Daily Development for Wednesday, February 18. 2004 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu CONDOMINIUMS; ASSOCIATIONS; DECISION MAKING; BUSINESS JUDGMENT RULE: The "business judgment rule" insulates directors from liability for their decisions even when they vote in ways from which they personally benefit and do not recuse themselves, so long as there is no clear showing of lack of good faith. Board of Managers of 229 v. J.P.S. Realty, 764 NYS 2d 405 (A.D. 1 Dept. 2003) This was a mixed use condominium project. The condominium board allegedly voted to make an allocation of expenses to the owner of a commercial unit that included a portion of expenses attributable entirely to the residential units. The court here reversed a finding of summary judgment for the association in part on the ground that the board may have acted outside of its authority. The editor takes this to mean that there was a question as to whether such action was authorized by the organic documents - declaration, bylaws, etc., of the association. The court quotes from the bylaws and discusses the stipulations of the parties, and it appears that the dispute was not as to whether the commercial condos could be required to bear the expenses attributable to residential properties, but whether in fact such an allocation was made here. The owner argued that the allocation of expenses to it was inherently flawed because several of the board members who voted for the allocation were themselves residential unit owners who directly benefitted from the vote. The court concluded that, notwithstanding that they were voting on matters theoretically involving their own personal interest, the decision of the board members was still shielded from attack under New York's business judgment rule test of the validity of association determinations. Comment 1: The court noted that there was no evidence that "only" the residential directors approved the allocations at issue or that they controlled the board. The court does not say why this would have mattered. The directors almost certainly were unit owners. They either were commercial unit owners or residential unit owners. In either case, they had a bias on this issue. It would be impossible to get a disinterested vote. In this environment, does it make sense to challenge a decision made by the board on the basis that some voting board members got an incidental benefit, even if they were the only ones voting in favor? Comment 2: Of course, the "business judgment test" normally is regarded as a rule of liability (or non liability) for corporate directors. In the common interest association context, however, it has been coopted as a test for validity of association decisions. New York applies the test relatively rigorously in favor of the association discretion. Cases in other jurisdictions may not be so consistent. Further, there is authority that the test is of no benefit if the association does not adopt a rational procedure for making the decisions in the first place. Riss v. Angel, 934 P.2d. 669 (Wash. 1997), the DIRT DD for 7/7/97, involving architectural approval, so found in dicta, although the statement was not a holding because the court refrained from deciding whether the "business judgment rule" or the alternative "reasonable test" was the controlling test for evaluating association judgments in Washington. Many have argued that there is virtually no distinction in practice between the two tests. Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. 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