Background: The Business Judgment Rule
At its core, and applied to community associations, the business judgment rule is a common law principle, subsequently adopted into statute, that provides that the decisions of a board of directors are not subject to judicial review (that is, they can’t be successfully challenged by a lawsuit) unless there is evidence that the board committed fraud or acted in bad faith.
This makes sense from a policy perspective; boards are elected for precisely this reason. They are chosen to exercise good judgment on behalf of the owners within the community, so we should generally not have courts diving in and meddling in the minutiae of their work. If the community is generally displeased with the board, they have several options: vote for someone else at the next election, remove board members via the process in their documents, or call for a special meeting on certain issues if the power is delegated to the owners. It’s democratic, and we want to let the process function without too much bureaucracy. However, if the board is committing fraud or engaging in bad faith actions, then yes, there should absolutely be a right for an owner to get judicial review and relief.
Maryland courts have reviewed this argument and basically agreed. Most famously in Black v. Fox Hills, the Court of Special Appeals held: “There was no allegation in the complaint of any fraud or bad faith. Absent fraud or bad faith, the decision to approve the fence was a business judgment with which a court will not interfere.”
There. The BJR in a nutshell. Simple.
But since we are talking condos and HOAs, you know it’s going to get more complicated than that. And it has. Community boards, occasionally advised by zealous attorneys or managers, have used the BJR to defend any and all decisions, and contend that it stands for the proposition that no decision of the board can ever be questioned. Board requires owners to remove all sheds and replace them with bounce houses? BJR says it’s okay. Board wants to install revolving doors into every unit in the complex? BJR says they can. Board decides to fine someone for being left-handed? BJR says it’s fine.
Obviously this becomes problematic at some point. The BJR has good reasons and rationale, but if it is abused, then it loses its utility. Everything can’t be protected by the business judgment rule, right? Or we wouldn’t need it at all. We would just say “boards can do whatever they want” and leave it at that.
Stay tuned for future posts on the BJR and some of the twists and turns involved in its interpretation and use in the community association context.