The Supremes Uphold the Business Judgement Rule
by Stanley Feldsott, Esq.

Gertrude M. Lamden was the owner of a unit in a 104-unit condominium complex. The buildings had been originally poorly constructed, thus making moisture prevalent and making the wood a choice feeding ground for termites.

Lamden believed that tenting was the appropriate fix for ridding the complex of termites. The Board opted for spot treatment instead. They based this decision on cost, the inconvenience of relocation, the possible health hazards, claims forlost rent by homeowners and the belief that tenting would also be a short-term remedy. In addition the Board had hired contractors to make repairs to the exteriors of the buildings and balcony decks that included repairs to water and termite damaged areas.

The following year, Lamden sued the Association for breach of the CC&Rs for failure to maintain the common areas, negligence, and failure to comply with Civil Code Section 1364. The Board countered by claiming that the decision to spot treat was made in good faith. Lamden waived her right to recover money damages before trial. Both sides agreed that it was the Association's duty to maintain the common areas with respect to termites. The trial court applied the business judgment rule and found that the Association's actions were unassailable, whether the actions were objectively reasonable or not. The Association was awarded attorney's fees. Lamden appealed.

The appellate court found that the Association owes an objective duty of reasonable care in repairing and maintaining the project. This was distinguished from the duty owed when performing other functions. Then the case went before the California Supreme Court.

The California Supreme Court reversed the appellate court's decision and in doing so, clarified the law and gave associations corporate protection and immunity. The Supreme Court found that where a community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community and its members, exercises discretion within the scope of its authority, the courts should defer to the board's decision. In other words, the Supreme Court said that the lower courts should not second-guess the Board's decisions when the Board exercised its proper business judgment with regard to the discharge and performance of its duties as identified by the statute or the governing documents.