Overview

In California HOAs, the Business Judgment Rule, often called the BJR, is a statutory presumption that can protect corporate directors, including HOA board members, from personal liability for decisions they make on behalf of the HOA. But that presumption can be forfeited. Corporations Code 7231 sets the doctrine’s boundaries by requiring directors to act in good faith, to believe their decisions serve the HOA’s best interests, and to exercise the level of care an ordinarily prudent person would use under similar circumstances, including reasonable inquiry. When HOA directors satisfy those conditions, the law limits personal liability for an alleged failure to discharge their duties, but only to that extent and only under those circumstances. When HOA board members violate the law, their own governing documents, act in bad faith, or commit gross negligence, they risk losing the benefits of the BJR, and if that happens, individual HOA directors can be held personally liable.

In my prior Fact Sheet, “What Is the Business Judgment Rule in California HOAs?,” I explained the nature and scope of the Business Judgment Rule and what it was designed to do under California law. Then, in “When the Business Judgment Rule Does Not Protect an HOA Board,” I addressed the specific situations where the statutory presumption falls away and HOA directors lose the protections they often assume apply automatically. Those Fact Sheets focused on doctrine and limits. This Fact Sheet addresses something different.

Here, the focus is on how HOA boards misuse the Business Judgment Rule in the real world. Bad HOA boards, and their HOA lawyers, routinely invoke the BJR not as a conditional presumption tied to process, but as a conversation-ending tactic. Homeowners frequently encounter this misuse in attorney “cease and desist” letters, at hearings, and in enforcement disputes, architectural denials, records requests, and internal dispute resolution meetings. In such situations, bad HOAs will cite the Business Judgment Rule to avoid explanation, to discourage further inquiry, or to suggest that any challenge is futile because the court will uphold the board’s decision.

This is not, however, how the Business Judgment Rule works. The BJR does not excuse an HOA board from investigating disputed facts, does not justify selective enforcement, and does not convert a vote into legal insulation. Reliance on management or legal counsel does not automatically trigger protection, and invoking the BJR does not relieve directors of the obligation to act reasonably, lawfully, and in good faith.

This Fact Sheet identifies the most common ways HOA boards misuse the Business Judgment Rule as a procedural shortcut and intimidation tool. It explains why those tactics fail under Corporations Code 7231, and it gives homeowners a framework for recognizing when an HOA board is hiding behind BJR language rather than complying with the statutory duties that determine whether the presumption applies at all.

Key Points

HOA boards frequently misuse the Business Judgment Rule in ways that have little to do with how the statute actually works. Rather than applying the BJR as a conditional presumption tied to process and good faith, many HOA boards deploy it as a shortcut to suppress homeowner challenges and avoid scrutiny. The following points explain the most common misuse tactics and why they fail under California law.

• Bad HOA boards often invoke the Business Judgment Rule as a conversation-ending tactic. HOA boards routinely respond to homeowner questions or challenges by declaring, as if it was a foregone conclusion, that the Business Judgment Rule applies, as if that statement alone forecloses further discussion. Corporations Code 7231 does not support that approach. If you remember nothing else from this Fact Sheet, then remember this: the BJR is conditional. Its application depends on how the HOA board reached its decision.
• A board vote does not automatically trigger BJR protection. Many HOA boards equate “we voted” with legal insulation. The statutes do not. Corporations Code 7231 requires good faith, reasonable inquiry, and prudent decision-making. A vote taken without investigation, without reliable information, or with a predetermined outcome does not satisfy those requirements.
• Bad HOAs misuse the BJR to avoid reasonable inquiry. The Business Judgment Rule expressly incorporates reasonable inquiry as part of a director’s duty of care. Bad HOA boards often misuse BJR language to justify refusing to investigate disputed facts, ignoring homeowner evidence, or relying on assumptions instead of verification. When an HOA board skips inquiry, it undermines the very conditions required for BJR protection.
• Reliance on management or legal counsel does not automatically insulate an HOA board. Corporations Code 7231 allows directors to rely on information from managers, attorneys, accountants, or other professionals only when the reliance itself is reasonable and undertaken in good faith. HOA boards misuse the BJR when they claim that the mere involvement of counsel or management excuses them from independent judgment or shields flawed decisions from challenge.
• HOA boards often cite the BJR to deflect records requests and transparency obligations. Homeowners frequently encounter BJR misuse when requesting documents or explanations under Civil Code 5200. The Business Judgment Rule does not authorize an HOA board to withhold records, refuse to explain its actions, or ignore statutory disclosure duties. Using the BJR to justify secrecy and lack of transparency reflects procedural abuse, not lawful governance. If you’re interested, you can read my article on the power of Civil Code 5200, “Forcing HOA Transparency: The Power of Civil Code § 5200 to Demand Records.” If you’d prefer, you can watch an episode of my podcast, HOA HELL, on the same subject titled “Your HOA’s Paper Trail: How to Use Civil Code § 5200 to Get Every Document You Need.”  
• Selective enforcement is incompatible with BJR protection. When an HOA board enforces rules unevenly or targets certain homeowners while ignoring similar violations committed by other HOA members, it is guilty of selective enforcement. Selective enforcement is a common context in which bad HOA boards misuse BJR rhetoric to mask arbitrary or retaliatory conduct. And in situations where directors engage in selective enforcement, they will likely lose the protections offered by the Business Judgment Rule.
• HOA boards misuse the BJR to intimidate homeowners out of initiating IDR or ADR. Bad HOA boards invoke the Business Judgment Rule to suggest that pursuing internal dispute resolution or alternative dispute resolution is pointless. The BJR does not, however, support anything of the sort. On the contrary, using BJR language to discourage participation is a misuse of the doctrine.
• Misuse of the Business Judgment Rule can expose individual directors to personal liability. When HOA board members act in bad faith, violate governing documents, ignore the law, or commit gross negligence, they risk forfeiting the BJR’s protections. Contrary to what bad HOA boards will tell homeowners, in those situations, Corporations Code 7231 allows personal liability to come back into play.
• Homeowners should recognize BJR misuse as a warning sign, not a dead end. When an HOA board repeatedly cites the Business Judgment Rule without explaining its reasoning or process, homeowners should view that conduct as a red flag. Consulting experienced California HOA lawyers, like those at MBK Chapman, can help homeowners identify procedural abuse, preserve evidence, and respond effectively before disputes escalate.

Taken together, these points show that the Business Judgment Rule does not operate as a shield for procedural abuse. When HOA boards misuse the BJR to bypass inquiry, transparency, or fairness, they step outside the statute’s protections and invite exactly the scrutiny they claim to avoid.

If your HOA board is hiding behind the Business Judgment Rule to avoid scrutiny, shut down questions, or intimidate you into backing off, call MBK Chapman. We’ll set your HOA straight.

FAQs

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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