Articles Posted in Business Litigation

Not all contractual breaches are treated equally. Some breaches are material, while other breaches are not. Materiality matters because a material breach relieves the non-breaching party of his or her duties to perform under the contract. JF & LN, LLC v. Royal Oldsmobile-GMC Trucks Co., 292 So. 3d 500 (Fla. 2d DCA 2020) (“…[N]ot every breach permits the nonbreaching party to cease performance. Instead, the failure to perform the contractual obligation must be central to the contract or, in other words, material.”). Material breaches occur when the breach “go[es] to the essence of the contract; it must be the type of breach that would discharge the injured party from further contractual duty on his part.” Eclectic Synergy, LLC v. Seredin, 347 So. 3d 27 (Fla. 4th DCA 2022). However, “trivial noncompliance and minor failings do not constitute material breaches.” Burlington & Rockenbach, P.A. v. Law Offices of E. Clay Parker, 160 So. 3d 955 (Fla. 5th DCA 2015). By extension, trivial breaches do not relieve the non-breaching party from performing. See DK Arena, Inc. v. EB Acquisitions I, LLC, 121 So. 3d 634 (Fla. 4th DCA 2013) (The “failure of the appellee to cause the release of the escrow deposit was a non-material breach of contract, [because n]othing in the contract or addendum obligated appellee to take any action to cause the deposit to be released.”). Peter Mavrick is a Fort Lauderdale business litigation attorney.  The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

A “time is of the essence” provision can transform an immaterial breach into a material breach. Imagine a scenario where a seller agrees to sell a widget to a buyer for a specific price to be paid by January 1. Then imagine the buyer does not pay the full purchase price until January 2. Many would argue a one-day tardiness in payment is trivial and immaterial. However, a “time is of the essence provision” can make the buyer’s late payment a material breach relieving the seller of his obligation to sell the widget. In fact, “time is of the essence provisions” where created for this very purpose. Rybovich Boat Works, Inc. v. Atkins, 587 So. 2d 519 (Fla. 4th DCA 1991) (A “time is of the essence provision” is “intended to give the sellers an immediate right to cancel the contract if the buyer were unable to timely demonstrate an ability to purchase.”). For example, in Rybovich Boat Works, Inc., 587 So. 2d 519, the court granted summary judgment in favor of the seller because the buyer failed to set a closing date and failed to close by the latest date called for in the agreement despite the “time is of the essence” provision. Id.

“Time is of the essence” provisions are not always enforced. In equitable proceedings, “time is of the essence” provisions are only given effect when the party seeking enforcement demonstrates clear applicability to the relevant contract requirement. Jackson v. Holmes, 307 So. 2d 470, 472 (Fla. 2d DCA 1975) (A “‘time is of the essence’ provision will be given effect in an equitable proceeding probided [sic] it is shown to be clearly applicable to the contract requirement against which it is sought to be applied.”). Court do not want to “‘achieve [a] result by merely putting into the contract the words time is of the essence….’” Jackson v. Holmes, 307 So.2d 470 (Fla. 2d DCA 1975) (quoting 3A Corbin, Contracts § 715 (1960)). Therefore, “time is of the essence” provisions may be rejected in equitable proceedings when applied to matters of minimal consequence. Arvilla Motel, Inc. v. Shriver, 889 So. 2d 887 (Fla. 2d DCA 2004) (cautioning courts “not to apply a general provision that time is of the essence to all of the many ‘promises for sundry performance, varying in amount and importance,’ because parties often insert the provision in the contract without any realization of its significance.”) (quoting 3A Corbin, Contracts § 715 (1960)).

Florida’s broad homestead protection laws are enshrined in Florida’s Constitution. They offer unique asset protection most states do not, and prevent most creditors from levying against a debtor’s home so long as that home qualifies as a homestead.  Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm  Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

Florida’s constitution provides that:

There shall be exempt from forced sale under process of any court,… the following property owned by a natural person:

