This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Thursday, July 31, 2014
Right Outcome, but the Court of Appeals is Confused as to the Business Judgment Rule
Outcome, but the Court of Appeals is Confused as to the
a recent decision the Court of Appeals correctly found that it would not second
guess the decisions made by a board of directors as to how corporate assets
should be applied to remedy existing problems.At the same time, however, the Court was off base as to what is the
Business Judgment Rule, and was off base as to who owes and who is the beneficiary
of the fiduciary obligations in a corporation.Davis v. Innwood Condominium
Property Owners Association, Inc., No. 2013-CA-001221-MR, 2014 WL 2938486
(Ky. App. June 27, 2014).
owned a condominium in the Ironwood development, a low and fixed income
complex. The property has in recent years faced a number of challenges
including the need to expend some $100,000 in brick repairs in order to remedy
a code violation, significant repairs to the heating system, and an increase in
insurance premiums after a fire.A
special assessment of the owners was made in order to increase reserves.
who at various times has served on the board of directors, brought suit
alleging that the board had failed to satisfy the terms of the master deed as
to a number of issues including exterior maintenance, limitations upon
occupancy of units and failing to require background checks on occupants.In addition, he alleged that the board had
failed to maintain the property as a “first-class condominium.”Collectively, he asserted that these
failures, characterized as breaches of fiduciary duty, reduced the fair market
value of his unit.
discovery, the trial court dismissed the complaint as being subject to the
“business judgment rule”; this appeal followed.
argument was that the Master Deed set forth requirements, that even though some
issues were being address the board was not requiring full compliance with
those requirements, and a breach of fiduciary duty therefore resulted.The Court of Appeals affirmed the trial
court’s determination that the Business Judgment Rule precluded court
intervention, it writing:
The business judgment rule
is “a presumption that in making a business decision, not involving
self-interest, the directors of a corporation acted on an informed basis, in
good faith and in the honest belief that the action taken was in the best
interests of the company.” Allied Ready Mix
Co., Inc. ex. rel. Mattingly v. Allen, 994 S.W.2d 4, 8 (Ky.App.1998).
The record below indicates that the Board sought guidance from its management
company, Prudential Parks, and Weisberg Realtors in making decisions as to how
to best address the issues raised by Davis. The record further reflected that
the Board did not have all of the necessary funds at its disposal to
immediately fix each of the problems raised by Davis. However, the Board, based
upon the advice it received, in consideration of the financial status of the
tenants and owners at Innwood, did vote to approve a Special Assessment for
repairs and maintenance. By considering the economic standing of its residents
and the problems at issue and making such a decision, this Court is not
persuaded that the Board breached any fiduciary duty in this instance.
Finding there to be no assertion of
fraud or conflict of interests that precludes the application of the Business
Judgment Rule, the trial court’s dismissal of the complaint was upheld.
said, before the quoted language above the court misidentified the source of
the Business Judgment Rule as being in the statutory formulae of the standards
imposed upon corporate directors, those being KRS §§ 273.215 and 271B.8-300.Sorry, but that is not the case.Those cases recite the standards of performance and the standards of
culpability imposed upon directors.The
Business Judgment Rule, in contrast, applies not to corporate directors but
rather to the courts called upon to assess the actions taken by the directors,
and creates a presumption against judicial review of decisions made by a
corporate board.In no manner is this
presumption against judicial review “codified” in the the Kentucky statutes on
business and nonprofit corporations.
point, this one clearly dicta, in which the Court of Appeals was on less than a
sound footing was in finding that there exists a fiduciary duty running from
the corporation’s board to the individual owners thereof.The Court of Appeals acknowledged that this
determination is in contrast to that made in the then not final Ballard v. Willow
Council of Co–Owners, Inc., 430 S.W.3d 229,
2013 WL 6134150 (Ky. 2013).A
motion for reconsideration in Ballard was
denied on June 19, 2014, and that decision is now final. Hence the suggestion
in Davis that a fiduciary duty is
owed directly to the owners should be treated as moot.