme Court clarified the standard of review that is to be applied when interpreting community association declarations.The Court determined that the “business judgment rule” applies to an association board’s decisions under the association’s governing documents. The court stated that “In applying the business judgment rule, courts generally apply a presumption of reasonableness.” In this particular case, the board’s decision was upheld because it was “reasonable and made in good faith and [was] not arbitrary or capricious.” Read more here.

This ruling reinforces a Utah community association board's authority to interpret the governing documents and make decisions accordingly, providing they are acting reasonably and in good faith.

Illinois condominium boards are similarly required to act in the best interests of the unit owners and are protected by the business judgment rule provided that they do not act in bad faith or with malice. However, they are also required to show diligence in handling the affairs of the association by taking proper precautions to protect the association. This includes taking such steps as reviewing association financial transactions and securing proper insurance.


How liable are condo board members for bad decisions?
The Washington Post
Benny L. Kass
17 December 2014

What exactly is the “business judgment rule?” I have a problem with my condominium board, and the condo attorney keeps referring to this as a defense. Can you explain?
— Herb

This rule began in Delaware many years ago, created by judges to protect members of a corporate board from liability for decisions that it made. The rule has been adopted across the country to apply to condos. In effect, a judge will say that even if the board (or a director) made a mistake, the court will not second-guess or punish it unless the board did something criminal or nefarious.

Many states, including Maryland, Virginia and more recently the District, have adopted the business judgment rule for condominium associations.

Why? Because service on a condo association board is a thankless, payless position, and if board members can also be sued and held personally liable for money damages because a homeowner is upset, those board members will not serve. Many board members have told me that if not for the business judgment rule — as well as the officers and directors insurance — they would never have agreed to be on the board.

The courts have consistently held that volunteer board members are not perfect and will make decisions that are not always correct.

A case from New Jersey, Anklowitz v. Greenbriar at Whittingham Community Association, defined the rule in the August decision this way: The “test is (1) whether the association’s actions were authorized by statute or by its own bylaws . . . and if so (2) whether the action is fraudulent, self-dealing or unconscionable.” If a contested act of the association meets each of these tests, the judiciary will not interfere.

One author, writing in the Valparaiso University Law Review, pointed out that “the rule is multi-faceted. Most generally, the business judgment rule acts as a presumption in favor of corporate managers’ actions. Stronger still, the rule provides a safe harbor that makes both directors and their actions unassailable if certain prerequisites have been met.”

In the District for many years, the business judgment rule for condominiums was rejected by the courts. Instead, the courts imposed a “reasonableness” test: Was the board reasonable in its response to the complaint? While this often generated more decisions in favor of condo owners, it created uncertainty and anxiety among board members — as well as additional time and legal expenses while the court decided each case.

However, the D.C. Council recently amended the condominium act. Among many other provisions, the reasonableness test was rejected in favor of the business judgment rule. According to the Committee on Economic Development report, that rule “is generally thought to be more deferential to the informed judgment of the association or executive board, giving such bodies confidence to govern without fear of second guessing by courts.”

However, the report warned “that it does not absolve officers from their fiduciary duties. They must still work in good faith, stay reasonably informed and only take actions in furtherance of the legitimate interests of the condominium association they represent. . . . Under the business judgment rule, officers would still be liable for instances of fraud or negligence and actions can be overturned where they fail to adhere to the association’s instruments and procedures.”

This, in my view, is a good summary of the rule. In effect, it still preserves the element of reasonableness.

Though I have one disagreement with that statement, namely, board members should be more than “reasonably informed.” They should be fully informed.

I cannot tell you how many board members who have openly admitted to me that they never bothered to read their association’s legal documents.

Is that good business judgment?

Benny L. Kass is a Washington and Maryland lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel.

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