We have recently spent some time focusing on the role of an Association’s board of directors as the entity designated to make decisions for the Association, the fiduciary duties of board members in making those decisions, and adoption of policies and standards for association governance to help make sure those duties are met and to avoid legal liability or undue controversy. Given these duties of board members and the disagreement that can arise in communities as well as the fact boards of directors are human, a board member may wonder about protections for the Association and for board members for decisions that are made in good faith.
The business judgment rule is legal presumption that boards and directors know best how to manage a corporation and judges and courts should not get involved in those decisions so long as they are legal and rational. The general rule and some rationale for it has been summarized as follows and cited by Michigan courts:
It is not the function of the court to manage a corporation nor to substitute its own judgment for that of the officers thereof. It is only when the officers are guilty of willful abuse of their discretionary powers or of bad faith or neglect of duty or of perversion of the purpose of the corporation or when fraud or breach of trust are involved that the Court will interfere.
More recently, quoting from American Jurisprudence, the Michigan Court of Appeals discussed the application of the business judgment rule in the context of condominium associations in the unpublished case of MJ Dev Co, Inc v Inn at Bay Harbor Ass’n, unpublished per curiam opinion of the Court of Appeals, issued Feb 23, 2017 (Docket No. 330496).
Ordinarily, the decisions made by a condominium association board should be reviewed by a court using the same business judgment rule that governs decisions made by other types of corporate directors. The business judgment rule limits the judicial review of decisions made by a condominium’s board of managers to whether the board’s actions are authorized, and whether the actions were taken in good faith and in furtherance of the legitimate interests of the condominium. It can be gleaned from the case law that so long as a condominium board acts for the purposes of the condominium, within the scope of its authority and in good faith, the courts will not substitute their judgment for that of the board’s. (citations omitted).
Id. at 3.
The real world scenario that the Court in the MJ case was analyzing was, in part, a decision by the Association to replace an existing electric fireplace with a large gas fireplace that cost over $10,000. Was this an addition to common elements, which did require Co-owners’ approval, or replacement of common elements, which did not? The Court determined that replacement of a fireplace with another fireplace, albeit a different and more expensive one, was a replacement and thus the board was empowered to install the fireplace without Co-owner approval. The Court noted a more stringent definition of a replacement could have been included in the Condo Bylaws but was not. The case can be taken as an illustration of the business judgment rule: the Court analyzed the language of governing documents to determine if the board had the authority to replace the fireplace as it did, but without evidence of something untoward or language that limited the board’s authority, it did not step into the question of whether the new fireplace was a good or bad decision or whether the Association or individual directors should have any liability for the decision.
Board members do have fiduciary duties to the Association, including a duty of care to act prudently and investigate whether the advice of experts is needed in order to make a decision, but board members are entitled to rely on the advice of experts. When maintenance questions arise, they should seek the advice of experts in the relevant area. When financial questions arise, they should seek the advice of experts, like a CPA. And, when legal questions arise, they should seek the advice of the Association’s legal counsel. So long as board members are acting on advice and are not breaching fiduciary duties or engaging in criminal activity, they are not subject to personal liability. If this were not the case, no one would, or even should, serve on the board of directors.
If you have questions or are facing issues regarding protections or liability limitations for board members or your Association, the attorneys at Tilchin & Hall, P.C. are knowledgeable in those areas and ready to help. Please reach out to us at (248) 349-6203 or email us using the form below.
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