Business Judgment Rule Designed to Shield Directors from Personal Liability
A recent case out of Florida’s Third District discussed the business judgment rule and ultra vires acts. Of importance, the Third District held that the business judgment rule was not required to be raised as an affirmative defense. Hence, the business judgment rule could be relied on notwithstanding a board/manager/director not raising it as an affirmative defense in a lawsuit asserted against them.
The business judgment rule is a critical rule for anyone serving on a board to appreciate because it is designed to benefit them, i.e., to shield them for personal liability for their decisions. Without such a rule, who would really want to ever serve on a board?!?
In Florida, the business judgment rule has been codified by statute for corporations, limited liability companies, and not-for-profit corporations. See § 607.0831(1), Fla. Stat. (2021) (“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 deference to nonprofit officers and directors). As drafted, these statutes protect directors from liability under most circumstances, absent a showing of bad faith, self-dealing, or a violation of criminal law.
In conformity with these statutory and common law tenets, Florida courts have extended business-judgment deference to common interest associations, uniformly shielding “a condominium 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” from judicial review. Hollywood Towers Condo. Ass’n, Inc. v. Hampton, 40 So. 3d 784, 787 (Fla. 4th DCA 2010).
New Horizons Condominium Master Association, Inc. v. Harding, 47 Fla.L.Weekly D491b (Fla. 3d DCA 2022)
An ultra vires act is not subject to the business judgment rule because:
Ultra vires acts are those performed without legal authority. They are therefore characterized as void on the basis that no power to act existed, even where proper procedural requirements are followed. Conversely, acts by a corporation that are within its realm of power, albeit imprudent or violative of a clear directive, are intra vires.
New Horizons Condominium Master Association, supra (internal citations omitted).
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