June 18, 2025
Do District of Columbia Courts Apply the Business Judgment Rule?
The Business Judgment Rule (BJR) is a legal doctrine that owners must understand when dealing with their homeowners’ associations, condominiums and housing cooperatives. The BJR is a legal presumption that corporate directors’ business decisions were on an informed basis, in good faith and in the honest belief that the actions taken were in the best interest of the organization. The BJR imposes a burden upon the challenger to rebut the presumption. There are several exceptions to the BJR. Before discussing that, I would like to explain why the BJR is so heavily ingrained in the law of any organization. Generally, it is not the job of courts to “armchair quarterback” the management and internal life of private business organizations by reversing decisions that the judge or the plaintiff view to be imprudent. The same could be said for families, houses of worship, and school boards. Classical liberalism allows people to freely associate with each other as they see fit and order their own affairs, and to give up a certain measure of their own freedom or flexibility to pursue a common endeavor. The BJR is not a delegation of authority, it is a legal presumption that can be overcome by proof. Overbroad application of the BJR can undermine the property rights, free association and liberty to contract principles that the BJR is supposed to protect. To be clear, the BJR does not mean that corporate boards can do whatever they want.
The BJR is important in the community association context. It acts as a check on the idea that a single homeowner ought to be able to challenge any doubtful board decision on a theory of violation of the governing instruments or breach of fiduciary duty. The whole idea of a private association is that neither an individual director nor lot owner ought to be able to hijack the business of the collective by ignoring rules of order. I have written about the BJR in the past. On March 16, 2022, I posted, “Are Courts Critical or Deferential towards HOA Decisions?” This compared the BJR to other standards that may apply under Virginia law such as principles of strict construction or reasonableness. On April 15, 2022, I posted the article, “Condominium Director Conflict of Interests and the Business Judgment Rule.” This piece focused on a Maryland appellate decision Cherrington Condo. v. Kenney that dealt with the interested director exception to the BJR. The landowner prevailed on a challenge to a landscaping contract that favored certain townhouse owners. Maryland courts hold that the BJR applies in that state, subject to certain exceptions. Any exception to the BJR is a fact specific inquiry, especially the meaning of the governing instruments. Note that the rights to inspect books and records and attend business meetings are essential to discern whether a BJR exception may apply.
I would like to now turn to District of Columbia, which has fewer community associations. D.C. has older row houses which are usually not governed by an association. The most common types of D.C. common interest communities are cooperatives and condominiums. D.C. has its own condominium act which was based in part upon Virginia’s. D.C. does not have an equivalent to the Property Owners Association Act. D.C. has corporate statutes that impose standards of conduct on directors of corporations. However, those statutes do not always apply because many organizations are not set up as D.C. corporations. In corporate governance cases, the applicable statutes are a good place to start. The BJR is primarily a legal presumption that is used by the courts in various states to ascertain the burdens of the parties to move forward in litigation. Do District of Columbia courts apply the Business Judgment Rule? In a 2006 decision, the Court of Appeals considered a derivative action, Behradrezaee v. Dashtara, brought by a shareholder against a D.C. stock corporation, alleging self-dealing and misuse of corporate assets regarding leases by the corporation for two stores, a lease by the corporation for warehouse space, and preferential hiring practices. In Behradrezaee v. Dashtara, the Court of Appeals sent the case back to the Superior Court because the complaint adequately pleaded a derivative action based on improper refusal to pursue a claim, by reason of the directors’ interestedness. This opinion recognized the BJR in the sense that there would be little reason to find an exception if the rule did not otherwise apply.
Two years prior, the Court of Appeals decided a residential cooperative case, Willens v. 2720 Wisconsin Avenue Cooperative Association. This is an interesting common interest community case because the opinion discusses the paradox that every association board is susceptible to a conflict arising from the interests that the directors have in their own properties governed by their own votes. This raises a thorny question as to whether the reality of pervasive director interestedness warrants stricter or more relaxed application of the duty to govern impartially in the interest of the community as a whole.
