2008 Issue (Future)

THE BUSINESS JUDGMENT RULE AND HOW IT
PROTECTS OFFICERS AND DIRECTORS
By Steven G. Berg, Esq.

As the attorney for a goodly number of common interest communities, in any given week I receive telephone calls, letters and e-mails which fall into the following categories:

1. A member of a client association’s Board of Directors advises me that a unit owner has threatened to sue the entire Board because the association decided to remove a tree on common elements which shaded that owner’s unit.
2. I receive a letter from a unit owner’s attorney advising me that his client intends to sue the Board because the building in which his client’s unit is located hasn’t been painted in four years, and he claims that it is discouraging potential buyers.  The association’s financial resources will only permit painting the complex every five years.
3. Another Board member calls to tell me she is totally distraught because the siding contractor hired by the association closed up shop in the middle of the night, taking the association’s contract deposit with him.  The annual meeting of unit owners is coming up and she doesn’t want to face her friends and neighbors.

My advice to my clients in all of these situations has one common thread – the Business Judgment Rule.  The Business Judgment Rule is a legal principle which holds that an officer or director who makes a decision using reasonable judgment will not be held personally liable for that action.  The Business Judgment Rule is codified in the Connecticut Non-Stock Corporation Act, Section 33-1104 of the Connecticut General Statutes, which provides as follows:

1. A director shall discharge his duties as a director, including his 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, 3) in a manner he reasonably believes to be in the best interests of the corporation.
2. In discharging his duties a director is entitled to 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 person’s professional or expert competence; or c) a committee of the Board of Directors of which he is not a member if the director reasonably believes the committee merits confidence.
3. A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section.

The Business Judgment Rule insulates corporate directors for business decisions made “within the power of the corporation for which the directors have exercised due care.  Business judgments made in good faith with due care are generally exempt from judicial review.  The Business Judgment Rule exists because judicial review of business decisions is disfavored.  Connecticut courts recognize that corporate officers and directors have better information before them than judges.  Furthermore, officers and directors have an inherent incentive to act in the corporation’s best interests.

In everyday terms, what the Business Judgment Rule means is that an officer or director who has used reasonable judgment, done his or her homework, and has acted in good faith will be protected from legal liability.  If, for example, the Board of Directors has obtained competitive bids for a siding project, researched the project requirements and checked the contractor’s references, the contractor can still turn out to be a crook.  As with any aspect of life, things can go wrong even though you’ve done everything right.

It should be noted that “business judgment” can not be used to justify any and every action taken by a Board of Directors.  For example, if a Board singles out certain owners for selective enforcement of rules, a Court will look at a Board’s record of decisions in similar situations which arose with other unit owners.

Another layer of protection for members of an association’s Board of Directors is provided by Section 33-1117 of the Connecticut General Statutes. That law permits a non-stock corporation, such as a condominium association, to indemnify individuals who were acting in their official capacity and conducted themselves in good faith and in accordance with the best interests of the corporation.  The Connecticut Common Interest Ownership Act, in Section 47-244(13) of the Connecticut General Statutes, specifically authorizes an association, whether or not it is incorporated, to provide for the indemnification of officers and directors.

Finally, and as a practical matter, the greatest comfort to a member of the Board of Directors who is faced with a claim or suit, is the fact that every association has (or should have) insurance coverage (commonly referred to as D&O coverage) for directors and officers.  So while it is never pleasant to be on the receiving end of a lawsuit, the defense of the case becomes the insurance company’s responsibility.

For officers and directors of associations, the formula is simple.  Do your homework.  Obtain and heed the advice of competent professionals. Always act fairly and in good faith and you will have protection from personal liability.

Steven Berg is an attorney who represents condominium associations throughout central and western Connecticut.  He maintains offices in Norwalk, Bridgeport and Newtown.