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The Business Judgment Rule Won't Protect an "Unconscionable" Board

Richard Siegler and Dale Degenshein in Featured Articles on February 18, 2014

Oyster Bay, The Hamlet on Olde Oyster Bay, Nassau County

Business Judgment Rule and Unconscionable Boards
Feb. 18, 2014

Joseph and Anita Tucciarone, both in their 70s, owned a home in that gated community. In another action, pending before a different judge, a neighbor, Jill Fadlon, claimed the Tucciarones planted an invasive form of bamboo, which had spread to her property and rendered the yard unusable. 

In this newer case, the Tucciarones claimed that the HOA's board improperly imposed fines $14,000, of which the couple had paid more than $8,000, in connection with the bamboo infestation. Other than failing to pay the balance, they were not in arrears.

The Tucciarones claimed they could not remove the bamboo on Fadlon's property because Fadlon would not permit access. In addition, they tried to settle the action begun by Fadlon, but were unable to do so. The court explained that the Tucciarones had no control over whether Fadlon would provide access so that the offending bamboo could be removed.

Forcing 70-Year-Olds to Walk a Mile?

Regardless, in August 2013, the board adopted a resolution that residents who were in arrears for more than 60 days would not be permitted to drive their cars onto the premises and would be denied access to other amenities. The entrance to the HOA was on the Long Island Expressway and public parking was roughly one mile away. The Tucciarones argued that, by not permitting them to drive onto the property, the board in effect denied them access to their home.

The court determined that the issue was whether the fines and penalties were properly imposed. The only evidence concerning the fines was letters from the HOA's counsel to the Tucciarones, advising that the board would impose fines on an escalating basis if the bamboo were not removed. The HOA failed to produce copies of a board resolution imposing fines, explaining why the Tucciarones were being fined and what they could do to avoid the penalty, or even the notice of meeting or the minutes of the meeting at which the resolution was adopted. 

The court then turned to the HOA's governing documents, which said every member had rights of "enjoyment in and to the" property, but that the rights could be suspended if an assessment remained unpaid for 30 days and that assessments were to be used "exclusively for the purpose of promoting the recreation, health, safety and welfare of the residents... and in particular for the improvement and maintenance of properties, services and facilities…"

Further, the HOA documents set out a procedure to be followed: After a determination that a complaint was valid, a written notice of the violation was required to be sent to the homeowner. If not cured, a second notice was to be sent, after which a fine would be imposed. The bylaws also established a grievance committee and a grievance procedure.

The court noted there was no evidence the board followed any of these procedures, and that the HOA relied on arguments made in the Fadlon action to justify its imposition of the fines. When the fines failed to cause the Tucciarones to act, the HOA "escalated the stakes" and imposed "measures affecting the physical well-being" of the couple. 

Back in the Driver's Seat

The court granted the Tucciarones' motion for a preliminary injunction and extended a temporary stay. The HOA was enjoined from enforcing any resolution regarding the bamboo infestation, levying or seeking to collect any fine in connection with this case or denying the Tucciarones the use amenities, including the right to access the premises with a car.

In making this decision, the court discussed the Business Judgment Rule, noting that it is premised on the concept that there should be no judicial inquiry into board actions unless the owner can determine that the action was not taken in good faith, in the exercise of honest judgment and in the lawful and legitimate corporate purpose. The court explained that the Business Judgment Rule does not apply when the actions of a board are "unconscionable," as may have been the case here. 

Ii appears that the board consciously placed the Tucciarones in a no-win position, and plainly did not follow its own rules. There is no question that it had to comply with its governing documents in any treatment of unit-owners. In instances such as this, strict compliance is required and it is advisable that a board produce the paperwork to demonstrate it has done precisely that. 

 

Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan.  Dale J. Degenshein is a special counsel for that firm.

Illustration by Liza Donnelly. Click to enlarge

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