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Third District Court of Appeal Clarifies Standard for Allowing Direct Lawsuits by Shareholders

new-home-for-sale-One of the most important questions a shareholder must face when contemplating legal action is whether he or she may sue directly or bring a derivative action on behalf of the entity. A recent decision from the Third District Court of Appeal, ruling against an LLC member’s individual action, brings some very important clarity to this issue under Florida law.

The case involved a South Florida real estate company, San Remo Homes LLC. Dinuro Investments LLC and two other entities were each the three equal members of San Remo. Several years after the three LLCs formed San Remo, the other two members of the entity formed another LLC, SR Acquisitions LLC. SR eventually used foreclosure actions to acquire all of San Remo’s properties, leaving Dinuro effectively owning nothing.

Dinuro sued, claiming the other LLC members breached their contractual obligations contained in San Remo’s operating agreement by draining it of all worth. The trial court dismissed Dinuro’s case, ruling that its claims were not grounds for direct action, and that it should have undertaken a derivative suit on behalf of San Remo instead of suing directly.

The appeals court, in reaching its conclusion, noted that the precedent addressing the issue represented nearly fifty years of case law with a distinct lack of clarity. To cut through this, the court established a two-part test for when shareholders may seek direct action. Shareholders may only pursue direct action, according to the court, if either (1) the shareholder incurred some sort of direct harm to it that did not flow indirectly to it as a result of a direct injury suffered by the corporation, or (2) the shareholder received some sort of unique injury that is “separate and distinct” from the harm that befell the other shareholders.

The court then determined that, under this test, Dinuro did not have a valid basis for a direct action. The entire basis of the case was that, by working together through SR to acquire all of San Remo’s properties, the other two member totally devalued San Remo. All of these facts pointed only to an injury to San Remo. Dinuro’s case never established any harm that did not flow from San Remo or was separate and distinct from the damage done to all of San Remo’s members.

The court also rejected a second argument that the other members breached separate duties that they owed Dinuro under the terms of San Remo’s operating agreement and this breach allowed it to pursue a direct action. The court pointed out that San Remo’s operating agreement “conspicuously” lacked a provision stating that the members were directly liable to one another in the event of a breach of the agreement. Without such language, the court determined that the “individual members are not liable for obligations or decisions of the company, as limited liability is one of the paramount reasons for forming an LLC.”

Business ventures typically start with the best of intentions and highest of hopes; however, if your circumstances have you considering legal action against the other members of your LLC, it is important to seek out skilled counsel about your options. For knowledgeable advice and determined representation, get in touch with the Florida commercial litigation attorneys at Stok Folk & Kon. Our attorneys can help you protect your business interests.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

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