Business Judgment Rule & Fiduciary Obligations of Boards
Fourth District Court of Appeal Enunciates Two-Pronged Test to Evaluate Decisions Made by the Board of Directors of a Community Association.
The officers and directors of community associations have a fiduciary relationship to the members (owners), as stated in §718.111(1)(a) and §720.303(1), Florida Statutes. The directors are obligated to discharge their responsibilities in good faith. Board decisions are generally protected by the "business judgment rule". The theory behind this rule is that Courts should not substitute their judgment for the judgment of the elected or appointed board members, so long as the members of the board acted in compliance with established standards of conduct. Florida Statutes, Section 718.111(1)(d), provides:
(d) As required by s. 617.0830, an officer, director, or agent shall discharge his or her duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he or she reasonably believes to be in the interests of the association. An officer, director, or agent shall be liable for monetary damages as provided in s. 617.0834 if such officer, director, or agent breached or failed to perform his or her duties and the breach of, or failure to perform, his or her duties constitutes a violation of criminal law as provided in s. 617.0834; constitutes a transaction from which the officer or director derived an improper personal benefit, either directly or indirectly; or constitutes recklessness or an act or omission that was in bad faith, with malicious purpose, or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.
The new test to determine whether the board's decision should be protected by the business judgment rule comes from a case where an owner prevented the association from extending balcony concrete repairs into her unit. The engineer for the project said to remove the concrete four inches beyond the corrosion, which necessitated work in the unit, not just the balcony. The owner hired her own engineer who said the extra work wasn't necessary.
The association sued to gain access to the unit to perform the repairs recommended by the project engineer. The appellate court explained that its review of the board's decision was limited by the business judgment rule and held:
...courts must give deference to a condominium association's decision if that decision is within the scope of the association's authority and it is reasonable - that is, not arbitrary, capricious, or in bad faith [emphasis added]
The case was sent back to the trial court for analysis pursuant to the new test, to wit:
- Does the board have authority to invade the unit to perform common element repairs?
- and, if so
- Is the decision to do so reasonable or, in other words, was the board decision to invade the unit arbitrary, capricious or made in bad faith?
This case is hot off the press and therefore not final if the parties file motions for rehearing.
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RESPONSE: I agree with you 100%. We need changes to laws/regulations to maximize the cost recovery for condominium associations. I haven't even raised any "solar easement" issues yet on this site.
I am a condo unit owner at Gateland Village, Davie Fl. I have been to the Condo Craze class held by Glazer and Assoc to be a certified board member. One of the many questions I asked at this class was: My Board of Assoc President has been paying his own cell phone for the past 6 years, the Secretary/Treasurer/Director (all these positions handled by one person) has been paying her gas, cell phone, as well as a weekly salary: I asked this question at the class: Can the Board of Assoc pay themselves a wkly salary as well as personal items such as the gas and cellphone? Over the years we have had 4-5 Board members each year, this woman who pays herself was at one time labeled the secretary, but then changed her title to director, and has been paying herself and her boyfriend tens of thousands over the past 6 years, I have read over the 718's inside and out, I was advised by Glazer and Assoc that this is against the law, I already have an investigation going, but I need more clarity on this law, when is it criminal vs civil?
RESPONSE: If this is a condominium association, you may find the ombudsman's office and/or the division investigators helpful. The division is authorized to investigate complaints of unlawful compensation to board members.
There is a very big difference between a violation of the condo laws and criminal behavior. You need to consult with the local law enforcement officials if you believe there is a violation of the criminal laws. Law enforcement will usually require adequate proof in the form of an audit or other professional review in order to take action.
we have a president who now says he is a paying non-member. he has made public statements at a board meeting that our documents are not legal. he, several years ago, tried to claim he was not a member and our association lawyer gave us an opinion that yes he was, as he paid dues and voted. The latest problem is that he has gone to the attorney with our bylaw committee chairperson and they asked questions about the legality of our documents without a motion by the bylaw committee or board. what are our options.
RESPONSE: The board designates who is authorized to initiate legal services, so if the rest of the board members get together they can notify the atty of the president's limited authority or simply remove the president from that position (not remove from the board, solely remove as an officer). There may be certain provisions of your documents that are not "legal" and you may be facing other issues, like MRTA issues, improper amendments, etc. The board needs to understand the legal issues and then take appropriate action on behalf of the association.