Directors are protected by Business Judgment Rule Regarding Settlement of Claims against Builder / Developer

This case involved a dispute between condominium owners (“Owners”) and their condominium owners’ association (“Association”) over the application of the “Business Judgment Rule” in a manner that protects Association from Owners’ claims for negligence when there has not been a showing of fraud, bad faith, or self-interest.

Shortly after the builder and developer of the development transferred control of Association to the owners, Association learned of some alleged design and construction defects and various breaches of warranties. Association made claims against the builder / developer for damages. Relying on legal counsel, Association entered into a settlement agreement, the terms of which included a clause whereby Association agreed to hold the builder / developer harmless against all future claims, including any claims for latent defects or other unknown claims. In the years following the settlement more construction problems were discovered, and Association had to make a special assessment on the unit owners to raise additional funds that were needed for repairs to the common elements.

Owners believed that additional special assessments to correct the problems were inevitable. Although Association considered bringing an action for negligence or malpractice against its former legal counsel who represented it in connection with the settlement agreement, it ultimately decided not to pursue the claims against the lawyers.

Contending that Association was negligent in connection with the settlement agreement and its decision not to pursue claims against the lawyers who represented it in connection with the settlement, Owners refused: