What is the Business Judgment Rule and How Does it Protect the Board of Directors of a Community Association?

November 20th, 2020

Posted in Business & Corporate Law,Real Estate Law

A community association’s board of directors is often tasked with making difficult and sometimes controversial decisions regarding community issues, such as covenant enforcement, collection action against delinquent owners, or larger issues with neighboring associations or governmental entities, among other issues. The gravity of these critical decisions can be stressful for board members and create questions regarding their own exposure to liability. A common question and concern from community association directors in these situations is, “Can I be held personally responsible for my actions as a director?”

Fortunately for these board members, Florida Statute §607.0830, commonly known as the “Business Judgment Rule”, provides protections for directors who discharge their duties “in good faith and in a manner he or she reasonably believes to be in the best interest of the corporation.” Additionally, directors, in becoming informed on a matter, are required to exercise “the care that an ordinarily prudent person in a like position would reasonable believe appropriate under similar circumstances.” Directors can (and likely should) rely on opinions of professions such as, accountants, engineers, and lawyers, as well as information provided by employees or other data.  A director or board of directors which acts in such a manner is generally shielded from personal liability for actions that were appropriately taken. See Fla. Stat. §607.0830 (2020). However, no such protection applies when it is shown that a director was self-dealing, unjustly enriched, committed fraud, or some other criminal offense.

A Board, when facing a difficult decision, should ensure they have proper professional guidance and are adequately informed in order to make a decision. The Board must have the actual authority to make the decision, and it must act reasonably as described by Florida Statute §607.0830 in doing so. Further, the Board must comply with the procedures in the governing documents and the Florida Statutes with respect to the actions and decisions of the Board. Directors acting in such a manner are generally shielded from personal liability by the Business Judgment Rule, absent a showing of criminal activity, self-dealing, unjust enrichment, or fraud.

Accordingly, the board of directors of a condominium or homeowners’ association are encouraged to obtain professional advice from experts and legal counsel whenever facing a difficult decision where liability for the association or the individual director could be a concern. Lastly, keep in mind that D&O or Directors & Officers insurance may provide coverage or added protection in making difficult decisions.

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