Association & Board of Director Liability Analysis
07/02/08 11:40 AM Filed in: Legal
An unpublished opinion
was rendered by the South Carolina Court of Appeals
earlier this year, which has no precedential value
and cannot be cited or relied upon as a precedent in
any legal proceeding, but it does provide an
excellent analysis with regard to the issue of
Association and Director liability. The opinion is
self explanatory and can be accessed via
www.sccourts.org,
but set forth herein below are several key issues
cited in this opinion.
An
unpublished opinion was rendered by the South
Carolina Court of Appeals earlier this year, which
has no precedential value and cannot be cited or
relied upon as a precedent in any legal proceeding,
but it does provide an excellent analysis with regard
to the issue of Association and Director liability.
The opinion is self explanatory and can be accessed
via www.sccourts.org,
but set forth herein below are several key issues
cited in this opinion.
The first is that the State of South Carolina recognizes the business judgment rule, which precludes judicial review of actions taken by a corporate body absent a showing of lack of good faith, fraud, self-dealing or unconscionable conduct. Dockside Ass’n, Inc. v. Detyens, 294 S.C. 87, 362 S.E.2d 874. Although there are no cases directly on point in our state relative to the express application of the business judgment rule to a non-profit Homeowners’ Association, in the South Carolina case of Seabrook Island Property Association v. Pelzer, 292 S.C. 343, 356 S.E.2d 411 (Ct. App. 1987) the Court did, by implication, apply the business judgment rule to a non-profit Homeowners’ Association. Please note, however, that in the Seabrook Island case the decision of the Board of Directors was overturned because the Court took the position that the action adopted by the Board of Directors was not within the express powers of the Board. In order to avoid liability, Board decisions must be based upon the powers enumerated in the enabling documents for the Association, thus creating intra vires (within the scope of authority) decisions.
Another point of interest of this decision is that the Court of Appeals specifically noted in the holding that the Association sought advice and counsel from various outside professionals and consultants including: the Association’s attorney; the Association’s accountant and CPA; the Association’s property manager, the Association’s maintenance personnel; outside engineers; architects; plumbers; electricians; and general contractors. The Court further opined that the Board of Directors met the “good faith” requirement of the business judgment rule by turning to such professionals, and by virtue of the fact that the Association consulted trusted professionals and acted within the Board’s express authority as enumerated in the documents, the claim of the Plaintiffs in this case that the Board of Directors was negligent for improperly discharging its duties and for fiscal mismanagement was denied both at the circuit court level and at the Appellate level.
Again, this case cannot be cited for judicial authority, but the analysis provided in the case provides an excellent example as to the actions that need to be followed in order for an Association to be in the best possible position to withstand any claims for fiscal mismanagement and the like.
The first is that the State of South Carolina recognizes the business judgment rule, which precludes judicial review of actions taken by a corporate body absent a showing of lack of good faith, fraud, self-dealing or unconscionable conduct. Dockside Ass’n, Inc. v. Detyens, 294 S.C. 87, 362 S.E.2d 874. Although there are no cases directly on point in our state relative to the express application of the business judgment rule to a non-profit Homeowners’ Association, in the South Carolina case of Seabrook Island Property Association v. Pelzer, 292 S.C. 343, 356 S.E.2d 411 (Ct. App. 1987) the Court did, by implication, apply the business judgment rule to a non-profit Homeowners’ Association. Please note, however, that in the Seabrook Island case the decision of the Board of Directors was overturned because the Court took the position that the action adopted by the Board of Directors was not within the express powers of the Board. In order to avoid liability, Board decisions must be based upon the powers enumerated in the enabling documents for the Association, thus creating intra vires (within the scope of authority) decisions.
Another point of interest of this decision is that the Court of Appeals specifically noted in the holding that the Association sought advice and counsel from various outside professionals and consultants including: the Association’s attorney; the Association’s accountant and CPA; the Association’s property manager, the Association’s maintenance personnel; outside engineers; architects; plumbers; electricians; and general contractors. The Court further opined that the Board of Directors met the “good faith” requirement of the business judgment rule by turning to such professionals, and by virtue of the fact that the Association consulted trusted professionals and acted within the Board’s express authority as enumerated in the documents, the claim of the Plaintiffs in this case that the Board of Directors was negligent for improperly discharging its duties and for fiscal mismanagement was denied both at the circuit court level and at the Appellate level.
Again, this case cannot be cited for judicial authority, but the analysis provided in the case provides an excellent example as to the actions that need to be followed in order for an Association to be in the best possible position to withstand any claims for fiscal mismanagement and the like.