NEW HORIZONS CONDOMINIUM MASTER ASSOCIATION, INC. v. ROBERT HARDING

• Court: District Court of Appeal of Florida
• Decided: February 23, 2022
• Docket: 20-1471
• Status: Published

Opinion

Third District Court of Appeal State of Florida

Opinion filed February 23, 2022. Not final until disposition of timely filed motion for rehearing.

________________

No. 3D20-1471 Lower Tribunal No. 16-27442 ________________

New Horizons Condominium Master Association, Inc., Appellant,

vs.

Robert Harding, et al., Appellees.

An appeal from the Circuit Court for Miami-Dade County, Abby Cynamon, Judge.

Scott J. Edwards, P.A., and Scott J. Edwards (Boca Raton), for appellant.

Mark Perlman, P.A., and Mark Perlman (Hollywood), for appellees.

Before SCALES, MILLER, and BOKOR, JJ.

MILLER, J. In this garden-variety condominium dispute over assessments,

appellant, New Horizons Condominium Master Association, Inc., challenges

a final summary judgment granting declaratory relief and awarding monetary

damages in favor of appellees, Robert Harding and Fifth Horizons

Condominium, Inc. By way of the final judgment, the trial court compelled

the disclosure of several years of audits and invalidated a budgetary

allocation for cable services as ultra vires. On appeal, the Master

Association contends that factual issues precluded summary judgment, and,

regardless, the trial court erred in failing to consider whether the actions of

its directors were protected from review as the product of a valid exercise of

business judgment. We affirm in part and reverse in part.

BACKGROUND

The Master Association governs a condominium development in North

Miami, Florida. It is comprised of seven member subdivisions, one of which

is Fifth Horizons. Each subdivision has a separate community association.

The Master Association provides common services to the sub-associations,

including asphalt and parking lot maintenance, clubhouse and pool area

amenities, common area lighting, landscaping, irrigation, and, as pertinent to

this case, bulk cable and telecommunications services. These services are

funded by assessments collected from the sub-associations.

2 The sub-associations have the authority to designate residents to

serve as directors on the Master Association’s Board (the “Board”). During

the time period relevant to these proceedings, Harding was designated by

Fifth Horizons to serve on the Board.

In late 2009, the Master Association entered into a contract with

Comcast for the provision of cable services. Pursuant to the contractual

terms, Comcast was obligated to provide cable services to all seven sub-

associations. Each sub-association was charged with proportionally

satisfying the cable costs, as assessed by the Master Association.

Several years into the contract, a dispute arose regarding payment,

and Comcast demanded over $300,000.00 in arrearages from the Master

Association. In early 2016, the Board convened to discuss a potential

settlement. During the meeting, the Board drafted a budget which included

a line-item expense for Comcast services in the amount of $248,000.00.

After two subsequent meetings were prematurely terminated, purportedly

due to Harding’s conduct and a correlating inability to obtain a quorum,

approval of the budget was delayed.

In the summer of 2016, the Board met and approved a settlement with

Comcast in the amount of $100,000.00. Despite this approval, the Board

3 ratified the previously drafted budget allocating $248,000.00 for Comcast

costs. 1

Harding and Fifth Horizons then brought suit in the circuit court. In the

operative complaint, they sought declaratory relief, alleging the budget, as

developed, was ultra vires because it included assessments beyond that

required to defray reasonable expenses. 2 Fifth Horizons further asserted it

overpaid assessments for 2016 by $3,791.62. The Master Association

counterclaimed, asserting claims of breach of contract and unjust enrichment

and alleging Fifth Horizons engaged in a pattern of underpayment and

withholding of assessments.

Harding and Fifth Horizons moved for final summary judgment. The

Master Association countered with verified opposition and further raised the

legal argument that the actions of its directors warranted business-judgment

deference. Relying upon the evidentiary record, along with the failure by the

Master Association to plead business-judgment deference as an affirmative

defense, the trial court granted final summary judgment in favor of Fifth

1 The settlement documents were executed several months later and retroactively terminated the contract. 2 The complaint also sought injunctive relief, the disposition of which is not subject to this appeal.

4 Horizons and Harding on both the claims and counterclaims. 3 The instant

appeal followed.

STANDARD OF REVIEW

We review both the grant of summary judgment and the application of

the business judgment rule de novo. See Volusia County v. Aberdeen at

Ormond Beach, L.P., 760 So. 2d 126, 130 (Fla. 2000).

ANALYSIS

We affirm the compelled disclosure of audits without further discussion

and turn our examination to whether the failure by the Master Association to

plead the business judgment rule as an affirmative defense precluded its

application. “[B]orn of the recognition that directors are, in most cases, more

qualified to make business decisions than are judges,” Royal Harbour Yacht

Club Marina Condo. Ass’n, Inc. v. Maresma, 304 So. 3d 1268, 1269 (Fla. 3d

DCA 2020) (quoting Int’l Ins. Co. v. Johns, 874 F.2d 1447, 1458 n.20 (11th

Cir. 1989)), “[t]he business judgment rule has been part of English and

American common law for more than 200 years.” Gerard V. Mantes & Emily

S. Fields, The Business Judgment Rule, 99 Mich. B.J. 30, 30 (Jan. 2020).

While “[t]he precise verbal formulation of [the] rule varies from jurisdiction to

3 The lower court excised all purported overages from the projected 2016 budget, which had the effect of reducing Fifth Horizons’ annual assessment by $3,791.62.

