Brandt Law Group Blog

THE BUSINESS JUDGMENT RULE: HOW TRUE IS THE ADAGE THAT “NO GOOD DEED GOES UNPUNISHED?”

by | Jul 8, 2018 | Condominium Law |

It is too well settled to admit of controversy that ordinarily neither the directors nor the other officers of a corporation are liable for mere mistake or errors of judgment, either of law or fact. In other words, directors of a commercial corporation may take chances, the same kind of chances that a man would take in his own business. Because they are given this wide latitude, the law will not hold directors liable for honest errors, for mistakes of judgment, when they act without corrupt motive and in good faith, that is, for mistakes which may properly be classified under the head of honest mistakes. And that is true even though the errors may be so gross that they may demonstrate the unfitness of the directors to manage the corporate affairs. This rule is commonly referred to as the “business judgment rule.”

Schwarzmann v. Association of Apartments Owners, 33 Wn. App. 397, 402, 655 P.2d 1177 (Div. 1, 1982) quoting W. Fletcher § 1039 at pages 621–25.  This “business judgment rule” is a rule that is also applied to the directors and officers of condominium and homeowners’ association, which are most often organized as non-profit corporations.

The standards of care for condominium directors is found in RCW 64.34.308(1) and states, in pertinent part:

the board of directors shall act in all instances on behalf of the association. In the performance of their duties, the officers and members of the board of directors are required to exercise: (a) If appointed by the declarant, the care required of fiduciaries of the unit owners; or (b) if elected by the unit owners, ordinary and reasonable care.

Emphasis added.  These standards of care are the same whether your condominium is governed by the Washington Condominium Act or the older Horizontal Property Regimes Act.

Now this all sounds like a lot of legalese to me (even as a lawyer), so I am sure it sounds even more nebulous to the rest of you.  You ask:  How is the business judgment rule applied when one or more of the people that you have elected to your Board has acted in a way that has caused you and/or the other members of your Association some level of harm?  How is a court going to view a claim by the members of the Association against these volunteer directors and/or officers?

The short answer is that where a Board of Directors’ decisions and actions are reasonable and absent fraud, dishonesty, and incompetence, the decisions are not subject to court intervention.  However, when those decisions are based in either fraud, dishonesty, or incompetence, condominium unit owners may seek intervention by a court.  “The business judgment rule does not . . . protect a defendant’s conduct in Washington if the defendant [Association through a Director/the Board of Directors] did not exercise proper care, skill, and diligence.”  Shinn v. Thrust IV, Inc., 56 Wn. App. 827, 833 -35, 786 P.2d 285 (Div. 1, 1990).  Incompetent conduct is actionable under the business judgment rule.  Schwarzmann v. Association of Apartments Owners, 33 Wn. App. 397, 403, 655 P.2d 1177 (Div. 1, 1982).

A judge will not substitute his/her own judgment for that of association directors unless the association directors have failed to exercise proper care, skill, and diligence.  Riss v. Angel, 131 Wn.2d 612, 632, 934 P.2d 669 (1997).  Reasonable care in their actions or inaction is required to allow association directors to be insulated by the business judgment rule.   Good faith alone is insufficient because a director must also act with such care as a reasonably prudent person in a like position would use under similar circumstances.  This means that you can’t just mean well in your activities as a director.  You must mean well and act in a reasonable manner, at a minimum, to avoid liability for harm caused to an association member.

If you are an association director or officer, make sure that your good deeds are undertaken in a reasonable manner and in good faith so that you are not punished for volunteering to help run your Association.  Don’t fall victim to the adage that “no good deed goes unpunished”!

by Michael D. Brandt