Understanding Board Decisions and Judicial Deference:
Two Recent Appellate Cases Illustrate When A Court Will Defer To The "Business Judgment" Of A Board of Directors
Note: Please also see the updated article: Judicial Deference Revisited
California law offers a limited protection to homeowner Boards of Directors: the rule of judicial deference. Arising from the 1999 California Supreme Court case of Lamden v. La Jolla Shores Clubdominium HOA, this rule states that when a board acts in good faith and in the best interests of its members in making discretionary decisions concerning its obligations, a court will defer to that judgment and not second-guess the board's decision-making.
The Fourth District Court of Appeal confronted the application of judicial deference in two 2008 decisions: E. Miles Harvey v. The Landing Homeowners Association (the Harvey case) and Ekstrom, et al. v. Marquesa at Monarch Beach Homeowners Association. In the first case, the Court deferred to the Board's decision-making. In the second, it did not. The purpose of this article is to show why these cases arrive at different results concerning judicial deference to a Board's conclusions, and what lessons a Board should take from both.
The Origin of "Judicial Deference"
The doctrine of "judicial deference" as applied to the Board of Directors of a homeowners association originates in a legal concept known as the “business judgment rule.” This rule holds that management decisions made in good faith in what the corporation's directors believe to be the corporation's best interest will not be second-guessed by the court. In short, the rule prohibits the court from playing the proverbial Monday-morning quarterback and interposing its own judgment for that of the directors.
In the Lamden case, the California Supreme Court confronted the question of whether this rule should apply to the Board of Directors of a homeowners association in the same way it did to directors of other corporations.1 The Lamden plaintiff was an owner who had sued his Association after its Board elected to spot treat for termites instead of tenting and fumigating the entire building. The question before the Court was whether the decision to spot treat, given how expensive it would be to fully fumigate the building, was one that was within the Board's discretion and subject to deference from the Court.
The Court held deference was appropriate and applied the business judgment rule to community association Boards. The Court held it should “defer to the board's authority and presumed expertise” provided the Board's action is made in good faith, with regard for its members' best interests, and within the scope of its authority under CC&Rs in deciding how best to maintain common areas.2 With this, the business judgment rule for corporations became a rule of judicial deference to the decisions of association boards.
Now, careful readers noted the phrase in italics and asked: What happens if a court thinks the board acted outside its authority and how can a Board make sure it does not exceed that authority? That is precisely the question the Fourth District Court analyzed in two 2008 cases, Harvey and Ekstrom, applying the same principles with two strikingly different results.
Judicial Deference Granted: The Harvey Case3
The Harvey case concerned the Landing Homeowners Association (Association), which managed a four-story, 92 unit condominium complex located in Coronado, California. At this complex, owners on the fourth floor had empty attic space above their units. This attic space was technically common area maintained by the Association. However, unbeknownst to the Board, many of the fourth floor owners had used this space for storage, and had done so for years.
The Board discovered this use after a homeowner's complaint in 2002 prompted an inspection. At the time, the Board President was Mr. Harvey, the eventual plaintiff. Harvey, along with two other members of The Landing Architectural Review Committee (ARC) issued a report containing the findings of the inspection. That report also concluded that the use of the fourth floor attic space complied with the CC&Rs, which allowed an owner to use adjacent common area if that use was nominal and did not interfere with other owners' use and enjoyment. Since the attics could not be used by any owner other than the fourth-floor owner whose unit sat underneath it, Harvey and the ARC members concluded such use was permissible.4
Harvey then consulted counsel, who opined that the use of the attic area for storage was impermissible because it was not nominal use and that the Association lacked authority to grant the encroaching owners the right to continue to use the space. Based on this guidance, Harvey requested the Board issue notices of violation under the CC&Rs to the fourth floor owners using the attic space. When the Board refused, Harvey immediately resigned as president, though he remained on the Board.
After further investigation and discussions with building inspectors from the City of Coronado, the Board eventually issued notices of violation to all owners using the attic space, and then entered into negotiations with these owners to effectuate a way for them to use the space. After much back and forth between the Board and these owners, the Board eventually passed a resolution granting exclusive use to these owners of the attic space above their respective units.
Harvey filed suit, claiming this transfer was improper amongst other causes of action. The Association moved for summary judgment and the trial court granted the motion, finding that the language of the CC&Rs permitted the transfer of exclusive use of these spaces and deferring to the Board's expertise as to that use.
