July 23, 2019

July 23, 2019

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July 22, 2019

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Does The Business Judgment Rule Extend To A Board Interpretations?

The California Supreme Court has adopted a rule of deference to most decisions made by community association boards:

"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.”

Lamden v. La Jolla Shores Clubdominium Homeowners Assn. 21 Cal. 4th 249, 253 (1999).  This deference can be viewed as a special application of the more general "business judgment rule".  Consonant with Lamden, California courts have extended deference to a variety of board decisions, such those involving maintenance and repair, remedies for violations of the association's Covenants, the designation of storage space in a common area, the adoption of rules relating to short-term rentals, and the approval or rejection of a homeowner’s improvement plan.  Judicial deference to board decisions, however, is not without limits.

In  Felipa Richland Eith v. Ketelhut, 2018 Cal. App. LEXIS 1162, the Court of Appeal expressly declined to accord deference to a board's interpretation of the association's CC&Rs:

"The interpretation of CC&R's is a legal question to be decided by the courts, not the Board."

Although brooking no deference, the Court nonetheless agreed with the board's interpretation that the operation of a vineyard on a homeowner's property did not violate the CC&R's prohibition of business or commercial activity.

Note to readers:  In yesterday's post, I noted that I could not locate the form for alleged violations of NRS 78.047 on the Nevada Secretary of State's website.  The Nevada Secretary of State has since provided me with this link to the form.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...