Michigan Condo Board Liability Protection: Understanding the Business Judgment Rule

For condominium associations across Michigan, the governing documents that run the community do not age gracefully on their own. Serving on a Michigan condominium association’s board of directors is a genuine act of community service. Board members in Troy, Bloomfield Hills, Novi, Southfield, Dearborn, and condominium communities throughout Oakland County, Macomb County, and Wayne County volunteer their time, navigate difficult personalities, manage complex financial decisions, and absorb the stress of governance for no compensation. What many of them may not fully understand, until a co-owner files a lawsuit, is that volunteer service does not automatically confer immunity from personal liability.

The good news is that Michigan law provides substantial protection for condominium board members who govern responsibly. The centerpiece of that protection is the Business Judgment Rule, codified in the Michigan Nonprofit Corporation Act, MCL 450.2541, which governs every incorporated Michigan condominium association. Understanding how that rule works, what it requires from board members to activate its protection, and where its limits lie is essential knowledge for a Michigan board member.

For condominium associations across Michigan, the governing documents that run the community do not age gracefully on their own. Serving on a Michigan condominium association’s board of directors is a genuine act of community service. Board members in Troy, Bloomfield Hills, Novi, Southfield, Dearborn, and condominium communities throughout Oakland County, Macomb County, and Wayne County volunteer their time, navigate difficult personalities, manage complex financial decisions, and absorb the stress of governance for no compensation. What many of them may not fully understand, until a co-owner files a lawsuit, is that volunteer service does not automatically confer immunity from personal liability.

The good news is that Michigan law provides substantial protection for condominium board members who govern responsibly. The centerpiece of that protection is the Business Judgment Rule, codified in the Michigan Nonprofit Corporation Act, MCL 450.2541, which governs every incorporated Michigan condominium association. Understanding how that rule works, what it requires from board members to activate its protection, and where its limits lie is essential knowledge for a Michigan board member.

Why Michigan Condo Board Members Worry About Personal Liability — and Why That Worry Is Warranted

The liability anxiety that board members experience is not unfounded. Michigan condominium associations are frequently the targets of co-owner litigation — challenges to enforcement decisions, disputes over assessment levies, claims of selective enforcement, allegations of fiduciary breach, and challenges to the board’s authority to act. Because the association is a Michigan nonprofit corporation and its board members are its decision-makers, individual directors can find themselves named personally in lawsuits that arise from governance decisions they made in good faith under genuine time pressure.

The stakes extend beyond money. A lawsuit, even a meritless one, consumes board time, strains community relationships, and can deter future volunteers from serving. In Southeast Michigan’s densely developed condominium markets, where associations in communities like Bloomfield Township, Livonia, and Grosse Pointe regularly confront contentious enforcement and collection situations, this is not a theoretical risk.

The Legal Foundation: MCL 450.2541 and the Michigan Nonprofit Corporation Act

The Three-Part Standard of Care Every Director Must Meet

MCL 450.2541 provides the governing standard of care for Michigan condominium and HOA board members, requiring each director to act in good faith, with the care of an ordinarily prudent person in a like position, and in a manner reasonably believed to be in the best interests of the corporation. These three elements work together. A decision can be wrong, even costly, and still be protected if the director who made it acted in good faith, exercised reasonable care in reaching it, and genuinely believed it served the association’s interests. Michigan courts will refrain from substituting their judgment for a board’s reasonable judgment, and that judicial restraint is the practical meaning of the Business Judgment Rule in the condominium context.

The Business Judgment Rule as a Defense

The Business Judgment Rule is codified in MCL 450.2541(2), which provides that in discharging their duties, a director or officer is entitled to rely on information, opinions, reports, or statements prepared or presented by: one or more directors, officers, or employees of the corporation whom the director reasonably believes to be reliable and competent; legal counsel, public accountants, engineers, or other persons as to matters the director reasonably believes are within their professional or expert competence; or a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.

The practical consequence of this provision is significant: a board that engages counsel, reviews a professional’s report, and then acts on that professional guidance has a powerful statutory defense against a claim that it breached its duty of care. The rule does not guarantee the decision was correct. It protects the process by which the decision was made.

The Reliance Doctrine: Why Consulting Counsel Matters More Than You Think

A board of directors that relies on the opinion of counsel will likely have the protections of the Business Judgment Rule and be deemed to have acted in good faith and in the best interests of the association. In contrast, a board that arbitrarily makes decisions without the opinion of legal counsel subjects itself to potential liability. This is not merely theoretical. In enforcement disputes, assessment challenges, and governance controversies litigated in the Oakland County Circuit Court and Wayne County Circuit Court, the presence or absence of documented legal consultation can be outcome-determinative on the liability question.

Under MCL 450.2541(3), a director is not entitled to rely on information if they have knowledge concerning the matter that makes such reliance unwarranted. This qualification is critical: the reliance protection is not a blank check. A board member who consults counsel but then proceeds in a manner directly contrary to that advice, or who relies on obviously inadequate information, cannot invoke the protection of the rule.

