Overview
The Business Judgment Rule (sometimes referred to as the “BJR”) is often treated by bad HOA boards and managers as a sort of universal shield against scrutiny or negligent/bad faith actions. So, for example, when homeowners living in such associations question decisions, challenge enforcement, or point out legal violations, these bad HOA boards frequently respond with a reflexive claim that the Business Judgment Rule applies and that courts will invariably defer. That framing is both incomplete and flat-out wrong.
In California HOAs, the Business Judgment Rule applies only when boards satisfy specific statutory requirements. It is neither automatic nor unconditional, and it does not protect every decision simply because a board voted on it. When boards act outside their authority, fail to conduct reasonable inquiry, commit gross negligence, act in bad faith, ignore governing documents, or violate statutory duties, the presumption of reasonableness known as the BJR disappears. And in those circumstances, courts will not defer, leaving those bad HOA directors without the protection of the rule.
This Fact Sheet focuses on the situations where bad HOA boards lose the benefit of the Business Judgment Rule altogether. It explains the most common ways bad directors disqualify themselves from its protection, including decisions made without good faith, without adequate investigation, or in disregard of the governing documents or California law. It also clarifies why relying on management, legal counsel, or internal policies does not automatically restore the rule’s protection when the underlying decision-making process is itself flawed.
Understanding when the BJR does not apply is just as important as understanding when it does. For homeowners evaluating whether a board’s conduct is entitled to deference or open to challenge, this distinction often determines whether a dispute ends at the boardroom table or proceeds to court.
For a quick guide on what the BJR is within the context of California HOAs, see my Fact Sheet, “What Is the Business Judgment Rule in California HOAs?” For a deeper dive into this topic as a whole, see an episode of my podcast, HOA HELL, entitled “California HOAs: The Business Judgment Rule.”
Key Points
The Business Judgment Rule applies only when HOA boards meet specific statutory and procedural requirements. The following key points explain the most common situations where boards lose the BJR’s protection under California law.
- The Business Judgment Rule does not apply when boards act outside their legal authority. Under Corporations Code 7231, HOA board members (i.e., directors) enjoy the presumption offered by the Business Judgment Rule if they act within the scope of authority granted to them by the governing documents and California law (including the Davis-Stirling Act). When boards exceed that authority, courts will not defer to their decisions, and the BJR will provide no protection.
- Bad faith conduct removes Business Judgment Rule protection. Directors must honestly believe they are acting in the best interests of the HOA. Decisions driven by retaliation, animus, ego, self-interest, or pretext fall outside the rule and receive no judicial deference.
- Failure to conduct reasonable inquiry defeats the rule. The Business Judgment Rule protects process, not outcomes. Boards that rubber-stamp management recommendations, ignore relevant evidence, fail to hire competent professionals where necessary (e.g., attorneys, accountants, contractors, etc.) or refuse to investigate disputed facts fail the reasonable-inquiry requirement and lose the presumption of reasonableness.
- Gross negligence is not protected by the Business Judgment Rule. While directors are not required to be perfect—in fact, they don’t always have to pick the “best” solution to a problem, or even a “correct” solution—they must always act with the care an ordinarily prudent person would use under similar circumstances. Grossly careless or reckless decision-making disqualifies boards from the BJR’s protective presumption.
- Boards cannot rely on the Business Judgment Rule to justify breaking the law. Courts do not defer to decisions that violate the Davis-Stirling Act or other applicable California laws. Stated differently, your HOA cannot invoke the Business Judgment Rule to excuse unlawful conduct.
- Ignoring or “wrongfully” misapplying the governing documents is not protected by the BJR. When HOA boards act contrary to the CC&Rs or other governing documents, or when they unreasonably (or in bad faith) misinterpret their obligations under the governing documents, courts do not apply the Business Judgment Rule. Deference evaporates when boards fail to follow the documents they are bound to enforce.
