Business Judgment Rules does not Apply to Unauthorized Acts

The South Carolina Supreme Court held that association board decisions must be evaluated individually to see if the business judgment rule applied, and the business judgment rule did not apply when the board acted beyond its authority. Although this case was decided in South Carolina, it could be an indication of how a Washington court would decide a similar issue. The case of Fisher v. Shipyard Village Council of Co-Owners, Inc. concerned the use of the “business judgment rule” by the association as a defense against accusations of improper board actions (when the business judgment rule applies, the court will not second-guess a board’s business decisions). The association’s master deed and bylaws stated that the unit doors and windows were the unit owner’s responsibility to maintain. The association was responsible for the maintenance of the common elements, and the cost was spread evenly among all the owners. If an owner’s negligence created a hazard or took away from the property’s value, the association could perform the required maintenance and charge the cost to that individual owner. Some of the property owners were having difficulty making the required repairs, and water intrusion began to cause damage to the property. Over several years, the association was informed by consultants of the causes of the leaking and the increasing cost to fix the problems. The association made attempts to prevent further water damage with minor repairs and tried to get the owners to make repairs. The repairs went undone or were ultimately unsuccessful, and the property sustained severe damage. The association sought to amend the bylaws to make the association responsible for maintaining the windows and doors as common elements, since the owners were not making the necessary repairs, but the amendment did not pass. The association sought approval through written consent of the owners and received consent from more than two-thirds. However, the bylaws required approval of all owners when voting using written consent outside of a meeting. The association sought to make the repairs using funds from a special assessment, but some of the owners hired a lawyer to dispute the assessment based on the improper amendment of the bylaws. The board continued to operate as if the amendment had properly passed and again sought approval for a special assessment. The owners did not approve the special assessment, so the board split the costs of the repairs on the next two annual budgets, but failed to submit the budget to the owners as required by the bylaws. The owners sued the association for negligence, misrepresentation, breach of fiduciary duty, and violations of the master deed and bylaws. The case made it all the way up to the South Carolina Supreme Court. The Supreme Court held that a jury, not a judge, must decide whether the board breached its duty to investigate the water leaks and properly allocate the repair costs. The Supreme Court also held that the association should be able to use the business judgment rule as a defense, but agreed with the lower court that the business judgment rule did not apply to actions outside the board’s authority. The business judgment rule should only apply when the board acts within its authority, without corrupt motives, and in good faith. The Supreme Court also found that the association’s failure to give the budget to the owners and attempt to impose an assessment based on the invalid amendment were beyond the authority of the board, so were not protected by the business judgment rule.
Categories: Blog, Board Conduct