Designed to avoid judges from second-guessing a decision by a corporation’s board of directors, the Business Judgment Rule’ is an effective tool. Absent self-dealing, dishonesty or fraud the Business Judgment Rule shielded corporate directors, both profit and non-profit, from liability stemming from bad business decisions. For community association directors, this is no longer the case.
In the Florida 4th DCA case of Hollywood Towers Condo v. Hampton, the Court endorsed a new two-prong test in determining whether a decision by a community association director is shielded under the Business Judgment Rule. “Courts must give deference to a condominium association’s decision if that decision was:
1. within the scope of the association’s authority and
2. the decision was reasonable (not arbitrary, capricious, or in bad faith).
Essentially, by second-guessing the directors’ decision, the Court will determine if the same decision should be afforded the protections of the Business Judgment Rule and not be second-guessed.
Adequate ‘Directors and Officers’ insurance coverage along with knowing all of the facts and retaining professionals for assistance in decision making should be the standard in which each associations’ directors compares himself/herself.
Read the Hollywood Towers Condo. Assoc. v. Hampton case by clicking here