Tag: business judgment rule

In NJ, HOA boards do not have to be reasonable

Nor in any other state that stands by the Business Judgment Rule (BJR) doctrine.

 

Re: Esposito v. Riviera at Freehold HOA, No. A-6001-09T1, (NJ Supr.Ct App. Div. April 2011).

 

This appellate court decision reflects what’s wrong with our judicial system with its doctrine of binding precedents, stare decisis, that is used to uphold earlier decisions even if they may be obviously unjust by anyone’s standard. It perpetuates injustice and judicial bias, as we see with HOA decisions. In Esposito, the court cited the protections for homeowners based on the Twin Rivers NJ Supreme Court opinion,

 

The protections for common interest residents were described by the Court in [Twin Rivers]. The Court noted that (emphasis added):

 

First, the business judgment rule protects common interest community residents from arbitrary decision-making. . . . Pursuant to the business judgment rule, a homeowners’ association’s rules and regulations will be invalidated (1) if they are not authorized by statute or by the bylaws or master deed, or (2) if the association’s actions are “fraudulent, self-dealing or unconscionable.” Our Appellate Division has uniformly invoked the business judgment rule in cases involving homeowners’ associations.

 

[It should be noted that this ipse dixit (a dictum in the courts) that homeowners were protected by the business judgment rule was an “offering” to mollify homeowners who just had their constitutional protections to free speech rejected by the NJ Supreme Court.]

 

Note the BJR absence of reasonableness in board decision making as found in the Restatement (Third) of Property: Servitudes, § 3.1(2) – (4), and elsewhere. However, the homeowners were well aware of reasonableness as a criteria for valid decisions and argued the “material adverse effect” standard that includes reasonableness as a criteria instead of the BJR. Unfortunately, the Court quickly perceived that this standard only applied to condominiums as indicated in the court decision (Billig v. Buckingham Condominium Association I, Inc., 287 N.J.Super. 551 (App. Div. 1996)).

 

The Court decided that, emphasis added,

 

The trial judge held that since the Association was not a condominium association, the Condominium Act did not apply, and he refused to extend the “reasonableness” and “material adverse effect” standard in Billig to this matter. After a careful review of the record and weighing of the evidence, we see no reason to disturb the judgment requiring replacement of the door. We reach this decision based on the finding of facts by the trial court, which are adequately supported by the evidence, and essentially for the legal conclusions expressed in [the trial judge’s] comprehensive and thoughtful opinion.

What about justice? Why is reasonableness required for justice to be served in condos but not in HOAs? HOAs are sui generis, a combination of nonprofit and governmental functions. They are not just another run-of-the-mill nonprofit with ease of entry and access, and without liens or foreclosure penalties. Don’t they deserve a heightened degree of homeowner protection as provided under the “material adverse effect” and Restatement doctrines? Are we a nation of laws to serve justice or a nation of men to decide as they please?

 

[As to the nature of this complaint, the homeowner replaced his “colonial” style door with a “gothic” style door, which I am told are quite different. Esposito claimed that the property manger gave him a verbal OK, which he relied on, but submittted a change approval after the fact. The ACC, as we all could anticipate, denied the after-the-fact request. And so the suit progressed. Why, it can be reasonbly asked without fears of lost income, didn’t the board or ACC simply say it was quite unreasonable to replace a colonial with a gothic? You don’t need a King Solomon to nake this rational, reasonable, decision. Well, maybe so if you accept McKenzie’s view that incompetent people are conscripted to run HOAs and who affect the individual homeowner’s finances. Was it undue lawyer influence based on the fear of lost fees?]

 

Returnng to the argument at hand, judicial bias against HOAs, as I wrote previously in Judicial precedent and HOA bias,

The researchers found that the doctrine of stare decisis, itself, falls victim to the preferences of the judges. “Stare decisis is the rule of law that imports the aura of legitimacy on the judicial process by holding future decisions to be bound by prior decisions that serve as “precedent.” The doctrine of stare decisis ‘permits society to presume that bedrock principles are founded in the law rather than in the proclivities of individuals, and thereby contributes to the integrity of our constitutional system of government. Vasquez v. Hillery, 474 US 254 (1986).’

 

In HOAs in America, I quoted William B. Allen’scomments on Machiavelli’s The Prince, which helps illuminate my argument. In his commentary Allen wrote that “the role of morals in politics is mainly to cultivate illusions,” and that “politics is merely appearance and morality is merely pretense.” And speaking of justice, the necessary ingredient for the claim to the legitimacy of government and to be obeyed in conscience, Allen offers Machiavelli’s advice, “Because the [right] to rule is rather the appearance of justice rather than justice itself, the appearance of injustice defeats every [right] to rule.”

