Monday, October 14, 2013

Corporations - Derivative Vs. Direct/Individual Actions

By J. Kevin Carey and Michael L. Jones

There continue to be cases reflecting a fundamental misunderstanding with regard to individual liability in the context of actions involving corporations.  As the cases cited below make clear, in order to determine whether claims are derivative, which must be brought in the name of and on behalf of the corporation, or direct, which may be brought by shareholders individually, it is important to first identify the characteristics that define what constitutes and distinguishes derivative from direct/individual actions:

Derivative Actions:

1. “(A)ction brought by one or more stockholders of a corporation to enforce a corporate right or to prevent or remedy a wrong to the corporation.”  Alario v. Miller, 354 So. 2d 925, 926 (Fla. 2d DCA 1978); Doltz v. Harris & Assoc., 280 F.Supp.2d 377, 385 (E.D. Penn. 2003).

2. “(T)he gravamen of the complaint is injury to the corporation or to the whole body of its stock or property and not injury to the plaintiff’s individual interest as a stockholder.”  Alario, 354 So. 2d at 926; Doltz, 280 F.Supp.2d at 385.

3. “(T)he injury is primarily against the corporation, or the stockholders generally.”  Id.

4. “(T)he 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. Professional Wrecker Operators of Fla., Inc., 801 So. 2d 175, 178 (Fla. 5th DCA 2001).

Direct/Individual Actions:

1. “(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.”  Alario, 354 So. 2d at  926; Doltz, 280 F.Supp.2d at 385.

2. An injury suffered directly by the stockholder, which is separate and distinct from that sustained by other stockholders.  Alario, 354 So. 2d at 926; Professional Wrecker Operators of Fla., Inc., 801 So. 2d at 179; Doltz, 280 F.Supp.2d at 385. 
In attempting to clarify any confusion, it is further noteworthy that derivative claims and direct/individual claims are not mutually exclusive.  A shareholder/officer/director of a corporation has a fiduciary duty to both the corporation and to fellow shareholders.  In some cases, the shareholder/officer/director has breached his/her fiduciary duty to the corporation as well as his/her fiduciary duty to other shareholders.  In that instance, a complaint may contain both derivative and direct/individual causes of action.  See, e.g., Doltz, supra; see also Sheridan Health Corp., Inc. v. Amko, 993 So. 2d 167, 171 (Fla. 4th DCA 2008) (citing Donahue) (“The fact that joint adventurers may determine to carry out the purpose of the agreement through the medium of a corporation does not change the essential nature of the relationship.”)

As recently as October 2012, the Fourth District Court of Appeals confirmed the ongoing viability of Donahue and SheridanBarreiro v. Braver, 98 So. 3d 746 (Fla. 4th DCA 2012).  Locally, Judge Herbert J. Baumann, Jr., also recently acknowledged the ongoing viability of Donahue/Sheridan in holding “that the parties’ decision to operate their real estate development venture [through corporations] did not eliminate the fiduciary duties that they owed to one another.” Order on  Motion to Dismiss, Jan. 30, 2013, Hills. Cty. Cir. Case No. 07-CA-15878.