Community Association Board Members are Protected by the Business Judgment Rule
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Board members oftentimes hesitate in taking necessary actions as they become frozen by the fear that their decisions may lead to unintended consequences. This results in critical decisions being delayed—the proverbial kicking the can down the road. Yet, depending upon the situation, the failure to act could produce a worse outcome. Board members do have a fiduciary duty and responsibility to their associations, and the fear of breaching this duty is what leads to board members hesitating when it comes to making major and difficult decisions. However, the “business judgment rule” applies to association board members just as it applies to other corporate directors and officers. This Blog post will discuss how community association board members are protected by the business judgment rule.
Community associations, whether an HOA or a condominium, are non-profit corporate entities. As such, they are governed by the Florida Not For Profit Corporation Act, which is codified in Chapter 617, Florida Statutes. A long-standing doctrine of Florida corporate law is the business judgment rule, which states that directors are not liable for their business decisions, and the actions of the board will be upheld, if the directors discharge their duties in good faith and in the best interest of the corporation. See Fla. Stat. § 607.0830.
Florida’s courts have held the business judgment rule applies to the board of directors of community associations as well and have also provided guidance as to how it is judged in the community association context. In Hollywood Towers Condo. Ass’n v. Hampton, it was explained that the standard an association’s board is judged by is that of reasonableness. 40 So.3d 784 (Fla. 4th DCA 2010). The court stated, “We . . . hold that courts must give deference to [an association’s] decision if that decision is within the scope of the association’s authority and is reasonable—that is, not arbitrary, capricious, or in bad faith.” Id. at 787. Stated another way, the court established a two-prong test for determining whether a decision made by an association’s board is protected by the business judgment rule: (1) is the decision within the scope of the association’s authority; and (2) is the decision reasonable. Id. Furthermore, the court defined “reasonable” in this context as meaning not (1) arbitrary, (2) capricious, or (3) in bad faith. Id.
Over the years, the business judgment rule has been raised to defend the decisions made by various association boards throughout Florida. For example, it was used in evaluating a board’s decision to lease a portion of the common area parking spots. Garcia v. Crescent Plaza Condo. Ass’n, 813 So.2d 975 (Fla. 2d DCA 2002). It was also applied to a board’s decision to charge special assessments for common element improvements. Farrington v. Casa Solana Condo. Ass’n, 517 So.2d 70 (Fla. 3d DCA 1987). In Hollywood Towers, the court used it to evaluate the board’s decision to access an owner’s unit for performing maintenance on the balcony. 40 So.3d at 787.
While the business judgment rule has not always been a successful defense for a board of directors, it will be if the board’s actions are within its authority and determined reasonable. In conclusion, when a board is facing a tough situation, before making its decision it should ask two questions: 1) do we have the statutory authority, contractual authority or authority under the association’s governing documents to take the specific action in question, and 2) if the authority exists, is the action a reasonable one to take.