Fort Lauderdale Business Lawyer - Mavrick Law Firm

BUSINESS LITIGATION: THE PRE-SUIT DEMAND REQUIREMENT FOR CORPORATE DERIVATIVE ACTIONS IN FLORIDA

Mavrick Law Firm Team — Tue, 10 Oct 2017 17:56:42 GMT

A derivative lawsuit is a lawsuit whereby a shareholder of a corporation sues a third party on behalf of the corporation. Any recovery from such lawsuits are the property of the corporation, not the shareholder who brought the lawsuit. Often times, the defendant of a derivative lawsuit will be someone close to the corporation, such as a director or corporate officer, who has allegedly engaged in, or continues to engage in, improper conduct to the detriment of the corporation. However, a shareholder cannot bring a derivative lawsuit whenever he, she, or it wishes. In Florida, derivative lawsuits are governed by § 607.07401, Florida Statutes, stating in pertinent part:

(2) A complaint in a proceeding brought in the right of a corporation must…allege with particularity the demand made to obtain action by the board of directors and that the demand was refused or ignored by the board of directors…

As such, under Florida law, a shareholder must first make a demand to the board of directors to bring the lawsuit. It is only when the board of directors refuses to bring such an action that the shareholder may file the derivative suit. In some cases, however, a shareholder may attempt to circumvent the pre-suit demand requirement by alleging it would be “futile” to bring such a demand to the board of directors. The Fort Lauderdale business litigation attorneys at the Mavrick Law Firm have successfully defended corporate officers and directors in corporate derivative actions.

Prior to the statute’s 1990 revisions, Florida case law historically recognized a futility exception to the pre-suit demand requirement. In Belcher v. Schilling, 309 So. 2d 32 (Fla. 3d DCA 1975), the Third District Court of Appeal quoted from the 1975 version of the § 607.07401, which stated:

The complaint must set forth with particularity the efforts of the plaintiff to secure the initiation of such actions by the board of directors of such corporation or the reasons for not having made such effort.

Nevertheless, the 1990 revisions removed all exceptions to the demand requirement. Thus, Florida courts when interpreting the post-1990 version of the statute have consistently held that a derivative lawsuit requires demand upon the board of directors prior to being brought by the shareholder. See Ferola v. Blue Reef Holding Corp., 719 So. 2d 389, 390 (Fla. 4th DCA 1997) (citing § 607.07401 (1997)) (“A derivative action…requires service of a demand to take action on the board of directors”).

By persuading the courts in Florida that there is no longer a “futility” exception to the pre-suit demand requirement for corporate derivative suits under Florida law, the Mavrick Law Firm has obtained dismissals of actions where shareholders intentionally fail to make such a demand. However, it is important to be aware that this article only covers derivative lawsuits in the context of corporations. Derivative lawsuits also may be brought by members of limited liability companies pursuant to Florida’s Revised Limited Liability Company Act at § 605.0802, Fla. Stat., but the pre-suit demand requirement in such lawsuits is subject to a “futility” exception under the express wording of subsection (2) of the statute.

The Fort Lauderdale business litigation attorneys at the Mavrick Law Firm have successfully represented many businesses in Florida business litigation cases throughout the Miami-Dade, Broward, and Palm Beach County areas encompassed by the Third and Fourth District Courts of Appeal, as well as Hillsborough, Sarasota, and other counties encompassed by the Second Circuit Court of Appeals. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.

UNLICENSED CONTRACTORS CANNOT ENFORCE CONSTRUCTION CONTRACTS BUT COULD BE LIABLE UNDER THOSE CONTRACTS

Mavrick Law Firm Team — Fri, 06 Jun 2014 04:00:00 GMT

When two parties commit the same wrongdoing and are equally at fault, the court generally will not get involved in their transaction. That rule is known as the doctrine of “in pari delicto.” The doctrine of in pari delicto generally will apply to various forms of unlawful contracts. For example, if two parties enter into an illegal contract to split the profits of a robbery, neither party can seek to have the court enforce the contract when one party refuses to share the profits. Both parties were equally at fault—or in pari delicto—and the court will leave the parties as they are. Until recently, some Florida courts applied the doctrine of in pari delicto to construction contracts entered into by unlicensed contractors.

In Earth Trades, Inc. v. T&G Corp., 108 So. 3d 580 (Fla. 2013), an unlicensed subcontractor (“Earth Trades”) entered into a construction contract with a general contractor (“T&G”). T&G knew that Earth Trades was unlicensed when it entered into the contract. After a dispute between the parties arose, Earth Trade sued T&G for breach of the contract. T&G countersued for breach of contract against Earth Trade. At that point Earth Trade argued that neither T&G nor Earth Trade could enforce the contract because the contract was unlawful. Earth Trade further argued that because both parties knew that the contract was unlawful, the parties were in pari delicto. The Florida Supreme Court disagreed.

The Florida legislature amended the statute regarding unlicensed construction contractors in 2003. As amended, the statute reads as follows: “contracts entered into on or after October 1, 1990, by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.” Fla. Stat. § 489.128(1) (emphasis added). The statute therefore explicitly makes the contract unenforceable only by the unlicensed contractor and not the party contracting with the unlicensed contractor. Because the legislature placed the liability on the unlicensed contractor, “the fault of the person or entity engaging in unlicensed contracting is not substantially equal to that of the party who merely hires a contractor with knowledge of the contractor’s unlicensed status.” Earth Trades, Inc., 108 So. 3d at 587. Earth Trades was therefore not in pari delicto with T&G even though T&G knew that Earth Trades was unlicensed.

