Judicial Deference Rule
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JUDICIAL DEFERENCE RULE

Judicial Deference or "business judgment doctrine" is the principle where courts will defer to business decisions of a board even if a reasonable person would have acted differently.

A mistake of judgment on the part of a board of directors does not justify taking the control of corporate affairs from the board of directors and placing it with the stockholders. The board of directors may make incorrect decisions, as well as correct ones, so long as it is faithful to the corporation and uses its best business judgment. (Beehan v. Lido Isle.)

Burden of Proof. The burden of proof is on an objecting homeowner to show that an association’s decision is arbitrary, imposes burdens on the use of lands it affects that substantially outweigh the restriction's benefits to the development's residents, or violates a fundamental public policy." (Nahrstedt, 8 Cal.4th at 361, 386; Cohen, 142 Cal.App.3d at 642, 651-654.) In this regard, "courts do not conduct a case-by-case analysis of the restrictions to determine the effect on an individual homeowner; [instead they] consider the reasonableness of the restrictions by looking at the goals and concerns of the entire development." (Dolan-King, 81 Cal.App.4th at 965, 975.)

Presumption Favors Decision. The business judgment rule "sets up a presumption that directors' decisions are based on sound business judgment. This presumption can be rebutted only by a factual showing of fraud, bad faith or gross overreaching." (Eldridge v. Tymshare, Inc. (1986) 186 Cal.App.3d 767, 776.)

[N]either a court nor minority shareholders can substitute their business judgment for that of a corporation where its board of directors has acted in good faith and with a view to the best interests of the corporation and all its shareholders. The power to manage the affairs of a corporation is vested in the board of directors.... Every presumption is in favor of the good faith of the directors. Interference with such discretion is not warranted in doubtful cases. (Beehan v. Lido Isle Community Assn (1977) 70 Cal.App.3d 858, 865.)

Rules & Regulations. Although rules and regulations enacted by the board of a homeowners’ association are not recorded, they are entitled to similar judicial deference. “[W]here a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise.” (Lamden v. La Jolla Shores, (1999)  21 Cal.4th 249, 265.)

Case Law Affecting Judicial Deference. "[N]othing in Lamden limits judicial deference to maintenance decisions. Common interest developments are best operated by the board of directors, not the courts.”  (Watts v. Oak Shores Community Association (2015) 235 Cal.App.4th 466, 473.) Even so, judicial deference has limitations and "does not create a blanket immunity for all the decisions and actions of a homeowners association." (Affan v. Portofino Cove Homeowners Assn. (2010) 159 Cal.App.4th 930, 940.) Moreover, California's courts have not been consistent in its scope. The following cases has limited or broadened judicial deference as following:

  • It applies to the board's authority and presumed expertise regarding its right to maintain, control and manage the common areas. (Watts v. Oak Shores.)
  • It does not apply where a board makes decisions contrary to the governing documents. (Ekstrom v. Marquesa.)
  • It applies to decisions involving the common areas (Harvey v. Landing at 821. Dolan-King v. Ranch Santa Fe at 965.)
  • It is limited where the board fails to enforce the governing documents. (Lamden v. La Jolla Shores; Nahrstedt v. Lakeside Village; Dolan-King v. Rancho Santa Fe.)
  • It is limited where responsibility for repairs is unclear. (Dover Village v. Jennison.)
  • It does not apply where a board fails to investigate and make a repair decision. (Affan v. Portofino Cove.)
  • Generally, courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development's governing documents, and comply with public policy. (Nahrstedt v. Lakeside Village (1994) 8 Cal.4th 361, 383.)
  • So long as a homeowners’ association acts upon reasonable investigation, in good faith, and in a manner the association reasonably believes to be in the best interests of the association and its members, its decision will be upheld. (Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249, 265.)
  • A board’s decision is not scrutinized under the business judgment rule . . . until after the court determines that the action . . . falls with the discretionary range of action authorized by the contract. (Palm Springs Villas II HOA v. Parth.)
  • Even if the Board was acting in good faith . . ., its policy . . . was not in accord with the CC&Rs. . . . The Board’s interpretation of the CC&Rs was inconsistent with the plain meaning of the document and thus not entitled to judicial deference. (Ekstrom v. Marquesa at Monarch Beach Homeowners Assn. (2008) 168 Cal.App.4th 1111, 1123.)
  • An association has a corollary, fiduciary relationship with its members. (Cohen, 142 Cal.App.3d at 642, 650–651.)  Its actions must be undertaken in good faith, with regard for the best interests of the community association and its members, seeking professional advice where necessary. (Berryman v. Merit Property Management, Inc. (2007) 152 Cal.App.4th 1544, 1558.)
  • Conduct contrary to governing documents may fall outside the business judgment rule. (Palm Springs Villas II HOA v. Parth.)
  • Notwithstanding the deference to a director’s business judgment, the rule does not immunize a director from liability in the case of his or her abdication of corporate responsibilities. (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263.)

Business Judgment Rule. A related doctrine is the Business Judgment Rule.

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