Sunday, June 12, 2011

Recent Florida Supreme Court Case on Director Indemnity

What does an association director typically do when sued for his or her actions while performing (or not performing as the case may be) necessary corporate duties? Seek indemnification from the association for those same actions naturally.

Indemnity is generally defined as "the right of an injured person to claim reimbursement for its loss, damage or liability from a person who has such a duty." Most if not all association governing documents require the association to indemnify its directors and officers but typically as it relates to those directors being sued by a third party. Is a director entitled to such indemnification if he or she is being sued by the association?

The Supreme Court of Florida addressed this very issue recently in its opinion dated June 9, 2011, in the case of Donald Wendt, et al, vs. La Costa Beach Resort Condominium Association, Inc. Donald Wendt, Kenneth Wendt and Clarke Warne were directors of the La Costa Beach Club, a timeshare condominium in Pompano Beach. In July, 2003, the association sued these directors for breach of fiduciary duty. After the association's successful verdict, the directors moved for a new trial and brought an indemnification action against the association for expenses associated with defending themselves.

The trial court dismissed the directors' indemnification action with prejudice on various grounds. The Fourth DCA affirmed the trial court's decision and held that because there is no statutory right to indemnification in actions between a corporation and its own directors, the directors did not state a cause of action. In making this decision, the 4th DCA did acknowledge and certify its conflict with a decision by the 1st DCA in the Turkey Creek case, 766 So. 2d at 1247, which stated that Section 607.0850 of the Florida Statutes does provide for indemnification in cases in which a corporation has sued its own agent.

Section 607.0850 of the Florida Statutes authorizes corporate directors to seek indemnification from the corporation for actions brought against the directors by the corporation itself. However, there are restrictions in the statute as to when such indemnification is proper. For example, the person seeking indemnification must have "acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful."

The Florida Supreme Court quashed the 4th DCA's decision and approved the 1st DCA's reasoning by holding that Section 607.0850 of the Florida Statutes does authorize corporate directors to seek indemnification from the corporation for actions brought against the directors by the corporation itself. This is a boon for directors who might not otherwise be protected under the association's insurance coverage or any indemnification clause in the governing documents. Still, directors seeking same must be able to prove that they acted in good faith and under the reasonable belief that their actions would be in the association's best interests.

This work by Donna DiMaggio Berger, Esq. is licensed under a Creative Commons Attribution-NoDerivs 3.0 Generic License.

1 comment:

  1. While this might seem to create a vicious circle, the Florida Supreme Court recently permitted this type of indemnification in a suit where a condominium association sued its own directors, who, in turn, sought indemnification from the association for the costs of their defense.