Business Judgment Rule Applies Only When Board Directors Act Within Their Authority and Without Bad Faith
The South Carolina Court of Appeals has recently reiterated that the business judgment rule applies to ultra vires acts only - acts within the directors' authority. Baumann v. Long Cove Club Owners Ass''n, 380 S.C. 131, 138 (Ct. App. 2008). The case involved a residential subdivision located on a golf course in Hilton Head.
The association's board of directors approved a couple of expenditures for golf carts and renovation of the club house, totaling over $975,000. The declaration provided that any expenditure over $150,000 had to be approved either as part of the annual budget or by referendum. Also, the covenants stated that 15% of the owners, and representing 15% of the properties, could call for a special meeting to require the association to take an action by referendum. In the event of litigation between the association and members, the prevailing party would be entitled to attorney's fees.
In response to a proper request by a sufficient number of members, a special meeting was called. Prior to the meeting, the members received a letter from the association that also included an explanation statement by the members who requested the meeting. The statement explained the purpose of the meeting: to approve or disapprove the expenditures undertaken by the board. At the meeting, members were presented with two choices: vote "yes" or "no" on whether to have a referendum regarding the expenditures. The vote was 251 to 102 for not having a referendum.
The members then sued the association, asking the trial court to declare that the association has not complied with the restrictive covenants. After a judgment for the association, both parties appealed: the association asking for attorney's fees and the members arguing the lower court erred in finding that the association did not violate the covenants.
The members' argument was that the association acted ultra vires or outside its authority. An association may only act within the authority granted by law and the association's charter or articles of incorporation and any authorized by-laws or rules and regulations. Under the business judgment rule, a court will not review a decision of the governing board of a corporation unless there is a showing that the board acted in bad faith, with corrupt motives or incompetence. However, the business judgment rule applies only when the board acts intra vires or within its authority.
So, the question became: Were the board's actions within the law and the association's documents? The court of appeals disposed of this question easily. While the board may have not formulated the questions to members the way the plaintiffs proposed, the questions presented for voting were essentially the same. The association, therefore, did not violate the covenants.
As to attorney's fees, the suing members were not entitled to any because they did not prevail. Furthermore, the court interpreted the covenants to provide attorney's fees only to a party prevailing against a violator of covenants. The association did not allege that the members violated any covenants. Therefore, it was not entitled to attorney's fees.
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Posted by Ryan McCabe at 2/3/2009 4:21 PM 
Categories: Attorney's Fees, Homeowners Association, Covenant Enforcement, Board of Directors, SC HOA Law, Business Judgment Rule, Case Law Summary
Categories: Attorney's Fees, Homeowners Association, Covenant Enforcement, Board of Directors, SC HOA Law, Business Judgment Rule, Case Law Summary
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