Court Ruling: Association Directors’ Expenditures are Protected

The case involved an action filed by several condominium unit owners individually, and on behalf of all other unit owners (hereinafter collectively “Owners”), against the individual members of the association’s former board of directors (hereinafter collectively “Directors”) and the association’s property manager (“Manager”). In the action, Owners alleged that Directors negligently depleted the Association’s reserves by incurring fees and costs to litigate a land use application against a neighboring development, and that Manager negligently and carelessly failed to exercise its duties, which resulted in the depletion of the Association’s reserve funds.

The trial court granted summary judgment in favor of Directors after finding that they were protected under both the “business judgment rule” because there was no evidence of fraud, self-dealing, or unconscionability, and an exculpatory clause contained in the Association’s bylaws. The trial court also granted summary judgment in favor of Manager after finding that the Association’s financial affairs relating to budgeting, management, and the Association’s reserve funds, were the sole and exclusive responsibility of the board of directors, and there was no evidence of damages caused by Manager’s conduct. Owners appealed the trial court’s judgments in favor of Directors and Manager.

The appellate court agreed with the trial court’s ruling that Directors were protected under the business judgment rule based on the application of a two-prong test to determine: (1) whether the actions taken by Directors were authorized by statute or by the Association’s bylaws or master deed, and if so, (2) whether the action taken was fraudulent, self-dealing or unconscionable. In applying this test, the court: