Termites, Business Judgment Rule and Second Guessing Community Association Boards of Directors—Lamden v. La Jolla Shores Clubdominium Homeowners Association

Blog Article by David Swedelson, SwedelsonGottlieb Senior Partner, Condo Lawyer and Community Association Attorney
Resulting in one of the most important common interest development cases decided by the California Supreme Court, Mrs. Gertrude Lamden disagreed with her homeowners association’s board’s decision to address a termite problem by spot treating the affected areas rather than tenting and fumigating the entire building.

Upon learning of a termite problem in the association’s common area, the board carefully investigated and considered its options, taking into account the expense, inconvenience to members, likelihood of effectiveness, and a number of other factors, and decided to spot treat the affected areas. After that failed to eradicate the termites, Mrs. Lamden sued the association, requesting a court order requiring that the association fumigate her building.

Overturning the opinion of the Court of Appeal, the California Supreme Court held that the “business judgment rule”, which requires that courts defer to the judgment of the board, applied, and the board’s decision to spot treat was upheld. As a rationale for its decision, the Court indicated that “common sense suggests that judicial deference in such cases as this is appropriate, in view of the relative competence, over that of the courts, possessed by owners and directors of common interest developments to make the detailed and peculiar economic decisions necessary in the maintenance of those developments.” Basically, the Court acknowledged that the board was more qualified to make this decision than the judge, and so there would be no judicial second-guessing.

This case is important in that it limits the extent to which homeowners can challenge the decisions made by community association boards, when the governing documents give the board the discretion to make such decisions. Arguably, Mrs. Lamden was right and spot-treating the termites was a mistake. However, because the board made that decision upon reasonable investigation, in good faith and with regard for the best interests of the association, its decision was upheld by the Court.

Although this case was originally limited to board decisions relating to maintenance and repair, its holding has since been broadened to apply to other board decisions. It is important to note that this principle only applies when the governing documents authorize the board to use its discretion; the same discretion is not afforded when the board acts in direct contravention of the governing documents.

This is an important case for board members and managers to know about to ensure that the board meets all of the prerequisites for the business judgment rule to apply, and to document same. The Court in the Lamden case may not have been so understanding if the association hadn’t kept records of the information that it gathered from various fumigation companies, demonstrating that the board did its research before making a decision.

Lamden v. La Jolla Shores Clubdominium Homeowners Association (1999) 21 Cal. 4th 249
David Swedelson is a condo law expert. He responds to comments and general questions via email: dcs@sghoalaw.com

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