MCL 450.2209: The Articles of Incorporation Liability Shield

Eliminating Personal Liability Through the Articles of Incorporation

The Business Judgment Rule is a defense — it must be raised in litigation and proven through the facts. MCL 450.2209 offers something more structural: a provision in the association’s Articles of Incorporation that can eliminate personal monetary liability for board members before any lawsuit is ever filed.

MCL 450.2209 permits the articles of incorporation to contain a provision that eliminates a director’s liability for monetary damages unless the director received a financial benefit they were not entitled to, intentionally inflicted harm on the corporation or its members, declared an improper distribution, committed an intentional criminal act, or was liable for attorney’s fees as a result of a bad-faith derivative action. The 2015 amendments to the Michigan Nonprofit Corporation Act expanded the permissible exculpation language that may be included in a nonprofit corporation’s articles of incorporation, including by removing the former gross-negligence carveout from the director-liability provision in MCL 450.2209(1)(c). 

The Five Exceptions That Cannot Be Eliminated

Even the strongest articles of incorporation provision cannot eliminate liability for: receiving an unauthorized financial benefit; intentionally inflicting harm on the corporation or its members; declaring an improper distribution; committing an intentional criminal act; or being found liable for attorney fees in a bad-faith derivative action. These five exceptions represent the floor of accountability that Michigan law preserves regardless of what the governing documents say. Notably, they require intentional or clearly wrongful conduct. Ordinary governance mistakes, even poor ones, are not in this category.

Association Assumption of Liability: MCL 450.2209(1)(e)

MCL 450.2209(1)(e) provides that a condominium association may assume liability for all acts or omissions of a volunteer director, volunteer officer, or other volunteer, provided the volunteer was acting within the scope of their authority, their conduct did not amount to gross negligence or willful and wanton misconduct, and their conduct was not an intentional tort. This provision allows the association, rather than the individual board member, to bear the financial consequences of covered governance decisions. It is one of the most powerful liability tools available to Michigan condominium associations, and it requires an express provision in the Articles of Incorporation to be effective.

Why Volunteer Status Is Critical to These Protections

The protections available under MCL 450.2209(1)(c) and (e) extend only to volunteer directors and officers — those who do not receive anything of more than nominal value for serving. Michigan associations considering any form of board member compensation must understand that even modest compensation may cost a director their eligibility for these statutory protections. This is a governance decision that warrants consultation with Michigan condominium counsel before implementation.

What the Business Judgment Rule Protects — and What It Does Not

Decisions the Rule Shields

The Business Judgment Rule provides meaningful protection for a wide range of ordinary governance decisions: selecting contractors and vendors; approving budgets and assessments; setting enforcement priorities; interpreting ambiguous bylaw provisions; and managing common element repairs. In each of these areas, courts applying Michigan law have been reluctant to second-guess board decisions made through a defensible process.

Where the Rule Breaks Down: Ultra Vires Acts and Bad Faith

Michigan courts have held that acts of directors that are ultra vires (beyond the power of the corporation) may subject a director to liability, as they may not be in good faith, reasonably prudent, and in the best interests of the corporation. Courts can apply this principle to condominium and HOA directors and potentially hold them liable for failing to comply with the plain language of their governing documents, as such actions are beyond the power of the nonprofit corporation. This is a critical limitation: a board that acts outside the authority granted by the Master Deed, Bylaws, or Michigan Condominium Act cannot invoke the Business Judgment Rule to cover that action. The rule presupposes that the board is exercising legitimate authority.

The Rule Does Not Protect Boards That Ignore Their Own Documents

This is the most practically important limitation for Southeast Michigan boards to internalize. A board that imposes a fine without a hearing, records a lien on fines that its Bylaws do not authorize treating as assessments or amends its governing documents through a board vote alone rather than a co-owner vote under MCL 559.190(2) is not exercising business judgment. It is exceeding its authority. The Business Judgment Rule does not apply to ultra vires acts, regardless of the board’s good intentions.

Practical Governance: How Michigan Boards Earn Business Judgment Rule Protection on Every Decision

Document Your Deliberations

The Business Judgment Rule protects process, and process must be demonstrable. Board meeting minutes should reflect that contested or significant decisions were discussed, that relevant information was reviewed, and that the board considered the association’s interests. Sparse minutes, or no minutes at all, are a litigation disadvantage that the Business Judgment Rule will be hard pressed to overcome.

Consult the Right Experts

Act Within the Scope of Your Authority

Before the board takes any significant action, the threshold question is always: does our authority to take this action exist in the governing documents or Michigan law? If the answer is not clearly yes, seek legal guidance before acting. An ultra vires action is not protected by the Business Judgment Rule and may expose individual board members to personal liability regardless of what the Articles of Incorporation say.

