Condo Director Liability is Limited

In our modern and somewhat litigious society, any position of authority can make one feel like a target. That is often the case with condominium associations. Many run the other way when asked to serve on the board because they are concerned about liability. Good news for those serving is Florida law provides a lot of protection from liability for those willing to serve as condominium association directors.

Powerful protection is Section 617.0834 Florida Statutes. That statute is part of the Florida Not For Profit Corporations Act (“Act”) applies to officers and directors of nonprofit organizations recognized under Sections 501(c)(3), 501(c)(4) or 501(c)(6) of the Internal Revenue Code and agricultural organizations recognized under Section 501(c)(5) of the Internal Revenue Code. Nonprofit condominium associations are generally recognized under Section 501(c)(4) of the Act.

That statute provides that officers and directors of the entity referenced in the statute are not personally liable for monetary damages to any person for any statement, vote, decision or failure to take an action, regarding organizational management or policy unless (a) the person breached or failed to perform the person’s duties as an officer or director, and (b) the breach or failure to perform is violation of criminal law (unless the person had reasonable cause to believe the conduct was lawful or no reasonable cause to believe it was unlawful), a transaction from which the person derived an improper personal benefit, or recklessness or an act or omission committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.

The statute even defines recklessness. Recklessness means acting or failing to act in conscious disregard of a risk known or so obvious that it was known or should have been known to be so great as to make it highly probable harm would follow from such action or omission. In short, a director has to commit a crime to kickback or something similar or be reckless as defined by statute to face liability. To help clarify further, Section 718.111 of Florida Statutes specifically prohibits any officer or director from soliciting, offering to accept or exacting a kickback and makes violation of the statute a felony. 

A director is entitled to rely on information, opinions and reports as long as the reliance is in good faith and the director does not know the reliance is unwarranted. That means the director can rely upon financial reports from the Treasurer, information from a manager, information provided in the normal course of business and others providing information which the director feels is reliable.

That does not mean a director gets to do whatever the director wants. Directors still have a fiduciary duty to their association. What does that mean? It means a director has a duty of loyalty and care and must act in good faith and in the best interest of the corporation. It also means a director has a duty of loyalty to the association to take action in the best interest of the association and that duty takes precedence over any personal interest of the director.

More good news for directors is Florida courts tend to defer to decisions by association directors under what is known as the business judgment rule. Judges defer to decisions by the Board of Directors unless the judge finds there was evidence of bad faith, abuse of discretion, criminal activity or fraud. The idea is that directors are considered to be acting in what they consider to be in the best interest of the association. Owners elect and can recall and install new directors if they are unhappy. The third reason for the business judgment rule is judges do not want a never-ending string of lawsuits by unit owners against their boards when a unit owner is unhappy with board action. In effect, the business judgment rule gives maximum deference to self-governance and help minimize court time.

The business judgment rule is a strong defense to a claim by a unit owner against a director for alleged breach of fiduciary duty. To even get started, a unit owner must allege in a complaint an allegation of fraud, self-dealing, unjust enrichment or criminal activity and not merely that a director’s actions are not in the best interest of the association.

From time to time a unit owner recognizing the protections afforded the association directors and will sue the association instead. But Florida courts have made clear that a condominium association does not have a fiduciary duty to its owners. Fiduciary duties are personal to officers and directors.

An unhappy unit owner should also consider the cost of litigating that unhappiness with board members. Most declarations of condominium provide that the prevailing party in any dispute between the association and an owner is entitled to recover attorney’s fees as part of the case. 

Section 718.303 Florida Statutes also provides fees for the prevailing party in litigation between an owner and the association or a director for failure to comply with Florida’s Condominium Act, the declaration, the documents creating the association and the association’s bylaws. That can make pursuit of a losing case expensive with the owner paying the owner’s attorney and the director’s attorney.

Even though Florida law provides condominium association directors with strong protection from liability, most associations also carry director and officer insurance to provide even more protection. Because Florida law is so protective, the premium for those policies is relatively modest.

The protections afforded condominium association directors under many Florida law are substantial. Most associations carry insurance on top of the statutory protection, personal liability even farther away. Those wary of serving as a condominium association director might change their mind if they understood Florida law.

William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.