Question/Answer for April 25, 2013
There were some e-mail questions I got today that reveal that there may have been some confusion about discussion in class today about Lamden, and what the court was (and wasn't) saying about the prospect of an owner's association board or its members being liable to owners for bad decisions. So let me try to clarify by talking about a series of examples.
1. First, go back to the "Bubba" example from Wednesday's class. Bubba buys a lot in the Pine Straw Golf Links development, which is subject to CC&Rs that require all lot owners to be dues-paying members of the golf club. The CC&Rs do not expressly limit the HOA's discretion in operating the club and the golf course. When the golf course is not breaking even, the HOA has to decide between increasing dues or admitting members of the public to play during limited hours (as a means of increasing revenues). The HOA gathers information about the impacts of similar decisions at 10 other private clubs throughout the Midwest, and at a properly-noticed meeting, after giving all owners an opportunity to speak, the HOA decides to allow members of the public to play on Mondays rather than increase dues. Bubba objects to this decision and decides to sell his house, but several prospective buyers refuse to buy because they've heard "the club is in trouble." Bubba then sues, claiming that the decision has reduced the value of his home.
Even if Bubba can prove that the decision has actually reduced the value of his home (which may be difficult), the Lamden decision suggests that the Board should not be liable to Bubba for this decision. The Board had a difficult decision to make regarding how to address the income shortfall associated with the golf course in a manner that was in the best interest of the entire community. It gathered an appropriate amount of information to inform its decision; even if that decision "didn't work out" as well as the Board might hope, Bubba should not be able to complain about the decision as long as the Board members followed the appropriate procedures and made its decision after a reasonable investigation.
2. By contrast, now suppose that Bubba shows that the Board made a decision to turn over management of the golf course to World Golf, a golf course management company that is in fact owned by the husband of the Chair of the HOA Board. The Board members do no investigation of World Golf, instead relying upon the Chair's statements that World Golf's reputation is "impeccable." The Chair does not disclose the fact that her husband owns World Golf, or that World Golf is currently in litigation with three other clubs for breach of its management agreements. World Golf's management of the course causes widespread unhappiness among the members, including Bubba, who cannot find a buyer for his home because they've heard "the club is in trouble." In this situation, the Board's decision would not be protected by the business judgment principle, and Bubba or other objecting owners could challenge the validity of the Board's contract with World Golf. Further, if Bubba can actually prove to the satisfaction of a jury that the Board's decision to hire World Golf had the effect of reducing the value of his home (which, again, may be difficult, but not impossible), Bubba may be able to recover damages from the Board.
3. X buys a unit in Mountain View Condominiums, a condominium development which is subject to CC&Rs that establish a condominium association and a board of directors (the Board) for the association. The Board makes a decision to contract for snow removal with Snowplow Steve, LLC, a licensed and fully-insured company with 30+ years of experience in snow removal, after interviewing and receiving bids from six different companies and checking references on all six companies. The following year, Snowplow Steve's new employee is clearing the Mountain View parking lot after a snowstorm and negligently damages the cars of four condo residents, including X. Snowplow Steve, LLC is liable under tort law to X. However, the Board is not vicariously liable for the torts of Snowplow Steve, LLC (which is an independent contractor). Further, the Board would not be liable to X based on an argument that the Board was negligent or otherwise breached a duty to the residents in deciding to contract with Snowplow Steve, LLC.
4. X buys a unit in Mountain View Condominiums, a condominium development which is subject to CC&Rs that establish a condominium association and a board of directors (the Board) for the association. The Board makes a decision to contract for snow removal with Steve Smith, a local high school student who does not have a business license and does not have business liability insurance (he did offer the lowest bid, though). After a snowstorm, Steve is plowing the lot and negligently damages the cars of X and three other condo residents. There is no question that Steve is liable under tort law for his negligence, and will have to pay for the damages caused to the resident's cars. Further, the Board is likely liable to X and the other residents who suffered damages, because the Board was almost certainly negligent in its decision to hire an unlicensed and uninsured contractor.
5. Bubba buys a unit in Mountain View Condominiums, a condominium development which is subject to CC&Rs that establish a condominium association and a board of directors (the Board) for the association. The roof of the building requires repair or replacement. The Board interviews six different companies and checks their references; three recommend replacing the roof, and three recommend just patching it. The Board ultimately decides to contract with Rick's Roofing, LLC, a licensed and fully insured contractor, to patch the roof. Bubba, who lives in a unit that has previously suffered from roof leaks, is irate because he is having a difficult time selling his unit because word is "on the street" that the condo has had issues with a leaky roof in the past. Bubba sues the Board for damages claiming that the Board's decision breaches a duty of care owed to the homeowners. This example is essentially comparable to Lamden; assuming that the court concludes that the Board's investigation was reasonable, the court will probably conclude that the Board's decision is protected by the business judgment principle.
Note, however, that if Rick's does a negligent job doing the work, and as a result the roof continues to leak and causes damages to Bubba's unit, Rick's is liable in negligence for those damages (although the condo association would not be vicariously liable).
6. Bubba buys a unit in Mountain View Condominiums, a condominium development which is subject to CC&Rs that establish a condominium association and a board of directors (the Board) for the association. Bubba is injured one day when he is attacked and robbed in his unit by two armed men who broke into his unit (which was not protected by a deadbolt lock). Bubba sues the condo association board saying that the association was negligent in not providing deadbolt locks on the units, arguing that landlords have a similar liability to tenants under the warranty of habitability. Bubba will likely lose; the condo association is not in the position of a landlord with respect to Bubba's unit, and the condo association has no duty to Bubba with respect to the habitability of his own unit (which he owns in fee simple).
7. Bubba buys a unit in Mountain View Condominiums, a condominium development which is subject to CC&Rs that establish a condominium association and a board of directors (the Board) for the association. Bubba is injured one day when he is attacked and robbed by two armed men as he was entering the front door of the condominium building just after dark. He sues the Board, arguing that the Board was negligent in not providing security at the front door. Historically, such tort claims against the Board would have failed, in part because the common areas in a condominium were not owned by the Board, but were instead owned by the residents themselves as tenants in common (such that Bubba would essentially have been suing himself!). More recently, courts have begun to conclude that a condominium association may be held liable in tort for negligence if a resident is injured due to an attack if the risk of such an attack was foreseeable (if there was a condition that posed an unreasonable risk) and the association failed to address that risk. Thus, the California court in Frances T. (discussed in Lamden) allowed a complaint to go forward in a case where a resident was raped outside the entrance to the building; she had complained of inadequate entrance lighting and there had been other attacks in the area, and thus the court allowed her tort complaint against the Board to go to a jury.
There could be an endless set of variations, but hopefully these examples lay out the basic approach that a court would take depending upon the type of Board decision and the type of harm (i.e., damage to property vs. personal injury).