Using Good Judicial Judgment: Dispensing with the Business Judgment Rule in Mixed-Use Community Association Disputes
Volume 81, No. 3, Fall 2008
By Russell Zuckerman

Community associations in America are becoming increasingly popular. In addition to their widespread growth throughout the country, community associations are fundamentally changing. Whereas the traditional community association consisted of purely residential members, projects are now becoming more and more mixed use. Mixed-use projects feature a combination of retail and other commercial operations in addition to the traditional residential development. Since they hit the scene in the 1970s, residential community associations have presented courts with numerous disputes with which judges have wrestled to develop a wide body of case law. While jurisdictions took different approaches to residential community association disputes, reasonably predictable and coherent law emerged from jurisdiction to jurisdiction. Perhaps fatigued, courts in many jurisdictions are applying the same body of case law and corresponding standards of review to mixed-use association disputes, rather than looking critically at the fundamentally different beast that is now stalking the land.

In Vail, Colorado, a group of retail unit owners known as the Lodge Retailers Association (“LRA”) brought an action against their mixed-use condominium association, the Lodge Apartment Condominium Association (“LACA”) for assessing maintenance fees for elements the LRA claimed were uncommon. The mixed-use condominium consisted of seventy-four units; fifty-nine were for residential purposes, and fifteen were for retail purposes. In addition to the retail and residential presence in the building, a luxury hotel known as the Lodge at Vail (“Hotel”) was interconnected to the condominium, sharing a lobby, walls, and a pool and spa facility. The LACA board hired the Hotel as the association’s managing agent. In its capacity as managing agent, the Hotel, with the approval of the LACA board, rolled several hotel-related expenses into the association’s common elements, such as the pool and front desk, and expenses in connection with a vacation rental program. The LRA claimed that they received no benefit from the assessment scheme. The obligation to pay for the hotel-related expenses resulted in considerable diminution in the value of their retail units. The LRA thus sought, inter alia, declaratory judgment and restitution for overpayment of past expenses.

The LRA, a minority class subject to the will of the residential majority, faced a daunting litigation because of Colorado’s decision–or lack thereof–to apply the business judgment rule (“BJR”) in the context of mixed-use community association disputes. The LRA convinced a jury that the assessment scheme was exploitative of minority commercial interests, but ultimately the board and association prevailed because of the BJR defense. The trial court afforded BJR protection to the board’s decision to enter the management agreement with the Hotel, which was a complete defense to LRA’s claims.

Colorado and a minority of other states, who use the BJR in the context of mixed-use community association disputes, leave minority membership classes little recourse through the courts to ensure their reliance interests in their properties. This Comment critiques courts in BJR jurisdictions for failing to distinguish between purely residential communities and mixed-use projects in fashioning a standard of review. It further argues that boards of mixed-use projects deserve less judicial deference than the BJR generally requires courts to give. Instead of the BJR in the mixed-use context, courts should implement a reasonableness standard that allows them to properly balance the competing interests at stake.

To fully appreciate the problem with applying the BJR to mixed-use community association disputes, it is necessary to understand the evolution of the BJR doctrine beginning in the corporate context and then its adoption in the community association setting. Accordingly, Part II of this Comment reviews the beginnings of the BJR in the for-profit corporate setting and then explores the BJR in residential community associations. That discussion details various rationales offered to support the BJR in the residential community association context. This Comment then looks at the leading alternative to the BJR, known as the reasonableness standard, which is the standard a majority of jurisdictions use in the community association context. Part II concludes with a discussion of the mixed-use community association and analyzes various disputes that arise. It also juxtaposes the BJR with the reasonableness standard as a means of resolving community association disputes in the mixed-use project.

Part III of this Comment highlights the problems with applying the BJR to the mixed-use community association and further argues that each rationale concerning the BJR’s deferential approach is inapplicable to the mixed-use project. This Part argues that the reasonableness standard is preferable to the BJR in the mixed-use context because it allows minority owners, legitimately harmed, adequate recourse through the courts. To illustrate the BJR’s ineffectiveness in the mixed-use setting, Part III concludes by applying the BJR to the facts of a real-life dispute taken from a case in Maryland, a jurisdiction that uses the reasonableness standard.

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