On appeal, the Fourth District affirmed the grant of summary judgment in the Association's favor. Relying on the doctrine of judicial deference from the Lamden case, the Court held that the language of the CC&Rs permitted the Board to allow the fourth floor owners to use the attic space. The Board's determination to permit that use was within its discretion and the court deferred to its expertise concerning use of the common area. The Board investigated the issue, met with the City to ensure use complied with building codes, and confirmed that use would not increase insurance premiums for the Association. These actions, in the Court's view, constituted reasonable investigation and good faith efforts by the Board with regard to the community's best interests.5 Because it acted in good faith, and because the CC&Rs gave it the authority to do what it did, the Board's actions were subject to the rule of judicial deference and the Court would not interpose its judgment for the Board's.
Thus, Harvey teaches that a Board must act within its authority under the CC&Rs in order to benefit from judicial deference. The Harvey CC&Rs expressly gave the Board power to transfer the common area attic space. However, when a board's own actions go beyond its power under the CC&Rs, it will not be protected by "judicial deference." That was the hard, and ultimately expensive, lesson taught by the same Court of Appeal in the Ekstrom case".
Judicial Deference Denied: The Ekstrom Case6
The setting of the Ekstrom case was Marquesa at Monarch Beach (Marquesa), a luxury development in Dana Point, California. The plaintiffs were a collection of homeowners at Marquesa who had purchased their properties in the late 90s and early 2000s. They had paid a premium for their units, which had desirable ocean and golf course views.
Problems arose when palm trees planted throughout the property grew far above the height of the homes on their lots, blocking the views of other owners. In 2002, plaintiffs brought their complaints to their Board's attention. The Board, however, felt that the trees added to the aesthetic value of the development and that this outweighed the owners' view impairment concerns. This divided the owners into, in the words of the Court of Appeal, “two contentious factions:” those who opposed any effort to cut the trees and those who wanted them cut or removed entirely.
Two CC&R provisions were primarily at issue in this dispute:
As is always advisable, the Board sought the guidance of an attorney for a legal opinion as to whether it had to cut or remove the palm trees. More ill-advised, however, was the Board's decision to get their opinion from an attorney who was “inexperienced in representing homeowners' associations” and had a “close, personal relationship” with the long-time Board president.7 This was especially disconcerting given that the President had 20 palm trees on his property, several of which were obstructing plaintiffs' view. Perhaps unsurprisingly, the attorney opined: 1) that Section 7.10 prevented any homeowner from asserting a right to a view; and 2) the ARC's authority under Section 7.18 of the CC&Rs included the ability to exempt palm trees. In 2003, the Board (after election of a new member) sought a second-opinion from a different attorney, whose conclusion was exactly the opposite: the Board had no authority to categorically exempt palm trees under either section.
The Board next attempted to amend the CC&Rs via a membership vote to exempt palm trees from Section 7.18. When that failed, and the Board did not cut down the trees nor consent to mediation of the dispute, plaintiffs filed their complaint, seeking a declaration that the Association had to enforce Section 7.18 and further seeking an injunction directing the Board to identify and rectify those trees offensive to plaintiffs' views.
While the case was pending, the Board adopted a new set of Rules and Regulations to restrict the definition of “view” under Section 7.18 in a way to permit the palm trees. The redefined “view” included only the area in the rear of the property, six feet off the ground, and excluded anything outside the lot lines of the property. This would have prohibited most of plaintiffs' claims, either because of the lot shapes or because the views were from a property's second story, well above the “six feet off the ground” that defined a view under the Rules.
The ensuing court dispute did not favor the Board. The court found for plaintiffs and ordered the Association to enforce Section 7.18. It held that the express purpose of Section 7.18 was to preserve ocean and golf course views and that the Board was powerless to exempt a whole class of trees from the section. It expressly rejected the new definition of “view” that the Board promulgated during the litigation. Finally, the Court concluded that Section 7.18 and Section 7.10 did not conflict because the consent to view impairment of Section 7.10 did not apply to trees. And perhaps the most important part: it awarded plaintiffs their litigation costs and attorneys' fees.
On appeal, the Association argued that under the "judicial deference" rule of Lamden, the trial court should have deferred to the Board's expertise and not second-guessed it. The Board argued that it operated within its authority in interpreting and enforcing its on CC&Rs, and that the trial court should not have disturbed that judgment.
The Court of Appeal, however, soundly rejected that argument.8 First, it held the Association had waived the argument by not properly raising it.9 Nonetheless, the Court went on to rule, the claim of judicial deference failed on its merits. The court reinforced that the judicial deference rule was appropriate where the Board's discretionary decision-making was at issue.10 Lamden involved such discretion because the Board's decision to spot treat for termites rather than fumigate an entire building did not expressly conflict with the CC&Rs and, ultimately, was a choice properly left to the Board as it exercised its management responsibilities.11
In contrast, where a Board's decision runs afoul of the express language of the CC&Rs, a Board receives no protection from Lamden's rule of judicial deference. The Ekstrom court found that the CC&Rs clearly protected the rights of owners not to have their views obstructed by palm trees.12 Nothing in the CC&Rs gave the Board the authority to exempt an entire class of trees from enforcement.13 Finally, the Ekstrom court distinguished the Harvey ruling on precisely this point: In Harvey, the Board acted in a manner consistent with its authority under the CC&Rs; here, the Court held, the CC&Rs gave the Board “no discretion to act as it did.14
What Lessons Should A Board Take From Harvey and Ekstrom?
The most potent lesson of both Harvey and Ekstrom is that a board cannot seek "judicial deference" for decisions that are outside the scope of its authority under the governing documents. If the governing documents give the Board discretionary authority, their decisions will typically be afforded deference. On the other hand, where a Board acts in a manner inconsistent with those governing documents, it will not. The cases also present several other important, related considerations.
First, a Board should not assume a court is going to defer to its decisions simply because those decisions concern common area maintenance or other duties of the board and the Association. A Board must review its CC&Rs thoroughly to determine what it can and cannot do. A Board, like its members, must comply with the CC&Rs and cannot act outside the scope of its authority.
Second, a court will only grant judicial deference where a Board acts in good faith, with reasonable investigation and in the best interests of the community as a whole. Thus, the Board should seek to be consistent in its handling of similar issues and it cannot act in a manner that favors certain owners (particularly Board members) over others. The Harvey Court found the board to be consistent in its dealings with this issue because each fourth floor owner was able to use the same amount of common area attic space for storage. This contributed to its finding that the Board acted in good faith, justifying judicial deference. In contrast, the Ekstrom Board inconsistently applied its tree-trimming rules, cutting down some trees while letting only the palm trees remain. Worse, this action worked favoritism to the Board president, who was one of the owners of the offending trees. A board must strive to apply its rules equally and fairly in order to benefit from judicial deference.
Third, in making its decisions, the board should seek advice of counsel that is independent and has experience representing homeowners associations. The Board president in Ekstrom had a personal relationship with the first counsel that appears to have affected that attorney's advice. Moreover, that attorney lacked experience representing homeowners associations. Boards must avoid this pitfall by seeking out independent, experienced counsel with a proven track record of successful representation of Associations, their boards and their membership. Of course, attorneys may differ on whether certain actions go beyond the Board's authority. In that case, the Board must redouble its efforts to act in good faith in the interests of the whole community.
The fourth and final lesson is both a combination and a consequence of the other three. When an owner brings an action against a board that has failed to be fair and consistent in enforcing its CC&Rs, judicial deference is unlikely to shield the Board from liability. And if that happens, the Board may have to pay the owner's costs and attorneys' fees. A Board can avoid that liability - and possibly collect its own fees back - when it acts as the Harvey Board did: fairly and without favoritism to certain owners or, worse, certain Board members.
1 Lamden v. La Jolla Shores Clubdominium HOA (1999) 21 Cal.4th 249.
2 Id. at 266.
3 E. Miles Harvey v. The Landing Homeowners Association et al., (2008) 162 Cal.App.4th 809.
4 A single exception was an owner who had actually finished the attic and was using it as living space. The City of Coronado claimed that was a violation of the Building Code. However, the City confirmed that the Code did not prohibit use of the space for storage.
5 Harvey, supra, 162 Cal.App.4th at pp. 821 - 822.
6 Ekstrom, et al. v. Marquesa at Monarch Beach Homeowners Association (2008) 168 Cal.App.4th 1111.
7 Id. at p. 1117.
8 Id. at p. 1123.
10 Id. at pp. 1123 - 1125.
11 Id. at p. 1123.
12 Id. at pp. 1123 - 1124.
13 Id. at p. 1124.
14 Id. at p. 1125.