November 14, 2000 - In a May 23, 2000 decision, the Fourth Appellate District recognized the special litigation defense for Boards of Directors in homeowners associations. The defense allows a disinterested group of directors to determine that lawsuit, brought by individual homeowners on behalf of the association's best interest.
The Leisure World homeowners associations involved in this case are adjacent to the El Toro Marine Corp Air Base. The case arose out of proposals to convert the Air Base into a commercial airport. Between 1995 and 1996, the associations that govern Leisure World contributed over $500,000 to a local initiative that would have impeded or prevented the airport conversion.
A lawsuit was brought by individual homeowners against the Boards to prevent further contributions toward the initiative. The primary concern was that the contributions were paid from special assessments collected from homeowner members, some of whom were in favor of the conversion. The associations brought a motion to dismiss the case because a special committee of disinterested directors had determined that maintaining the suit is not in the best interest of the association. The Finley court agreed.
The general concept behind the special litigation defense is simple. Under the business judgement rule, a Director for a homeowners association cannot be held liable for actions taken in good faith which he or she believes, based upon a reasonable investigation, to be in the best interest of the corporation. The Board of Directors for a homeowners association is responsible for managing the affairs of the corporation.
The lawsuit brought in this case is a shareholder derivative lawsuit brought by a number of disgruntled shareholders. The special litigation committee reestablishes control of the association's affairs in the Board of Directors.
As such, the main purpose behind the special litigation defense committee is to further the fundamental principle that those best suited to make decisions for an association, including the decision to bring a lawsuit, are it's directors, not he homeowners or the courts.
With the Court reiterating the concept of allowing the Board to make decisions in the best interest of the association, the impact of this ruling may be most prevalent on construction defect litigation in California. Individual homeowners will have a harder time seeking to remove cases from construction defect litigation once a disinterested group of directors determines that litigation is in the best interest of the association.
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