Understanding the Business Judgment Rule in Nevada HOA Governance!
In Nevada, as in many states, HOA board members—often volunteers—are granted significant discretion under a legal doctrine known as the Business Judgment Rule (BJR). This protection shields them from personal liability when they make decisions in good faith, even if those decisions later prove mistaken or unpopular. In essence, directors have what some call “the right to be wrong.”
While this shield encourages homeowners to volunteer for board service without fear of lawsuits, it also raises a pressing concern: What happens when that discretion becomes a license for abuse?
What Is the Business Judgment Rule?
The BJR is a judicial doctrine that limits courts from second-guessing the decisions of corporate directors (including HOA directors) as long as certain standards are met. It is not a standard of conduct—it is a standard of liability. That is, a board member may have acted poorly or even unwisely, but unless their action violated key legal duties, courts generally defer to their judgment.[i]
This means that courts will not impose liability simply because a decision had a bad outcome. However, the shield could vanish when directors act in bad faith, with a conflict of interest, or in violation of statutory mandates.
Key Elements of the Business Judgment Rule:
To benefit from the BJR, a board decision must meet the following criteria:
Informed Decision – The director made a reasonable effort to become informed before acting.
Good Faith – The decision was made honestly, not deceitfully or with malicious intent.
No Conflict of Interest – The director did not personally benefit from the decision.
Best Interests – The decision was made with the honest belief that it served the association’s best interests.
Regulators and courts alike often defer to a board’s judgment, especially where complex financial or technical issues are at play. Unless there is clear evidence of misconduct, panels are reluctant to substitute their own judgment for that of volunteer directors who may have consulted legal or financial advisors. As such, expect a court to presume the decision was valid—even if it caused harm.[ii]
Application in Nevada Law:
Under NRS 82.221, which applies to nonprofit corporations (including most HOAs in Nevada), a director or officer is not personally liable for damages unless:
“It is proven that the director’s or officer’s act or failure to act constituted a breach of fiduciary duty and such breach involved intentional misconduct, fraud or a knowing violation of law.” — NRS 82.221(1)(a).
Under NRS 82.221(4), no suit may lie for a mere failure to exercise due care “unless the act or omission involves intentional misconduct, fraud or knowing violation of the law.”
In Chur v. Eighth Judicial District Court, the Nevada Supreme Court held that allegations of gross negligence alone do not suffice to plead a breach of the duty of care; a plaintiff must allege “intentional misconduct, fraud or a knowing violation of law” to state a viable claim under NRS 78.138(7) (the parallel provision for private corporations)
While the Nevada Supreme Court’s decision in Chur interpreted NRS 78.138(7) to require proof of “intentional misconduct, fraud or knowing violation of law,” that holding technically constrains only the corporate-statute framework—not NRS 116’s HOA provisions. Will it be applied to HOA directors?
In any case there is a high threshold for individual liability: poor decisions, negligence, or even ignorance may not be enough to impose personal consequences.
HOA Boards as Fiduciaries (NRS Chapter 116):
HOA directors are fiduciaries under NRS 116.3103, which requires they act on behalf of the units’ owners and exercise the powers and discharge the duties of the association in good faith, in the manner a reasonably prudent person would act under similar circumstances and in the best interests of the units’ owners collectively.
For the BJR to apply in Nevada HOA governance:
Directors must act within their legal authority;
They must avoid arbitrary or capricious decisions;
They must disclose conflicts in accordance with NRS 116.31084;
They cannot use the BJR to shield bad faith, retaliatory, or procedurally defective actions.
Declarant-Affiliated Directors and Structural Conflicts:
The BJR provides no protection for directors acting in their own interest or for a third party—particularly the declarant (developer).
In Beazer Homes Holding Corp. v. Dist. Ct., the Nevada Supreme Court held:
“Even directors appointed by the declarant must act in the best interests of the association, not the declarant. Their fiduciary duty is not diminished by the source of their appointment.” — Beazer Homes Holding Corp. v. Eighth Judicial Dist. Ct., 128 Nev. 723, 291 P.3d 128, 134 (2012)[iii]
Statutes such as NRS 116.31034(10) (which exempts declarant-affiliated directors from “personal profit” disqualification for board eligibility) and NRS 116.31084(3) (which exempts them from mandatory abstention requirements) implicitly acknowledge such conflicts, but do not eliminate the underlying fiduciary duties.
When the BJR May Not Apply:
The business judgment rule may not insulate directors from liability when:[iv]
They violate mandatory statutory duties (e.g., failing to hold elections under NRS 116.31034(5));
They engage in self-dealing or fail to disclose material conflicts (see NRS 116.31084(1));
Their actions reflect bad faith, gross negligence, or intentional misconduct;
Their governance becomes arbitrary, oppressive, or exceeds statutory authority.
The Insurance Angle: Not All Conduct Is Covered:
Most Nevada HOAs carry Directors & Officers (D&O) insurance, but policies often exclude:
Intentional or criminal misconduct;
Claims involving personal gain or undisclosed conflicts;
Violations of law or governing documents.
Thus, even if a director avoids personal liability under the BJR, insurance coverage may still be denied, exposing the HOA (and ultimately the owners) to financial risk. [v]
Final Thought: The Shield Should Not Become a Cloak:
The Business Judgment Rule is essential to encourage volunteer governance, but it is not a license for fiduciary abdication or misconduct. Directors—especially those structurally conflicted or aligned with declarants—must act in the best interests of the association.
Where procedural mandates are ignored, conflicts are concealed, or decisions reflect retaliation or arbitrary behavior, courts should!! decline to apply the BJR. Oversight agencies and legislators should likewise recognize the limits of this doctrine and adopt statutory reforms that clarify its proper scope.
Furthermore, NAC 116.405 authorizes the Commission, when adjudicating complaints under NRS 116.615, to “consider” multiple non-exclusive factors. Do these factors serve as potential independent grounds for adverse findings? Does the regulation impose liability risks absent the “intentional misconduct” required by Chur and the lessor threshold of the duty-of-care framework in NRS 116.3103(a)?
In Nevada's HOA environment—where power is concentrated and oversight remains weak—the BJR must be invoked carefully and challenged when abused.
! This blog is provided as an educational service to the internet community. It is intended to encourage a examination and reform efforts. Any advice that is provided on this site is based on the author's experience. He is not an attorney and the contents does not constitute legal advice. Readers should not act or rely on any information herein without consulting a qualified attorney for legal counsel specific to their circumstances.
!! Unlike the corporate standard under NRS 78.138, intentional misconduct is not required—albeit I am not aware of any Nevada rule on point. Ordinary conflict-driven or negligent governance may suffice- as would not be the case under NRS 78- especially if it results in measurable harm to the association or its members.
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[i] Levandusky v. One Fifth Ave. Apt. Corp., 553 N.E.2d 1317, 1322 (N.Y. 1990).
[ii] NRDC v. Arco, 705 F. Supp. 410, 422 (S.D.N.Y. 1989).
[iii] While the case did not enumerate a multi-part test, the Court reviewed the actions of declarant-affiliated board members through the lens of association interest, not declarant control, thereby confirming that directors may not subordinate association interests to private ones.
[iv] Cohen v. Kite Hill Community Ass’n, 142 Cal. App. 3d 642, 654 (1983) (holding that HOAs must act reasonably and in good faith for BJR to apply); also Levandusky, 553 N.E.2d at 1322 (limiting BJR where rules are applied selectively or oppressively).
[v] American Int’l Specialty Lines Ins. Co. v. Tower Mgmt. Servs., Inc., 375 F.3d 118 (2d Cir. 2004).