The liability protections afforded to a corporation’s directors include a legal doctrine known as the “Business Judgment Rule.” In the context of HOAs, the California Supreme Court in the case of Lamden v. La Jolla Shores Clubdominium HOA (1999) 21 Cal.4th 249 adopted a rule which it termed as analogous to the Business Judgment Rule: the “Rule of Judicial Deference.” The Rule of Judicial Deference (aka “Business Judgment Doctrine”) generally requires courts to defer to maintenance decisions made by HOA boards even if a reasonable person would have acted differently in the same situation:
“Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise. Thus, we adopt today for California courts a rule of judicial deference to community association board decisionmaking that applies, regardless of an association’s corporate status, when owners in common interest developments seek to litigate ordinary maintenance decisions entrusted to the discretion of their associations’ boards of directors.” (Lamden, at 253.)
The justification for such deference is premised upon “the relative competence, over that of courts, possessed by owners and directors of common interest developments to make the detailed and peculiar economic decisions necessary in the maintenance of those developments.” (Lamden, at 270-271.)
The Rule of Judicial Deference has been touched upon in numerous HOA cases, including the landmark case of Nahrstedt v. Lakeside Village Condominium Association (1994) 8 Cal.4th 361:
“Generally, courts will uphold decisions made by the [board] so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with public policy.” (Nahrstedt, at 374.)
So long as the board acts in accordance with its duties, in good faith, and in a manner it believes to be in the best interests of the association and its members, its decision will generally be upheld. (Lamden, at 265; Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal. App. 4th 965, 979.) Courts generally afford boards with the presumption in favor of their actions being taken in good faith. (Beehan v. Lido Isle Community Assn. (1977) 70 Cal. App. 3d 858, 865: (…“Every presumption is in favor of the good faith of the directors. Interference with such discretion is not warranted in doubtful cases.”).)
Limitations on Judicial Deference
The Rule of Judicial Deference does not necessarily extend to every action (or decision not to act) that the board may take. Notably, the rule set forth in Lamden was tied solely to board decisions concerning “ordinary maintenance”:
“The precise question presented, then, is whether we should in this case adopt for California courts a rule-analogous perhaps to the business judgment rule-of judicial deference to community association board decisionmaking that would apply, regardless of an association’s corporate status, when owners in common interest developments seek to litigate ordinary maintenance decisions entrusted to the discretion of their associations’ boards of directors.” (Lamden, at 260.)
The California Court of Appeal has stated the importance of noting “the narrow scope of the Lamden rule. It is a rule of deference to the reasoned decisionmaking of homeowners association boards concerning ordinary maintenance. It does not create a blanket immunity for all the decisions and actions of a homeowners association. The Supreme Court’s precise articulation of the rule makes clear that the rule of deference applies only when a homeowner sues an association over a maintenance decision that meets the enumerated criteria.” (Affan v. Portofino Cove HOA (2010) 189 Cal.App.4th 930, 940.)
Notwithstanding the Court’s reference to the “narrow scope of the Lamden rule,” the Rule of Judicial Deference is still being expanded in the wake of the Affan holding. In the 2015 case of Watts v. Oak Shores Community Association, the California Court of Appeal touched on the Affan holding, noting that its articulation of the Lamden rule “gives ‘deference to reasoned decisionmaking of homeowners association boards concerning ordinary maintainenace.’…[b]ut there is no reason to read Lamden so narrowly. In fact, courts have given deference to board decisions that do not concern ordinary maintenance. Thus, for example, in Dolan-King v. Rancho Sante Fe Assn. (2000) 81 Cal.App.4th 965, 979, the court gave deference to an association board’s decision denying an owner’s application for a room addition on aesthetic grounds.” (Watts v. Oak Shores Community Assn. (2015) 235 Cal.App.4th 466, 473.) The Court in Watts ultimately upheld an association’s ability to adopt reasonable rules and impose fees on members relating to short-term rentals of condominium units. At the heart of the Watts holding was the Court’s belief that “common interest developments are best operated by the board of directors, not the courts.” (Id.)
However, there are various decisions that a board may make to which the Rule of Judicial Deference may not necessarily apply, including:
- Situations where the board has failed to enforce the governing documents. (Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361; Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965.)
- Decisions made by the board which are contrary to the governing documents. (Ekstrom v. Marquesa at Monarch Beach HOA (2008) 168 Cal.App.4th 1111.)
- Situations where the association’s maintenance and repair responsibilities are ambiguous. (Dover Village Association v. Jennison (2010) 191 Cal.App.4th 123.)
- Situations where the board unreasonably fails to investigate maintenance and repair issues. (Affan v. Portofino Cove HOA (2010) 189 Cal.App.4th 930.)
Scope of Liability Protection
The Rule of Judicial Deference “provides protection from personal liability for the individual directors of a non-profit homeowners association. It does not follow and is not true that the same rule of judicial deference will also automatically provide cover to the [association] itself. There is a difference between the standard of care, which is a reflection of the duty expected of decision makers, and the judicial deference rule, which is a modified standard of review for determining whether the actual decisions-makers will be held liable for their poor decisions.” (Ritter & Ritter v. Churchill Condominium Assn. (2008) 166 Cal.App.4th 103, 125.)
Related Case Law
- Watts v. Oak Shores Community Association
(2015) 235 Cal.App.4th 466
[Operating Rules; Rental Activities; Board Deference] Homeowners associations may adopt reasonable rules and impose fees on members relating to short-term rentals of condominium units.
- Ritter & Ritter v. Churchill Condominium Association
(2008) 166 Cal.App.4th 103
[Maintenance; Board Deference] The deference afforded to HOA boards covers only “ordinary” maintenance; the “Lamden Rule” only insulates directors from liability, not the HOA.
- Affan v. Portofino Cove Homeowners Association
(2010) 189 Cal.App.4th 930
[Maintenance; Board Deference] The deference afforded to HOA Boards may not extend to situations where the Board fails to act or to investigate the scope of required maintenance or repairs.
- Dover Village Association v. Jennison
(2010) 191 Cal.App.4th 123
[Maintenance; Board Deference] The deference afforded to HOA Boards for maintenance decisions does not extend to the Board’s interpretation as to the scope of the HOA’s maintenance responsibilities under its CC&Rs.
- Ekstrom v. Marquesa at Monarch Beach Homeowners Association
(2008) 168 Cal.App.4th 1111
[Architectural Control; Board Powers] An association’s board of directors may not adopt rules that are in conflict with the CC&Rs.
- Lamden v. La Jolla Shores Clubdominium Homeowners Association
(1999) 21 Cal.4th 249
[Rule of Judicial Deference; Maintenance] Courts will defer to decisions made by a HOA Board of Directors regarding ordinary maintenance of a common interest development.
- Nahrstedt v. Lakeside Village Condominium Association, Inc.
(1994) 8 Cal. 4th 361
[Governing Documents; Use Restrictions] CC&R restrictions are presumed reasonable, and are enforceable unless they are arbitrary, impose burdens on the use of land that outweigh their benefits, or violate public policy.
“Expanded Scope of ‘Judicial Deference’ – Authority to Impose Short-term Renter Fees” – Published on HOA Lawyer Blog (April 13, 2015)