Board Has Broad Discretion to Set Amendments
The Washington Supreme Court has ruled that an HOA’s governing documents grant the board broad discretion in setting assessments. The court also ruled that the board’s decision on assessments was entitled to substantial deference — but not because of the business judgment rule (Surowiecki v. Hat Island Community Ass’n).
“This is a major win for associations in Washington state and may be helpful to associations nationwide in resisting challenges to discretionary decisions of the board or the membership,” says Anthony Rafel, managing partner at Rafel Law Group in Seattle, who submitted a brief to the Washington Supreme Court in support of the association.
The Ruling’s Origins
The case dates back to 2014. The association includes 974 lots. About 270 lots have houses, with approximately 40 as full-time residences. The association owns and maintains amenities such as platted roads, a golf course, a marina, a ferry, and a water treatment and distribution facility.
The governing documents authorize assessments against members on an “equitable basis.” Beginning in 1967, the association has levied assessments based on a uniform, per-lot basis for operating expenses not covered by use-based fees.
The board has considered alternative approaches but ultimately opted to continue allocating assessments equally among lots. This decision was ratified by a membership vote.
The owner who filed the lawsuit own numerous lots in the community, most of them undeveloped. He argued that allocating assessments on a per-lot basis isn’t equitable because not all lots are the same.
“He said those who had built on their lots got a lot more benefit, so the allocation wasn’t equitable,” Rafel says. According to the owner, assessments should be allocated based on each lot’s assessed value.
The trial court dismissed the case before trial, though. It held that the owner hadn’t submitted sufficient evidence that the association’s decision was unreasonable. It further found that the association’s assessment-setting was protected by the business judgment rule.
The owner appealed, and we covered the worrisome opinion that came out of the Court of Appeals. That court found that courts needn’t defer to an association’s interpretation of its own governing documents under the business judgment rule. And the rule, it asserted, limits only the personal liability of individual directors; it doesn’t immunize the association itself.
As a result, the appellate court said, the board’s discretionary decisions were subject to a reasonableness standard — specifically, whether a decision was reasonable based on the process employed and facts considered.
“The Court of Appeals decision was unusual and left an uncomfortable feeling that, anytime an owner is unhappy with the way an assessment has been approved and submitted to the owners, the assessment can be challenged and become a factual issue to be decided by a jury,” Rafel says.
“That was concerning because there’s an established statutory procedure for approving budgets and assessments here, which isn’t unique to Washington.” Under the statute, budgets and assessments generally are first approved by the board and then submitted to the owners.
“Unless a majority votes to reject, they’re ratified,” Rafel says. “The governing documents here also provided that, if there’s any change in assessment from one year to the next, it required majority approval.
“The appellate ruling threw a monkey wrench into the normal process. Associations should be able to rely on the ratification process, which is democratic.”
Good News for Associations
The association appealed to the state Supreme Court, which sided with the association. It noted that the governing documents explicitly grant the association “the power to charge and assess its members on an equitable basis …” Implicit in that phrasing, the court said, is a broad grant of discretion when deciding the allocation method.
Moreover, the phrase “on an equitable basis” only limits the range of options available to the association — it doesn’t imply one equitable basis is better than another.
Although the owner had identified an alternative allocation method that could be equitable, the court said, that wasn’t enough to raise a question about whether the association’s method wasn’t equitable. The court pointed out that the board had held several community meetings seeking owner input and considered his proposed method.
While the Supreme Court agreed with the Court of Appeals that courts don’t have to defer to an association’s interpretation of its governing documents, it found that courts do owe deference to associations’ reasonable discretionary decisions and adopted a rule to that effect.
Under the rule, if an association makes a discretionary decision in a procedurally valid way, courts won’t substitute their judgment for the association’s unless the challenger shows fraud, dishonesty or incompetence.
“This is a sigh of relief for associations,” Rafel says. “It provides predictability and finality with respect to one of the most important functions of an association, which is raising money through assessments. Having a process that can be thrown into doubt simply because an owner says the method wasn’t equitable would just eviscerate our statute.”
Rafel believes the ruling might prove helpful in other states, too. While statutory requirements for setting assessments vary by state, governing documents throughout the country tend to give boards broad discretion in this area.
In Michigan, for example, owners don’t get a direct vote on most types of assessments. “Generally, all of our governing documents indicate the board sets the assessments without any kind of owner approval,” says Kevin Hirzel, managing member of Hirzel Law, PLC, in Michigan.
“The way it works here, the court is just going to interpret the governing document as written, as a legal contract. It wouldn’t get into the business judgment rule.”
Notably, the Washington Supreme Court didn’t invoke the business judgment rule in reaching its decision. Because the owner in this case didn’t establish that the assessments weren’t equitably assessed, the court didn’t need to consider whether the business judgment rule applied.
It did, however, recognize that the role of the rule where associations are concerned “is the subject of ongoing debate” and that it’s “an open question” whether the limitation on liability applies to associations themselves.
The court concluded, though, that these “important questions … must await a case that squarely presents those issues.”