In a
decision approved for publication, New Jersey’s Appellate Division recently
held that the business judgment rule protected the actions of a common-interest
community’s board of trustees in rejecting certain residents’ requests to
elevate their homes higher than the board’s regulations allowed after
Superstorm Sandy. See Alloco v. Ocean Beach & Bay Club, 2018
WL 3999039 (N.J. Super. Ct. App. Div. Aug. 22, 2018). The decision is
significant in limiting challenges to a board’s action to grounds of fraud, self-dealing
or unconscionability.

The Ocean Beach and Bay Club (the “Club”) is a Jersey Shore
common-interest community established to manage almost 1,000 lots owned by its
members, as well as some common areas. Among other things, the Club’s
certificate of incorporation provided that “no[ ] more than one residence
nor more than [a] one-story one-family dwelling shall be allowed on any lot,”
and established a board of trustees (the “Board”) to enforce and amend the
regulations as necessary. After Superstorm Sandy, the Board amended the
regulations to allow some members to elevate their homes. Plaintiffs, all of
whom were members of the Club and lost their homes in the storm, attempted to
elevate their homes even higher than the regulations allowed in order to use
the new space under the homes for parking, but the Board rejected their request
to do so. Plaintiffs then brought this action alleging, inter alia,
that the Board violated the business judgment rule in its adoption and
enforcement of the regulations and that the “Club acted incompetently in
devising regulations limiting the height of structures.” The parties both moved
for summary judgment, and the trial court granted the Board’s motion and
dismissed the complaint.

On appeal, the Appellate Division affirmed the trial court’s
decision. Under the business judgment rule, "when business judgments are
made in good faith based on reasonable business knowledge, the decision makers
are immune from liability from actions brought by others who have an interest
in the business entity. The business judgment rule generally asks (1) whether
the actions were authorized by statute or by charter, and if so, (2) whether
the action is fraudulent, self-dealing or unconscionable." The first prong
was met because the Club’s by-laws authorize the Board to make “any and all
rules and regulations and enforce compliance therewith[.]” With regard to the
second prong, the Court found that Plaintiffs’ claims that the Board engaged in
self-dealing were unsubstantiated and unrelated to the height restrictions
Plaintiffs challenged, and “[a]llegations of self-dealing in unrelated matters
are insufficient.” Additionally, the Court rejected Plaintiffs’ claim that
“incompetence” violates the business judgment rule. In doing so, the Court
disapproved of the statement in Papalexiou v. Tower W. Condo., 167 N.J.
Super. 516, 527 (Ch. Div. 1979) that “[c]ourts will not second-guess the
actions of directors unless it appears that they are the result of fraud,
dishonesty or incompetence,” finding that the chancery court in Papalexiou
mistakenly cited an inapposite section of another case for this “incompetence”
language and that “[w]e must continue to follow the Supreme Court’s lead and
require a showing of fraud, self-dealing or unconscionable conduct.” Finally,
the Court found that any procedural errors made by the Board—such as its
alleged failure to print and send its members notice of
changes in rules and regulations within 30 days—were inconsequential and did
not show that the Board’s actions were fraudulent, self-dealing or
unconscionable.

For a copy
of the decision, please contact Michael O’Donnell at modonnell@riker.com or Dylan
Goetsch at dgoetsch@riker.com.