5 jurisdiction, and there are some substantive differences among the various

versions of the rule . . . the essence of the rule is clear.” Mark A. Sargent &

Dennis R. Honabach, D&O Liability Handbook § I:3 (Sept. 2020) (footnote

omitted). The rule protects officers and directors from judicial review of their

acts, provided that “business judgments are made in good faith based on

reasonable business knowledge.” Action Against Directors and Officers—

Business Judgment § 12:7.50 (2021).

In Florida, the business judgment rule has been codified by statute for

corporations, limited liability companies, and not-for-profit corporations. See

§ 607.0831(1), Fla. Stat. (2021) (“A director is not personally liable for

monetary damages to the corporation or any other person for any statement,

vote, decision to take or not to take action, or any failure to take any action,

as a director . . . .”); § 605.04093(1), Fla. Stat. (“A manager in a manager-

managed limited liability company or a member in a member-managed

limited liability company is not personally liable for monetary damages to the

limited liability company, its members, or any other person for any statement,

vote, decision, or failure to act regarding management or policy decisions

. . . .”); § 617.0834(1), Fla. Stat. (extending business-judgment deference to

nonprofit officers and directors). As drafted, these statutes protect directors

6 from liability under most circumstances, absent a showing of bad faith, self-

dealing, or a violation of criminal law.

In conformity with these statutory and common law tenets, Florida

courts have extended business-judgment deference to common interest

associations, uniformly shielding “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” from judicial

review. Hollywood Towers Condo. Ass’n, Inc. v. Hampton, 40 So. 3d 784,

787 (Fla. 4th DCA 2010).

There are no reported Florida decisions holding that a party seeking to

invoke business-judgment deference must raise the rule as an affirmative

defense. Indeed, both the statutory language and a survey of persuasive

authority from other jurisdictions suggest the contrary.

The statutes affording business-judgment protection render directors

immune unless there is a showing of bad faith, self-dealing, or criminal

conduct. Although the Florida Legislature could have defined the business

judgment rule as an affirmative defense that the defendant must raise, it did

not do so. See State v. Ellis, 723 So. 2d 187, 190 (Fla. 1998). Instead, it

enacted a presumptive framework consistent with that adopted in other

jurisdictions.

7 In this regard, whether formally codified or not, the business judgment

rule is generally viewed as a historically accepted principle of managerial

prerogative. See Bruce T. Rosenbaum, The Presumptions and Burdens of

the Duty of Loyalty Regarding Target Company Defensive Tactics, 48 Ohio

St. L.J. 273, 274 (1987); see also Data Key Partners v. Permira Advisers

LLC, 849 N.W.2d 693, 701 (Wis. 2014) (second alteration in original)

(quoting Reget v. Paige, 626 N.W.2d 302, 310 (Wis. Ct. App. 2001)) (“[T]he

business judgment rule ‘immunize[s] individual directors from liability and

protects the board’s actions from undue scrutiny by the courts.’”). Consistent

with this view, the rule does not need to be raised in defensive pleadings to

shield corporate conduct from judicial review. Instead, it applies

presumptively by operation of law. See In re Great Lakes Comnet, Inc., 586

B.R. 718, 725 (Bankr. W.D. Mich. 2018) (“The business judgment rule is not

an affirmative defense. Rather, it is a substantive and procedural

presumption . . . .”); Kaye v. Lone Star Fund V (U.S.), L.P., 453 B.R. 645,

679 (N.D. Tex. 2011) (“[D]escribing the presumption created by the business

judgment rule as an affirmative defense is, at best, a dubious

characterization of the rule.”); Marsalis v. Wilson, 778 N.E.2d 612, 616 (Ohio

Ct. App. 2002) (“Civ.R. 8(B) [General rules of pleading] suggests that the

defendants might be obligated to plead the business judgment rule as a

8 defense, though that is probably not required, since a presumption in

defendants’ favor exists by operation of law, whether or not it is pleaded.”).

Several cases even stand for the proposition that a party seeking to

challenge a business decision must first establish facts rebutting the

presumption of reasonableness. See Cuker v. Mikalauskas, 692 A.2d 1042,

1046 (Pa. 1997) (quoting Rosenfield v. Metals Selling Corp., 643 A.2d 1253,

1262 (Conn. 1994)) (“The fact is that liability is rarely imposed upon

corporate directors or officers simply for bad judgment and this reluctance to

impose liability for unsuccessful business decisions has been doctrinally

labeled the business judgment rule. Shareholders challenging the wisdom

of a business decision taken by management must overcome the business

judgment rule.”); Solomon v. Armstrong, 747 A.2d 1098, 1111–12 (Del. Ch.

