2022 Supreme Court Case Clarifies Legal Standard For Setting HOA Assessments

On Behalf of | May 9, 2022 | Homeowners' Associations |

In the case of Bangerter v Hat Island Community Association decided February 24, 2022, the Washington Supreme Court discussed the standards applicable to HOAs when they establish assessments for homeowners.  The case involved a Hat Island (Snohomish County) HOA where the community included both developed and undeveloped lots (some of which were potentially undevelopable).  The HOA had adopted a uniform (“one size fits all”) assessment for all lots (regardless of their degree of development) to fund HOA expenses related to the community’s private roads, golf course, marina, ferry and water treatment facilities.

Some homeowners in the community challenged the assessments as being unreasonable and inequitable due to the fact that no distinction was made between lots and owners that use the financed facilities and those that did not use any or most of them.

The Supreme Court in its opinion confirmed the rule that all HOAs are to be given “substantial deference” in their assessment decisions and have “broad discretion” in the assessment process.

In discussing the issues presented the Bangerter Court made a number of points that are worth noting including the following:

  1. An HOA which is granted “the power to charge and assess” is entitled to a grant of broad discretion in deciding the method of allocating costs to its members. The phrase “on an equitable basis” set forth in the Hat Island Covenants “serve[d] only to limit the range of options available to [the HOA]; it does not imply that there is one equitable basis that is better than another.”
  2. An HOA has broad discretion regarding the establishing of assessments, but that discretion “must be exercised reasonably and in good faith.” In order for such exercise to be reasonable, the HOA must follow “the procedures laid out in the governing documents and in relevant statutes” and it also must utilize information that is “reasonably accurate” in making its decisions.
  3. The Court held that when an HOA makes a discretionary decision in a procedurally valid way, the “Courts will not substitute their judgment for that of the Association” unless there is a showing of “fraud, dishonesty or incompetence”. Additionally, the Court stated that “reasonable care is required” in the HOA’s decision-making.
  4. In Bangerter both the trial court and the court of appeals (the lower courts) had considered what is referred to as the “Business Judgment Rule” in reaching their decisions. The Supreme Court observed that the application to HOAs of the so-called “Business Judgment Rule” is a “thorny question” that need not be decided in this particular case.  Thus, the Supreme Court provided no guidance on the applicability of that Rule to the case.  The Supreme Court’s decision was instead based upon other principles of law as set forth above.

Thus, in the aftermath of the Bangerter case, it remains unclear as to whether the Business Judgment Rule provides any legal protection to decisions made by HOAs.  It will still likely, however, provide some legal protection to individual Board members themselves who participate in those decisions.

I will not attempt in this Blog to go into any greater details about the Business Judgment Rule inasmuch as it ultimately was not a factor in the Court’s decision and was only referenced as an issue the Court need not address.

If you have questions regarding HOA or COA (condominium association) legal issues, we can help.