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Business Judgement Rule

Can a homeowner file a complaint with the AZ Department of Real Estate regarding a Board decision that in the homeowner’s opinion violates the business judgement rule? I don’t want to get too specific, but recently my HOA Board correctly and prudently spent $2k to install an object that would improve safety and security in the neighborhood. Other parts of my neighborhood already have this object, but this one area for decades has not had this object, despite committees and homeowners wanting this object in the neglected area.

A minority of homeowners are upset about this object. If they are successful in getting elected to the Board and then immediately vote to remove the object, would I be successful in filing a case with the AZ Department of Real Estate over a bad business judgement decision due to “sunk costs”, negligence if a crime occurred because of the lack of the object and discrimination, because other areas of the HOA have this object and this certain area does not? I have before and after photographs to prove how this object is needed and makes this area of the complex vulnerable to crime. There is also an extremely high probability if a police offer came to do an assessment of the neighborhood, he/she would recommend this object in the area it was installed.

3 Responses

  1. dennisl

    Nick;

    You have several issues in your question the first is relative to the business judgement rule. While every HOA attorney and every community manager will swear that because the rule is codified in Arizona statutes for non-profit corporations of which most if not all common interest communities are, that it applies to all such communities. The truth is that in 2000 the American Law Institute published the Restatement of Law third for Property Servitudes which clearly debunked that theory because it provided too much preferential treatment of Board’s decision making. That position was made part of Arizona case law in the Appellate courts ruling and decision in Tierra Ranchos HOA v Kitchukov 1 CA-CV 06-0474 in 2006. To this day the HOA industry ignores this fact and continues to promote that the business judgement rule continues to apply to all common interest communities. The main reason for this is that the business judgement rule includes a provision that indemnifies the board from liability if they make decisions based on the advice of their advisors. What this means is that if a board makes a decision based on the advice of their community manager or their attorney even if that advise is wrong or illegal the board is protected from liability from its decision. This is a blank check to all community managers and HOA attorneys. So guess why they (the HOA Industry) wants to continue this charade?

    The bottom line here is that the business judgement rule does not and cannot be applied to CIC boards.

    The second part of your question is if you can file a Petition to ADRE and the ALJ based on the business judgement rule? The answer to that is simple and is no. The ADRE dispute resolution process is limited to violations of ARS Title 33 Chapters 9 and 16. The business judgement rule is from ARS Title 10. All of your proposed justifications are also not specifically addressed in the business judgement rule even if it applied to your HOA.

    The third issue is buried within your question. I will make an assumption that the “object” that you refer too is some type of security light, or something to that effect. Allow me to provide this example to clarify your issue. Again the Arizona Supreme court in their decision and ruling in Martinez v. Woodmar IV Condominium that the association had a duty to protect its members from predictable risk. In that case the association was found libel for the shooting of a guest in the community by a gang of external community individuals based on the failure of the association to maintain its street lighting, fences and security gates and guards. While you cannot deal with this issue with the ADRE process if the security issue is removed and something happens because of it, the association can and will be held liable for potentially untold judgements because of their failure to protect their members or their guest.

    Both cases cited in this response can be found on this site under Resources and Tools.

    Dennis

  2. nick

    Dennis,

    Thank you very much for your comprehensive reply! From your response, it appears that the Tierra Ranchos case is effectively being ignored and the promulgated business judgement rule shields the HOA Board from poor decision making, especially if the HOA management company and its representatives back the Board.

    The “object” in my case is a streetlight on common area that has engendered email “wars” and boorish behavior from the minority who are opposed to it. If this minority light-phobic crowd gets elected to the Board and puts the removal of a streetlight on a future Board meeting agenda, I would have to convince the HOA community manager in 3 to 5 minutes with before (pitch black) and after photos of the area, past committee meeting records where a streetlight was recommended, email notifications of past crimes that have taken place in other areas of the property, the Board only changing the gate code once a year, and the Martinez vs Woodmar IV case as the clincher, of how foolish it would be to remove the streetlight, correct? If the community manager disagrees with my argument and tells a new Board they have every right to remove the light, then is my only recourse other than campaigning for a new Board, to wait for a crime to occur on the dark street and then possibly the victim would file a civil suit against the HOA that would cost him/her big $$ in legal fees?

    1. dennisl

      Nick
      Basically the association owns the common property and has every right to ensure that the common property is protected and provides a safe environment for the community members. I suspect that the opposition to these lights come from homeowners that are impacted in their homes by these lights shining in their windows. There is a way that the street protection can be provided and the impact to the homes in the immediate area of the lights can be minimized. Put side shades on the lights so that they do not shine into the windows of the adjacent neighbors. Many cities have similar shades on street lighting that are close to residential areas. If this is the case in your community than this would be a reasonable compromise. The greater issue is the protection of the homeowners and ultimately the protection of the association from liability, and if this compromise does not satisfy the impacted homeowners, than it is your duty to act in the best interest of the entire community and not just this group of homeowners.

      Dennis

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