Articles Posted in Business Litigation

Often, a member of a limited liability company can sue another member for a breach of an operating agreement in a corporate “derivative action” rather than in a “direct action” against the other member.  This is because the victim is often the limited liability company, not the individual member.  Aggrieved members of limited liability companies sometimes try to sue directly because the remedies allow them to recover from the wrongdoing instead of the corporation.  Thus, whether a lawsuit is properly a “direct action” or “derivative action” can be a critical strategic issue.  Peter Mavrick is a Miami business litigation lawyer, and also 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, and other legal disputes in federal and state courts and in arbitration.

Whether the business litigation is a “direct action” or “derivative action” can have significant repercussions as to the recovery.  A member of an LLC who successfully sues the company directly can generally recover all their damages.  By contrast, a member suing derivatively generally can benefit only from the proportionate increase in value that the derivative lawsuit brings.  This is because the company is the real plaintiff in a derivative lawsuit, even though it may be controlled by an individual member.  Miami’s Third District Court of Appeal explained in pertinent part: “[w]hether a particular action may be brought as a direct suit or must be maintained as a derivative suit can be a confusing inquiry. After all, a member or shareholder with a personal stake in a company or corporation necessarily sustains a loss when the company loses value, and determining which types of loss are directly compensable by direct suit requires fine lines to be drawn. These distinctions are even more difficult to draw for closely held corporations and LLCs, which typically have fewer individuals that possess an ownership interest, because claims of mismanagement or self-dealing become a zero-sum game in which one party profits from the company’s loss, while the other is harmed due to the company’s reduced value.”  Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014).

A previous article discussed how the law governing whether the lawsuit properly qualifies as a “derivative action” or a “direct action” is usually based on the law of the state of incorporation. In the State of Florida, whether a member of a limited liability company can sue directly is determined under the Florida Revised Limited Liability Company Act.  A member can directly sue a LLC for “[a]n actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company” § 605.0801(2)(a), Fla. Stat.  Additionally, a member can sue for “[a]n actual or threatened injury resulting from a violation of a separate statutory or contractual duty owed by the alleged wrongdoer to the member, even if the injury is in whole or in part the same as the injury suffered or threatened to be suffered by the limited liability company.”  § 605.0801(2)(b), Fla. Stat.

A shareholder wishing to file a derivative suit must generally present that dispute to the board of directors with a demand prior to filing a shareholder’s derivative suit.  The way that this demand process works can vary between the states and can ultimately determine whether a shareholder is able to proceed with a lawsuit.  A recent decision from United States Court of Appeals for the Eleventh Circuit resolved this question by determining that law of the state of incorporation controls the demand requirements on a corporation even in disputes concerning federal law.  Peter Mavrick is a Fort Lauderdale business litigation lawyer, and also represents clients in business litigation in Miami, 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, and other legal disputes in federal and state courts and in arbitration.

When a disgruntled shareholder for a corporation believes that the corporation should have taken legal action against another entity (including directors, officers, or employees of the company as well as any third-party), that shareholder can initiate a demand that the corporation take action.  The board of directors of that corporation has the opportunity to exercise its business judgment as to whether to take the requested action or to ignore it.  If the corporation refuses to act, the shareholder can sometimes file a derivative lawsuit, which is a type of business litigation where the shareholder steps into the shoes of a corporation and sues on the corporation’s behalf.  The derivative lawsuit can be dismissed if the court finds that the board of directors properly exercised their business judgment.  “The purpose of requiring a precomplaint demand is to protect the directors’ prerogative to take over the litigation or to oppose it.” Kamen v. Kemper Fin. Services, Inc., 500 U.S. 90 (1991).  Under many states’ laws, a shareholder can bypass this demand requirement by showing that the demand would have been futile.  “To the extent that a jurisdiction recognizes the futility exception to demand, the jurisdiction places a limit upon the directors’ usual power to control the initiation of corporate litigation […]. By permitting the shareholder to circumvent the board’s business judgment on the desirability of corporate litigation, the ‘futility’ exception defines the circumstances in which the shareholder may exercise this particular incident of managerial authority.”  Kamen v. Kemper Fin. Services, Inc., 500 U.S. 90 (1991).  Demand futility can usually be found when the decisionmakers are themselves personally interested in the outcome of the subject dispute.

Alternatively, in certain circumstances a shareholder who holds a claim can directly file a lawsuit against the corporation for a right that he himself owns, as opposed to the corporation.  This avenue of business litigation bypasses the requirement to make a demand.  The law concerning whether a board of directors properly exercises its business judgment after receiving a demand as well as the law concerning whether a cause of action should be “direct” or “derivative” varies between the states.  Accordingly, the question as to whether a shareholder will have an opportunity to seek relief in court will depend on which law applies in questions as to the board’s business judgment and whether the shareholder has a direct cause of action.

