The Washington Court of Appeals (Division One) decided the case of Bangerter v. Hat Island Community Association in September 2020. In doing so the Court analyzed and made rulings relevant to all planned communities (HOAs and COAs) and their governing boards.
The Bangerter case involved a 900+ lot community situated on Hat Island (located near Everett, WA) in which a lot owner challenged the HOA’s decision to levy uniform assessments against all lots in the community for HOA roads and some community facilities. Such a uniform assessment scheme was challenged as inequitable, because the owners of undeveloped lots, unbuildable lots, lots without water hookups and lots with owners who lived there fulltime were all treated the same. These different categories of lots had dramatically different values and significantly different impacts on community roads and facilities.
This challenge to the uniform assessments came despite the fact that such uniformity had been the practice of this Hat Island HOA for approximately 48 consecutive years. The 1962 CCRs for the Hat Island community provided that assessments were to be levied “on an equitable basis”. Many years later Bylaws were adopted by the HOA that for the first time required assessments to be “on a uniform basis”. However, that Bylaw provision was ultimately reversed and removed by a membership vote long before the lawsuit was brought. Thus, both the trial court and the Bangerter Court of Appeals only considered the “equitable” language from the CCRs.
The trial court rejected the lot owner’s challenge ruling that a uniform assessment system represented a valid exercise of discretion by the HOA that could not be challenged under the corporate “Business Judgment Rule”. This “Business Judgment Rule”
On appeal the HOA argued that uniform assessments were “equitable” and represented a reasonable assessment system that was approved by the membership and that it was not subject to challenge under the Business Judgment Rule. Under the Business Judgment Rule corporate management will not be held liable if:
- the decision made is within the power of the corporation and the authority of management and
- there is a reasonable basis to indicate that the decision was made in good faith
Thus, under the Business Judgment Rule even if a decision is considered wrong or unreasonable it cannot be challenged if within the authority of corporate management and made in good faith.
The lot owner challenging the uniform assessment system claimed Business Judgment Rule did not apply to protect the corporation (here the HOA) itself but only the individual Board members and officers and thus it could be challenged as inequitable even if made in good faith.
The Bangerter Court ultimately ruled that (a) the Business Judgment Rule did not apply to the HOA itself (agreeing with the challenging lot owner) and (b) the HOA’s decision regarding an assessment system– even had the Business Judgment Rule applied – must be “reasonable” and reflect a “reasonable exercise of discretion” by the HOA. It thus ruled that the trial court must hear the lot owner’s challenge and determine whether the uniform assessment system was reasonable and “equitable” as required by the governing documents,
The Bangerter Court did not decide those issues itself but did observe that, in order to be equitable, assessments must be “fair to all concerned” and that a tiered, non-uniform assessment system might well be “equitable” in proper circumstances.
Additionally, the Bangerter Court emphasized these principles:
- The interpretation of an HOA’s governing documents is a question of law that does not require deference to the HOA’s interpretation. Particularly, when the HOA’s governing documents provide that individual members can seek judicial resolution of disputes over their interpretation the Court can substitute its judgment for that of the HOA Board.
- On the other hand, an HOA’s have discretion to decide what type of assessment structure is “equitable” (if the governing documents only require that it be “equitable”).
- Whether an HOA’s decision to adopt any particular assessment is reasonable depends not on the substance of the decision but rather on the “process employed and the facts considered”.
- In interpreting provisions of the governing documents the Court will always endeavor to adopt an interpretation that protects the homeowners’ collective interests.
What do we learn from the Bangerter decision? HOAs and their governing Boards must take special care in making decisions regarding assessments to insure that the process is fair, all views are considered and all facts weighed, and that the decision itself is reasonable in light of the language of the governing documents and the relevant facts and circumstances. Of course, if a particular HOA’s (or COA’s) governing documents plainly and unambiguously provide for the assessment structure (unlike the HOA in the Bangerter Case), that makes it much simpler as the HOA has no discretion.
If you have questions regarding the assessment structure in your planned community (HOA or COA), we can help. Please call for assistance.