BOARD DECISIONS,
THE BUSINESS JUDGMENT RULE, AND JUDICIAL DEFERENCE
By:
California law provides individual directors and boards with defenses to support their diligent, good faith, and reasonable decisions.
law.
Tis is especially true for any board member who spends countless hours enforcing the governing documents, participating in violation hearings, attending board meetings, and communicating with homeowners regarding issues at their Association. Not to mention that these hours are spent as unpaid volunteers. While the stress of litigation may not be avoided, California law provides individual directors and boards with defenses to support their diligent, good faith, and reasonable decisions.
N Tese defenses are known as the “business judgment rule” and “judicial deference.”
Individual Board Members Can Be Protected Under The Business Judgment Rule
Under the business judgment rule, a board member who performs their duties in good faith, in a manner they believe to
However, the fact that a board made a decision does not necessarily invoke the protections of the business judgment rule. First, the decision has to be within the board’s authority under to the Association’s governing documents or California law. Second, a board member cannot simply ignore a problem hoping to use the business judgment rule as a defense. As noted by the California Court of Appeal in Palm Springs Villas
7 John F. Baumgardner
o board member wants to see their name, or that of their Association, listed as a defendant in a lawsuit alleging they violated their obligations under the Association’s CC&Rs or California
be in the best interests of the Association, and with such care as a similarly situated person, is not liable for any alleged failure to discharge their obligations as a board member. (Corporations Code § 7231.) Additionally, in reaching their decisions, a board member may rely on reports, opinions, statements, or other information provided by: (1) other officers or employees of the Association the board member believes is reliable and competent on the matter, (2) the board’s attorneys, accountants or other individuals with professional or expert competence on the matter, or (3) a committee that the board member does not serve on and is composed of competent, reliable, and/or professional individuals.
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