FIDUCIARY DUTY
The Board always has a fiduciary duty to the Owners. Fiduciary duty is an umbrella term and includes a duty of loyalty and a duty of ordinary care. While these obligations have historically applied to corporate boards, today even unincorporated Associations are usually held to the same standard.
The Board’s duty of loyalty prohibits Board members from using their position to take unfair advantage of the Association. Board members owe a duty of undivided loyalty to the Association. They may not make decisions for the Association that benefit their own interests at the expense of the Association and its members. For example, the Board breaches the duty of loyalty if they sign a contract with a company in which a Board member has a material financial interest and the contract price is unfair to the Association.
Florida Statutes do not prohibit a transaction between the corporation and a Board member who has a material financial interest in the transaction if:
- The transaction is approved by the remaining Board members after disclosure of the interest.
- The affected Board member does not vote.
- The transaction is in the best interest of the Association.
If the governing documents or Florida law prohibits the transaction, the transaction may be invalid and Board members may be personally liable. Therefore, the Board should be certain it has complied with the law and its own Association documents before entering into any transaction that directly affects the financial interest of a Board member.
Even though the governing documents and Florida law permit the Board to enter into a transaction in which a Board member has a direct financial interest, it is usually unwise for the Board to do so. The transaction gives the appearance of impropriety. As a result, the Board may lose credibility with the residents.
In addition to the Board members’ obligation to avoid conflicts of interest, they have a duty to exercise ordinary care in fulfilling their responsibilities. In other words, Board members must perform their duties in good faith, in a manner they reasonably believe to be in the best interests of the Condominium Association, and with such care as an ordinarily prudent person in a similar position under similar circumstances would use.
If Board members act in good faith and have a rational basis for their decision, a Court will probably not interfere with the decision. Board members are not guarantors of the success of the Association and generally are not liable to mistakes in business judgment. This principle is referred to as the business judgment rule, and applies whether or not the Association is incorporated.
A problem arises when a director has to miss a series of meetings and is unwilling or unable to pay attention to Association affairs. If a director is unable to attend to the Association’s business for whatever reason, he or she is not fulfilling the duty of ordinary care and is not fulfilling the obligations imposed by law. Under these conditions, the Board member should resign.
The key is for a Board Member to act in the best interests of the Association and to act reasonably. Acting reasonably means paying attention to Association business and seeking expert advice when the Board members do not have sufficient information or knowledge
Making Decisions and Understanding the Business Judgment Rule
When acting on behalf of the community, the Board must use care in making decisions. In fact, they are obligated by law to do so. They will be judged by a standard known as the business judgment rule to determine if they carried out or breached their duty to the Association in making a decision.
DID THE BOARD…
- act within the bounds of their authority?
- believe that they were acting in the best interest of the Association?
- consult with experts in the relevant field?
- base their decision on what was best for the owners as a whole?
The business judgment rule won’t apply to all situations. For instance, if the Board intentionally misinterprets the governing documents, the rule won’t apply. The business judgment rule only considers whether the Board met their duty of care to the Owners as a whole in making their decision.
The Fiduciary Duty. Where does it come from?
The Condominium Act.
718.111
The Association.
(1) CORPORATE ENTITY.--
The operation of the condominium shall be by the association, which must be a Florida corporation for profit or a Florida corporation not for profit. However, any association which was in existence on January 1, 1977, need not be incorporated. The owners of units shall be shareholders or members of the association. The officers and directors of the association have a fiduciary relationship to the unit owners. It is the intent of the Legislature that nothing in this paragraph shall be construed as providing for or removing a requirement of a fiduciary relationship between any manager employed by the association and the unit owners. An officer, director, or manager may not solicit, offer to accept, or accept any thing or service of value for which consideration has not been provided for his or her own benefit or that of his or her immediate family, from any person providing or proposing to provide goods or services to the association. Any such officer, director, or manager who knowingly so solicits, offers to accept, or accepts any thing or service of value is subject to a civil penalty pursuant to s. 718.501(1)(d). However, this paragraph does not prohibit an officer, director, or manager from accepting services or items received in connection with trade fairs or education programs. An association may operate more than one condominium.
(b) A director of the association who is present at a meeting of its board at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless he or she votes against such action or abstains from voting in respect thereto because of an asserted conflict of interest. Directors may not vote by proxy or by secret ballot at board meetings, except that officers may be elected by secret ballot. A vote or abstention for each member present shall be recorded in the minutes.
The Cooperative Act.
- Cooperatives; access to units; records; financial reports; assessments; purchase of leases
(8) CORPORATE ENTITY.--
(a) The officers and directors of the association have a fiduciary relationship to the unit owners. An officer, director, or manager may not solicit, offer to accept, or accept any thing or service of value for which consideration has not been provided for his or her own benefit or that of his or her immediate family, from any person providing or proposing to provide goods or services to the association. Any such officer, director, or manager who knowingly so solicits, offers to accept, or accepts any thing or service of value is subject to a civil penalty pursuant to s. 719.501(1)(d). However, this paragraph does not prohibit an officer, director, or manager from accepting services or items received in connection with trade fairs or education programs.
