Recent Iowa Supreme Court Ruling Affecting Homeowner Associations

As someone who deals with homeowner associations on a regular basis, we thought you may be interested in a recent Iowa Supreme Court ruling which gives some guidance on the authority and liability of a non-profit condominium association board.

The case arose because the owners of four of the 87 units at West Grand Towers in Des Moines sued the condo association in June 2008 seeking a legal ruling that the association had acted improperly in failing to seek a vote of its members before spending $200,000 on repairs to a parking garage. Those owners claimed the Bylaws required a two-thirds majority vote for any expense greater than $25,000 “unless required for emergency repair, protection or operation” of the property’s common areas. A District Court judge agreed with the owners and entered judgment against the association, and the association filed an appeal.

On December 16, 2011, the Iowa Supreme Court overturned this ruling, finding that the Bylaw in question was ambiguous since the word “emergency” might reasonably be understood to modify only “repair” and not “protection” or “operation.” As a result, the Court held that the Business Judgment Rule should protect the decision of the association’s board of directors.

The Business Judgment Rule has long been black letter law in Iowa, but this is the first time it has been applied to a non-profit condominium association board. The rule requires judges to defer to business decisions by corporate directors so long as those directors act in good faith, make a reasonable decision and act in what they believe to be the corporate interest. Applied here, since the Bylaw in question was ambiguous, the Court held the Business Judgment Rule protects the decision of the board.

While the Bylaw, in this case, was unique to West Grand Towers, the application of the Business Judgment Rule is something that could affect your interaction with non-profit homeowner associations in the future. Based on this ruling, the decision of any association board will be protected under the Business Judgment Rule so long as the board can be shown to have acted in good faith, the decision was reasonably prudent and the board believed the decision to be in the corporate interest. Conversely, if these things cannot be proven, the action of the board could be successfully challenged.

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