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Does the Business Judgment Rule Protect HOA Boards That Violate the Governing Documents?

by | HOA Explainers

DOES THE BUSINESS JUDGMENT RULE PROTECT HOA BOARDS THAT VIOLATE THE GOVERNING DOCUMENTS?

This HOA Explainer addresses whether the Business Judgment Rule protects California HOA boards when they violate their governing documents.

Short Answer

No.

The Business Judgment Rule does not protect HOA boards that violate their governing documents. Boards cannot claim protection for decisions made outside the authority granted to them by the association’s CC&Rs, Bylaws, or Rules.

What This Means Under California HOA Law

In California HOAs, the Business Judgment Rule applies only when directors act within the scope of their authority. That authority comes from the governing documents. When a board violates those documents, it is not exercising judgment within its lawful discretion.

The rule is meant to protect directors who make decisions the documents allow them to make. It does not insulate boards that ignore, contradict, or selectively enforce the governing documents.

Why HOA Boards Take This Position

Bad HOA boards often claim Business Judgment Rule protection even after violating their own documents because the rule sounds absolute. Boards frequently rely on it to avoid responsibility when homeowners point to clear documentary violations.

This framing shifts attention away from the actual issue. The issue is not whether the board merely exercised its legitimate judgment, but whether the board had the authority to act the way it did in the first place.

What This Does Not Mean

The Business Judgment Rule does not excuse governing document violations.

It does not:

  • Allow boards to ignore the CC&Rs or bylaws.
  • Protect actions taken outside the board’s granted authority.
  • Justify selective or inconsistent enforcement of the rules.
  • Shield decisions that directly contradict the governing documents.
  • Convert unlawful conduct into protected discretion.

If directors act outside the proper scope of their authority or skip required procedures, the Business Judgment Rule may not apply. If directors violate the law or their governing documents, or commit acts of gross negligence, then the Business Judgment Rule does not apply.

How This Affects Homeowners

When an HOA board violates the governing documents and then invokes the Business Judgment Rule, homeowners should focus on the source of the board’s authority. A board cannot claim protection for conduct the documents do not permit.

The Business Judgment Rule protects lawful discretion. It does not protect document violations.

What Is the Business Judgment Rule in California HOAs?

Can You Hold HOA Board Members Personally Liable in California?

California HOAs: The Business Judgment Rule

When to Get Help

If your HOA board is violating the governing documents and claiming Business Judgment Rule protection, MBK Chapman can evaluate whether the board acted within its authority and whether the rule actually applies.

Learn More

For deeper analysis of HOA abuse and homeowner rights, listen to the HOA HELL podcast or read HOA HELL | California Homeowners’ Definitive Guide to Beating Bad HOAs (Amazon | Barnes & Noble).