Q. I am on the Board of Directors of our Condominium Association, and am concerned that we will be sued. We recently made a decision which, in my opinion, was wrong. The Board debated the issue at length, obtained the advice of our attorney, and unanimously voted to take a particular action. On reflection, many of us on the Board now believe we are wrong, but it is probably too late to correct the error. However, many owners are now talking litigation.
Do you have any advice?
A. I have one question for you. When did you decide you may have made the wrong decision -- before the vote or afterwards? Did you just go along with the majority, so as to avoid controversy, or did you reconsider your decision after the vote? All too often, Board members are afraid to vote their conscience, and are swayed by other Board members. This is not acceptable; a member of the Board is elected to represent the community, and to exercise independent judgment -- and should not be pressured by other board members. Debate within a Board is certainly healthy, but in the final analysis you must cast your vote independently, based on what you believe is right – and not for political or other extraneous reasons.
We are in a litigious society. In the condominium and homeowner association arena, any time a Board takes an action which is unpopular with at least one homeowner, litigation is threatened. Whether the issues deal with pets, parking, pianos or pools, the courts throughout the United States are flooded with litigation. Often, the lawsuit involves petty issues, but nevertheless no one likes to be sued.
The first thing I would do is to review the insurance policy which covers the Board of Directors. This is known as the "D and O" policy, which stands for Directors and Officers. Discuss the extent and scope of coverage with your insurance agent immediately. Your policy should cover you for legal fees, even if the insurance company ultimately declines coverage on the subject of the litigation itself. This is known as a "reservation of rights." The insurance company says "we will pick up the legal fees involved to defend you in the litigation, but we are reserving our rights not to cover you if the Court ultimately determines that there is liability."
To serve as a member of a Board of Directors is voluntary, and as anyone who has ever been a Director knows, it is a thankless job. The hours are long, there is no pay, and no one is ever satisfied. Indeed, you rarely get any thanks for the hard work you do.
However, over the years, the courts have created what is known as the "business judgment rule." In effect, the courts tell us that they do not want to second-guess the business decisions of Boards of Directors, when those decisions are made by Directors who have acted on an informed basis, in good faith, and on the honest (albeit mistaken) belief that their actions are in the best interests of the Community Association.
If the Board is sued, the courts will generally only inquire whether the Board acted in good faith and with due care. The burden to show that the Board acted improperly will rest on the person bringing the litigation. The Board will usually not be required to defend its own actions, once it has established good faith.
Obviously, if the plaintiff can show that the Directors operated in bad faith, abused their discretion, or indeed obtained personal financial benefits from their decision, then the court will make further inquiry. If the court ultimately finds that the Board has breached its fiduciary duty to the members of the association, then the court will hold the Board members individually responsible for the consequences of their actions.
One Court, reviewing the action of a Board of Directors, stated that the business judgment rule prohibits judicial inquiry into actions of Directors "taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." So long as the Directors have not breached their fiduciary obligations to the membership, "the exercise of their powers for the common and general interest of the Corporation may not be questioned, although the results show that what they did was unwise or inexpedient."
While the origin of the business judgment rule comes from corporate law, the courts have been applying this concept to all forms of community associations, including condominiums, cooperatives, and homeowner associations.
While every Director should be concerned about litigation, one rule of thumb should be kept prominently in mind.
If you review all of the facts with an open mind, and have no hidden agenda, and if you are not going to personally benefit by virtue of your decision, you should be protected by the business judgment rule, even if you make a mistake.
It is difficult – and often stressful -- to be a member of a Board of Directors of a community association. You can, however, take comfort in the "business judgment rule."