Disgruntled purchases of goods or services may later claim fraud by asserting that they relied on untrue statements made by the selling company when deciding to make the purchase.  However, a purchaser generally may not rely on a statement that qualifies as “puffery.”  A statement is puffery if it is merely a statement of opinion and does not otherwise contain a statement of objective fact.  Sometimes the line between a statement of opinion and a statement of an objective fact can be blurry Peter Mavrick is a Fort Lauderdale business litigation lawyer, and also represents clients in business litigation in Miami, 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, and other legal disputes in federal and state courts and in arbitration.

A company may defend against business litigation claims that it misrepresented its products or services by asserting that the statements are mere “puffery.”  Puffery is the “expression of an exaggerated opinion—as opposed to a factual misrepresentation—with the intent to sell a good or service.” Black’s Law Dictionary (10th ed. 2014).  The puffery doctrine recognizes that purchasers should expect that sellers will exaggerate the quality of their goods or services and that the purchaser should be expected to form their own opinions.

The puffery doctrine has wide applicability in business litigation.  Generally, statements which qualify as puffery cannot support a plaintiff’s claim of misrepresentation, fraud, a violation of the Florida Deceptive and Unfair Trade Practices Act, and other similar causes of action.  Recent cases have also applied the doctrine of puffery to investor lawsuits under Rule 10b-5.  Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307 (11th Cir. 2019) (holding the doctrine’s applicability under Rule 10b-5 within the Eleventh Circuit Court of Appeals, explaining “[e]xcessively vague, generalized, and optimistic comments—the sorts of statements that constitute puffery—aren’t those that a ‘reasonable investor,’ exercising due care, would view as moving the investment-decision needle—that is, they’re not material”).

The business judgment rule can shield directors of corporations, members of limited liability companies, and associations from liability against claims of negligent management.  The business judgment rule is designed to prevent courts from “Monday morning quarterbacking” the decisions made by those in control of organizations merely because the plaintiff does not like the outcome of a decision.  These decisionmakers may be liable, however, if a plaintiff can show that the decision-maker breached the duty of loyalty to the organization or when the decision-maker does not follow its own rules in making the decision.  Peter Mavrick is a Miami business litigation lawyer, and also represents clients in business litigation in Fort Lauderdale and Palm Beach.  The Mavrick Law Firm represents clients in breach of contract litigation, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, and other legal disputes in federal and state courts and in arbitration.

The business judgment rule prevents courts from scrutinizing the reasoned and legitimate exercise of discretion by an organization’s decision-makers.  “Courts have properly decided to give directors a wide latitude in the management of the affairs of a corporation provided always that judgment, and that means an honest, unbiased judgment, is reasonably exercised by them.”  Royal Harbour Yacht Club Marina Condo. Ass’n, Inc. v. Maresma, 45 Fla. L. Weekly D612 (Fla. 3d DCA Mar. 18, 2020).  “In Florida, corporate directors generally have wide discretion in the performance of their duties and a court […] will not attempt to pass upon questions of the mere exercise of business judgment, which is vested by law in the governing body of the corporation.”  Lake Region Packing Ass’n, Inc. v. Furze, 327 So. 2d 212 (Fla. 1976).

“The rule’s essential premise is that ‘absent any wrongdoing, the board’s business decisions should not be fodder for in-depth ex post legal scrutiny.’”  Int’l Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. 1989).  Consequently, courts analyzing whether the business judgment rule applies will look to the moment that the decision was made and not what occurred afterwards.  Miller v. Homeland Prop. Owners Ass’n, Inc., 284 So. 3d 534 (Fla. 4th DCA 2019) (“And we must look to the circumstances surrounding the Association’s exercise of that judgment as they existed when the action was taken, not five years later”).

Under Florida law, every contract has a duty of good faith and fair dealing.  A party to a contract generally cannot subvert the very purpose of a contract through an improper exercise of its discretion.  A party does not violate the duty of good faith and fair dealing, however, when the parties expressly contemplated the method by which the party would exercise its discretion and the party complied with that method.  Peter Mavrick is a Fort Lauderdale business litigation lawyer, and also represents clients in business litigation in Miami, 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, and other legal disputes in federal and state courts and in arbitration.

Essentially, the contractual duty of good faith makes it unlawful for a contracting party to violate the spirit of the contract by improperly exercising discretion in a way that is not contradicted by the agreement.  “[E]very contract includes an implied covenant that the parties will perform in good faith.”  Cty. of Brevard v. Miorelli Eng’g, Inc., 703 So. 2d 1049 (Fla. 1997).  “[T]he implied covenant of good faith and fair dealing is designed to protect the contracting parties’ reasonable expectations.” Speedway SuperAmerica, LLC v. Tropic Enterprises, Inc., 966 So. 2d 1 (Fla. 2d DCA 2007).  “[W]here the terms of the contract afford a party substantial discretion to promote that party’s self-interest, the duty to act in good faith nevertheless limits that party’s ability to act capriciously to contravene the reasonable contractual expectations of the other party.”  Cox v. CSX Intermodal, Inc., 732 So.2d 1092 (Fla. 1st DCA 1999).  For example, the covenant of good faith and fair dealing can prevent a landlord from unreasonably withholding his consent to assign a lease when the terms of the lease only permit assignment upon the written consent of the landlord. Fernandez v. Vazquez, 397 So.2d 1171 (Fla. 3d DCA 1981) (holding that it may be a violation of the duty of good faith for a landlord to withhold consent for leverage in contract negotiations).

“[T]here are two limitations on [claims of a breach of the contractual duty of good faith]: (1) where application of the covenant would contravene the express terms of the agreement; and (2) where there is no accompanying action for breach of an express term of the agreement.” QBE Ins. Corp. v. Chalfonte Condo. Apartment Ass’n, Inc., 94 So. 3d 541 (Fla. 2012).  Accordingly, the duty of good faith must “relate to the performance of an express term of the contract and is not an abstract and independent term of a contract which may be asserted as a source of breach when all other terms have been performed pursuant to the contract requirements.” Ins. Concepts & Design, Inc. v. Healthplan Servs., Inc., 785 So.2d 1232 (Fla. 4th DCA 2001); Johnson Enter. of Jacksonville, Inc. v. FPL Group, Inc., 162 F.3d 1290 (11th Cir. 1998) (“[G]ood faith requirement does not exist ‘in the air’. Rather, it attaches only to the performance of a specific contractual obligation”).  “Allowing [a party] to pursue the claim for breach of duty of good faith where no enforceable executory contractual obligation on [other party’s] part remained would add an obligation to the contract which was not negotiated by the parties and not in the contract.”  Hosp. Corp. of Am. v. Florida Med. Ctr., Inc., 710 So. 2d 573 (Fla. 4th DCA 1998).  Parties can avoid potential claims of the breach of the covenant of good faith and fair dealing by expressly agreeing to the method by which discretion may be exercised or providing terms which indicate that the party has complete discretion to take such an action.

An aggrieved party to a contract will sometimes claim that they were fraudulently induced into entering the contract. These types of claims may often be difficult to prove. A plaintiff cannot prevail on a fraudulent inducement claim by simply showing that he or she was deceived. A plaintiff must also show evidence of a defendant’s fraudulent intent. Island Travel & Tours, Ltd., Co. v. MYR Indep., Inc., 45 Fla. L. Weekly D704 (Fla. 3d DCA Mar. 25, 2020). Peter Mavrick is a Fort Lauderdale business litigation lawyer, and also represents clients in business litigation in Miami and Palm Beach.  The Mavrick Law Firm represents clients in breach of contract litigation, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, and other legal disputes in federal and state courts and in arbitration.

To prevail on a claim of fraudulent inducement, a plaintiff must prove that a defendant “(1) made a statement concerning a material fact, (2) knowing that the statement was false, (3) with intent that the plaintiffs act on the false statement; and (4) the plaintiffs were damaged as a result of their reasonable reliance on the false statement.” Gemini Inv’rs III, L.P. v. Nunez, 78 So. 3d 94 (Fla. 3d DCA 2012). The defendant’s intent is often the most difficult element to prove in a fraudulent inducement claim.

It is not uncommon in business litigation for fraud claims to be based on failure to keep a promise.  However, a fraudulent inducement claim cannot be asserted merely because the other contracting party is purposefully refusing to do what it promised. “An action for fraud generally may not be predicated on statements of opinion or promises of future action, but rather must be based on a statement concerning a past or existing fact.” Mejia v. Jurich, 781 So. 2d 1175 (Fla. 3d DCA 2001). In other words, if the other contracting party is selling Miami Dolphins’ season tickets, states that the NFL declared that the season will not be affected by the pandemic. However, if the person knows that to be a false statement, then there may be an action for fraud.  “[U]nder certain circumstances, a promise may be actionable as fraud where it can be shown that the promissor had a specific intent not to perform the promise at the time the promise was made, and the other elements of fraud are established.” Alexander/Davis Properties, Inc. v. Graham, 397 So.2d 699 (Fla. 4th DCA 1981). “In order for a promise of future performance to serve as a predicate for a claim of fraud, it must be established that the promise was made with the present intention not to comply.” Alexander/Davis Properties, Inc. v. Graham, 397 So.2d  at 699.