By: Charles B. Jimerson, Esq.
There are many claims available to oppressed members of Florida Limited Liability Companies (“LLC’s”) whose business partners misappropriate assets through unlawful distributions. This Blog post focuses on determining whether actions in making improper distributions by majority members or managers of Florida LLC’s constitute breaches of common law fiduciary duties owed to minority interest holders.
Florida courts recognize a tort cause of action for breach of fiduciary duty. Action Nissan, Inc. v. Hyundai Motor Am., 617 F.Supp.2d 1177, 1192 (M.D.Fla.2008); Doe v. Evans, 814 So.2d 370, 374 (Fla.2002). The elements of a claim for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) the breach of that duty; and (3) damage proximately caused by that breach. Minotty v. Baudo, 42 So. 3d 824, 835-36 (Fla. 4th DCA 2010) (citing Gracey v. Eaker, 837 So.2d 348, 353 (Fla.2002)). A breach of a fiduciary duty is an intentional tort. La Costa Beach Club Resort Condo. Ass’n, Inc. v. Carioti, 37 So. 3d 303, 308 (Fla. 4th DCA 2010).
When evaluating whether the claim applies to an oppressed Florida LLC member, the first step is to determine whether a fiduciary relationship exists. Corporate officers, controlling a corporation through ownership of a majority of the stock, have a fiduciary relation to minority stockholders. Snead v. United States Trucking Corp., 380 So. 2d 1075, 1078 (Fla. 1st DCA 1980), petition denied, 389 So. 2d 1116 (Fla. 1980); Tills v. United Parts, 395 So. 2d 618, 619 (Fla. 5th DCA 1981); FDIC v. Stahl, 840 F. Supp. 124, 126 (S.D. Fla. 1993) (citing Farber v. Servan Land Co., Inc., 662 F.2d 371, 377 (5th Cir. 1981) (interpreting Florida law) (“Florida common law defines the relationship of a director and of an officer to the corporation and its stockholders as that of a fiduciary and requires a director to act with fidelity and the utmost good faith.”) A cause of action for breach of fiduciary duty exists vis-à-vis majority shareholders that use their control of the corporation in their favor to the disadvantage of minority shareholders. Tillis; Granicz v. Morse, 603 So. 2d 103 (Fla. 2d DCA 1992); Hodges v. Buzzeo, 193 F. Supp. 2d 1279, 1288 (M.D. Fla. 2002).
Next, the oppressed member must outline what constitutes breach. In other words, what does the duty encompass in the context of controlling members and managers of an LLC. A majority shareholder breaches his fiduciary duty by taking a personal benefit or advantage not also enjoyed by the minority shareholder. Cohen v. Hattaway, 595 So. 2d 105, 107 (Fla. 5th DCA 1992) (“These fiduciary obligors cannot, either directly or indirectly, in their dealings on behalf of the fiduciary beneficiary with others, or in any other transaction in which they are under a duty to guard the interests of the fiduciary beneficiary, make any profit or acquire any other personal benefit or advantage, not also enjoyed by the fiduciary beneficiary, and if they do, they may be compelled to account to the beneficiary in an appropriate action.”). “If an LLC manager knowingly permitted the LLC to violate a contractual duty owed to one of the company’s members that would . . . constitute a breach of fiduciary duty.” Metro Communication Corp BVI v. Advanced Mobilecomm Technologies, Inc. 854 A.2d 121, 141 (Del. Ch. 2004).
In the context of managing an LLC, allowing distributions that render the company insolvent is a breach of fiduciary duty. Official Comm. of Unsecured Creditors of Toy King Distribs. v. Liberty Sav. Bank, FSB (In re Toy King Distribs.), 256 B.R. 1, 167 (Bankr. M.D. Fla. 2000). Further, employment of any “squeeze-out techniques” by majority shareholders may give rise to claims of oppression and breach of fiduciary duties. See Tillis v. United Parts, Inc., 395 So.2d 618 (Fla. 5th DCA 1981).); Karnegis v. Lazzo, 243 So.2d 642 (Fla. 3d DCA 1971).
