Daily Development for Wednesday, November 3, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

ASSOCIATIONS; DIRECTOR'S LIABILITY; STANDARD OF CARE: Alaska Supreme Court applies reasonableness test, and not the more lenient "business judgment" rule, to economic and management decisions by association boards.

Bennett v. Weimar, 975 P.2d 691 (Alaska 1999)

Plaintiff, owner of two units in a mixed use condominium, argued that the President of the Association, who also had voting control of the Association, acted unreasonably in providing for landscaping improvements that exhausted the reserve of the Association and raised her assessments by 250%. She also claimed that the President acted unreasonably in granting permission to a unit owner to install a coffee shop, in violation of a bylaw that had been enacted during plaintiff's term as president that prohibited restaurant uses.

The case apparently was poorly prepared and argued by the plaintiff, and thus some of the really interesting issues do not get an adequate airing here. For instance, all the evidence pertaining to the impact of the cost of the improvements on assessments and evidence purporting to show that the President received special personal benefits from the improvements were contained in plaintiff's affidavits that the court ruled as inadmissable in this summary dismissal motion because the plaintiff's signature had not been notarized.

We also don't get a good look at the question of whether a party who serves both as President and as owner of a controlling interest in the association has any duty to avoid conflicts of interest concerning improvements to his own properties.

The court upheld the granting of a summary judgment motion for the defendant President (plaintiff did not sue the association). But in doing so the court rejected the defendant President's argument that the standard of care for decisions involving individual decisions of maintenance ought to be measured by the more lenient "business judgment rule," under which the court will challenge only those decisions rising to the level of fraud, dishonesty or incompetence. Note that a California court of appeals in an unpublished decision earlier this year decided that the business judgment rule did apply to economic and maintenance decisions, even though a tougher standard might be applied to more general association governance decisions such as bylaws amendments. Lamden v. La Jolla Shores Clubdominium Assoc.,1999 WL 592088 (Cal. 1999) (the DIRT DD for 8/13/99).

As to the bylaws enforcement issue, the court held that the President was entitled to rely upon the opinion of counsel that the bylaw amendment prohibiting restaurants was invalid and unenforceable. The court does detail the basis for counsel's decision. It simply held that it was a reasonable decision for the President to refuse to apply provision that the association's own lawyer found to be unenforceable. The court said nothing about plaintiff's argument that the counsel's opinion was rendered after the President had given permission to the coffee shop to operate in violation of the bylaw provision.

Comment 1: Despite the court's adoption of the "reasonableness" test here, and its recognition that the test places a greater burden upon directors, the court lists a series of Alaska decisions demonstrating that in fact the court has not applied a very rigid standard in evaluating the reasonableness of association decisions that arguably fit within the appropriate purposes of the association's mandate. The court appears simply to be holding back some review authority for the time when the case comes along where the director's actions really rub the court the wrong way.

Comment 2: As to the failure to apply the bylaws, we do not, as noted, know the basis for the alleged invalidity of the bylaw prohibiting restaurants. if the basis for counsel's opinion was that the bylaws were not properly adopted, then it would seem that the association was quite reasonable in ignoring it. If, on the other hand the provision was lawfully enacted, but counsel believed it unenforceable for other reasons, one might argue that a reasonable board had a responsibility to take its own governing documents seriously. But how far would the association have to go? Surely it is not required to invest in a lawsuit against counsel's advice.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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