Court Deference to Board Business Decisions

The good faith acts of directors of profit or non-profit corporations which are within the powers of the corporation and within the exercise of an honest business judgment are valid.  Rywalt v. Writer Corp, 526 P.2d 316, 317 (Colo. App. 1974).

It is educational to review the Rywalt case, above, to show the deference the courts will give to Board decisions. In this case, a group of homeowners sued the Association in an attempt to prevent the Association from entering into an agreement with the developer to build a second tennis court on the common area close to the plaintiffs' homes. The cost of the tennis court would be borne by the developer. The plaintiffs argued, among other things, that the Association's decision was arbitrary and capricious.

The trial court concluded that the Association did act arbitrarily and capriciously and enjoined the Association from allowing the construction of the new tennis court. The court made extensive findings to support its decision that the Board acted arbitrarily and capriciously: the Association maintained incomplete minutes of its meetings; the Board held annual meetings for the sole purpose of electing directors – by inference the Board was not allowing owner participation in the agenda or discussions; the Board had a practice of holding closed board meetings, which excluded homeowner participation; the Board made the decision to go ahead with the tennis court without submitting the matter of the second tennis court to the architectural control committee; the Board ignored other matters which the court believed should have taken priority over the tennis courts, such as drainage problems and camper and boat parking; the inadequacy of a membership poll taken with regard to location of the proposed new court; and the failure to poll the membership on whether a new court was needed or required.

The breadth of these findings would have lead me to believe that the Court of Appeals would not reverse. It is rare that a court of appeals would reverse a case on the facts, especially when the trial court’s findings are as extensively detailed as in Rywalt. The deference that is usually accorded Board decisions by trial courts, as mentioned above, is also the same deference the Court of Appeals applies to the factual decisions of the trial courts.

On the surface it appeared that the homeowners made a strong evidentiary case that their Board acted "arbitrarily and capriciously." But, in scrutinizing the trial court's factual findings, the reversal by the Court of Appeals is not so surprising. The trial court emphasized the appearance of the Board in not fulfilling its fiduciary duties. The findings focusing on the Board's ancillary functioning had little if anything to do with the Board's governance, such as having incomplete minutes, conducting closed Board meetings, etc. The Appellate Court said, in reversing, "None of the above support a conclusion that the board acted arbitrarily or capriciously." It found that the pertinent statutes, the governing documents and restrictions did not require the Board to go through the hoops asserted by the trial court.

What the court found persuasive were the documents which regulated the governance of the Association. The declaration provided that the Board shall be managed by six directors; the by-laws gave the Board power to exercise for the Association all powers, duties, and authority vested in or delegated to the Association and not reserved to the membership by other documents. The trial court did not approach the issue of whether the Board was acting in good faith or that the action of allowing the developer at its cost to build a second tennis court for the benefit of the whole Association was arbitrary. Unpopular actions which may adversely affect some homeowners do not turn a board decision into one of bad faith or make it arbitrary or capricious.

As the Court of Appeals ruled, courts will not interfere with or regulate the conduct of the directors in the reasonable and honest exercise of their judgments and duties. It went on to say that without evidence that the directors acted in bad faith or in fraud of the rights of the members, the Board's decision will stand. But not all Board decision are given the deference, even if it can be shown they are made in good faith and not fraudulent, such as when the decision violates the governing documents of the Association or laws. This will be the discussion of a future topic.