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Berding | Weil Community Association ALERT Newsletter
Legal News and Comments for Community Association Boards and Managers Issue #19 • May 2009
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
By Matt Malone, Esq. and Andrew Baugh, Esq.
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. 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. 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 Case
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.
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.
ECHO Annual Seminar 2009
Race to Win!
The ECHO Annual Seminar is simply the best educational opportunity designed for HOA members. And in 2009, ECHO continues its 37-year tradition of providing the most up-to-date information on the most pressing issues for California HOAs. Whether you are a first time board member, a brand new condominium owner, or an HOA veteran, the Annual Seminar will give you the training and information you need.
Choose from 16 different educational seminars for a premium educational experience. In addition to ECHO's excellent HOA University track for new board members, the seminars offer a variety of new and traditional events
Saturday the 13th of June 2009
Santa Clara Convention Center, Santa Clara, CA
Experience the fun on the tradeshow floor: 125 vendors offer prizes, games, and an excellent way to find out about the latest services and technologies available to your association.

TOP ISSUES
QUESTION OF THE WEEK
Question:
"What is a Townhouse?"
Answer:
A Townhouse is an architectural style and not a legal form of ownership. The legal interest is usually referred to as a "Lot" much like that of a detached single family home. Townhome-style dwellings can also be condominiums. With a townhome you own your portion of the building on the lot, which is usually attached to several other "lots". While architecturally a single townhome is usually of two-story construction, most townhomes in California have a ground floor entrance and are not stacked. Townhomes are usually part of what is known as a Planned Development (PD).
The Board's Dilemma
Every board faces this dilemma sooner or later: how to raise revenue without raising assessments?
Since the only revenue the average association can obtain is from owner assessments, that's usually impossible.
Owners want the board to maintain and repair the association's property, but they don't want to pay more each month, especially in these difficult economic times…»
What You See
is (Not Necessarily)
What You Get!
"Visual and Accessible" is not enough: Let's amend the Davis-Stirling Act to delete Limitations on Reserve Study Inspections
It's the responsibility of every California community association to commission a reserve study every three years…»
Predictions of the Future in an Uncertain Present
Common interest developments are reliant on member assessments to provide long-term maintenance and repair.
Since the association's governing documents and state statutes give directors and members control over the amounts raised, funding decisions tend to be more political than practical…»
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