Alloco v. Ocean Beach and Bay Club, 456 N.J. Super. 124 (App. Div. 2018). This opinion by Judge Leone focuses on the business judgment rule and its applicability in the context of a planned residential community. As Judge Leone showed, the business judgment rule protects governing bodies of such developments just as it does corporate officials. The particular circumstances here involved the aftermath of Superstorm Sandy. Defendant’s Board, which under the governing deed and other documents has the power to adopt rules and regulations for the construction and modifications of homes in this community, promulgated rules that allowed homeowners to elevate their homes, but one of the plaintiffs was denied permission to elevate his home enough that the space below the elevated structure could be used for parking.
Plaintiffs sued the Club, seeking declarations that the Board had acted wrongfully. On cross-motions for summary judgment, the Chancery Division ruled for defendant, based on the business judgment rule, and denied plaintiffs’ motion for summary judgment. Plaintiffs appealed, but the Appellate Division affirmed.
Judge Leone found that the business judgment rule applied. The deed allowed the Board to make rules and regulations relating to construction of homes. Since that was so, only if the Board’s actions were “fraudulent, self-dealing or unconscionable” could plaintiffs surmount the protections of the business judgment rule. Plaintiffs did not argue fraud or unconscionability, but pointed instead to several purported issues of self-dealing. However, those claims were “unsubstantiated and unrelated to the Board’s actions, such as the height limitations that plaintiffs challenge in this litigation.”
Plaintiffs also challenged the Board’s enactment of the rules as “incompetent,” citing Papalexiou v. Tower W. Condo., 167 N.J. Super. 516 (Ch. Div. 1979), which had said that “[c]ourts will not second-guess the actions of directors unless it appears that they are the result of fraud, dishonesty or incompetence.” But Judge Leone found that that language applied only in contexts different than that here, and that “incompetence” did not “constitute fraud, self-dealing, or unconscionability.”
Relatedly, plaintiffs seized on admissions that the Board did not consist of construction experts and did not have “expert guidance” in promulgating the rules, thus making the Board incompetent. But Judge Leone observed that the Board need not be construction experts. The Board was tasked by the governing documents with making the rules, and they are protected if their decisions are made “in good faith based on reasonable business knowledge.” Besides, the Board offered an opinion of an expert that the rules were justified, and plaintiffs offered no expert or other evidence to the contrary.