The business judgment rule is a critical feature of the law governing corporations throughout the United States.  The United States Court of Appeals for the Eleventh Circuit, in In re Bal Harbour Club, Inc., 316 F.3d 1192 (11th Cir. 2003), explained that “[t]he business judgment rule is a judicial presumption that corporate officers and directors acted in good faith, even if their actions were ultimately detrimental to the corporation.”  Florida courts adhere to the business judgment rule.  The rule was solidified in English and American common laws over 200 years ago, and was created because directors are usually more qualified to make business decisions than judges.  Royal Harbour Yacht Club Marina Condo. Ass’n, Inc. v. Maresma, 304 So. 3d 1268, 1269 (Fla. 3d DCA 2020); Gerard V. Mantes & Emily S. Fields, The Business Judgment Rule, 99 Mich. B.J. 30 (Jan. 2020).  The business judgment rule applies to corporations, limited liability companies, and not-for-profit companies. See Fla. Stat. Sections 607.0831, 605.04093, and 617.0834.  The business judgment rule can also apply to home owner’s associations in some jurisdictions. See, e.g., Hollywood Towers Condo. Ass’n, Inc. v. Hampton, 40 So. 3d 784 (Fla. 4th DCA 2010) (allowing application of the business judgment rule to condominium associations if the association has contractual or statutory authority to perform the relevant act and the board’s actions were reasonable).  Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm  Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

The business judgment rule insulates corporate officers from personal fiduciary duty liability if they did not abuse their discretion, commit fraud, act in bad faith, or act illegality.  Int’l Ins. Co. v. Johns, 874 F.2d 1447 (11th Cir. 1989).  Corporate officers can apply the business judgment rule if they acted on an informed basis, in the best interests of the company, and observed corporate formalities. In re Fundamental Long Term Care, Inc., 527 B.R. 479 (Bankr. M.D. Fla. 2015). Litigants seeking to defend themselves from claims under the business judgment rule do not need to plead the issue as an affirmative defense because the rule applies presumptively by operation of law. New Horizons Condo. Master Ass’n, Inc. v. Harding, 336 So. 3d 796 (Fla. 3d DCA 2022) (“The rule does not need to be raised in defensive pleadings to shield corporate conduct from judicial review. Instead, it applies presumptively by operation of law.”). The presumption is so strong that some jurisdictions require a plaintiff to rebut it before challenging the corporate officer’s business judgment.  Solomon v. Armstrong, 747 A.2d 1098 (De. Ch. 1999) (“Under the business judgment rule, the burden of pleading and proof is on the party challenging the decision to allege facts to rebut the presumption.”). This is a powerful weapon for officers and directors because it can place the burden of disproof on the plaintiff. See Harding, 336 So. 3d 796 (denying summary judgment because the plaintiff could not prove the business judgment rule did not apply).

Officers and directors should still be careful when discharging fiduciary duties owed to the corporation because the business judgment rule is not a blank check. For example, in DiSorbo v. Am. Van Lines, Inc., 354 So. 3d 530 (Fla. 4th DCA 2023), the court rejected application of the business judgment rule because the corporate officer was an interested party to the relevant transaction. The court therefore determined that the officer should not benefit from the deferential business judgment rule, and instead applied a harsher law relating to conflict-of-interest transactions. Consequently, officers and directors should always endeavor to make decisions on an informed basis, make decisions in the best interests of the company, and observe corporate formalities before undertaking any action on behalf of the company. Davis v. Dorsey, 495 F. Supp. 2d 1162, 1176 (M.D. Ala. 2007) (“If the defendant has engaged the corporation in a conflicting-interest transaction or has usurped a corporate opportunity, the business-judgment rule will not bar a claim based on the duty of care.”).

In a corporate derivative lawsuit, the shareholder does not have a “direct” injury that is particular to the specific shareholder.  Therefore, a shareholder must turn to a derivative lawsuit. In these lawsuits, the shareholder sues to enforce rights belonging to the corporation for which the corporation itself could have sued for redress. Medkser v. Feingold, 307 Fed. Appx. 262 (11th Cir. 2008). The derivative lawsuit is an exception to the general rule requiring a company to sue on its own behalf. Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (1984). Damages recovered in derivative lawsuits are paid to the corporation rather than shareholder that commenced suit because the shareholder stepped into the shoes of the corporation.  The derivative lawsuit is intended to benefit the corporation and all of its shareholders.  Peter Mavrick is a Fort Lauderdale business litigation attorney.  The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

The “standing” requirement usually prevents a shareholder from suing the corporation it owns a part of (along with the corporation’s officers and directors) for mismanagement because the corporation is usually the party injured by the mismanagement. See Braun v. Buyers Choice Mortgage Corp., 851 So.2d 199 (Fla. 4th DCA 2003) (“The fact that [the shareholder ] may have lost the value of his investment because [the corporation] went out of business is, at best, an indirect injury.”). Standing is a legal concept that ensures a litigant is entitled to have a court decide the merits of his or her dispute. Warth v. Seldin, 422 U.S. 490, (1975). A plaintiff is required to prove its standing as a perquisite to recovering from the defendant. Id. A plaintiff must demonstrate that it suffered an injury that is concrete, particularized, and fairly traceable to the defendant’s action to satisfy the standing requirement. See Koziara v. City of Casselberry, 392 F.3d 1302 (11th Cir. 2004).

