Summer 1998 - Decisions made by a board of directors of homeowners associations are
routinely questioned by association members. The "Business Judgment Rule" is
commonly depended on by boards of directors to protect these decisions. However, the
California Court of Appeals recent ruling, Lamden v. La Jolla Shores Condominium
Association, 98 D.A.R. 3389, 98 C.D.O.S. 2475, (April, 1998, 4th Dist.) notes that
some decisions should be measured by an objective standard of reasonableness rather that
the business judgement rules. Lamden has been accepted for review by the California
Supreme Court, and thus cannot be cited as precedent at this time. Nonetheless, it holds
important lessons for Community Association managers.
Facts
In this case, a homeowner, Gertrude Lamden, owned a unit in the La Jolla Shores Club
cornplex. For several years, Gertrude's unit had serious termite problems. She obtained a
report saying that the building in which she lived should be tented and fumigated, and
insisted that tenting and fumigating the three and four story buildings was the only way
to solve the problem. The Association received a report which suggested either
tenting/fumigating or spot treating should be done to alleviate the termites. The
Association made a decision to spot treat because (1) the cost (about $118,000 to fumigate
the entire building), (2) the expense and hassle of relocating residents, (3) concerns
about the effect of chemicals on the residents' health, (4) the fact that over $1.5
million in exterior renovations to bridges and walkways (which would include replacement
of damaged areas) was planned in the next two years, (5) potential claims for lost rental
income, and finally, (6) the fact that tenting and fumigating may have provided only short
term benefits because termites are endemic to the wooded coastal area where the project is
located.
The homeowner sued in Superior Court. The Court held that the Association's action was
reasonable under the business judgment rule. The business judgment rule is found in
Corporation Code 7231 and requires the Board to act in good faith, and with the best
interests of the Association in mind, and after reasonable inquiry. The Court found for
the Association, and awarded the Association $40,000 in attorney’s fees'. The
homeowner appealed.
Issue
Should the Association's action to spot treat for termites judged by the business
judgment rule or under an objective standard of what is reasonable?
Holding
The Superior Court decision was reversed and Mrs. Lamden was granted a new trial
because the appellate court found that the wrong standard was applied. The proper standard
by which to judge the Association's action was the objective reasonableness standard, and
because it was "reasonably likely" that Mrs. Lamden would have prevailed if this
standard were applied, the case was sent back to the trial court.
Reasoning
The Lamden case involves termites, which are lucky enough to have their own
Davis-Stirling Act section, namely, section 1364. Section 1364 provides that a condominium
association is responsible for repairing and maintaining common areas as occasioned by the
presence of wood-destroying pests including termites and must promptly and effectively
treat these pests.
Under the CC&Rs there was no question that "common areas" meant common
areas as defined under the recorded condominium plan and included "bearing walls.
columns, floors, roofs, foundations..."
The court relied on Francis T v. Village Owners Assn., (1986) 42 Cal.3d 490, the
California Supreme Court case which distinguished between the Associations' duties to its
members under the governing documents and common law principle of ordinary care not to
injure a third party. Remember Frances T., the case where the California Supreme
Court found a condominium association liable to a resident who was assaulted after her
request for security lighting was denied? There, the court found a "dual
relationship." The association's directors were, of course, fiduciaries, and the
business judgment rule might apply to the Board/member relationship, but the Association
also was found to have a common law relationship with a resident, similar to a
"landlord." Because our friend Gertrude's lawyer alleged that the Board breached
its duty to the "tenant" Gertrude, the general landlord duty to exercise
reasonable care applied, the Appellate Court found.
Why is this decision so significant? Because while the trial court said, "We won't
second guess the Board's good faith decision," the Appellate Court said, "Yes.
we will!" The justices put on their "20-20 hindsight" glasses and said
there was evidence that the program of spot treatment was only a "partial
solution," and that under an "objective standard" (that is, what the
justices or the judge or the jury things a reasonable director would do in similar
circumstances) it was "reasonably likely an outcome more favorable to Lamden would
have resulted." The case was sent back to the trial court for the judge to try his
hand at second guessing.
We will now wait and see how the California Supreme Court views this issue. For now, be
aware and follow these Practice Pointers, and always ask yourself, is there a Gertrude in
your association, waiting to challenge the Board's decisions?
The Law Journal Guest Editor, David Feingold, Esq. recommends these practice pointers
be followed when dealing with controversial maintenance issues:
Practice Pointers
- Document significant maintenance or repair decisions in
a formal resolution, setting forth the information relied
on by the Board and the rationale for its decision.
- Rely on experts and seek second opinions.
- It a special assessment is required to fund repairs demanded
by an owner, put it to a vote of the membership as a funding
issue.
- Treat every owner's request seriously.
- Involve the owners, through committees, in evaluating courses
of action for controversial maintenance or repair issues.
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