New Hope for Florida Residential Associations: Florida Court Clears the Air on Applications of Florida's Business Judgment Rule

Florida's Business Judgment Rule has a long and often cited history. The rule prevents a court-which may possess less business expertise than the corporate directors-from calling upon directors to account for their actions, no matter how poor their business judgment, absent a showing by the plaintiff of abuse of discretion, fraud, bad faith or illegality. Kloha v. Duda, 246 F. Supp. 2d 1237, 1244 (M.D. Fla. 2003). The rule also prevents a fact-finder from using hindsight to second-guess directors' business decisions. Bal Harbour Club v. Ava Dev., 316 F.3d 1192 (11th Cir. Fla. 2003). Traditionally, the Business Judgment Rule served to protect corporate directors and officers from personal liability and was not a valid defense in suits brought against the corporation itself. See § 607.0831, Fla. Stat. (2009).

Over the years, in an apparent effort to not second-guess management decisions, courts have applied an adaptation of the Business Judgment Rule to decisions made by condominium associations. See Garcia v. Crescent Plaza Condo. Ass'n, 813 So.2d 975 (Fla. 2d DCA 2002) (applying the Business Judgment Rule to the condominium association's decision to lease a portion of the common element parking spots); Farrington v. Casa Solana Condo. Ass'n, 517 So.2d 70, 72 (Fla. 3d DCA 1987) (applying the Business Judgment Rule to the condominium association board's decision to approve a special assessment); and Tiffany Plaza Condo. Ass'n v. Spencer, 416 So.2d 823, 826 (Fla. 2d DCA 1982) (stating that the court will not interfere with an association's decision to exercise its authority in a reasonable manner).

In applying the Business Judgment Rule to condominium association decisions, courts have generally limited their review to two issues:

1. Whether the association has the contractual or statutory authority to perform the relevant act; and,

2. If the authority exists, whether the board's actions are reasonable.

See Garcia, 813 So. 2d at 977-978.

While it is clear, beginning as early as 1982 in the Tiffany Plaza case, that the courts have toyed with the application of Florida's Business Judgment Rule in the residential association setting, no Florida court has expressly set forth a test for review of association decisions. This has all changed with the Fourth District Court of Appeals' decision in Hollywood Towers Condominium Association, Inc., 40 So. 3d 784 (Fla. 4th DCA 2010).

In Hollywood Towers, the Florida Fourth District Court of Appeals was faced with a dispute over the standard by which a trial court should review the decision of a condominium association's board of directors. The underlying lawsuit involved the association's decision to access a unit owner's unit, during reasonable hours when necessary, in order to perform maintenance on the common elements-in this case, an outside balcony. The unit owner, Sharon Hampton, hired an engineer who determined that the association's access of the unit was unnecessary and that the maintenance to the balcony could be performed without the need to access the unit. Ms. Hampton denied the association access to her unit, and the association filed a lawsuit for injunctive relief. At the conclusion of an evidentiary hearing, the trial court found that the association did not meet its burden of showing irreparable harm because there is a clear question not only as to whether the maintenance work was necessary, but whether the failure to perform it would cause immediate harm. The association appealed this decision.

The dispute on appeal was over the standard by which a trial court should review the decision of a condominium association's board of directors. The association asserted that under the Business Judgment Rule, a trial court is required to defer to the association unless there is proof of fraud, self dealing, dishonesty or incompetency in arriving at the decision. Ms. Hampton argued that the Business Judgment Rule applied only to suits against directors for personal liability and that the trial court was required to determine whether the maintenance work and access to her unit was necessary.

In its unequivocal holding, the Fourth District Court of Appeals held that courts must give deference to 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. The District Court found that there was no dispute the association had authority to repair the common elements and had a right of access to the plaintiff's unit during reasonable hours, when necessary, to perform this work. Thus, the District Court found the trial court's focus was misplaced in determining there was a question of fact as to the reasonableness of the association's determination that the need to access the plaintiff's unit was necessary. The court ultimately held that the association's decision was protected by the Business Judgment Rule and that the proper inquiry was whether the association's decision was arbitrary, capricious or in bad faith.

The court's holding in Hollywood Towers clears the air by unequivocally extending the protections of the Business Judgment Rule to the residential association itself-not just its officers and directors. While the ultimate question of reasonableness is one of fact, the standard penned by the court in Hollywood Towers provides much needed clarity as to what Florida courts consider "reasonable" issues of fact. The District Court clearly held that "reasonable" means not (1) arbitrary, (2) capricious or (3) in bad faith. In future lawsuits filed against Florida residential associations where the record lacks evidence that the association's actions were arbitrary, capricious or in bad faith, Hollywood Towers provides material for summary judgment and possible dismissal as a matter of law based on the Business Judgment Rule.

*Phillip is an associate in the firm's Tampa, Florida, office who can be reached at (813) 472-7834 or pjharris@mdwcg.com.

Defense Digest, Vol. 17, No. 1, March 2011