Condominium Board Members: The Business Judgment Rule and Its Protections
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In many condominium associations, unit owners sometimes question decisions made by the association’s board members. In Florida, those association board member decisions are governed by what is known as the business judgment rule. That rule affords broad protection to board decisions.
One Florida court recently addressed the scope of the business judgment rule, as applied to a condominium association board’s decision-making power. See New Horizons Condominium Master Association, Inc. v. Harding. In New Horizons, the Florida appellate court was faced with a dispute involving cable services for various condominium associations and the associations’ respective allocation for payment for those cable services. The master association condominium board ultimately settled the dispute with the cable provider but ratified a budget for those same services that was more than the settlement amount with the cable provider. A homeowner and one of the associations then filed suit against the master association, alleging, in part, that the budget for those costs was improper and lacked legal authority.
In response to the allegations of impropriety, the master association argued the actions of its board of directors were cloaked with the protection of the business judgment rule. In finding for the Master Association on its business judgment rule argument, the Florida court went into detail about the application of and the history of the business judgment rule in various types of board member settings. The court’s analysis provides good guidance for anyone sitting on a board, thinking about running for a board position, as well as anyone thinking about suing an association for decisions with which they may not agree.
What is the Business Judgment Rule?
In Florida, the business judgment rule applies to various types of entities. Specifically, that rule is codified by Florida Statutes for corporations, limited liability companies, and not-for-profit corporations (like condominium associations). See §607.0831 (1), Fla. Stat. (“A director is not personally liable for monetary damages to the corporation or any other person for any statement, vote, decision to take or not to take action, or any failure to take any action, as a director…”); §605.04093 (1), Fla. Stat. (“A manager in a manager-managed limited liability company or a member in a member-managed limited liability company is not personally liable for monetary damages to the limited liability company, its members, or any other person for any statement, vote, decision, or failure to act regarding management or policy decisions…”); §617.0834 (1), Fla. Stat. (extending business-judgment rule deference to non-profit officers and directors).
What do Florida Courts Say About the Breadth of the Business Judgment Rule?
Florida courts, like in the case of New Horizons, have extended their business judgment rule deference to community associations, thus, shielding board members from constantly being second-guessed on their decisions. That shield, however, is not impenetrable. In order for board decisions to be protected by the business judgment rule defense, those decisions must be within the scope of the association’s authority and must be reasonable. Stated differently, the business judgment rule will protect board members’ decisions that are not arbitrary, capricious or in bad faith.
As the court in New Horizons articulated, the purpose of the business judgment rule is to prevent courts from second-guessing board member decisions that are not made in bad faith, that are not the subject of self-dealing, or amount to criminal conduct. If those decisions do not fall within those categories, board members will likely be immune from prosecution.
In addition, the court in New Horizons also analyzed whether the association needed to formally plead, as an affirmative defense, the business judgment rule protection for its decisions. The court found that no such requirement existed because there is a presumption that the business judgment rule applied to the board’s decision. In so doing, the court cited various cases, from various jurisdictions (including outside of Florida), supporting the view that liability is rarely imposed upon corporate directors or officers simply for bad judgment or wrong decisions.
The holding in New Horizons emphasizes the deference given by Florida courts to the business judgment rule protection in connection with board members’ decisions. The court’s ruling should provide guidance to board members (and potential board members) faced with challenging decisions, as well as those attempting to second guess those decisions.