The Business Judgment Rule Spelling Out the Rules for HOA Boards

 Co-op or condo ownership can mean fewer concerns about maintenance and  administration for residents, but it also means living by a new set of rules  and regulations. Co-op and HOA boards don’t operate as little fiefdoms unto themselves, of course—but the truth is that your board has a significant degree of power to decide on  policies and procedures for the entire association community.  

 Most of the time, boards and their managers run associations smoothly and  without incident. Troubles only arise in the system when the actions of the  board run against the overall interest of the community, or when one or more  neighbors dispute a board’s action, believing it to be unfair. Such cases can lead to lawsuits, with  neighbor suing neighbor and the courts ultimately sorting out the disputes.  

 These cases are governed by the business judgment rule, which came out of court  decisions based on the state’s Business Corporation Law (BCL). The business judgment rule is one of the  primary statutes regulating operation of cooperative housing corporations in  New Jersey and other states. The business judgment rule essentially says that  if the board or a board member acts in good faith in making a decision in the  interest of the building or association, the court will likely not intervene,  even if the decision turns out to negatively impact the building or  association. Courts have consistently ruled that board members have been given  the power to make such decisions for their co-op, and partly because of this,  they cannot be held personally liable for those decisions.  

 Business Corporation Law Sets Bar

 Courts refer to the business judgment rule when determining whether or not the  actions of a board or board member are permissible under the law and under the  governing documents of the cooperative in question. The rule is used regularly  in other states, as well as in New Jersey. New Jersey’s BCL was implemented more than a century ago, and has been updated as business  practices have changed, technologically speaking and otherwise. The state’s Business Corporation Law originally was the most open and business-friendly  law in the nation.  

 “Delaware passed a general corporation law in 1899, and even before that in 1890,  there were New Jersey laws regarding what a corporation could do,” says Edward A. Berman, an attorney and managing member with Berman, Record,  Sauter & Jardim, which has offices in Morristown and New York City. “In 1868, the U.S. Supreme Court ruled that corporations were not citizens, but  entities with power only conferred on them by the legislature.”  

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