June 18, 2025
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).
