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Bye-bye business judgment rule?

Publication: Rural Cooperatives
Publication Date: 01-JAN-06 		Format: Online
Delivery: Immediate Online Access
Full Article Title: Bye-bye business judgment rule?(LEGAL CORNER)

Article Excerpt
Cooperative directors owe a fiduciary duty to the membership to exercise their authority in the best interests of the association and all of its members. In lawsuits claiming directors violated their duty, courts have routinely applied the "business judgment rule."

In its simplest terms, the business judgment rule provides that a board action is protected from challenge if there is a good business justification for the decision and it isn't fraudulent or an abuse of discretion. When the business judgment rule is applied, the burden of proof to establish the impropriety of the decision is on those challenging it.

But in today's environment of heightened concern over the diligence of directors, courts may begin looking for another standard for measuring director conduct. In a recent decision involving a suit against a housing cooperative and most of its directors, the appellate court said the trial court should have applied a "reasonableness" test, and the burden of proof should be on the directors to prove their actions were indeed "reasonable."

Case facts

In 1974, an apartment building on Wisconsin Avenue in the District of Columbia was converted to a housing cooperative. The cooperative association financed the purchase with money borrowed from the developer who had...

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