In this action an association member (Owner) sought to annul a license agreement between his property owners association (Association) and another owner. In late 2017, Associations Board of Directors, acting on behalf of Association, entered into the license agreement which granted the other owner the exclusive right to affix his private docks to Associations community dock in exchange for a yearly license fee and for services provided to Association by the owners company. Owner commenced the action against Association and the Board of Directors seeking to annul the license agreement based on claims that the Board of Directors had acted outside the scope of its authority when it entered into the license agreement. In late 2018, the trial court entered a judgment that annulled the license agreement and an appeal followed.
The appellate court stated that courts should apply the business judgment rule when reviewing actions of a homeowners association and limit its inquiry to whether the action was authorized and taken in good faith and in furtherance of the legitimate interests of the association. Thus, courts should defer to actions by a homeowners association board so long as the action taken was for purposes of the association, within the scope of the boards authority, and taken in good faith. Stated another way, the business judgment rule does not apply when an associations board acts outside the scope of its authority or violates its own governing documents.
In applying the business judgment rule to the facts of this case, the court found that entering into the subject licensing agreement was outside the authority of Associations Board of Directors because Associations Declaration stated that each member of Association was privileged to use Associations recreational facilities in common with other members, and the modification or cancellation of that privilege was not permitted. The court found that by granting one owner the exclusive right to affix his private docks to Associations community dock, the Board prevented other members from docking their boats at the portion of the community dock to which the private dock was affixed. The effect of that action was to modify the privilege of all members to dock their boats in the area that was blocked by the private dock, and that was not authorized by Associations Declaration. Thus, the granting of the license violated Associations governing documents and the actions of Associations Board of Directors were not protected by the business judgment rule. Accordingly, the judgment to annul the license agreement was affirmed.
New York Supreme Court Appellate Division decision (May 20, 2020).
See case decision: Beckerman_v._Lattingtown_Harbor_Prop._Owners_Ass’n_Inc