## Facts

- Croton River Club, Inc. was the sponsor/developer of Half Moon Bay, a planned residential community with amenities including a marina, and later became a Chapter 11 debtor.
- When Croton filed for Chapter 11 in 1991, the project was incomplete; some residential units and marina slips had been constructed and sold.
- The Half Moon Bay Homeowners Association, a New York nonprofit, maintained common elements and set budgets for common expenses.
- Historically, Croton allocated 14.25% of certain shared common expenses (used by both the marina and residential units) to the marina.
- After litigation and a settlement, a homeowner-controlled board assumed authority to set the marina’s expense allocation paid by slip owners.
- The homeowner-controlled board adopted a new approach that substantially increased the marina’s share of common expenses (including by applying a large multiplier to a broad expense list), producing major savings to homeowners and a sharp increase in marina charges.
- Croton challenged the allocation in an adversary proceeding, asserting the board’s decision was unreasonable, self-interested, and harmed the value of the marina as property of the bankruptcy estate.
- The bankruptcy court held the business judgment rule did not protect the allocation, found the allocation unreasonable after an evidentiary hearing, and substituted a different allocation largely tracking the prior 14.25% formula; the district court affirmed.
- During the litigation, the marina was sold.

## Issues

1. Whether the homeowners association board’s allocation of common expenses to the marina was insulated from review under New York’s business judgment rule.
2. Whether the bankruptcy court had authority to replace the association’s allocation with a reasonable substitute affecting estate property.
3. Whether a bankruptcy-court order prospectively barring changes to the allocation remained effective after the marina was sold.

## Decision

- The court affirmed that the business judgment rule did not protect the board’s allocation because the decision was self-interested and not a disinterested exercise of association governance.
- The court affirmed the finding that the allocation was unreasonable and upheld the bankruptcy court’s substitution of a different allocation substantially reinstating the prior 14.25% approach.
- The court held that the portion of the order barring future changes to the allocation was no longer in force after the marina’s sale.

## Legal Principles

- Under New York law, the business judgment rule generally protects board decisions made in good faith and in furtherance of legitimate organizational purposes, but it does not shield decisions infected by self-interest or conflicting personal financial incentives.
- A homeowners association board’s cost allocation may be subject to judicial scrutiny where the allocation substantially benefits board members as homeowners by shifting expenses to a discrete group of owners.
- Bankruptcy courts may use their equitable authority to protect estate property from unreasonable burdens imposed by non-debtor entities when those burdens materially affect the value or administration of the estate.
- When a challenged allocation affects estate property, a bankruptcy court may fashion a corrective remedy, including substituting a reasonable allocation, rather than leaving an unreasonable allocation in place.
- Prospective bankruptcy relief tied to an estate asset may lapse or become ineffective once the asset is sold.

## Conclusion

The Second Circuit held that a homeowner-controlled association board could not invoke the business judgment rule to shield a self-interested reallocation of common expenses that shifted costs to marina owners and impaired an estate asset, and it approved the bankruptcy court’s authority to impose a reasonable substitute allocation while limiting any forward-looking restraint once the marina was no longer part of the estate.


In re Croton River Club, Inc., 52 F.3d 41 (2d Cir. 1995)