Facts. The documents required the consent of the first floor unit owner if the second floor unit owner wanted to erect a terrace above a first floor unit.  When the first floor unit owner refused to give consent, the Board waived the consent requirement and allowed the second floor unit owner to construct a terrace, after determining that it would have no impact on the value of the first floor unit.  The first floor unit owner sued to annul the board’s decision.

Court Rulings. The trial court denied the request and dismissed the suit on the basis that the board’s decision was protected by the business judgment rule.  The first floor unit owner appealed.  The appellate court found in favor of the first floor unit owner, specifically holding:

“The business judgment rule provides that a court should defer to [an association] board’s determination ‘[s]o long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith’ ” (citations omitted) To trigger further judicial scrutiny, an aggrieved [proper party] … must make a showing that the board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith”.

Reasoning. The appellate court found that the board favored resident owners over non-resident owners.  Accordingly, the appeals court held that the business judgment rule does not protect a board when its actions don’t legitimately further the corporate purpose.

Lesson.  Follow your documents or you will end up spending money on attorneys that could be better spent on the needs of the association.