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The business judgment rule is a critical feature of the law governing corporations throughout the United States.  The United States Court of Appeals for the Eleventh Circuit, in In re Bal Harbour Club, Inc., 316 F.3d 1192 (11th Cir. 2003), explained that “[t]he business judgment rule is a judicial presumption that corporate officers and directors acted in good faith, even if their actions were ultimately detrimental to the corporation.”  Florida courts adhere to the business judgment rule.  The rule was solidified in English and American common laws over 200 years ago, and was created because directors are usually more qualified to make business decisions than judges.  Royal Harbour Yacht Club Marina Condo. Ass’n, Inc. v. Maresma, 304 So. 3d 1268, 1269 (Fla. 3d DCA 2020); Gerard V. Mantes & Emily S. Fields, The Business Judgment Rule, 99 Mich. B.J. 30 (Jan. 2020).  The business judgment rule applies to corporations, limited liability companies, and not-for-profit companies. See Fla. Stat. Sections 607.0831, 605.04093, and 617.0834.  The business judgment rule can also apply to home owner’s associations in some jurisdictions. See, e.g., Hollywood Towers Condo. Ass’n, Inc. v. Hampton, 40 So. 3d 784 (Fla. 4th DCA 2010) (allowing application of the business judgment rule to condominium associations if the association has contractual or statutory authority to perform the relevant act and the board’s actions were reasonable).  Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm  Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

The business judgment rule insulates corporate officers from personal fiduciary duty liability if they did not abuse their discretion, commit fraud, act in bad faith, or act illegality.  Int’l Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. 1989).  Corporate officers can apply the business judgment rule if they acted on an informed basis, in the best interests of the company, and observed corporate formalities. In re Fundamental Long Term Care, Inc., 527 B.R. 479 (Bankr. M.D. Fla. 2015). Litigants seeking to defend themselves from claims under the business judgment rule do not need to plead the issue as an affirmative defense because the rule applies presumptively by operation of law. New Horizons Condo. Master Ass’n, Inc. v. Harding, 336 So. 3d 796 (Fla. 3d DCA 2022) (“The rule does not need to be raised in defensive pleadings to shield corporate conduct from judicial review. Instead, it applies presumptively by operation of law.”). The presumption is so strong that some jurisdictions require a plaintiff to rebut it before challenging the corporate officer’s business judgment.  Solomon v. Armstrong, 747 A.2d 1098 (De. Ch. 1999) (“Under the business judgment rule, the burden of pleading and proof is on the party challenging the decision to allege facts to rebut the presumption.”). This is a powerful weapon for officers and directors because it can place the burden of disproof on the plaintiff. See Harding, 336 So. 3d 796 (denying summary judgment because the plaintiff could not prove the business judgment rule did not apply).

Officers and directors should still be careful when discharging fiduciary duties owed to the corporation because the business judgment rule is not a blank check. For example, in DiSorbo v. Am. Van Lines, Inc., 354 So. 3d 530 (Fla. 4th DCA 2023), the court rejected application of the business judgment rule because the corporate officer was an interested party to the relevant transaction. The court therefore determined that the officer should not benefit from the deferential business judgment rule, and instead applied a harsher law relating to conflict-of-interest transactions. Consequently, officers and directors should always endeavor to make decisions on an informed basis, make decisions in the best interests of the company, and observe corporate formalities before undertaking any action on behalf of the company. Davis v. Dorsey, 495 F. Supp. 2d 1162, 1176 (M.D. Ala. 2007) (“If the defendant has engaged the corporation in a conflicting-interest transaction or has usurped a corporate opportunity, the business-judgment rule will not bar a claim based on the duty of care.”).

Peter Mavrick is a Miami business litigation lawyer, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.

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