Business Judgment Rule

Subscribe to Business Judgment Rule
Documents
Facts

Defendant, Castletown Corner Owner’s Association, Inc. (“Association”), had a duty to maintain a lift station.  Specifically, the declaration imposed an obligation on the Association to pay “all Maintenance Costs in connection with” improvements constructed at the Association.  Maintenance costs are then defined as “all of the costs necessary to maintain the … sewers, utility strips, and other facilities … and to keep such facilities operational and in good condition, including, but not limited to, the cost of all upkeep, maintenance, repair, replacement … for the continuous operation of such facilities.”  Plaintiff, owner of one of the commercial units, sued the Association for failing to properly maintain the lift station after an incident where the sanitary lift station malfunctioned and flooded the building with human sewage, which allegedly caused Plaintiff’s tenant to terminate its lease. …
Continue Reading Language in Declaration Makes Association Strictly Liable

Emotion Faces

Mental health issues can impact community associations in a myriad of ways.  Often Associations become the “reluctant care provider” (owners have no family/next of kin, or the family “dumped” the owner in the Association rather than in a care facility).  This can be true of older residents (“aging-in-place”) as well of younger residents.  The COVID pandemic, and the corresponding year of lockdowns, has added extra stress and increased isolation, exacerbating existing mental health conditions.  This has led to an increase of emotional distress, substance abuse, and suicides.

Because community associations are communities, issues that arise with one resident can interfere with another resident’s use and enjoyment of their property.  Mental health issues don’t always stay “contained” within the affected owner’s property – noise, shouting, threats, trespassing, damage to property, physical violence – all can interfere with other residents’ quiet enjoyment of their property.  While these issues can manifest themselves as harassment and hostilities, they can also lead to dangerous situations.  [To read more on dealing with harassment and hostile environment, click HERE.]

While it is not the Association’s responsibility to determine if someone has a mental disability, it is the Association’s responsibility to help ensure that all residents live harmoniously.  …
Continue Reading Tackling Mental Health and Aging Issues in Your Community Association

Fiduciary Duty
Facts

Plaintiff, Ms. Carmichael, is on the board of directors of Commerce Towers Condominium (“Association”).  On the board with her is Mr. Frese and Mr. Vickers.  Mr. Vickers, Mr. Frese and Mr. Tarantino are the officers of the Association. (collectively “Officers”).  All three are also the officers of Tarantino Properties, Inc. (the “Management Company”). Carmichael and other unit owners (collectively “Owners”), individually and on behalf of the Association, sued the Officers and the Management company for breaches of fiduciary duties and for unjust enrichment because the Officers caused the Association to provide for the maintenance and preservation of property that was not part of the Association (the retail space of the buildings).  The Officers and Management Company asserted that the Owners did not have standing to sue on behalf of the Association (a derivative suit).
Continue Reading Self-Dealing by Director is a Breach of Fiduciary Duty (Case 2)

Fiduciary Duty
Facts

Plaintiff, Coley, owns a home in an HOA, the Eskaton Village (“Association”).  Two other Eskaton named entities (“Eskaton”) develop and support HOAs.  A five-member board runs the Association, subject to the Declaration.  Eskaton has always controlled three of the five directors on the Association Board because it owns 137 of the 267 units.  The three directors are always employees of Eskaton and are “financially incentivized to run the Association for the benefit of Eskaton.”  In short, the better Eskaton performs the higher their compensation, which is directly related to the expenses of the Association.  Coley, one of the other two directors, filed suit because of various acts by the other directors to benefit their employer at the expense of the Association, including disclosing attorney client privileged communications.
Continue Reading Self-Dealing by Director is a Breach of Fiduciary Duty (Case 1)

Fair Judgment

The Business Judgment Rule can be a great protection for condo and HOA boards—but only if the board is following the documents.

Facts.  The Declaration for an HOA stated that the Board had the discretion to raise the “maximum annual assessment” without a vote of the homeowners as long as it was “in an amount equal to 150% of the rise, if any, of the [CPI] for the preceding month of July.” Higher increases required the vote of the homeowners. The Association’s Bylaws contained a formula for calculating this “maximum annual assessment” raise, but the formula allowed the Board to accumulate the CPI increases year over year in calculating the maximum assessment. The Board followed the Bylaws formula, and owners sued, contending (1) that the increase to the maximum annual assessment was higher than the Board had authority to do under the Declaration; and (2) that the Bylaws formula conflicted with the Declaration. The HOA Board argued that it exercised good Business Judgment in following the Bylaws formula.
Continue Reading How is the Business Judgment Rule Applied to Board Actions?

Mulching

An owner violates the rules. The Board assesses fines to the unit owner.  Will the fines hold up in a court of law? In this case, they did—and your Association can take note of what this Court says the HOA did right.

Facts.  In a 2017 case, an owner who lived in a subdivision with an HOA planted bamboo in their yard, which then spread and infested a neighboring owner’s yard and some common areas.  When the owner failed to remove the offending plants after notice, the HOA Board started to fine the owner, rather than to exercise “self-help” and take care of the bamboo infestation for the owner.  …
Continue Reading A Board of Directors’ Right to Fine for Violations

Favoritism

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.
Continue Reading Who Says the Board Can’t Favor Resident Owners?