Whether you are pursuing or defending against a legal action asserting misconduct in the management of a corporation, partnership, or other business entity, one of the keys to your case may be whether or not the person suing has the legal right to bring the action he seeks to advance. In a recent Miami case, that issue was the undoing of a minority shareholder’s breach of fiduciary duty action against the majority shareholders, who were also his brothers. The minority shareholder failed because he tried to bring derivative claims in a direct action, which led the trial court to throw out the case and the Third District Court of Appeal to uphold that decision.
The case involved a dispute over the management of several business entities. A family, consisting of four brothers and a sister (James, John, Jeffrey, Jack, and Jennifer), owned several corporations, limited partnerships, and a nursery situated between South Miami and Homestead.
In 2005, the partnerships sold five of the nursery’s parcels of land to an outside entity. That entity ceased paying in 2008 and, facing foreclosure, worked out a settlement. That settlement called for the buyer to transfer three of the parcels to an entity that was owned by John, Jeffrey, and Jack.
This settlement was one of the motivations that led James to sue. In addition to the settlement, James also contested certain “unearned excessive bonuses and management fees” paid by the nursery to his three brothers. All of this, according to James, added up to an actionable case of breach of fiduciary duty.
The three brothers asked the trial court to throw out the case against them. The trial court entered an order granting summary judgment, agreeing with the three brothers’ argument that James’ case was ultimately a derivative action, rather than a direct action, and that James lacked legal standing to bring such a derivative action.
In order for a breach of fiduciary duty claim like James’ to be a direct one, the law requires the plaintiff to prove that the harm he suffered was something that was direct and was “a special injury separate and distinct from that sustained by the other partners.” A 2014 ruling issued by the Third DCA, Dinuro Investments, LLC v. Camacho, explained what the guideposts are for an allowable direct action for a breach of fiduciary duty. In order for such a case to go forward, the plaintiff’s injuries have to be something inflicted directly upon him, rather than something that flowed to him as an extension of an initial and direct harm incurred by the company. Alternatively, the law allows the plaintiff to go forward if he can prove that his injuries were something unique to him that was not sustained by other shareholders.
James’ lawsuit resembled other cases in which other minority shareholders sued over excessive compensation to majority shareholders. Even if the compensation was proven to be excessive, the harm suffered as a result of that overpayment was an injury to the company, rather than a direct harm to the minority shareholder.
The other alleged basis for the breach claim fell short for similar reasons. Even if the decision to transfer the three parcels to another company instead of reverting them back to the limited partnership that owned them before was improper, the direct injury was one suffered by the limited partnership, rather than a minority shareholder like James.
Whether you are pursuing or defending a shareholder action, you need knowledgeable counsel experienced in these types of cases. The hardworking and experienced South Florida shareholder litigation attorneys at Stok Folk + Kon have been helping clients for many years with their shareholder litigation and other business-related needs.
Contact us online or by calling (954) 237-1777 to schedule your consultation and find out how this firm can help you protect your interests.
More blog posts:
LLC Member’s Insufficient Affidavit Dooms Florida Lawsuit on Appeal, Florida Business Lawyers Blog, July 28, 2016
Third District Court of Appeal Clarifies Standard for Allowing Direct Lawsuits by Shareholders, Florida Business Lawyers Blog, Aug. 27, 2014