November 16, 2020

Washington Court of Appeals: Business Judgment Rule Only Protects Directors

The Washington Court of Appeals recently decided in a published opinion that the business judgment rule protects the directors of a condominium or homeowners association from personal liability but does not immunize the association itself.  The business judgment rule limits the liability of corporate management where (1) the decision to undertake a transaction is within the power of the corporation and the authority of its management; and (2) there is a reasonable basis to indicate that the transaction was made in good faith.  If that rule applies, then a plaintiff may only challenge a decision if made through fraud, dishonesty, or incompetence.  It is based on the notion that directors of a corporation are not liable for mere mistakes or errors of judgment.  The Court's opinion pointed out that directors are required to exercise reasonable care even under the business judgment rule and that directors' failure to adequately investigate a matter removes them from the rule's insulating effect.