Articles - When Are Directors Personally Liable For Their Conduct As Board Members?


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WHEN ARE DIRECTORS PERSONALLY LIABLE FOR THEIR CONDUCT AS BOARD MEMBERS?
I am often called by a disgruntled condominium unit owner and asked to file a lawsuit against the individual members of the board of directors of the condominium association for what the owner considers some type of wrongful conduct. A common situation is when a board doesn't pay certain bills and is sued by a vendor, resulting in an obligation to pay not only the debt, but also the vendor's substantial legal fees. Another situation is when an association President enters into a contract that the owner considers very one-sided for a vendor, or at a price that is too high. The owner thinks there is a clear case of negligence on the part of the board (or even a kickback) and that there should be personal liability on the members of the Board of Directors for the harm done to the Association. In these examples, the harm is the amount of legal fees payable to the vendor, or the difference between the actual contract price and the price the owner says the Association could have or should have obtained. So what does an attorney consider in deciding whether the owner has a case? Section 718.303 of the Condominium Act provides that: "Actions for damages … for failure to comply with these provisions (i.e, the provisions of the Act), may be brought by the association or by a unit owner against: … (d) any director who willfully and knowingly fails to comply with these provisions." A similar provision of the Florida Not-for-Profit Act, Section 617.0834, may apply and provides for immunity from personal liability unless the director's actions constitute a criminal violation, or provided an improper personal benefit to the director, or was reckless, committed in bad faith or with malicious purpose. Thus, from the applicable statutes the Courts have concluded: "association directors are immune from liability in their individual capacity, absent fraud, criminal activity or self-dealing/unjust enrichment." A violation of the condominium act must be done "willfully and knowingly." More than simple negligence is required before personal liability for monetary damages may be imposed. Thus, in a case where a director breached his fiduciary duty by failing to renew fire insurance on the association's clubhouse, the individual director was not held personally liable for his negligence even though his actions were clearly wrong. In another case where the board members failed to property administer insurance proceeds from Hurricane Andrew, the Board members were not personally liable because there was no fraud or crime committed and the board members did not derive any person benefit from their conduct, even though they may have been negligent. In a 1997 case, the Third District Court of Appeal in Florida said: "The purpose of (the statutes) is to shield condominium association directors from individual liability in instances of negligent management. Indeed, it would undoubtedly be difficult to find persons willing to serve on condominium board of directors … if immunity from individual liability in instances of simple negligence was not upheld." Obviously, it is so important that directors are competent as business people. Simple negligence on their part may harm the association, and errors and omission insurance coverage may provide some recourse in certain instances, but without more than simple negligence, no recourse may be had against the board members personally. Always consult with your own attorney about your specific case. And Good luck! Michael E. Rehr, Esq. 9500 So. Dadeland Blvd Suite 550 Miami, FL 33156 Telephone (305) 670-8993 mrehr@rehrlaw.com

WHEN ARE DIRECTORS PERSONALLY LIABLE FOR THEIR CONDUCT AS BOARD MEMBERS?

I am often called by a disgruntled condominium unit owner and asked to file a lawsuit against the individual members of the board of directors of the condominium association for what the owner considers some type of wrongful conduct. A common situation is when a board doesn't pay certain bills and is sued by a vendor, resulting in an obligation to pay not only the debt, but also the vendor's substantial legal fees. Another situation is when an association President enters into a contract that the owner considers very one-sided for a vendor, or at a price that is too high. The owner thinks there is a clear case of negligence on the part of the board (or even a kickback) and that there should be personal liability on the members of the Board of Directors for the harm done to the Association. In these examples, the harm is the amount of legal fees payable to the vendor, or the difference between the actual contract price and the price the owner says the Association could have or should have obtained. So what does an attorney consider in deciding whether the owner has a case?

Section 718.303 of the Condominium Act provides that: "Actions for damages … for failure to comply with these provisions (i.e, the provisions of the Act), may be brought by the association or by a unit owner against: … (d) any director who willfully and knowingly fails to comply with these provisions." A similar provision of the Florida Not-for-Profit Act, Section 617.0834, may apply and provides for immunity from personal liability unless the director's actions constitute a criminal violation, or provided an improper personal benefit to the director, or was reckless, committed in bad faith or with malicious purpose. Thus, from the applicable statutes the Courts have concluded: "association directors are immune from liability in their individual capacity, absent fraud, criminal activity or self-dealing/unjust enrichment." A violation of the condominium act must be done "willfully and knowingly." More than simple negligence is required before personal liability for monetary damages may be imposed.

Thus, in a case where a director breached his fiduciary duty by failing to renew fire insurance on the association's clubhouse, the individual director was not held personally liable for his negligence even though his actions were clearly wrong. In another case where the board members failed to property administer insurance proceeds from Hurricane Andrew, the Board members were not personally liable because there was no fraud or crime committed and the board members did not derive any person benefit from their conduct, even though they may have been negligent. In a 1997 case, the Third District Court of Appeal in Florida said: "The purpose of (the statutes) is to shield condominium association directors from individual liability in instances of negligent management. Indeed, it would undoubtedly be difficult to find persons willing to serve on condominium board of directors … if immunity from individual liability in instances of simple negligence was not upheld."

Obviously, it is so important that directors are competent as business people.
Simple negligence on their part may harm the association, and errors and omission insurance coverage may provide some recourse in certain instances, but without more than simple negligence, no recourse may be had against the board members personally.

Always consult with your own attorney about your specific case.

And Good luck!
Michael E. Rehr, Esq.
9500 So. Dadeland Blvd
Suite 550
Miami, FL 33156
Telephone (305) 670-8993
mrehr@rehrlaw.com

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