Appellate Division Holds Business Judgment Rule Applies to Beach Club

Aug 28, 2018

In a case involving the destruction of homes in a beach club community, the Appellate Division recently held that the club’s board of trustees was shielded from liability by the Business Judgment Rule.  Alloco, et al. v. Ocean Beach and Bay Club, et al. – N.J. Super. – (App. Div. 2018).

The Ocean Beach and Bay Club is a New Jersey not for profit corporation established to operate a community consisting of approximately 986 lots individually owned by members with common areas including a clubhouse.  Superstorm Sandy damaged or destroyed many homes in the club’s community, including plaintiff’s home.  As a result, the board enacted rule changes and clarified and expanded building requirements connected with flood zone compliance.  Although the rule changes allowed members to elevate their home, Alloco was denied permission to elevate his home even higher to allow the space beneath the elevated structure to be used for parking.

A complaint was filed alleging, among other things, that the board violated the Business Judgment Rule by adopting and enforcing its rules and regulations.  The complaint also alleged that the club failed to comply with the club Certificate of Incorporation and violated the New Jersey Non-Profit Corporation Act at N.J.S.A. 15A:1-1-16-2. 

The trial court dismissed the plaintiff’s claim on summary judgment citing the Business Judgment Rule.  The Appellate Division affirmed.

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 rule generally asks whether the actions were authorized by statute or by charter, and if so, whether the action is fraudulent, self-dealing or unconscionable. 

The court noted that the Business Judgment Rule applies to “common interest communities” such as the club.  The rule creates a rebuttable presumption that the actions of a board are valid.  The court held that the evidence proffered by plaintiffs was insufficient to rebut the presumption of validity and carry their initial burden of showing the board’s actions were fraudulent, self-dealing or unconscionable.  Furthermore, the Appellate Division noted that plaintiff’s argument that the board and its rules were incompetent was irrelevant, because incompetence does not show that board members are fraudulent, self-dealing or unconscionable.