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When Does the Business Judgment Rule Protect HOA Boards in California?

by | HOA Explainers

WHEN DOES THE BUSINESS JUDGMENT RULE PROTECT HOA BOARDS IN CALIFORNIA?

This HOA Explainer addresses when the Business Judgment Rule protects California HOA boards and when it does not.

Short Answer

Only in limited situations.

The Business Judgment Rule protects HOA boards only when directors act in good faith, after reasonable inquiry, and within the limits of the governing documents. Boards are not protected simply because they claim the rule applies.

What This Means Under California HOA Law

In California HOAs, the Business Judgment Rule is a process-based standard. Courts look at how a board made a decision, not whether the board labels that decision as protected.

The rule is meant to protect directors who follow the law and required procedures. It is not designed to shield boards that violate governing documents, ignore statutory duties, or refuse to engage with homeowner concerns.

What This Does Not Mean

The Business Judgment Rule does not protect HOA boards simply because they say it does.

It does not, for example:

  • Excuse violations of the governing documents.
  • Shield boards that ignore the law.
  • Protect decisions made without reasonable inquiry.
  • Allow boards to shut down homeowner questions.
  • Immunize unlawful or bad-faith conduct.

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

How This Affects Homeowners

When an HOA board relies on the Business Judgment Rule, the real issue is whether the board followed the law and governing documents, not whether the board invokes the rule. A board’s assertion of protection does not make that protection real.

The rule protects lawful decision-making. It does not excuse unlawful decisions or silence homeowner oversight.

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 invoking the Business Judgment Rule to excuse bad conduct, ignore the law, or shut down homeowner inquiries, the expert attorneys MBK Chapman can evaluate whether the rule actually applies and whether the board’s actions are legally defensible.

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).