MIAMI BUSINESS LITIGATION: SHOWING DIRECT HARM AND SPECIAL INJURY TO ESTABLISH DIRECT STANDING IN FLORIDA

Business litigation in Florida often involves disputes between corporate entities and the persons with ownership interests in such entities. Two of the more common corporate ownership structures in Florida are the corporation and the limited liability company. The owners of a corporation are known as shareholders, and the owners of a limited liability company are known as members. In Florida, there are certain requirements a shareholder or member must first satisfy to have direct standing to sue and recover damages on their own behalf. Otherwise, the individual must pursue their claims derivatively as a shareholder or member on behalf of the company. To have direct standing under Florida law, an individual must show direct harm and special injury to maintain a direct action. Peter Mavrick is a Miami business litigation attorney, and represents clients in business litigation in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents clients in breach of contract litigation, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

Under Florida law, “an action may be brought directly only if (1) there is a direct harm to the shareholder or member such that the alleged injury does not flow subsequently from an initial harm to the company and (2) there is a special injury to the shareholder or member that is separate and distinct from those sustained by the other shareholders or members.” Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014). “[A] stockholder may bring a suit in his own right to redress an injury sustained directly by him, and which is separate and distinct from that sustained by other stockholders.” Citizens National Bank of St. Petersburg v. Peters, 175 So. 2d 54 (Fla. 2d DCA 1965).

Under the direct harm prong, Courts must examine “whether the harm from the alleged wrongdoing flows first to the company and only damages the shareholders or members due to the loss in value of their respective ownership interest in the company, or whether the harm flows ‘directly’ to the shareholder or member in a way that is not secondary to the company’s loss.” Strazzulla v. Riverside Banking Co., 175 So. 3d 879 (Fla. 4th DCA 2015). The court must then “compare the individual’s harm to the company’s harm.” Only when the damages are unrelated to the damages sustained by the company and when the company would have no rights to recover in its own action can the shareholder bring a direct suit. Strazzulla v. Riverside Banking Co., 175 So. 3d 879 (Fla. 4th DCA 2015).

In Dinuro, the Florida’s Third District Court of Appeal found that a member of the LLC suffered no direct harm when other members allowed the LLC to default on promissory notes in order to allow those other members to purchase properties secured by the notes at a discount at the foreclosure sale. 141 So. 3d 731 (Fla. 3d DCA 2014). Indeed, the “injury is the determining factor in deciding whether a claim is direct or derivative; if the injury is to the corporation, and only indirectly harms the shareholder, the claim must be pursued as a derivative claim.” Fox v. Prof’l Wrecker Operators of Florida, Inc., 801 So. 2d 175 (Fla. 5th DCA 2001). “The substance of the allegations made, and not what they are labeled, determines the action.” Iezzi Fam. Ltd. P’ship v. Edgewater Beach Owners Ass’n, Inc., 254 So. 3d 584 (Fla. 1st DCA 2018). Only when the damages are unrelated to the damages sustained by the company and when the company would have no rights to recover in its own action can the shareholder bring a direct suit.

To find special injury and meet prong two of Florida’s test, Courts must “compare the individual plaintiff’s alleged injury to those injuries suffered by the other members or shareholders . . . and then determine whether the plaintiff’s injury is separate and distinct from [theirs].” Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014). The individual shareholder’s loss must be “substantially different from those losses sustained by other shareholders. It is also relevant whether the purported wrongdoer profited from the wrongdoing, “or at least suffered an injury less substantial” than that of the complaining shareholders.

“It is the body of the complaint which determines whether the injury is direct to the stockholder and the cause of action individual to him or is indirect as to the stockholder and the cause of action derivative from the corporation.” Braun v. Buyers Choice Mortg. Corp. ex re. McAloon, 851 So. 2d 199 (Fla. 4th DCA 2003) (citation omitted). However, even some Florida Courts admit that “this test can be difficult to apply, as the ‘special’ nature of the injury can be a nebulous inquiry that is often not readily apparent,” and the analysis is very fact specific. Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014).

Nonetheless, “Florida courts also recognize an exception to the [two-prong] test when an individual member or manager owes a specific duty to another member or manager apart from the duty owed to the company.” Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014). This duty can arise to the individual plaintiff under contractual or statutory mandates.

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.