Avoid Conflicts of Interest

A board member with a personal financial interest in a board decision should be recused from that vote, and the recusal should be documented in the minutes. Interested-party transactions are scrutinized in litigation, and the failure to recuse — particularly in a smaller association where board membership is limited — is a fact pattern that undermines the good-faith element of the Business Judgment Rule analysis.

Enforce Consistently

Selective enforcement is a common basis for co-owner claims against Michigan condominium boards. A board that enforces a rule against one co-owner but ignores the same violation by another opens itself to claims of discriminatory enforcement, breach of fiduciary duty, and potential Fair Housing Act issues. Documented, consistent enforcement is both a governance best practice and a liability protection strategy.

Directors & Officers Insurance: The Layer of Protection the Statute Does Not Provide

The statutory protections under the Michigan Nonprofit Corporation Act address the outcome of a lawsuit — whether a board member is personally liable for a judgment. D&O insurance addresses the process — who pays for the lawyers while the lawsuit is pending. Both are necessary. A board member who wins a lawsuit after two years of litigation has still experienced two years of litigation. Adequate D&O coverage, reviewed annually with the association’s insurance professional, is the practical complement to the legal protections the statute provides.

Best Practices for Southeast Michigan Boards 

Review your association’s Articles of Incorporation against the current MCL 450.2209 framework, particularly if the Articles predate the 2015 amendments to the Michigan Nonprofit Corporation Act. If your Articles do not contain current liability limitation and association assumption of liability provisions, a straightforward amendment can provide substantially expanded protection for every board member who serves your association going forward. Ensure your D&O coverage is adequate and current. Document every significant board decision with minutes that reflect the deliberative process. Consult Michigan condominium counsel before significant enforcement actions, assessment levies, or governance decisions where the board’s authority is anything less than clear. And enforce your governing documents consistently; the Business Judgment Rule’s good-faith requirement and the practical risk of selective enforcement claims both point toward the same governance discipline.

Frequently Asked Questions

Can a Michigan condo board member be personally sued for a governance decision?

Yes. Co-owners can and do name individual board members personally in lawsuits challenging governance decisions. The Business Judgment Rule under MCL 450.2541 and liability limitation provisions under MCL 450.2209 provide important defenses, but those defenses must be properly activated through good-faith process, documented deliberation, and Articles of Incorporation that contain the applicable liability protection provisions. Board members who act in good faith, within their authority, and with appropriate professional guidance are well-protected. Those who act arbitrarily, in bad faith, or beyond the scope of their authority are not.

What is the difference between the Business Judgment Rule and Directors and Officers insurance?

The Business Judgment Rule under MCL 450.2541 is a legal defense that, if successfully raised, protects board members from being held liable for governance decisions made in good faith and with reasonable care. D&O insurance is a financial product that pays the cost of defending a lawsuit, such as attorney fees, settlement amounts, and judgments,  regardless of whether the Business Judgment Rule ultimately applies. Every Michigan condo board needs both: the rule protects the outcome; the insurance protects the board’s finances during the process.

Does the Business Judgment Rule protect a board that made a bad financial decision?

Generally, yes — if the process was sound. A costly contractor selection, a miscalculated budget, or an ineffective repair strategy does not by itself create personal liability for board members who made the decision in good faith, gathered reasonable information, and genuinely believed the decision served the association’s interests. Michigan courts do not require boards to be right. They require boards to be reasonable. The rule breaks down when decisions are made in bad faith, without adequate information, outside the board’s authority, or in the face of clear conflicts of interest.

Do Michigan condo board members need to update their Articles of Incorporation to get liability protection?

Likely yes, if the Articles predate the 2015 amendments to the Michigan Nonprofit Corporation Act. Those amendments to MCL 450.2209 significantly expanded the scope of available liability protection. Associations whose Articles of Incorporation were filed before January 2015 may not reflect these expanded protections. A review by Michigan condominium counsel is the appropriate starting point.

What actions by a condo board member are NOT protected by the Business Judgment Rule?

The Business Judgment Rule does not protect conduct that is ultra vires, meaning that it is beyond the board’s legal authority under the governing documents or Michigan law. It also does not protect decisions made in bad faith, with clear conflicts of interest, or in deliberate disregard of professional advice. Separately, the liability limitation provisions of MCL 450.2209 expressly cannot eliminate liability for: receiving an unauthorized financial benefit; intentionally inflicting harm on the corporation or its members; declaring an improper distribution; committing an intentional criminal act; or being found liable for attorney fees in a bad-faith derivative action.

Disclaimer: This article is intended for general educational purposes only and does not constitute legal advice. The information provided does not create an attorney-client relationship. Michigan condominium board members, property managers, and associations with specific legal questions should consult qualified Michigan condominium and HOA counsel regarding their particular circumstances.

About the Author

Richard M. Delonis is a Michigan condominium and HOA lawyer at Szura & Delonis, PLC in Southfield (Metro Detroit). He advises association boards and community association managers on governance, rule enforcement, assessment collections, document amendments, and risk management, with a practical focus on helping boards reduce disputes and run defensible, well-documented processes.