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ALTACITIES® ▶ HOA ‘Business Judgment Rule’


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Homeowners won’t reside long in a California Common Interest Development or Homeowner‘s Association (HOA), without coming to face with the state corporations code. Even though officers and directors are deemed fiduciaries, boards are not required to make the "right" decision. Rather, they must make what they believe to be the best decision for the corporation with the available information. Corporations Code §7231(a) protects directors from personal liability if they make decisions that result in damage or loss to others, provided their decisions were made:
  • In good faith,
     
  • In a manner which the directors believe to be in the best interests of the corporation, and
     
  • With such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
The most-often cited caveat and premise for how the Business Judgment Rule applies in California to HOA governance, is:
“Generally, courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development's governing documents, and comply with public policy. Thus, subordination of individual property rights to the collective judgment of the owners association together with restrictions on the use of real property comprise the chief attributes of owning property in a common interest development.… Inherent in the condominium concept is the principle that to promote the health, happiness, and peace of mind of the majority of the unit owners since they are living in such close proximity and using facilities in common, each unit owner must give up a certain degree of freedom of choice which he [or she] might otherwise enjoy in separate, privately owned property. (Nahrstedt v. Lakeside Village.)” ▶ source
SEE ALSO ▶ Corporations Code §7231. Duties and Liabilities of Directors
Also, see ▶ ‘HOA Bill of Rights’
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