1999) (“Under the business judgment rule, the burden of pleading and proof

is on the party challenging the decision to allege facts to rebut the

presumption.”); Ferris Elevator Co., Inc. v. Neffco, Inc., 674 N.E.2d 449, 453

(Ill. App. Ct. 1996) (“The burden is on the party challenging the decision to

present facts rebutting the presumption.”); Oliveira v. Sugarman, 152 A.3d

728, 736 (Md. 2017) (quoting Boland v. Boland, 31 A.3d 529, 549 (Md.

2011)) (“To overcome the ‘dangerous terrain’ of the business judgment rule

presumption, the plaintiff must assert facts that suggest the corporate

9 directors did not act in accordance with the rule.”); Gantler v. Stephens, 965

A.2d 695, 706 (Del. 2009) (“Procedurally, the plaintiffs have the burden to

plead facts sufficient to rebut that presumption.”); Powell v. W. Ill. Elec.

Coop., 536 N.E.2d 231, 235 (Ill. App. Ct. 1989) (“[T]he directors’ decision is

presumed proper, and the burden is properly placed on the shareholder

plaintiffs to show that the directors are not now acting in good faith and

independently in desiring to prosecute the lawsuit.”); see also 13 Summ. Pa.

Jur. 2d, Business Relationships § 8:75 (2021) (“Where there is a prima facie

showing that the directors or majority shareholders have a self-interest in a

particular corporate transaction, or that the board has acted fraudulently or

in bad faith, the business judgment rule does not apply and the burden shifts

to the directors to demonstrate that the transaction is intrinsically fair.”).

Against this weight of authority and in the absence of any controlling

precedent to the contrary, we decline to engraft a pleading requirement into

the law. See Lori McMillan, The Business Judgment Rule as an Immunity

Doctrine, 4 Wm. & Mary Bus. L. Rev. 521, 569 (2013) (“As long as the

conditions for the application of the business judgment rule are met, the

courts will not assess the quality of the decision. This has a direct parallel to

immunity.”).

10 Here, the Master Association sought protection in the rule in its

opposition to summary judgment, specifically alleging its quorum of directors

acted with authority, neutrality, and good faith. Under this circumstance, the

Board was not required to raise business-judgment deference as an

affirmative defense.

Fifth Horizons alternatively argues, however, that the Board’s actions

were ultra vires, therefore not subject to business-judgment deference. In

support of its position, it contends the amount allocated for cable within the

budget exceeded that necessary to defray the costs of the settlement.

We reject this proposition on two grounds. First, because the parties

sharply disputed the chronology of the settlement, development of the

budget, and necessity for collecting assessments, the competing evidence

of record created a factual issue incapable of resolution on summary

judgment. Second, irrespective of the factual issues, this position overlooks

a critical legal distinction. 4 Ultra vires acts are those performed without legal

authority. They are therefore characterized as void on the basis that no

power to act existed, even where proper procedural requirements are

4 Two of our sister courts have determined that “the business judgment rule applies to ultra vires claims against the corporation itself.” Share v. Broken Sound Club, Inc., 312 So. 3d 962, 971 (Fla. 4th DCA 2021); see also Yarnall Warehouse & Transfer, Inc. v. Three Ivory Bros. Moving Co., 226 So. 2d 887, 892 (Fla. 2d DCA 1969).

11 followed. See Liberty Couns. v. Fla. Bar Bd. of Governors, 12 So. 3d 183,

191–92 (Fla. 2009). Conversely, acts by a corporation that are within its

realm of power, albeit imprudent or violative of a clear directive, are intra

vires. See Hollywood Towers, 40 So. 3d at 787.

Here, the governing documents grant the Master Association “all of the

powers and privileges granted to corporations not for profit” including “all of

the powers incidental and reasonably necessary to implement and effectuate

the purposes of the corporation.” The bylaws further authorize the Master

Association to adopt an annual budget, “contain[ing] the estimates of the cost

of performing the functions of the [corporation],” and “[to] make, levy, and

collect assessments against each condominium to defray the costs of the

[corporation], and to use the proceeds of said assessment in the exercise of

the powers and duties granted to the corporation.” Because the Master

Association was authorized to develop a budget and collect assessments

from the sub-associations, inclusion of the challenged assessments in the

budget constituted an intra vires act, and business-judgment deference was

a salient consideration.

Accordingly, we affirm the compelled disclosure of past audits but

reverse those portions of the judgment declaring the actions of the board

ultra vires, dispensing with the Master Association’s counterclaims, and

12 awarding damages to Fifth Horizons. Upon remand, the trial court is

constrained to “look to the circumstances surrounding the [Master]

Association’s exercise of [business] judgment as they existed when the

action was taken,” rather than at the time suit was filed. Miller v. Homeland

Prop. Owners Ass’n, Inc., 284 So. 3d 534, 538 (Fla. 4th DCA 2019).

Affirmed in part and reversed in part.