Reorienting the HOA board: business judgment rule

Mentoring: Reorienting HOA board – business judgment

consulting SIG image1HOAs love business judgment rule (BJR) that can be found in too many court opinions including, as a prime example, the infamous NJ Supreme court opinion in Twin Rivers.

First, the business judgment rule protects members from arbitrary decision-making. . . . Our Appellate Division has uniformly invoked the business judgment rule in cases involving homeowners’ associations.[1]

In CAI’s amicus brief in the above case, argued that “the settled legal principles” of the business judgment rule

permit community association trustees to fulfill their fiduciary duties and to exercise judgment in balancing the needs and obligations of the community as a whole with those of individual homeowners and residents, without undue judicial interference.[2]

As can be noted, the CAI brief equates the HOA interests with the members’ interests and that it is acting in the best interests of the members subject to “the needs and obligations of the community.” Sort of confusing doubletalk me thinks.

Wayne Hyatt is quoted (p. 9) that the business judgment rule

defends the procedure under which the board has acted and the right of the board to be the sole arbiter of the issue involved. The result is that if the procedure is valid, the court will not second guess the substance of a board’s action. Consequently, the court upholds the decision without subjecting the wisdom of the board’s action to judicial scrutiny.[3]

In California’s Lamden v. La Jolla,

[A] hallmark of the business judgment rule is that, when the rule’s requirements are met, a court will not substitute its judgment for that of the corporation’s board of directors. . . . [A]nyone who buys a unit in a common interest development with knowledge of its owners association’s discretionary power accepts ‘the risk that the power may be used in a way that benefits the commonality but harms the individual.’ “[4]

I cannot overstate the profound damaging effect by the courts as they continue to ignore HOAs as de facto governments and treat them as a pure real estate corporation. The School has performed an excellent job in creating a supportive mindset. Their demonstrable ignorance can only stem from the thorough indoctrination by the CAI School of HOA Governance that flows from the HOA “bible,” The Homes Association Handbook (cover page link).[5]

The BJR serves to protect the BOD from member lawsuits where the issues center on the BOD’s broad discretionary powers. Essentially the basis of BJR presumes that the BOD knows better about managing the HOA than the judge and, after all, the members chose the directors. In a cop-out not me attitude the judge simply goes along with the BOD’s position. YOU LOSE!

It is a very effective argument, tactic, because the homeowner and his attorney do not challenge this view that the BOD knows best. There is no rebuttal arguing that the BOD is practicing bad management, or is acting inconsistent with their obligation to act in members best interest – not in the best interest of the HOA. There is the presumption that the members’ interests are totally found in the governing documents and none other exist. It is an attitude in contrast to our Bill of Rights, Amendments 9 (enumeration clause) and 10 (rights delegated to the people).   Under the HOA “constitution,” any non- specified prohibitions or rights belong to the HOA and not its members.

Once again I’m touching upon a defect in the HOA legal scheme. Under corporation law the BOD is responsible to the HOA association. True! But the CC&Rs override that law. Why?  Let’s not forget that we have a PRIVATE contract agreed to by the members requiring the BOD to function in the best interest of the members.[6]  The private contract defense works for the members and not the BOD What’s fair is fair! Right?

In order to move past many of the persistent HOA problems and issues the BOD, as well as the legislators and courts, must adjust their views and mindset with respect to the HOA scheme. To restore equality before the law HOAs must be viewed as another form of local public government. The reorientation of the BOD comes first. There are ample materials, courses, seminars and public education, a substantial precedents and history on how to function as a public government and still protect and retain the private nature HOA community.

Notes

[1] CBTR v. Twin Rivers, 929 A.2d 1060, II, (N.J. 2007).

[2] CAI amicus brief, CBTR v. Twin Rivers (N.J. Super. App. Div. Docket C-121-00 2004).

[3] Id.

[4] Lamden v. La Jolla, 980 P.2d 940, Calif. 1999).

[5] The Homes Association Handbook, MARYJO CORNISH, Editor, Urban Land Institute, TB#50 (1964). Its Foreword omits any concern about the homeowners or constitutional government. See cover pages that provide evidence of lack of local government concern as part of the purpose of TB50. See Analysis of The Homes Association Handbook.

[6] See “HOA contractual mission” in Restructuring HOAs – intents and purposes.