Florida Litigation Update: Defendants in Civil Actions May Assert the Business Judgment Rule Without Pleading an Affirmative Defense
On February 23, 2022, the Florida Third District Court of Appeal issued its opinion in New Horizons Condominium Master Association, Inc. v. Harding, and held that under Florida law a defendant does not waive the protections afforded by the business judgment rule even if the defendant did not plead the rule as an affirmative defense. In its opinion, the Third District analyzed case law from around the country to formulate a detailed explanation of the protections afforded by the rule and why it applies by operation of law. The opinion can be read here.
The litigation arose after a condo association approved a settlement with Comcast concerning arrearages. The plaintiff, Harding, sued the condo association alleging that its budget, which included the settlement amount, was ultra vires because it included assessments beyond those required to defray reasonable expenses. In answering the compliant, the condo association did not raise the business judgment rule as an affirmative defense. After Harding moved for summary judgment, the condo association argued that the directors’ decisions were protected by the business-judgment rule and therefore the association was shielded from liability. In granting Harding’s motion for summary judgment, the lower court relied in part on the association’s failure to plead the business judgment rule as an affirmative defense. The association appealed. On appeal, the Third District addressed the issue of whether the failure of the condo association to plead the business judgment rule as an affirmative defense precluded its application.
Under Florida law, the business judgment rule is a codified statutory protection that protects directors of corporations and not-for-profits and managers/members of limited liability companies from liability for actions taken absent a showing of bad faith, self-dealing, or a violation of criminal law. See § 607.0831(1), Fla. Stat. (codifying the business judgment rule as to corporate directors); § 605.04093(1), Fla. Stat. (codifying the business judgment rule as to managers/members of limited liability companies); § 617.0834(1), Fla. Stat. (codifying the business judgment rule as to nonprofit officers and directors). These protections also protect condo associations’ decisions so long as the decision is within the scope of the association’s authority and is reasonable, i.e. not arbitrary, capricious, or in bad faith. Hollywood Towers Condo. Ass’n, Inc. v. Hampton, 40 So. 3d 784, 7878 (Fla. 4th DCA 2010).
In reversing the trial court’s granting of summary judgment, the Third District held that because the business judgment rule is a statutory presumption, a defendant does not need to plead protection under the rule as an affirmative defense for the rule to apply. In so holding, the Third District analyzed the statutory language and as well as authority from other jurisdictions throughout the country. The Third District noted that although the Florida Legislature could have defined the business judgment rule as an affirmative defense that must be pled by the defendant; it did not do so. Instead, based on its review of decisions of courts of other jurisdictions interpreting similar statutes, the Third District held that the Legislature codified the protections of the business judgment rule as a statutory presumption that applies automatically by operation of law. Thus, because the rule is a statutory presumption, protection from liability under the rule does not need to be pled by a defendant as an affirmative defense. As a result, the condo association is now able to argue in opposition to Plaintiff’s summary judgment motion that its board’s actions were protected by the business judgment rule based on the appellate court’s conclusion that the trial court erred in ruling that the association’s failure to plead the rule as an affirmative defense constituted a waiver of the defense.
Left unanswered by the Third District is whether the plaintiff has an affirmative obligation to plead around the business judgment rule. In reaching its decision, the Third District did not expressly hold that the plaintiff had an obligation to affirmative plead around the business judgment rule’s statutory presumption. However, the Third District did note that cases from other jurisdictions “stand for the proposition that a party seeking to challenge a business decision must first establish facts rebutting the presumption of reasonableness.”
The practical effect of the Third District’s decision is that a plaintiff who fails to plead facts that would defeat the business judgment rule would not shift the burden to the defendant to establish that the actions taken were in good faith. Plaintiffs and defendants alike should keep the practical effect of the Third District’s opinion in mind when pleading and defending against claims that are potentially subject to the business judgment rule because improper pleading may subject a claim to dismissal.
Regardless of which side you’re on, FIDJ’s seasoned trial and appellate litigators can help you. Our appellate and trial support practice group is chaired by Jeffrey J. Molinaro, B.C.S., who is recognized by the Florida Bar as a Board Certified Specialist in Appellate Practice. For more information on how we can assist in your appellate or trial support needs, contact us at 305-350-5690 or info@fidjlaw.com.