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Are You Protected by the Business Judgment Rule- Procedure or Policy?

On Behalf of | Apr 25, 2018 | HOA Law |

“Unreasonable, Arbitrary and Capricious”

Are you acting in a way that is “unreasonable” “arbitrary” or with “caprice”??? Unreasonable: not governed by or acting according to reason or exceeding the bounds of reason or Moderation. Arbitrary: existing or coming about seemingly at random or by chance or as a capricious and unreasonable act of will or based on or determined by individual preference or convenience rather than by necessity or the intrinsic nature of something. Capricious/caprice: a sudden, impulsive, and seemingly unmotivated notion or action policy changes that seem to be motivated by nothing more than caprice or a sudden usually unpredictable condition, change, or series of changes “the caprices of the weather”.

What is the Business Judgment Rule?

HOA Directors and Officers must discharge duties in good faith; with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and, in a manner the director or officer reasonably believes to be in the best interests of the nonprofit corporation.

Directors and Officers are entitled to rely on information, opinions, reports, or statements and data, IF prepared or presented by: (a) officers or employees of the HOA whom D or O reasonably believes to be reliable and competent in the matters presented; (b) legal counsel, a public accountant, or another person as to matters the D or O reasonably believes are within the person’s professional or expert competence. (See Utah Code § 16-6a-822).

“[T]here is considerable room for debate on what is reasonable and what is not reasonable in a business context” and that “the court … must be careful not to substitute its judgment for that of [the Board].” See, e.g., Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 45 (Del. 1994) (“[C]ourts will not substitute their business judgment for that of the directors, but will determine if the directors’ decision was, on balance, within a range of reasonableness.”)

Ft. Pierce Indus. Park Phases II, III & IV Owners Assn. v. Shakespeare, 379 P.3d 1218, 1229 (Utah 2016)

Procedure or Policy?

Procedure: a series of steps followed in a regular definite order.

Policy: prudence or wisdom in the management of affairs.

Does the Business Judgment Rule Apply?

Fountain Valley

In Fountain Valley, HOA threatening litigation against an elderly homeowner with Hodgkin’s disease, gained access to the interior of his residence and demanded he remove a number of personal items, including books and papers not constituting “standard reading material,” claiming the items posed a fire hazard. (Fountain Valley, 79 Cal.Rptr.2d 248.)

Outcome: Owner settled the original complaint but cross-complained for violation of privacy, trespass, negligence and breach of contract. Jury returned a verdict in favor of owner, finding specifically that the HOA acted unreasonably.

Levanger v. Vincent, 2000 UT App 103 (Procedure)

CC&Rs may be amended by “vote of owners holding a majority of the lots in the Subdivision”.

  • Mail in ballot process used without a meeting and 57% of owners voted in favor of amendment.
  • Utah’s Non-profit act that governed at the time requires “unanimous written consent” in the absence of a meeting.

Outcome: Amendment ineffectual because of failure to comply with the Non-Profit Act and the Association’s Bylaws.

Gosnay v. Big Sky HOA (Montana, 1983)

“Animals such as dogs, cats, birds or horses are allowed in the subdivision as pets only and so long as they do not constitute a nuisance to others.”

  • Owners maintained horses on their Lot.
  • On appeal HOA argues valiantly in support of their nuisance determination:
  • HOA’s attorney states, “[a]dditionally, these horses, and their ensuing, resounding, egregious divestitures of abdominal gas echoing through the hills and vales of this otherwise peaceful area, closely akin to the point blank discharge of a doublebarreled shotgun, have utterly no place in this quiet, residential hamlet of Big Sky.”

Outcome: Court comments, “[w]hile the loquacious author is guilty of hyperbole the nuisance premise is difficult to dispute. Certainly we are unable to say that the Committee, in finding unhoused horses to be a nuisance, abused its discretion as a matter of law.”

Express Language of Governing Documents & Statutes

Have you complied with applicable requirements for:

  • Notice??
  • Time Requirements?? 10 days, 30 days, 60 days??
  • Is a hearing or meeting required? Hearing on fines? Meeting to amend documents?
  • Does it involve “procedure” or “policy”??