Limited circumstances can allow shareholders to sue their own corporation directly. But these circumstances vary state to state. Some states apply a “direct harm” test that examines whether the harm flows to the company first or to the shareholder first.  For example, the California appellate court decision in Shuster v. Gardner, 127 Cal.App.4^th 305 (2005), stated in pertinent part that, “a shareholder cannot bring a direct action for damages against management on the theory their alleged wrongdoing decreased the value of his or her stock (e.g., by reducing corporate assets and net worth).” (emphasis in original)). Other states employ a “special injury” test that requires a comparison of plaintiff’s injuries to those suffered by the other shareholders, such as the Alaska court decision in Hanson v. Kake Tribal Corp., 939 P.2d 1320 (Alaska 1997).  Hanson stated in pertinent part that, “[a] plaintiff alleges a special injury and may maintain an individual action if the shareholder complains of an injury distinct from that suffered by other shareholders, or a wrong involving one of the shareholder’s contractual rights as a shareholder.”  A third group of states use a “duty owed” test that examines the statutory and contractual terms to determine whether the duty at issue was owed to the individual shareholder or to the company generally. See, e.g., G&N Aircraft, Inc. v. Boelm, 743 N.E.2d 227 (Ind. 2001), explaining that that (“a direct action may be brought when: it is based upon a primary or personal right belonging to the plaintiff—stockholder…. It is derivative when the action is based upon a primary right of the corporation….”).  And a fourth group of states allow a shareholder to sue directly if the corporation or its directors/officers owe a separate duty to the shareholder under some contractual or statutory right. See Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3d DCA 2014); Patel v. 2602 Deerfield, LLC, 819 S.E.2d 527 (Ga. Ct. App. 2018) (The shareholder must allege “a wrong involving a contractual right that is independent of any right of the corporation.”). Florida courts apply a combination of tests in the form of the direct harm test, special injury test, and contract test. See Dinuro Investments, LLC, 141 So. 3d 731.

Breach of contract claims benefit from a relatively long statute of limitations. In Florida, a plaintiff has five years to assert a claim for breach of a written contract. Fla. Stat. § 95.11 (providing a five-year statute of limitations for written contracts). The statute of limitations begins to run when the contract is breached. State Farm Mut. Auto. Ins. Co. v. Lee, 678 So. 2d 818 (Fla. 1996) (“A cause of action on a contract accrues and the statute of limitations begins to run from the time of the breach of contract”). This is somewhat unique when contrasted against other claims under Florida law, where statutes of limitation generally begin running when the plaintiff knew or should have known the claim accrued. See, e.g., Wood v. Eli Lilly & Co., 701 So. 2d 344, 347 (Fla. 1997) (The “statute of limitations for DES negligence actions begins to run on the date the plaintiff knew or should have known of his or her injury”); Fla. Stat § 95.031 (“An action founded upon fraud… must be begun… with the period running from the time the facts giving rise to the cause of action were discovered or should have been discovered…”).  Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm  Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

Florida’s statute of limitation law seemingly creates a bright line rule for business litigation claims founded on a breach of contract.  Five years after a contract is breached, the plaintiff is time-barred from asserting a claim on that contract. State Farm Mut. Auto. Ins. Co., 678 So. 2d 818. This is true even if damages do not result or become ascertained until some point in the future because the action is founded on the breach of duty and not the consequent injuries. Med. Jet, S.A. v. Signature Flight Support-Palm Beach, Inc., 941 So. 2d 576 (Fla. 4th DCA 2006) (“Florida has followed this general rule that a cause of action for breach of contract accrues at the time of the breach, ‘not from the time when consequential damages result or become ascertained.’”). Fradley v. Dade Cnty., 187 So. 2d 48 (Fla. 3d DCA 1966) (holding that the limitations period begins running from the date of the breach because the “action is founded on the breach of duty and not the consequent injuries”).

