Business Judgment Rule Not a License to Ignore POA Declaration

This was originally published on the SGR Blog.

Almost every aspect of residential community life and governance may be subject to differences of opinion, second guessing and litigation— the outcome of which may depend on the application of the “business judgment rule”. But, as a recent case demonstrates, that rule is irrelevant where the contested action violates the community’s governing document.

Peter Beckerman is a homeowner and member of the Lattingtown Harbor Property Owners Association, Inc. The POA is governed by the Board of Directors. On behalf of the POA, the Board entered into a license agreement with another member of the POA, Peter Tully. The license granted Tully the exclusive right to affix his private docks to the POA’s community dock in exchange for a yearly license fee and for services provided to the POA by his company.

Beckerman sued  the POA to annul the license. He alleged that the Board acted outside the scope of its authority by entering into an  exclusive agreement  with Tully. And Tully intervened in the proceeding and moved to dismiss Beckerman’s petition.

Supreme Court denied Tully’s motion, granted the petition and annuled the license agreement. Tully appealed.

In reviewing the actions of  the board of a homeowners’ association, the court usually applies the business judgment rule and limits its inquiry to whether the action was authorized, taken in good faith and in furtherance of the legitimate interests of the association.

And the court defers to the board’s actions so long as the board acted for the purposes of the homeowners’ association, within the scope of its authority and in good faith. However, the business judgment rule does not apply when a board acts outside the scope of its authority or violates its own governing documents.

Here, the appeals court agreed that entering into the license agreement was outside the Board’s authority. The POA’s Amended Declaration stated that each member of the POA was privileged to use the POA’s community recreational facilities in common with other members And the modification or cancellation of that privilege was not permitted.

By granting Tully the exclusive right to affix his private docks to the POA’s community dock, the Board prevented other members from docking their boats at the portion of the POA’s community dock to which Tully’s private docks were affixed.

The license agreement modified the privilege of POA members to dock their boats along the portions of the POA’s community dock which were blocked by Tully’s private docks. Thus, the license agreement was not authorized by the POA’s Amended Declaration and was properly annuled. To view the full court decision, click here.

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