- Reliance on experts is not automatically sufficient. Generally speaking, reliance on an expert (e.g., attorney, accountant, contractor, etc.) is enough to merit the protections of the Business Judgment Rule. But that reliance is not unconditional. Blind reliance, selective reliance, or reliance used as a pretext to avoid reasonable inquiry or action will not protect your HOA.
- Selective enforcement undermines the rule. Selective enforcement (i.e., unequal treatment of homeowners in similar situations) indicates a lack of good faith and reasoned process, placing board conduct outside the Business Judgment Rule.
- The Business Judgment Rule does not immunize HOAs from judicial intervention. Even when individual directors may avoid personal liability, courts may still grant injunctive or declaratory relief against a bad HOA when board conduct falls outside the BJR’s protection. More importantly, Homeowners may still pursue any other claims supported by the facts. The BJR is a presumption, not a shield from court inquiry. If a homeowner can overcome the BJR’s presumption by proving gross negligence or willful misconduct on the part of the HOA or its directors, then the HOA will lose the protections of the Business Judgment Rule.
Taken together, these points explain why the Business Judgment Rule is far narrower than many bad HOA boards claim and why courts withdraw deference when boards fail to act lawfully, reasonably, and in good faith.
FAQs
Does the Business Judgment Rule apply simply because the board voted on an issue?
No. An HOA board vote alone does not trigger protection. The Business Judgment Rule applies only when directors meet the statutory requirements set forth in Corporations Code 7231 by acting reasonably, in the best interest of the HOA, in good faith, and by making reasonable inquiry when it’s appropriate to do so.
Can a board rely on the Business Judgment Rule if it ignored homeowner evidence of wrongdoing?
No. HOA Boards that refuse to consider relevant information or fail to investigate disputed facts do not satisfy the reasonable-inquiry requirement and lose the rule’s protection.
Does following advice from legal counsel or other experts automatically guarantee protection?
No. Reliance on professionals must be reasonable. Boards cannot invoke the Business Judgment Rule when they use advice as a substitute for inquiry or selectively rely on advice to justify predetermined outcomes.
Can the Business Judgment Rule excuse violations of the governing documents?
No. When an HOA board ignores or violates its own governing documents (or skips mandatory steps in its decision-making process), it fails the reasonable inquiry and lawful conduct requirements of Corporations Code 7231. In those situations, it’s very unlikely that court will defer to the board’s decision.
Does the Business Judgment Rule prevent homeowners from suing their HOA?
No. Homeowners may still pursue any claims supported by the facts. The BJR is a presumption, not a shield from court inquiry. If a homeowner can overcome the BJR’s presumption by proving gross negligence or willful misconduct on the part of the HOA or its directors, then the HOA will lose the protections of the Business Judgment Rule.
Does the Business Judgment Rule apply if a board decision was based on facts that the board should’ve reasonably known were false?
Probably not. The Business Judgment Rule requires directors to act on the basis of reasonable inquiry and reasonably reliable information. When a board relies on demonstrably incorrect facts, ignores contrary evidence, or refuses to correct known factual errors, it cannot claim the protection of the rule. Decisions built on false or unsupported factual assumptions fall outside the scope of Corporations Code 7231.
About MBK Chapman Fact Sheets
Homeowners searching for answers online will often come across articles that appear authoritative, but are actually written as search-engine marketing content rather than by an experienced HOA lawyer. These pieces tend to prioritize keyword density over clarity, accuracy, or legal context, which often leaves homeowners more confused than informed.
At MBK Chapman, our Fact Sheets are part of our HOA Law Library and are written by Michael Kushner, an HOA lawyer with decades of hands-on experience representing California homeowners. In fact, Michael Kushner is the HOA lawyer who pioneered the systems and strategies used by some of California’s most successful homeowner-side HOA law firms.
Each Fact Sheet is deliberately concise, statute-based, and designed as a quick-reference guide to help homeowners understand key HOA laws and enforcement rules at a glance.
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