Michigan Court of Appeals evaluates Business Judgment Rule and Use of Assessments under Bylaws

A recent unpublished case from the Michigan Court of Appeals has particular relevance for condominium associations operating in Michigan. First, the Court ruled that decisions of the Board will be evaluated under the “business judgment rule”, meaning that if the Board acts in good faith and within the scope of its authority under the purposes of the corporation, the court will not substitute its judgment for that exercised by the Board. Second, the Court supported expenditures made by the Board for replacing existing Common Elements under the framework found in many communities throughout Michigan. In this case, the Association performed work related to the gutters and downspouts and installed an open fire gas fireplace in place of an existing electric fireplace. The Plaintiff argued that this work was an addition to the Common Elements and the expenditures required approval of the community. The Board argued it had the right to spend money to replace these items without approval of the Co-owners. The Court determined that replacements “do not have to be of the same specific character” or functionality.” It was held “the new fireplace assume[d] the function and was a substitute for the prior fireplace.” The fact that an electric fireplace was replaced with a gas one was not found to be an “addition.” Second, adding gutters and downspouts was not found to be an “addition” requiring a special assessment approval but rather is part of “maintenance” permitting the Board of Directors to assess via its normal budget (specifically, gutters “serve the vital role of diverting rain water away from buildings and structures, which acts to keep the property in good condition”, and are therefore considered “maintenance of the common elements under the bylaws” Finally, the court addressed whether money collected via an unapproved special assessment project could be utilized for other authorized items. Here, the Association’s annual budget had included a special assessment for installation of a service elevator. When the special assessment was not approved by the requisite number of co-owners, the Board used the money collected for other authorized projects. This expenditure was held to be in compliance with the Bylaws since nothing was spent on constructing an elevator. MJ Development Company, Inc. v Inn at Bay Harbor Association, 330496 (unpublished, February 23, 2017).