MIAMI BUSINESS LITIGATION: BUSINESS JUDGMENT RULE CAN INSULATE DIRECTORS FROM LIABILITY

The business judgment rule can shield directors of corporations, members of limited liability companies, and associations from liability against claims of negligent management. The business judgment rule is designed to prevent courts from “Monday morning quarterbacking” the decisions made by those in control of organizations merely because the plaintiff does not like the outcome of a decision. These decisionmakers may be liable, however, if a plaintiff can show that the decision-maker breached the duty of loyalty to the organization or when the decision-maker does not follow its own rules in making the decision. Peter Mavrick is a Miami business litigation lawyer, and also represents clients in business litigation in Fort Lauderdale and Palm Beach. The Mavrick Law Firm represents clients in breach of contract litigation, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, and other legal disputes in federal and state courts and in arbitration.

The business judgment rule prevents courts from scrutinizing the reasoned and legitimate exercise of discretion by an organization’s decision-makers. “Courts have properly decided to give directors a wide latitude in the management of the affairs of a corporation provided always that judgment, and that means an honest, unbiased judgment, is reasonably exercised by them.” Royal Harbour Yacht Club Marina Condo. Ass’n, Inc. v. Maresma, 45 Fla. L. Weekly D612 (Fla. 3d DCA Mar. 18, 2020). “In Florida, corporate directors generally have wide discretion in the performance of their duties and a court […] will not attempt to pass upon questions of the mere exercise of business judgment, which is vested by law in the governing body of the corporation.” Lake Region Packing Ass’n, Inc. v. Furze, 327 So. 2d 212 (Fla. 1976).

“The rule’s essential premise is that ‘absent any wrongdoing, the board’s business decisions should not be fodder for in-depth ex post legal scrutiny.’” Int’l Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. 1989). Consequently, courts analyzing whether the business judgment rule applies will look to the moment that the decision was made and not what occurred afterwards. Miller v. Homeland Prop. Owners Ass’n, Inc., 284 So. 3d 534 (Fla. 4th DCA 2019) (“And we must look to the circumstances surrounding the Association’s exercise of that judgment as they existed when the action was taken, not five years later”).

Florida has codified the business judgment rule for corporations, limited liability companies, and not-for-profit corporations. § 607.0831(1), Fla. Stat. (stating the business judgment rule and providing limited exceptions); § 605.04093, Fla. Stat. (providing similar protections to members and managers of limited liability companies); § 617.0831, Fla. Stat. (expressly incorporating the corporation business judgment rule for not-for-profit corporations). Florida courts have also extended business-judgment deference to common interest associations, like homeowners’ associations or trade groups, “if [a] decision is within the scope of the association’s authority and is reasonable–that is, not arbitrary, capricious, or in bad faith.” Miller v. Homeland Prop. Owners Ass’n, Inc., 284 So. 3d 534 (Fla. 4th DCA 2019).

The business judgment rule does not give decisionmakers license to abscond from their duty to act on behalf of their organization. “Each member of the board of directors, when discharging the duties of a director, including in discharging his or her duties as a member of a board committee, must act [i]n good faith[] and [i]n a manner he or she reasonably believes to be in the best interests of the corporation.” § 607.0830(1), Fla. Stat. Accordingly, a decisionmaker seeking protection under the business judgment rule must still act reasonably. Farrington v. Casa Solana Condo. Ass’n, Inc., 517 So. 2d 70 (Fla. 3d DCA 1987) (“The ‘business judgment rule’ will protect a corporation’s board of directors’ business judgment as long as the board acted in a ‘reasonable’ manner”).

The decision in question must be within the lawful discretion of the decisionmakers for the business judgment rule to apply. Int’l Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. 1989) (“For matters that Florida law vests in the board, the board has wide discretion, and a court generally will not substitute its judgment for that of the directors”). In Aerospace Accessory Serv., Inc. v. Abiseid, 943 So. 2d 866 (Fla. 3d DCA 2006), the court was evaluating whether the business judgment rule could apply to shield a director from liability concerning credit he issued to a customer on behalf of the corporation. Aerospace found that the defendant’s extension of credit on behalf of the company conflicted with a corporate directive to not extend credit to the customer. Aersospace explained that to allow the business judgment rule to apply when a director contradicted the will of the other board members “would be granting an individual director the authority to veto corporate policy. Corporate chaos would be the result, as each director could act on his own whim.”

The business judgment rule can shield decisionmakers from personal liability for decisions made on behalf of the corporation only when those decisions are reasonable, in good faith, and within the decisionmakers discretion under the organizations’ rules. Peter Mavrick is a Miami-Dade business litigation attorney who also practices business litigation in Fort Lauderdale and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.