Memorandum to Clients

DIRECTORS: NO LIABILITY UNLESS CONDUCT IS WILLFUL

hat action by a director can lead to liability? Does it matter whether the developer appointed the director to the board? Right now a Florida corporation’s director’s liability does not appear to be dependant upon how a director is appointed. But that may change.

In Sonny Boy, L.L.C. v. Asnani, 29 Fla. L. Weekly D1278 (Fla. 5^th DCA, May 28, 2004), a Florida appellate court ruled that directors of a Florida condominium association could not be held personally liable for the decisions they make absent fraud, self-dealing and betrayal of trust. The owner of several condominium units sued members of the board of directors seeking personal liability for breach of fiduciary duty. The owner alleged the board members failed to cause the condominium association to maintain and repair common elements which caused the owner to lose rental income. Two of the three individuals sued were appointed to be directors by the developer. The owner claimed that developer designated directors at the time the claim arose should be held to a higher standard for wrongful acts than elected directors.

The court looked to the Condominium Act to define the extent of director liability. Florida Statute §718.303 (1) provides:

Each unit owner, each tenant and other invitee, and each association shall be governed by, and shall comply with the provisions of, this chapter, the declaration, the documents creating the association, and the association bylaws and the provisions thereof shall be deemed expressly incorporated into any lease of a unit. Actions for damages or for injunctive relief, or both, for failure to comply with these provisions may be brought by the association or by a unit owner against:

* * *

(c) Directors designated by the developer, for actions taken by them prior to the time control of the association is assumed by unit owners other than the developer.

(d) Any director who willfully and knowingly fails to comply with these provisions.

 

The appellate court pointed out the statute does not provide any guidance in distinguishing between directors who are "designated by the developer" and "any director." A higher standard for directors designated by the developer was not included in the statute.

It was noted that Florida courts have adopted the "Business Judgment Rule" when determining if a director, whether or not designated by the developer, has breached a fiduciary duty in maintaining, repairing or replacing association property. The "Business Judgment Rule" generally provides that directors will not be held liable unless it can be shown there was fraud, self-dealing, dishonesty or incompetency involved. The purpose of the "Rule" is to remove courts from the everyday disputes arising where decisions are made in good faith.

The appellate court held that the owner’s complaint was insufficient because the owner only alleged the directors’ failure to conduct maintenance and repairs; not willfulness. In her dissent, Judge Sharp opined there is a difference between the standard of conduct imposed on elected directors and that imposed on developer designated directors. "I think personal liability for a developer-appointed director for action taken or not taken before control of the association is turned over to the unit owners, can be based on less than willful and knowing acts, which may include failure to comply with the condominium statute, and/or the condominium documents, or a violation of the good business rule test, and/or breach of a

fiduciary duty which favors the developer over the association," Judge Sharp said.

It remains to be seen if the court will revisit whether personal liability for developer designated directors can be based on less than willful and knowing acts. In the meantime, directors with liability questions should contact their counsel. It is appropriate for associations to confirm the status of their directors and officers liability insurance coverage.

hat happens if you want to play golf but you are required to take a cart instead of walk the course? One golfer thought his constitutional rights were violated because he was not able to walk. The golfer learned that not everything is protected by the constitution.

In a decision that may impact Florida golf course communities, a Florida appellate court recently held that a golfer does not have a constitutional right to walk a golf course. In Zurla v. City of Daytona Beach, 29 Fla. L. Weekly D1277 (Fla. 5^th DCA, May 28, 2004), Daniel Zurla sued the City of Daytona Beach and the City of Port Orange claiming the policy of the two municipally owned golf courses, which requires golfers to ride golf carts instead of walking at certain times and on certain days, violated his constitutional rights.

The trial court dismissed the complaint on the grounds the complaint failed to identify a liberty interest protected by the constitution. Rights protected include the rights to contract, to marry, and to raise one’s children - but not the desire to walk while golfing. In addition, the trial court pointed out that golf carts are used to speed up play and to increase revenue. Either objective is sufficient, the court noted, for the course to impose a golf cart requirement.

The appellate court agreed with the trial court’s decision, ending with these profound words: "We conclude with the observation that our founding fathers must be wondering if anyone today even reads the Constitution, much less understands it."

he firm welcomes Jennifer Thomas as a new associate. Jennifer comes to us from the Martin County State Attorney’s Office where she spent much time in the courtroom. Jennifer graduated from Florida State University and received her Juris Doctorate from the University of Miami. Please say hello the next time you visit.

Michael J. Gelfand has been requested to speak at The Florida Bar’s Legislative Update Seminar on August 5, 2004 at the Breakers and he will be the key note speaker at the University of Miami’s Institute on Condominiums and cluster housings in October. Reservations should be made directly with the Bar and University of Miami offices.