(b) A director of the association who is present at a meeting of its board at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless he or she votes against such action or abstains from voting in respect thereto because of an asserted conflict of interest. Directors may not vote by proxy or by secret ballot at board meetings, except that officers may be elected by secret ballot. A vote or abstention for each member present shall be recorded in the minutes.
The Homeowners Association Act
720.303 Association powers and duties; meetings of board; official records; budgets; financial reporting.--
(1) POWERS AND DUTIES.--An association which operates a community as defined in s. 720.301, must be operated by an association that is a Florida corporation. After October 1, 1995, the association must be incorporated and the initial governing documents must be recorded in the official records of the county in which the community is located. An association may operate more than one community. The officers and directors of an association have a fiduciary relationship to the members who are served by the association. The powers and duties of an association include those set forth in this chapter and, except as expressly limited or restricted in this chapter, those set forth in the governing documents. A member does not have authority to act for the association by virtue of being a member. An association may have more than one class of members and may issue membership certificates.
The Not for Profit Corporation Act
617.0830 General standards for directors.--
(1) A director shall discharge his or her duties as a director, including his or her duties as a member of a committee:
(a) In good faith;
(b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
(c) In a manner he or she reasonably believes to be in the best interests of the corporation.
(2) In discharging his or her duties, a director may rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:
(a) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;
(b) Legal counsel, public accountants, or other persons as to matters the director reasonably believes are within the persons' professional or expert competence; or
(c) A committee of the board of directors of which he or she is not a member if the director reasonably believes the committee merits confidence.
(3) A director is not acting in good faith if he or she has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (2) unwarranted.
(4) A director is not liable for any action taken as a director, or any failure to take any action, if he or she performed the duties of his or her office in compliance with this section.
617.0831 Indemnification and liability of officers, directors, employees, and agents.--Except as provided in s. 617.0834, ss. 607.0831 and 607.0850 apply to a corporation organized under this act and a rural electric cooperative organized under chapter 425. Any reference to "directors" in those sections includes the directors, managers, or trustees of a corporation organized under this act or of a rural electric cooperative organized under chapter 425. However, the term "director" as used in ss. 607.0831 and 607.0850 does not include a director appointed by the developer to the board of directors of a condominium association under chapter 718, a cooperative association under chapter 719, a homeowners' association defined in s. 720.301, or a timeshare managing entity under chapter 721. Any reference to "shareholders" in those sections includes members of a corporation organized under this act and members of a rural electric cooperative organized under chapter 425.
617.0832 Director conflicts of interest.--
(1) No contract or other transaction between a corporation and one or more of its directors or any other corporation, firm, association, or entity in which one or more of its directors are directors or officers or are financially interested shall be either void or voidable because of such relationship or interest, because such director or directors are present at the meeting of the board of directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction, or because his or her or their votes are counted for such purpose, if:
(a) The fact of such relationship or interest is disclosed or known to the board of directors or committee which authorizes, approves, or ratifies the contract or transaction by a vote or consent sufficient for the purpose without counting the votes or consents of such interested directors;
(b) The fact of such relationship or interest is disclosed or known to the members entitled to vote on such contract or transaction, if any, and they authorize, approve, or ratify it by vote or written consent; or
(c) The contract or transaction is fair and reasonable as to the corporation at the time it is authorized by the board, a committee, or the members.
(2) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction.
617.0834 Officers and directors of certain corporations and associations not for profit; immunity from civil liability.--
(1) An officer or director of a nonprofit organization recognized under s. 501(c)(3) or s. 501(c)(4) or s. 501(c)(6) of the Internal Revenue Code of 1986, as amended, or of an agricultural or a horticultural organization recognized under s. 501(c)(5), of the Internal Revenue Code of 1986, as amended, is 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 by an officer or director, unless:
(a) The officer or director breached or failed to perform his or her duties as an officer or director; and
(b) The officer's or director's breach of, or failure to perform, his or her duties constitutes:
1. A violation of the criminal law, unless the officer or director had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful. A judgment or other final adjudication against an officer or director in any criminal proceeding for violation of the criminal law estops that officer or director from contesting the fact that his or her breach, or failure to perform, constitutes a violation of the criminal law, but does not estop the officer or director from establishing that he or she had reasonable cause to believe that his or her conduct was lawful or had no reasonable cause to believe that his or her conduct was unlawful;
2. A transaction from which the officer or director derived an improper personal benefit, either directly or indirectly; or
3. Recklessness or an act or omission which was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.
(2) For the purposes of this section, the term:
(a) "Recklessness" means the acting, or omission to act, in conscious disregard of a risk:
1. Known, or so obvious that it should have been known, to the officer or director; and
2. Known to the officer or director, or so obvious that it should have been known, to be so great as to make it highly probable that harm would follow from such action or omission.
(b) "Director" means a person who serves as a director, trustee, or member of the governing board of an organization.
(c) "Officer" means a person who serves as an officer without compensation except reimbursement for actual expenses incurred or to be incurred.
© 2005
Richard DeBoest II, Esq.,
DeBoest, Stockman, Decker, Broughton & Hagan, P.A.
(239) 334-1381 Ft. Myers, FL
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