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

Third District Court of Appeal
State of Florida
Opinion filed February 23, 2022.
Not final until disposition of timely filed motion for rehearing.
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No. 3D20-1471
Lower Tribunal No. 16-27442
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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
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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.
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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
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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.
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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
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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
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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.”).
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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).
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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
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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.
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