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How Florida’s Business Judgment Rule Protects Corporate Directors
One of the main reasons that people create a legal entity for their business, such as a corporation or a limited liability company, is for liability protection. That is to say, such entities shield individual owners or directors from personal liability for actions taken by the business as a whole. An aggrieved party can therefore only seek monetary damages against the entity itself.
To strengthen this concept, American law has long recognized a principle known as the business judgment rule. This basically states that a judge (or jury) should not second-guess business decisions made by the directors or managers of a company, presuming they acted in good faith and within the scope of their legal authority. For example, a person cannot sue the individual members of a corporation’s board of directors simply because he disagrees with a business decision made by the board as a whole.
While the business judgment rule has long been recognized by the courts as part of the common law, it has also been codified by the Florida legislature. Section 607.0831 of the Florida Statutes expressly provides that a director is normally “not personally liable for monetary damages to the corporation or any other person” with respect to their actions (or inactions) as a director. Again, there are exceptions, such as for bad faith or where the director obtained an improper benefit from their actions.
Florida Appeals Court: Defendant Not Required to Plead Business Judgment as an Affirmative Defense
Section 607.0831 broadly applies to the directors of corporations, LLCs, and non-profit corporations. The Florida courts, however, have extended its provisions to also cover certain “common interest associations.” For instance, the Florida Third District Court of Appeals recently noted the business judgment rule also protects the decisions made by a condominium association’s board of directors.
The case before the Third District, New Horizons Condominium Master Association, Inc. v. Harding, involved what it described as a “garden-variety condominium dispute over assessments.” Basically, there was a master association comprised of seven sub-associations. Each sub-association appointed a member of the master association’s board. A dispute arose between one of the sub-associations (and its appointed director) and the master association’s board over a payment to a cable company.
When the sub-association sued, the master association said its actions were protected by the business judgment rule. The trial court rejected that position and ruled in favor of the sub-association. On appeal, however, the Third District sided with the master association and held the rule did apply.
The legal question was whether the master association was required to plead the business judgment rule as an “affirmative defense” to the sub-association’s lawsuit. The Third District said there was no prior Florida case imposing such a requirement. And as it read section 607.0831, immunity under the business judgment rule automatically protected the defendant unless the plaintiff–in this case, the sub-association–offered proof as to why some exception to the rule should apply.
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Business disputes arise every day over a variety of reasons. If you are involved in such a dispute and need legal advice from a qualified Tampa business and corporate attorney, contact HD Law Partners today to schedule a consultation.