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Posted: October 23, 2019

Homeowners’ Association’s Decisions Protected by Business Judgment Rule

On March 5, 2019, Judge Wilson of the Bergen County Superior Court (Law Division) issued a decision in Bennett v. Malone, Docket No. BER-L-3443-17, holding that the decisions of a homeowners’ association were protected by the business judgment rule, explaining:

A homeowners’ association has a fiduciary relationship with each of its unit owners that requires it to act reasonably and in good faith. This relationship requires that the association protect the interests of the group as a whole, and the interests of each constituent owner individually. Individual owners and residents are required to subordinate their own interests to those of the community at large.

N.J.S.A. 46:8N-14 states that a condominium association, acting through its officers of governing board, shall be responsible for the performance of the following duties, and the costs of which shall be common expenses: (a) the assessment and collection of funds for common expenses and payment thereof (b) an association shall exercise its powers and discharge its
functions in a manner that protects and furthers or is not inconsistent with the health, safety and general welfare of the residents of the community. The Board was also conferred additional powers enumerated in the sections of the By-Laws reproduced in the Factual Background section above.

While certain statutory requirements, in addition to the requirements imposed by the ByLaws were to be followed by the Board in making decisions, the Business Judgment Rule (the “BJR”) applies to limit the personal liability of the Board members. The BJR applies to homeowners’ and condominium associations.

The test for applicability of the BJR in relation to a condominium or homeowners’ association is as follows: (1) whether the Association’s actions were authorized by statue or by its own by-laws or master deed, and if so (2) whether the action is fraudulent, self-dealing, or unconscionable. If a contested act of the association meets each of these tests the judiciary will not interfere.

In this matter, there is no evidence of fraud or self-dealing. The funds raised through the assessments imposed on the unit owners were used only for litigation costs. At the same time, the unit owners approved the opposition to the Caliber project, and were aware of the assessments and the litigation. Moreover, at the conclusion of the bench trial in the Chancery Matter, Judge Toskos determined that Northgate had the power to challenge the Caliber project, and also had the option to pay for the litigation fees and costs through a common assessment.

Plaintiffs claim that the BJR is inapplicable in this instance, despite admitting the absence of fraud or self-dealing by Defendants. Instead, Plaintiffs argue that the BJR is inapplicable because Northgate failed to comply with various provisions of the New Jersey Condominium Act, the Real Property Full Disclosure Act, and the Rules and Regulations of the Department of Community Affairs. However, these arguments were already made in the Chancery Matter before Judge Toskos, who ultimately found them unconvincing in his findings of fact and conclusions of law.

Therefore, as there was no fraud, self-dealing, or unconscionability shown by Plaintiffs, the BJR is applicable in this matter and insulates the individual Board members named as Defendants from liability.

(Internal quotations and citations omitted).

We frequently litigate disputes over the sale or leasing of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.

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