The 2008 mortgage foreclosure crisis blurred this bright line. During this period, many homeowners were financially underwater.  They could not afford to pay their mortgages. Banks filed voluminous mortgage foreclosure complaints.  This overwhelmed the judicial system and caused backlogs for the banks and the courts. See Kevin F. Jursinski, The Mortgage Foreclosure Crisis In Florida: A 21st Century Solution, 84 FL Bar Journal 91 (2010).  As a result, many banks did not timely file their contractual foreclosure lawsuits. The judiciary seems to have rescued the banks by allowing them to file their contractual foreclosure actions outside the five-year window, so long as the bank changed the breach date to one that fit inside the limitations period. See Bartram v. U.S. Bank Nat. Ass’n, 211 So. 3d 1009 (Fla. 2016). In return, banks had to forego damages resulting from all unpaid mortgage payments that were owed before the statute of limitations expired. Id. (“As the Fourth District explained, under Singleton, a “new default, based on a different act or date of default not alleged in the dismissed action, creates a new cause of action.”). Id. The Supreme Court of Florida justified the rule because of “‘the unique nature of the mortgage obligation and the continuing obligations of the parties in that relationship,’ an ‘adjudication denying acceleration and foreclosure’ does not bar subsequent foreclosure actions based on separate and distinct defaults.” Id. (quoting Singleton v. Greymar Associates, 882 So. 2d 1004 (Fla. 2004)).

The Private Securities Litigation Reform Act (PSLRA) requires plaintiffs to meet a heightened pleading standard before they can participate in discovery. Congress passed the PSLRA because many plaintiffs filed frivolous securities fraud lawsuits based on minimal facts, and then used the discovery process to manufacture evidence establishing their claims. See Novak v. Kasaks, 216 F.3d 300, 310 (2d Cir. 2000) (“Congress plainly sought to impose a stricter nationwide pleading standard and did so.”). Plaintiffs, in effect, weaponized securities laws. Winer Family Tr. v. Queen, 503 F.3d 319, 326 (3d Cir. 2007) (“One of the purposes of the PSLRA’s heightened pleading requirements is to limit abusive securities class-action suits.”). PSLRA plaintiffs knew they could commence lawsuits with scant facts and subsequently obtain information giving the impression of securities fraud. Id. PSLRA plaintiffs also knew the act of suing was usually enough to force the defendants into settlement because PSLRA lawsuits are extremely expensive and onerous to defend. Id. As a result, Congress required a private securities law plaintiff to present evidence of securities fraud before the parties engaged in pretrial discovery. 15 U.S.C.A. § 78u-4.  Peter Mavrick is a Fort Lauderdale business litigation attorney.  The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment law, and other legal disputes in federal and state courts and in arbitration.

A PSLRA plaintiff must allege facts demonstrating the existence of the following elements to be entitled to discovery: “(1) a material misrepresentation (or omission), (2) scienter, i.e., a wrongful state of mind, (3) a connection with the purchase or sale of a security, (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as ‘transaction causation,’ (5) economic loss, and (6) ‘loss causation,’ i.e., a causal connection between the material misrepresentation and the loss.” Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (internal citations omitted and emphasis removed). For allegations regarding material misrepresentations or omissions, the plaintiff must “specify each statement alleged to have been misleading, the reason… why the statement is misleading” and all facts on which any belief was formed (assuming allegations were based on information and belief). 15 U.S.C.A. § 78u-4. And for the scienter component, the plaintiff must particularly allege the “facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. The scienter allegations must be “cogent” and “compelling” “in light of other explanations.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).

Discovery is automatically stayed in PSLRA cases unless, and until, the plaintiff alleges the requisite facts to satisfy the PSLRA’s heightened pleading standard. See In re Equifax Inc. Sec. Litig., 2018 WL 3023278 (N.D. Ga. June 18, 2018). The stay is mandated by Congressional statute. 15 U.S.C.A. § 78u-4 (“All discovery and other proceedings shall be stayed during the pendency of any motion to dismiss…”). However, an exception to the discovery stay exists when a party demonstrates discovery is necessary to preserve evidence or to prevent undue prejudice. Id. Undue prejudice occurs when (1) the plaintiffs would be unable to make informed decisions about their litigation strategy due to a rapidly shifting landscape because they are the only major interested party without documents forming the core of their proceedings, In re Bank of Am. Corp. Sec., Derivative, & Employment Ret. Income Sec. Act (ERISA) Litig., 2009 WL 4796169 (S.D.N.Y. Nov. 16, 2009), or (2) the plaintiff lacks access to documents that were previously produced in other lawsuits or to the government. New York State Teachers’ Ret. Sys. v. Gen. Motors Co., 2015 WL 1565462 (E.D. Mich. Apr. 8, 2015). The facts giving rise to both scenarios generally arise infrequently. Therefore, PSLRA defendants usually should not fear engaging in expensive discovery until the plaintiffs satisfy the PSLRA’s heightened pleading standard.