In 1974, a developer established the 2720 Wisconsin Avenue CooperativeAssociation, Inc. (the Cooperative) under the D.C. Cooperative Housing Act. As a Cooperative, the members do not own their individual units. They own shares in the corporation which owns the property as a whole. The member’s ownership interest consists of corporate equity in the Cooperative. The right to occupy or sublease a particular unit derives from being a member in good standing with the Cooperative. At creation, this particular developer transferred the building to the Cooperative in exchange for a wrap-around mortgage. The Cooperative subsequently apportioned the debt on the mortgage to the individual shareholders. Plaintiffs Liliane Willens and Steven Niederman exercised their rights to prepay their obligation under the apportionment. This saved them money on interest that would otherwise be incurred if paid out periodically. Subsequently, the Cooperative negotiated with the developer to release the mortgage in consideration of various setoffs and judgments entered against the developer, a sum that it agreed to pay, and assumption of an underlying promissory note. Thereafter, the board voted to release the other members of their obligation to pay their allotted portion of the debt. However, the board gave no rebate to Willens, Niederman or the other two prepaying members. The board voted to impose a new special assessment against the “forgiven” members to replenish the reserves, but this was less than the amount that had been forgiven. Willens and Niederman brought a lawsuit against the Cooperative. The Superior Court granted summary judgment for the Cooperative, finding that the decision to cancel the debt for the other members protected by the BJR.
The Court of Appeals found that the equity interests of the members, including the plaintiffs and the directors, were in the assets of the Cooperative, including the members individual promissory notes. In this sense, a housing cooperative is a fundamentally different sort of community association from a HOA or condominium. The cancellation of the mortgage debt apportioned in the promissory notes was equivalent to the distribution of corporate assets to the shareholders. The other members, including the directors, received a distribution of corporate assets. The plaintiffs received nothing. The Court of Appeals found this to constitute a prima facie case for breach of an implied covenant of good faith and fair dealing. Also, the Court found that the claim for breach of fiduciary duty ought to have been permitted to move forward. The directors of a Cooperative owe fiduciary duties to the corporation and its members, including a duty of loyalty. An unequal treatment of shareholders may be found to violate the fiduciary duty of loyalty. The Court found that to show breach of duty of loyalty, the plaintiffs were not required to present evidence of motivation for personal gain or actions in bad faith. Even where directors act in good faith, they may unintentionally violate the duty of loyalty. Because the Court found breach of duty of loyalty, the BJR will not apply. The Court explained:
“It is,” in short, “black-letter, settled law that when a corporate director or officer has an interest in a decision, the business judgment rule does not apply.” Croton River Club v. Half Moon Bay Homeowners Ass’n, 52 F.3d 41, 44 (2nd Cir. 1995); see also Williams, 891 F. Supp. at 1183-84.
We appreciate that the directors of a residential cooperative (or condominium) association will typically be unit owners who “will rarely be wholly disinterested” in any decision the board may make. Croton River Club, supra. This may be reason enough to stick with the “reasonableness” standard of review employed in Johnson, or otherwise to be cautious in affording such directors the protections of the business judgment rule; alternatively, it may be a justification for applying the rule with a degree of tolerance for some director interestedness where cooperative and condominium boards of directors are involved.
Wherever the line should be drawn, however, we think the present case falls on the wrong side of it for purposes of deciding whether the business judgment rule applies. Without in any way impugning the good faith and integrity of the director defendants in this case, the fact remains that they had a personal economic interest in the decision they made that was in direct conflict with that of appellants and other Cooperative members in the minority. The interest and the conflict, taken together, are too blatant in our view for the business judgment rule to shield it from scrutiny. It is not only that the directors benefitted personally from their decision to cancel their own (and the majority of members’) sizable promissory note obligations; it is also that they benefitted personally and disproportionately, if indirectly and only modestly, from their concurrent decision to withhold corresponding payments from the minority of members, including appellants, who had prepaid their notes. Simply put, withholding the distribution of corporate assets (money) from the minority indirectly enriched the majority, if only because the money remained in the corporate treasury.
Willens, 844 A.2d at 1138(emphasis added). While the Court of Appeals seems to recognize the BJR under D.C. law, the “interested director” exception, while narrow, is particularly potent when it applies. This exception could theoretically be raised in many cases because every director is impacted personally by the business decisions of the board. This is because every director is subject to the rules adopted and the assessments imposed or forgiven. Generally speaking, community associations are adverse to going to trial if their directors engaged in some sort of self-dealing.
In sum, a property owner in a D.C. community association ought to be prepared to show how her claim fits into a recognized exception to the BJR to move the case forward. The interestedness of the board members who made the adverse decision is something that such a party ought to carefully consider in determining whether a claim may be brought.
Selected Legal Authority:
D.C. Code § 29-306.30. Standards of conduct for directors.
D.C. Code § 29-306.31. Standards of liability for directors.
Behradrezaee v. Dashtara, 910 A.2d 349 (2006).
Willens v. 2720 Wis. Ave. Coop. Ass’n, 844 A.2d 1126 (2004).
June 4, 2025
District of Columbia Demolishes Building After Mailing Notice of Violation
Washington, D.C. has numerous old buildings. The building owners usually want to sell, repair or renovate them. Some owners fail to adequately maintain older buildings. Over the years, the D.C. government has taken an increasingly strict approach to unmaintained buildings. In some instances, the government ignores property that causes problems for adjacent residents. The government’s aggressive approach in such matters has put owners in a bind. The owner may struggle to maintain or remodel the property while simultaneously fight off legal notices.
In 2023, the D.C. Court of Appeals decided a case, 1417 Belmont Glen Community Development LLC vs. D.C., where a property owner brought a constitutional due process lawsuit against the D.C. government for demolishing its building on safety grounds. Belmont challenged the sufficiency of the notice provided to it as the owner. The case is important to the owner or occupant of any D.C. property that has or could have a maintenance or renovation issue. D.C. property owners ought to treat Notices of Violation and Notices of Infraction with appropriate seriousness.
Belmont owned a property in D.C. with an existing building. Belmont intended to develop it into a condominium association. In 2008, the building partially collapsed. The D.C. Department of Consumer and Regulatory Affairs (DCRA, now Department of Buildings) found it to be in imminent danger of further collapse, presenting a life safety issue. In 2009, DCRA issued a notice of violation and notice to abate (NOV). The NOV directed Belmont to demolish or repair it to make it safe. The NOV quoted statutes requiring structures that are unsafe or dangerous to be taken down or made safe as deemed necessary. The NOV mentioned that the mayor may summarily correct the violations where there is an imminent threat to safety. The NOV stated that the owner ought to be provided with notice by personal service or registered mail and by conspicuous posting. The NOV included deadlines and indicated an opportunity to request a hearing.
DCRA sent out the NOV by regular first-class mail and posted it on the door of the premises. Belmont contended that it never received a copy of the NOV. DCRA did not hear from Belmont. A second major collapse occurred. Approximately three months after the NOV, the D.C. government demolished the structure.
Belmont filed a lawsuit against the D.C. government, alleging violation of its Fifth Amendment due process rights by failure to provide proper notice. Note that the Fifth Amendment applies because D.C. is a federal city and not a state. The Superior Court initially granted Belmont’s motion for summary judgment. Later, upon D.C.’s motion to reconsider, the court did a 180-degree turn, entering judgment in favor of the government. Belmont appealed.
D.C. admitted that it did not follow the statutory registered mail notice requirements that applied. On appeal, Belmont argued that D.C.’s failure to follow the local procedural requirements in connection with the deprivation of a constitutionally protected property interest amounted to a constitutional due process violation. However, federal and D.C. courts have held that the failure to follow procedural statutes does not by implication amount to a constitutional violation. An error of state (or D.C.) procedural law does not automatically implicate the constitution.
