Kaman Cusimano Logo

Condo | HOA Lawyers

How is the Business Judgment Rule Applied to Board Actions?

The Business Judgment Rule can be a great protection for condo and HOA boards—but only if the board is following the documents.

Facts.  The Declaration for an HOA stated that the Board had the discretion to raise the “maximum annual assessment” without a vote of the homeowners as long as it was “in an amount equal to 150% of the rise, if any, of the [CPI] for the preceding month of July.” Higher increases required the vote of the homeowners. The Association’s Bylaws contained a formula for calculating this “maximum annual assessment” raise, but the formula allowed the Board to accumulate the CPI increases year over year in calculating the maximum assessment. The Board followed the Bylaws formula, and owners sued, contending (1) that the increase to the maximum annual assessment was higher than the Board had authority to do under the Declaration; and (2) that the Bylaws formula conflicted with the Declaration. The HOA Board argued that it exercised good Business Judgment in following the Bylaws formula.

Court Rulings. The Court rejected the HOA’s argument and found that the Business Judgement Rule did not protect the actions of the HOA Board because they acted beyond the Board’s powers. Because the Declaration controls over the Bylaws when there is a conflict in terms, the Court found the Board, in following the Bylaws formula and assessing the owners more than the allowed amount in the Declaration (without an owner vote), acted outside of its authority.

Lesson. Condominium and HOA Boards consist of volunteer owners, who oftentimes are not lawyers who specialize in condo law! This case highlights the importance of Boards leaning on and relying upon professionals, like condo and HOA lawyers, to help them navigate and interpret their governing documents.  If you see potential conflicting language between your Declaration, Bylaws, and Rules and Regulations, bring it to the attention of your attorney and ask for a legal opinion on it.  Boards can rely on their attorney’s opinion and stay out of trouble—unlike the unfortunate Board in the case above.

If you have any questions, please feel free to contact us.



Three bars icon gold

Recent blog Posts

Three bars icon gold

Partner Nicholas Meinert Presents at Northern Ohio CAI Chapter on the Corporate Transparency Act

On June 14, 2024, Partner Nicholas Meinert presented to the Northern Ohio Chapter of the ...
Read More →

Partners Dan Miske and Lydia Chartre presented at Wisconsin’s Chapter of CAI on reserves and lending

On May 23, 2024, Partners Dan Miske and Lydia Chartre presented a webinar for the ...
Read More →

Strengthening Community Associations: The Vital Role of a Comprehensive Assessment Recovery Policy and Procedure

Community associations are founded on principles of shared responsibility and collective maintenance. From maintaining common ...
Read More →

Partner Nick Meinert presented at OLCA’s Spring Conference

Partner Nicholas Meinert gave a presentation at the 2024 Ohio Lake Communities Association’s Spring Conference. ...
Read More →