Appellate court holds HOA board to fiduciary obligations of good faith and negligence

The California appellate court in Telford[i] has taken a long sought defense in favor of homeowners against the negligence and bad faith dealings by the board, stating that the homeowners’ association is not relieved “from liability for breach of its fiduciary duties because it occupied ‘a particularly elevated position of trust’ due to its quasi-governmental status and ‘the many interests it monitors and services it performs.‘” (Emphasis added). The court added that:  “because a homeowners’ association stands in a fiduciary relationship with the member homeowners,” a failure to monitor the project was a breach of its fiduciary duties to the memebrs in general. (Understand that the board does not have a fiduciary duty to any one specific member).

This single opinion strikes at one defect in the HOA legal scheme that was necessary for the widespread adoption and mass marketing of HOAs, the “free ride.” No longer will HOA boards get a free ride under the business judgment rule, but will now be held to act responsibly under its quasi-governmental legal status. The “free ride” laws and rulings were necessary to get uninformed, untrained and, in many cases, conscripted members, to join the board without any accountability. Now, this holding places a real-life awakening to the propaganda and myth that the HOA has no downside.

In this case, plaintiff Telford filed suit against the board on the basis of an approved construction project by a neighbor, charging a loss of quiet enjoyment, emotional stress, public and private nuisance, and negligence in enforcing compliance with the governing documents. (It is important to note that this was not a claim of contractual violations). Telford also charged that the approval “was not only negligent, but unreasonable, arbitrary and in bad faith” as its approval was based on friendships between the board and the member. Here, we are not only concerned with those broad powers and obligations granted to the board, but the application of the business judgment rule [BJR] that governs the broad, discretionary powers granted to the board. The Court repeated the precise ruling in Lamden (often neglected in CAI attorney citations): “deference is accorded only if the association has acted ‘upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members.’” BJR is not a grant of unlimited powers to the board.

Furthermore, with respect to a breach of fiduciary duty, the Court stated that a “breach of fiduciary duty is a tort.” And as I mentioned elsewhere, a tort is a common law wrongful act that allows for punitive damages against the board and/or individual director. A tort provides a strng counter-measure against the one-sided financial damages that HOA boards are entitled under state laws and the governing documents.

A second very important opinion that is addressed in Telford is the HOA board’s defense that there is an exculpatory clause in the governing documents; that is, a clause that grants the board immunity from liability as a result of its actions. The Court held, however, that this type of clause was against public policy and therefore invalid:

The law has traditionally viewed with disfavor attempts to secure insulation from one’s own negligence or wilful misconduct[.] “Furthermore, it is the express statutory policy of this state that `[a]ll contracts which have for their object, directly or indirectly, to exempt anyone from the responsibility for his own fraud or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.’”

Punitive damages are monetary compensation awarded to an injured party that goes beyond that which is necessary to compensate the individual for losses, and that is intended to punish the wrongdoer.

Punitive damages can serve to “police” the HOA board in view of the fact that state laws and the governing documents do not contain penalties, and serve to protect boards from accountability.  See Public Policy, Tort Law and Planned Communities[ii].
 
 

 

 

Reference 

i Telford v. Sagewood HOA, No. E048483, Cal. App. 4th Dist., Nov. 16, 2010.

ii  http://pvtgov.org/pvtgov/downloads/policy-torts.pdf

Understanding deference to HOA boards and overturning bad precedents

A recent California case, Affan v. Portofino Cove HOA, highlights several important aspects of legal precedent and the judicial deference doctrine that all advocates must understand. First, in California, as applied to maintenance decisions only, the court in Lamden v. La Jolla made a reasonable clarification of the business judgment rule and established the “judicial deference” doctrine.

This court ruled:

It is important to note the narrow scope of the Lamden rule. It is a rule of deference to the reasoned decisionmaking of homeowners association boards concerning ordinary maintenance. It does not create a blanket immunity for all the decisions and actions of a homeowners association. The Supreme Court’s precise articulation of the rule makes clear that the rule of deference applies only when a homeowner sues an association over a maintenance decision that meets the enumerated criteria.

The Lamden opinion made clear, however, that the rule applies only in limited circumstances. The court described those specific circumstances as follows: “Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise.”

You must understand the ruling, the courts reasoning, and the criteria that make for a valid defense by the HOA, such as, “duly constituted board”, “reasonable investigation”, “in good faith and in the best interests of the community”, “exercises its discretion . . . within . . . its authority”. And the Court added, “The judicial deference doctrine does not shield an association from liability for ignoring problems; instead, it protects the Association’s good faith decisions to maintain and repair common areas.” (emphasis added).

The court in Affan also removed the managers from protection under this defense since they are not an HOA.

Second, the Affan court clearly found fault with the trial court’s conclusion made without substantial evidence, like a dicta (opinions by authority without any foundation being supplied, as found in too many decisions favoring HOAs). “The trial court never decided, based on the evidence . . . . Instead, the court simply concluded as a matter of law, ‘based upon Lamden,’ that defendants were not liable for negligence . . . “ The court overruled the trial court and required a decision based on evidence.

Third, the Affan court illustrates out how the Lamden court overruled the business judgment rule and established the ‘judicial deference” rule, rejecting precedent in the name of justice and fairness. Unjust and unfair precedents favoring the HOA can be and must be overturned!