The Court of Appeals agreed with the Superior Court’s reconsidered ruling that a combination of (a) regular first-class mail and (b) posting on the property satisfied minimum constitutional due process requirements. The constitution requires “adequate” notice, not proof of “actual” notice.
What is important about this case is not merely the application of these constitutional law principles, but the question as to whether the content, form and timing of the notice provided was sufficient for the abatement action taken. Many Americans assume that robust procedural guardrails exist and must be observed before the local government can tear down the building that the owner is in the process of renovating.
Initially the Superior Court was dissatisfied with the decision of the D.C. government to raise the building when the NOV did not expressly inform Belmont that it would summarily do so if there was not a correction. The NOV was issued before, not after D.C. made a governmental decision to demolish the building. In its reconsidered ruling, the Superior Court observed that the NOV was “ambiguous” as to whether additional notice would be given before razing the building. The Court of Appeals went even further in validating the government’s powers, finding that the NOV unambiguously provided procedural due process of the imminent possibility that the government would tear down the building if Belmont failed to take action.
Note that the Superior Court and the Court of Appeals, at various times construed the legal characteristics of the NOV in different ways suggests that a homeowner attorney might also find the NOV confusing. What this appellate opinion means for owners is that the courts can be expected to construe any NOV in a manner friendly to the government’s prerogatives. It would be a mistake to assume that there would be subsequent regulatory notice of lawsuit before the building would be demolished. This does not mean that the agencies can do whatever they want. This means that property owners must exercise caution.
The Belmont opinion describes the facts in a manner that does leave the reader feeling particularly sorry for the landowner. The opinion strongly suggests that Belmont was negligent in monitoring the property. However, in other cases the facts that can be put into evidence may appear less clear 1. The statutes do not require the building to partially collapse before the government may take drastic action.
Given this appellate decision, it would be a mistake for any D.C. property owner to assume that the government would make a diligent effort to get in contact with her before taking corrective action, bring a lawsuit or a specific notice to demolish, or provide “grace” in a situation where it would be obvious that the property owner was in the process of renovating or improving the structure viewed as requiring maintenance.
Property owners can take precautions to avoid harsh results. The property owner can keep the government appraised of her best mailing address for legal notices. The owner can monitor the property for unsafe conditions or posted notices. The owner can prevent structures from becoming unsafe by conducting timely repairs. When a NOV or Notice of Infraction is posted or mailed, the owner ought not to view it as an advisory memorandum that can be ignored if it is wrong. For reasons of temperament or cultural background, some may be inclined to show their disapproval of an erroneous notice by ignoring it. This is quite risky. Any NOV, NOI or similar legal document ought to be viewed as something like a lawsuit or final court order which should be contested or appealed as legally required. On the flipside, the homeowner ought not to consider these developments to mean that if a NOV or NOI is issued, there is nothing that can be done to protect her rights. In many cases, the property owner ought to consult with an attorney to discuss what action ought to be taken. If nothing else, the Belmont case shows that simply doing nothing and seeing what happens should be avoided. Ordinarily, the property owner needs to submit a response form within a defined deadline to obtain a hearing before the agency or the Office of Administrative Hearings. As the Belmont case shows, the NOV or NOI does not necessarily need to be clear in order to allow the government to take adverse action.
One frequent issue in such matters is that the abatement or hearing request deadline stated in the NOI or NOV is inadequate to find a contractor, apply for a permit, and to abate the issue in the time allotted. The inadequacy of the time allotted forces the homeowner to either “dual track” the abatement with the legal hearing request and appeal or to abandon a legal challenge. But by abandoning such a challenge the homeowner opens herself up to drastic action like what is seen in the Belmont case.
Case Citation:
1417 Belmont Cmty. Dev., LLC v. D.C., 302 A.3d 512 (D.C. 2023).
