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What is the Business Judgement Rule for HOA Board of Directors?

What is the business judgement rule and why does it matter to a HOA Board of Directors? We will explore this question in this month's segment.

The Board of Directors of a homeowner association is not a guarantor of the success of the HOA. When the Board of Directors act within their capacity as directors in good faith and with a reasonable purpose (exercising their duty of loyalty and duty of care to the association) they are generally not held liable for the outcome of their decisions. They are fulfilling their fiduciary duty. So, then, the business judgement rule is in place to protect Board of Directors who act with care and loyalty to the HOA and its members.

1. Business Judgement Defined. What does the business judgement rule mean? It is a rule of law that provides corporate immunity and indemnity to HOA Board of directors of a non-profit corporation protecting them from liability for the consequences of informed decisions made in good faith. The principle applies whether or not an association is incorporated.

Acting reasonably implies paying close attention to association business and seeking out the help of expert assistance (such as lawyers, community association managers, general contractors, engineers, and accountants) when the Board lacks such knowledge and understanding. A good rule of thumb is to ask what would a prudent person do given a similar set of circumstances. As long as the Board is addressing the business of the association in a timely manner using the assistance of expert help they are generally acting with a duty of care and a duty of loyalty, in good faith, and in a reasonable manner. A Board member should not be concerned under these circumstances.

2. Problem Areas. There are, however, some areas of concern that Board members should be made aware. When a director is continuously unable to attend meetings or is not paying attention to association affairs, this may present a problem. If a director cannot attend to the HOA’s business for whatever reason he or she is not fulfilling the duty of care and legal obligations as a director. When this occurs regularly, a Board member should resign.

Whenever a member of the association approaches a Board member to receive permission for something, the director should invite the member to place his or her inquiry to the full Board of Directors or the management company. Either way, it should be brought to the full Board’s attention for review. Because a Board member cannot legally act on behalf of the Board in a capacity as a director without the prior authorization of the Board. Such wrongful action cannot be performed in good faith as a director apart from prior Board approval. There is no good reason for a director to act in such cases, unless it’s under an emergency situation that threatens harm to persons or property when time is of the essence. Plus, it takes pressure off of Board members when it occurs under ordinary situations.

3. Summary Remarks. The business judgement rule should be an encouragement to those Board members who govern well. It also should take pressure off of a Board in hiring a team of experts to assist in conducting the business of the HOA. Obviously not every concern can be addressed in this segment. If a Board has a doubt about the business judgement rule, it should seek the advice of an attorney specializing in homeowner associations in the state where your association resides.

Copyright © 2017 by Cambridge Management Group, LLC. All rights reserved.

DISCLAIMER: The information contained herein is intended for informational and educational purposes only and should not be construed as offering legal advice. For legal advice, seek the counsel of a competent attorney specializing in Community Association Law on matters pertaining to your state and community.

For more information visit our web page at or contact us at: Support@CambridgeHOAPropertyManagement or by calling us at 704-874-1820 or 844.612.1515.

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