Earth Trades, Inc. serves as a warning to those engaging in unlicensed contracting. If a construction contract goes sour, the unlicensed contractor will not be able to enforce the contract against the other party. The other party, however, might be able to enforce the construction contract against the unlicensed contractor. As the Florida Supreme Court held, “to avoid the draconian effects of the statute, the unlicensed contractor need only comply with the law.” Earth Trades, Inc. v. T&G Corp., 108 So. 3d at 586-587.

Peter T. Mavrick represents businesses in commercial litigation, labor/employment law, and trade secret and non-competition covenant litigation. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: peter@mavricklaw.com.

FRANCHISOR’S LIABILITY FOR FRANCHISEE ACTIONS

Mavrick Law Firm Team — Tue, 03 Jun 2014 04:00:00 GMT

Franchise agreements can serve to establish a mutually beneficial relationship for the franchisor and the franchisee. Under a franchise agreement, the franchisor’s brand is allowed to grow through an independent business, i.e., the franchisee, and the franchisee is able to start a business without having to create a new product or brand. Because franchisees are generally independent businesses, the franchisor will normally not be liable for the franchisee’s actionable conduct. However, the franchise agreement and other factual circumstances could render a franchisor vicariously liable for its franchisees’ actions.

In Parker v. Domino’s Pizza, 629 So. 2d 1026 (Fla. 4th DCA 1993), two plaintiffs were harmed as a result of an accident caused by a delivery driver employed by J&B Enterprises, a Domino’s Pizza (“Domino’s”) franchisee. Under Florida law, an employer can be vicariously liable for his or her employees’ actions. J&B Enterprises, as the employer of the delivery driver, could therefore be liable for the plaintiffs’ injuries. The plaintiffs argued, however, that Domino’s also was vicariously liable for the injuries caused by the delivery driver. The trial court held that Domino’s was not liable to the plaintiffs because the delivery driver was not a Domino’s employee. On appeal, the appellate court disagreed.

The appellate court held that the operating manual that Domino’s provided to J&B Enterprises was “a veritable bible for overseeing a Domino’s operation,” which contained “prescriptions for every conceivable facet of the business.” Parker v. Domino’s Pizza, 629 So. 2d 1026, 1029 (Fla. 4th DCA 1993). Because the manual indicated that Domino’s retained a high degree of control over J&B Enterprises, J&B Enterprises could be considered an agent of Domino’s. Consequently, the appellate court held that Domino’s could be found liable for the delivery driver’s actions.

Several years later, the same appellate court was presented with a similar question. In Madison v. Hollywood Subs, Inc., 997 So. 2d 1270, 1270 (Fla. 4th DCA 2009), an individual was shot and killed outside a Miami Subs restaurant. The restaurant was operated by Hollywood Subs, Inc., a Miami Subs franchisee. The plaintiff argued that the killing was a result of inadequate security and that both Hollywood Subs, Inc., the franchisee, and Miami Subs, the franchisor, were liable.

The appellate court considered the franchise agreement and found that Miami Subs was not liable for the killing. As the appellate court found, the “only control provided by the agreement was to insure uniformity in the standardization of products and services offered by the restaurant.” Madison v. Hollywood Subs, Inc., 997 So. 2d 1270, 1270 (Fla. 4th DCA 2009). Because Hollywood Subs, Inc. had sole control of the day-to-day operations, it was an independent contractor, and not an agent, of Miami Subs.

As the above cases demonstrate, whether a franchisee is an “agent” or “independent contractor” of a franchisor depends on the facts of each case. If the franchisor retains the right to control the day-to-day business operations, it can be held liable for its franchisee’s actions. If, however, the franchisor’s control is limited to maintaining uniformity among its franchisees, then the franchisor would generally not be vicariously liable for its franchisees’ conduct.

CONTRACT PROVISIONS FOR ATTORNEY’S FEES: FLORIDA’S RECIPROCITY LAW AND THE AMERICAN RULE

Mavrick Law Firm Team — Fri, 23 May 2014 04:00:00 GMT

The “American rule” holds that each party to a lawsuit will pay for his or her own attorney’s fees regardless of who prevails in the case. Unless a statute or contractual provision says otherwise, Florida courts will apply the American rule. For that reason, contracts oftentimes contain provisions stating that if litigation arises under the contract, the losing party must pay the prevailing party’s attorney’s fees.

Florida statutory law, however, requires reciprocity. In other words, if “a contract contains a provision allowing attorney’s fees to a party when he or she … enforce[s] the contract, the court may also allow reasonable attorney’s fees to the other party when that party prevails … with respect to the contract.” Fla. Stat. § 57.105(7). For example, the following contractual provision is not reciprocal: “Buyer shall pay for Seller’s attorney’s fees if Seller prevails in a claim against Buyer.” The terms of the contract grant only Seller, not Buyer, the right to attorney’s fees upon prevailing. However, because Florida law requires reciprocity, Florida courts generally will read that contractual provision as also granting Buyer a right to attorney’s fees upon prevailing in a suit to enforce the contract.

In Fla. Hurricane Prot. & Awning, Inc. v. Pastina, 43 So. 3d 893 (Fla. 4th DCA 2010), a homeowner entered into a contract with a contractor to install shutters. The contract included the following provision: “Purchaser [i.e., the homeowner,] is responsible for all costs of collection including Attorney’s fees.” