As a Shareholder of a Corporation or Member of a Limited Liability Company, is Your Claim Direct or Derivative.
Recently, in Dinuro Investments, LLC v. Camacho, 141 So.3d 731 (Fla. 3d DCA 2014), the court conducted a detailed survaey of the law in this area in both Florida and throughout the country. The court noted that three tests routinely have been applied to resolve the direct versus derivative claim question.
1. Direct Harm Test
The first test is the direct harm test. Under this test, the court examines 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. Under the direct harm approach, the examining court looks at the injury alleged by the individual shareholder and determines whether that injury flows from some damage to the company itself. The examining court then must compare the individual’s harm to the company’s harm, and a shareholder can only bring a direct suit if the damages are unrelated to the damages sustained by the company and if the company would have no right to recover in its own action. The Dinuro court noted that this approach likely provides the greatest simplicity in application, as the courts need only look to whether the alleged wrongful conduct devalued the company as a whole or was directed specifically towards the individual plaintiff.
2. Special Injury Test
The second test is the special injury test. Under this test, the examining court must compare the individual plaintiff’s alleged injury to those injuries suffered by the other members or shareholders of the company and then determine whether the plaintiff’s injury is separate and distinct from other members or shareholders. This approach requires a plaintiff to demonstrate that he has sustained a loss that is substantially different from those losses sustained by other shareholders or members before he can maintain an individual or direct suit. The Dinuro court noted that this test can be much more difficult to apply, as the ‘special’ nature of the injury can be a nebulous inquiry that is often not readily apparent.
3. Duty Owed Test
The third test is the duty owed test. Under this test, the examining court simply examines the statutory and contractual terms to determine whether the duty at issue was owed to the individual member or shareholder by a particular manager or member, or whether those duties were owed to the company generally. The Dinuro court noted that many courts have also applied this test as an exception to the general rule requiring either direct harm or special injury.
4. Florida’s Test (Two-Prong Test Plus Exception)
After discussing the various tests, the Dinuro court then surveyed Florida law. The court first noted that the Florida Supreme Court has not established a rule in this area. The court then cited to Citizens National Bank of St. Petersburg v. Peters, 175 So.2d 54 (Fla. 2d DCA 1965), as the first Florida appellate court to enunciate a rule governing the direct versus derivative suit issue as follows:
A Florida court has defined a derivative suit as an action in which a stockholder seeks to enforce a right of action existing in the corporation. Conversely, a direct action, or as some prefer, an individual action, is a suit by a stockholder to enforce a right of action existing in him.
What these definitions attempt to convey is that 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. If, however, the injury is primarily against the corporation, or the stockholders generally, then the cause of action is in the corporation and the individual’s right to bring it is derived from the corporation. Under Peters, a shareholder can bring a direct action only if the complaint alleges both a direct harm and a special injury. The Dinuro court further noted that this two-prong language has essentially become canon in Florida corporate law, as nearly all subsequent cases deciding whether an action is direct or derivative have quoted Peters or one of its progeny.
The Dinuro court noted that, “Florida courts also recognize an exception to the Peters test when an individual member or manager owes a specific duty to another member or manager apart from the duty owed to the company.” Id. (citations omitted). After further surveying Florida law, the court adopted a two-prong test with an exception for a special duty as follows:
In the view of some courts, the only way to reconcile nearly fifty years of apparently divergent case law on this point is by holding that 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….
These courts also find that there is an exception to this rule under Florida law. A shareholder or member need not satisfy this two-prong test when there is a separate duty owed by the defendant(s) to the individual plaintiff under contractual or statutory mandates. Thus, if the plaintiff has not satisfied the two-prong test (direct harm and special injury) or demonstrated a contractual or statutory exception, the action must be maintained derivatively on behalf of the corporation or company.
Please keep in mind that this post is being provided for educational purposes only. It is not designed to be complete in all material respects. In reading the above post, it is clear to see that determining what type of claim you have is not an easy task. Thus, if you have any questions, you should contact a qualified professional.