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.”