The Business Judgment Rule

Condominium and homeowners associations are non-profit corporations governed by the Florida Not For Profit Corporation Act, Chapter 617, Florida Statutes. The business judgment rule protects boards of directors from liability for their decisions if the directors discharge their duties in good faith and in the best interest of the corporation. See Fla. Stat. § 607.0830.

In Hollywood Towers Condo. Ass’n v. Hampton, the court explained that the business judgment rule that traditionally protected corporate directors from personal liability had adapted it to apply to decisions made by community associations. 40 So.3d 784 (Fla. 4th DCA 2010). Thus, courts reviewing decisions by associations had, for example, refused to second-guess the association’s decision to lease a portion of the common element parking spots or to approve a special assessment.

A court reviewing a board of directors’ decision generally limits its inquiry to two issues: (1) did the association have the authority to make the decision, either pursuant to statute or the governing documents, and (2) where the board’s actions are “reasonable.” But in determining whether the board’s actions were “reasonable,” courts will defer to the board’s decision as long as it is not “arbitrary, capricious, or in bad faith.” Stated another way, the test is as follow:

Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise.

Moreover, the business judgment rule imposes a high standard of proof for those who claim the directors have breached their fiduciary duty. Florida courts have held that corporate directors and officers do not violate their fiduciary duty, absent actual wrongdoing in the form of fraud, self-dealing, or unjust enrichment.  In Sonny Boy, LLC v Asnani, an owner claimed the individual directors of the association had breached their fiduciary duties by failing to maintain and repair the common elements, which caused the member to suffer damages from the loss of use and rental income.  The court held that, absent fraud, self-dealing and betrayal of trust, directors of condominium associations are not personally liable for the decisions they make in their capacity as directors.