Late last week, the Washington Supreme court issued a split opinion in Surowiecki v Hat Island that means good news for good boards (and great news for my partner, Jeremy Stilwell, and our client!) In the landmark case, the court adopted a standard by which community association board decisions are judged that should provide good board members with some peace of mind. The court held:
“[W]hen a homeowners association makes a discretionary decision in a procedurally valid way, courts will not substitute their judgment for that of the association absent a showing of ‘fraud, dishonesty, or incompetence. . . . Reasonable care is required.”
Prior to this decision, it was very unclear how Board decisions would be reviewed by the courts, and what deference a court should give to board decision. Despite the fact that volunteer directors are charged with making decisions all the time, the previous case law suggested that Associations could be liable if an owner disagreed with the decision and could convince the court that its decision was a better one. In this case, the court established that when the Association’s documents give a board discretion to make decisions, those decisions made in good faith (without fraud, dishonesty, incompetence, or other unreasonable behavior) cannot be challenged simply because an owner disagrees with the Board’s decision or interpretation.
In this particular case, the issue was whether the Board’s decision to assess all lots “uniformly” was consistent with the mandate to assess them “equitably.” An owner challenged the board decision to levy equal assessments, as one component of the Association’s overall budget. His argument was that the Board’s decision to assess equally was not “equitable” for a variety of reasons. But instead of just jumping to the issues of what “equitable” means, the court realized that the owner’s “evidence established, at most, that there may be more than one equitable way to distribute the costs of maintaining the community’s obligations.” The court found, this is not enough to overturn a board decision without some showing that the decision was influenced by fraud, dishonesty, or incompetence.
The court’s decision was based on sound policy reasons:
“We adopt that rule here in recognition of the respect due to the self-governance of homeowners associations, the importance of finality in budgeting, and the avoidance of interfering with associations’ ability to meet their financial obligations. To hold otherwise would subject the Association to lawsuits anytime a homeowner disagreed with a discretionary choice made by the board and ratified by the members.”
The court declined to address the application of the “business judgment rule” to board decisions generally (as opposed to individual director liability) and instead limited its holding to the deference afforded decisions made by homeowner association boards when exercising discretion. We argued all along that the Riss test, previously adopted by the court, should apply to require judicial deference to board decisions, not just to limit the liability of individual directors. This case establishes that standard as the law in Washington State. Boards should note the court’s emphasis that deference to decisions applies if their actions are procedurally consistent with the association’s governing documents, so it remains critical that directors follow their governing documents.
If you have any questions about this opinion or how it might apply to your community’s decision making processes, do not hesitate to contact us.
