This case involved a dispute between a condominium owner (Owner) and his homeowners association (Association) over an air conditioning system (HVAC System) owner installed on his patio adjacent to his unit. Because the installation required cutting through an exterior wall, which was a common element, and also placement of the unit on the patio, which was a limited common element, approval for the installation had to be given by Associations Board of Directors. The Business Justice Rule was not presented at the tome which is why this case was brought up.

In the summer of 2014, Owner submitted a request for Associations approval of Owners installation of the HVAC System. Associations Board waited to respond to Owners request until after it had researched potential noise and appearance issues that it was concerned about. In June of 2015, Associations Board approved the installation of the HVAC System by Owner on the condition that Owner sign a binding agreement that was to be prepared. Thereafter, Associations Board decided to draft a Memo of Understanding (MOU) that it wanted Owner to sign before the installation of the HVAC System, if the MOU was available. If the MOU was not available before the installation was to take place, Owner would have to sign it after the system was installed. The parties intended the MOU to constitute a binding agreement. Because the MOU was not available for signing by Owner before the installation, Owner went ahead and had the HVAC System installed without having first signed the MOU.

In July of 2015, Associations Board approved a draft of the MOU and decided to have it reviewed by Associations legal counsel. More than a year later, in September of 2016, Associations Board was still discussing how to protect the Association from liability when an owner installs an HVAC System. The directors discussed whether it would be best for Association to proceed with the MOU, or alternatively, with the drafting of a covenant or an amendment to Associations Declaration. On advice of legal counsel, Associations directors elected to use a covenant. The directors then moved to have legal counsel complete the necessary covenant for presentation to Owner.

In December of 2016, Association sent the completed covenant to Owner and he refused to sign it. After Owner repeatedly refused to sign the covenant, Association notified Owner that it was going to take action to force the removal of the HVAC System. To preempt such action, in May of 2017 Owner filed suit against Association alleging it had breached a duty of ordinary and reasonable care in its actions and should be estopped by the Court from removing the HVAC System. In January of 2018, the Court granted Association summary judgment and dismissed Owners claims. Owner then appealed the decision of the trial court.

In his appeal, Owner contended that Association had breached its duty to exercise ordinary and reasonable care in its efforts to force Owner to sign the covenant that had been prepared as a condition for him to be able to continue to use the HVAC System that had been approved by Association. In response, Association contended that the actions of the Board of Directors were protected by the business judgment rule. In considering Associations contention, the appellate court stated that the business judgment rule requires directors to act in good faith and with the care that an ordinarily prudent person in a like position would use under similar circumstances. The court further stated that, under the business judgment rule, a court will not substitute its judgment for that of Associations board members in the absence of evidence of fraud, dishonesty, or incompetence, which would be indicative of a failure to exercise proper care, skill, and diligence.

In applying the business judgment rule to the facts of the case, the appellate court stated that, under both the Declaration and state statutes, Association was vested with broad powers that included the ability to regulate the use, maintenance, repair, replacement, and modification of both Common Elements (the exterior of Owners unit), and Limited Common Elements (Owners patio area). The appellate court then concluded that the ability to regulate the Common and Limited Common Elements included the power to make rules for installing the HVAC System, subject to the Boards exercise of ordinary and reasonable care in carrying out its duties. Having found no evidence fraud, dishonesty, or incompetence, or that Associations Board did not act in good faith, the appellate court concluded that the actions of Associations Board were protected by the business judgment rule as a matter of law. The appellate court further found that: (i) Owner accepted the risk of completing the installation of the HVAC System before knowing all of Associations terms; (ii) Associations Board exercised proper care, skill, an diligence by seeking legal advice to create an agreement covering the installation of HVAC Systems; and (iii) Associations Board acted reasonably and in good faith.

In conclusion, the appellate court found that the decision by Associations Board to require Owner to sign the covenant that had been prepared by the Associations counsel, or remove the HVAC System, was a decision that was protected by the business judgment rule and accordingly, the court would not second-guess the directors actions. Thus, the appellate court affirmed the trial courts judgment and awarded attorney fees to Association.

UNPUBLISHED Washington Appellate Court decision (July 1, 2019).

See case decision: Hoy_v._400_Condo._Ass’n