Board Powers – The Business Judgment Rule
A frequent problem faced by members of Boards of Directors is not being sure of their authority to act in certain situations, as well as the potential for personal liability for their actions. There are many specific Board powers which are established in either the association’s governing documents or Florida Statutes, which make it easy for a Board to know how it should act in certain situations. But there are many more scenarios where it is not clear as to what is the Board’s authority. Examples of unclear issues may be: what clauses to include in the $1,000,0000 painting contract so as to protect the Association’s interests; or how long should a property management agreement be; or should the Association increase security at the community due to recent break-ins. Many of these decisions must be made utilizing the Business Judgment Rule.
The officers and directors of the association have a fiduciary relationship to the unit owners [Fla. Stat. § 718.111(1)(a)], and managers have such fiduciary relationships as may exist in their employment arrangement [Fla. Stat. §718.111(1)(a)]. This fiduciary duty requires them to act in good faith, in the best interests of the unit owners, exercise due care and diligence when acting for the community, and act within the scope of their authority. In non-condominium community association cases where there was no statutory duty, owners have been required to show individual losses resulting from the alleged breach of fiduciary duty beyond harm suffered by the association.
The Business Judgment Rule provides that decisions of directors will not be questioned unless there is a showing of fraud, self-dealing, dishonesty or incompetency. The Third District Court of Appeal held in a condominium case that “the ‘business judgment rule’ will protect a corporation’s board of directors’ business judgment as long as the board acted in a reasonable manner in passing the special assessment.” Reliance on the opinion of counsel may be a basis for finding a board’s decision to be reasonable.
In general, directors are not personally liable for mere negligence, and even breach of a fiduciary duty may not result in liability. However, it is arguable that they may be held liable for incompetence. The Condo Act, and Florida Statutes Chapters 607 and 617 require “more than simple negligence before personal liability for monetary damages attaches.” When a member accepts a position on the board, there is a legal presumption that the individual has knowledge of the duties and responsibilities of being a member of the board. Members are not excused from improper action on the grounds of ignorance or inexperience, and liability for board members for negligence and mismanagement exists in favor of the association and the individual unit owners.
Furthermore unilateral actions of an officer of an association may result in personal liability. In the matter of Feldman v. Harbor Village Community Association, Fla. Arb. Case No. 2008-05-2765 (Final Order April 29, 2010), the arbitrator ruled that the “Business Judgment Rule does not apply to unilateral actions of the President but applies to property conducted actions of the Board. The Rule did not authorize the actions of the President of the Master Association in removing a Board Member from a sub-association.”
There are a number of liability exposures for the board, board members, officers, and managers. Just a few of those are:
a) A unit owner’s claim that the board did not give adequate notice of a meeting, properly conduct a meeting, properly conduct an election, or allow inspection of the records, can force arbitration.
b) An officer or director of a condominium association who contracts on behalf of the association with himself, or with another corporation in which he is, or becomes, substantially interested, or with another for his personal benefit may be liable to the association for that amount by which he was unjustly enriched as a result of his contract.
c) Florida Statute §718.3026 provides added requirements for contracts or transactions between an association and one or more of its directors or any other entity in which one or more of the association’s directors are directors or officers or are “financially interested.” Approval of the contract or other transaction requires an affirmative vote of two-thirds of the directors present and, at the next regular or special meeting of the members, the existence of the contract or other transaction must be disclosed to them.
d) Associations who engage an unlicensed contractor to perform services are unable, by law, to legally enforce that contract, to recover for shoddy work, or otherwise maintain any action in law or in equity.
e) A unit owner may institute a suit against the association and any director for willful and knowing failure to comply with the provisions of the Condominium Act, the declaration, the articles, or the bylaws from which injunctive relief or damages may result along with an assessment for the unit owner’s attorney’s fees.
f) Individual officers and agents of a corporation are personally liable where they have committed a tort even if such acts are performed within the scope of their employment or as corporate officers or agents.
It is strongly recommended that all board members, officers, and managers have errors and omissions insurance coverage. Most importantly, they should always act in good faith, in the best interests of the unit owners, exercise due care and diligence when acting for the community, act within the scope of their authority, and take the time and courses needed to become competent on these issues.
Mr. Andrew Cuevas, Esq., is the President of Cuevas, Garcia & Torres, P.A., and oversees its Community Association Law Division of the firm. If you have any questions regarding this article or any other questions, you can contact Mr. Cuevas at (305) 461-9500 or at [email protected]. If you are interested in reading previous newsletters issued by the firm, please visit www.cuevaslaw.com, select the icon for News Room, then choose Newsletter, and thereafter select the category of Community Association News.
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