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Davis V. Dyson

Facts From 1998 through 2003, Joe Dyson and others served on the board of the Granville Homeowner's Association. Larson Property Management, Inc. (LPI) served as the property manager for Granville. Warren Larson, LPI's principal, embezzled $550,000 from the association by forging the signature of Anna Skalka, the director who served as the treasurer for the association, on 100 association checks.

During this period, the directors never reviewed the bank statements for the association, nor did they order any type of audit or even a financial review. The embezzlement was not discovered until July 2003 when the on-site manager looked at just one of the bank statements. To add insult and injury to embezzlement, the association did not have a bond covering the Larson crowd. To add outrage to insult, injury, and embezzlement, the directors never sought legal counsel regarding their duties, processes, and responsibilities.

To add expenses to the outrage, insult, injury, and embezzlement, the association had to fork over between $200,000 and $250,000 to pay legal and accounting fees for the investigation to determine exactly how much had been pilfered. The board did obtain $60,000 from an insurer and $4,000 from the bank, but the total uncompensated loss still exceeded $800,000.

Evelyn Davis and other homeowners (plaintiffs) brought suit against former board members (defendants) of the Association. The homeowners sought damages as individuals as well as on a derivative basis and for breach of the business judgment rule. The trial court dismissed the claims, and the homeowners appealed.

Judicial Opinion Gordon, Justice A fiduciary relationship is a relationship in which "there is special confidence in one who, in equity and good conscience, is bound to act in good faith with due regard to the interests of the other."

As part of this fiduciary duty, directors are required to comply with procedures in the condominium bylaws as well as the strictures of the condo act.

[I]n the case at hand, plaintiffs allege that the director defendants have violated the condo act and the Association's bylaws by failing to purchase the required insurance to protect the Association against fraud such as was allegedly committed by Larson. [S]uch allegations constitute a valid cause of action for breach of fiduciary duty.

[I]n the instant case [plaintiffs] have sufficiently alleged a violation of fiduciary duty on the part of the director defendants to survive a motion to dismiss on the pleadings.

Plaintiffs argue that defendants, as former directors, cannot assert the business judgment rule in their defense to bar the current suit. The business judgment rule does not apply where defendants have committed a breach of care, as is alleged in the complaint.

Under the business judgment rule, "[a]bsent evidence of bad faith, fraud, illegality or gross over reaching, courts are not at liberty to interfere with the exercise of business judgment by corporate directors." The purpose of this rule is to protect directors who have been diligent and careful in performing their duties from being subjected to liability from honest mistakes of judgment. However, it is a prerequisite to the application of the business judgment rule that the directors exercise due care in carrying out their corporate duties. If directors fail to exercise due care, then they may not use the business judgment rule as a shield for their conduct.

One component of due care is that directors must inform themselves of material facts necessary for them to properly exercise their business judgment. Thus, the business judgment rule is defeated where directors act without "becoming sufficiently informed to make an independent business decision."

... [P]laintiffs allege in their complaint that none of the director defendants reviewed any of the Association's monthly bank statements, which would have enabled them to uncover Larson's embezzlement. Plaintiffs further allege that the director defendants never obtained advice of counsel to learn about their duties regarding insurance coverage, Association finances, or supervision of key personnel. These allegations, when viewed in the light most favorable to plaintiffs could potentially support a finding that the director defendants breached their duty of due care. The "inexcusable unawareness or inattention" is alleged here in the present case.

In addition, plaintiffs allege that the director defendants violated the condo act through their failure to purchase proper insurance to protect Association funds. Illegality is one factor that can render directors unable to avail themselves of the protection of the business judgment rule. This is consistent with the general rule of tort law that violation of a statute designed to protect property is prima facie evidence of negligence, which, as discussed above, renders the business judgment rule inapplicable. Therefore, plaintiffs have sufficiently alleged a breach of due care, such that the business judgment rule does not apply to bar plaintiffs' suit at the pleading stage.

Affirmed in part, reversed in part, and remanded.

What is a Case Brief? When the Syllabus indicates a requirement to "Brief" a specific case. you will need to do so in writing. As is noted in the Assignments section of the Syllabus. you should informally brief ALL cases assigned as a tool for note talting. as a means of preparing for class discussion. and as a means of practicing briefwriting in advance of the formal written assignments. There will be two formal written brief assignments during the semester. Each brief is worth up to 25 points. HowI to Write a "Brief" We will discuss brief-writing extensively in class. but the following proyides a very good guide. When you submit the full written briefs. you will need to use the following "F -l-Ft-A- ' fFaets-lssue-Rule-Appliteration-conclusion} format. Facts: You need to present in the Facts portion of your brief the pertinent facts that a judge needs to know in order to rule on a case. The Facts should include what the procedural history of the case was in the trial court. including the decision of the trial court. and then which party appealed and to which court. Issue: What question must be answered in order to reach a conclusion in the case? The Issue MUST be expressed in the form of a legal auestian which. when answered. giyes a result in the particular case. Malte it specific fe.g. "Has there been a false imprisonment if the plaintiff was asleep at the time of 'confin ement'?"]| rather than general fe.g. "Will the plaintiff be successful?"}. You may malte it referable to the specific case being briefed fe.g. "Did the Defendant Dsco. Inc. owe a duty of care to the Plaintiff Miller when Miller was trespassing on Dsco's property?"}. or you can frame it so that the issue can apply to all cases that present a similar question {e.g. "Is a duty owed wheneyer there is an employment relationship?"}. the latter approach being preferred. Many cases present more than one issue.- if there is more than one issue. it is DH. to write more than one. but be sure to list the principal one and focus on that. Rule: The rule is the law that applies to the principal issue. It should be stated as a general principal. fe.g. A duty of care is owed whenever the defendant should anticipate that her conduct could create a rislt of harm to the plaintiff} not a conclusion to the particular case being briefed. {e.g. "The plaintiff was negligent."}. Typically. the Ftule can be expressed in one or two sentences. Application: The Application is a discussion of how the rule applies to the facts of a particular case. Essentially. the "Application" is a description of the relevant facts. the parties\" arguments and positions in the case. and the court's thought process by which it answered the Issue and established the Rule. While the Issue and Rule are normally only one or two sentences each. the Application section of a Brief should be two to four paragraphs long. It should be written debate. not simply a statement of the conclusion. Wheneyer possible. present both sides of any issue. Do not begin with your conclusion. The Application shows how you are able to traclt the court's reasoning on paper and is the most difficult sltill you will learn. Conclusion: What was the result of the case? Did the Appellate or Supreme Court affirm. reyerse or reverse and remand the lower court's decision