Wrongfully retaining revenues and profits of the LLC also constitutes breach of fiduciary duty. Foster-Thompson, LLC v. Thompson, 2007 U.S. Dist. LEXIS 43206. *26 (M.D. Fla. June 14, 2007); Merovich v. Huzenman, 911 So.2d 125, 128 (Fla. 3d DCA 2005). In Merovich, the court held that the members’ claim that the managers had wrongfully retained revenues and profits of the LLC was incorrectly dismissed because Fla. Stat. § 608.4225 might support a breach of fiduciary duty against the individual managers if appropriately pled. Id. at 128.
Other courts have held that, in a breach of duty of loyalty case, if one member misappropriates LLC funds, the other has a right to bring a direct claim. See Arifin v. Schude, No. 98-C-1591, 1999 U.S. Dist. LEXIS 7926, at *11-13 (N.D. Ill. May 14, 2000); Orsi v. Sunshine Art Studios, Inc., 874 F.Supp. 471, 475 (D. Mass. 1995); cf. Loyola Fed. Sav. Bank v. Fickling, 58 F.3d 603, 608 (11th Cir. 1995) (limited partner entitled to bring direct action for share of fee paid to general partner in breach of duty of loyalty case). Courts have also recognized that members of an LLC are directly injured by the misappropriation of funds, usurpation of business opportunities, or other willful misconduct by another member of the LLC. See generally Goldstein & Price, L.C. v. Tonkin & Mondl, L.C., 974 S.W.2d 543, 552 (Mo. Ct. App. 1998) (wrongful withdrawal of funds by manager of LLC would have immediate and direct effect on the injured member’s capital); Lawson v. Tax Lien Resources Group, LLC, 1998 U.S. Dist. LEXIS 21533, 1998 WL 957331 (N.D. Ill. Dec. 15, 1998) (former LLC member allowed to directly sue her former co-members alleging that they had wrongfully withheld her share of profits and other compensation).
In matters of insolvency or improper wind down, a Manager cannot argue that she was unaware the distributions would render the LLC insolvent, thus violating Florida law. “The duty of the directors of a company to act on an informed basis . . . forms the duty of care . . . .” Official Comm. of Unsecured Creditors of Toy King Distribs. v. Liberty Sav. Bank, FSB (In re Toy King Distribs.), 256 B.R. 1, 140 (Bankr. M.D. Fla. 2000) (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del. 1993). The director must “inform themselves, prior to making a business decision, of all material information reasonably available to them. Having become so informed, they must then act with requisite care in the discharge of their duties.” Id.
Under Florida law, a member of a LLC may bring a breach of fiduciary duty claim for money damages against another member or managing member for wrongfully retaining revenues and profits of the LLC. Foster-Thompson, LLC v. Thompson, 2007 U.S. Dist. LEXIS 43206. *26 (M.D. Fla. June 14, 2007); Merovich v. Huzenman, 911 So.2d 125, 128 (Fla. 3d DCA 2005). Though agreements and common law precedent may alter the damages available under the facts of the particular case, for breach of fiduciary duty, oppressed minority members should seek the difference between fair value of the oppressed or expelled member’s stock and lesser amount which defendant(s) were contractually required to pay him/her pursuant to governing agreement. Pedro v. Pedro, 489 N.W.2d 798 (Court of Appeals of Minnesota 1992).
While the parameters of the fiduciary relationship within an LLC may often be undefinable, the relationship itself is likely created when a majority member or manager exerts discretionary power over the interests of minority members. The relationship may arise expressly, through contracts and statutes, or may be implied under the specific circumstances of the parties’ relationship, which often requires a factually intensive inquiry. Once you determine a member is a fiduciary, you are then challenged with discerning what obligations he/she owes as a fiduciary and what are the consequences of his/her deviation from duty? Consult with an experienced business litigation lawyer to determine whether distributions made in a gridlocked LLC are in violation of contractual, statutory or common law duties owed.