22. April 2026

DOES THE BUSINESS JUDGMENT RULE GOT YOUR DIRECTORS’ BACKS? (July 2016)

The law protects members of a community association’s board of directors from courts interfering with their exercise of business judgment in making decisions for the association.  The rule of law is known as the business judgment rule and is codified in Corporations Code section 7231.   This protection is available only under certain circumstances.  To qualify, the director must perform his/her duties “in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances."  Reasonable diligence must be exercised.  As the California Court of Appeal recently characterized this requirement, “a director must act on an informed basis, be reasonably diligent, and exercise care in order to rely on the business judgment rule.”  Palm Springs Villas II Homeowners Association, Inc. v. Parth (2016) 248 Cal.App.4th 268.  Bottom line, directors must do their homework to avail themselves of the protection offered by the business judgment rule.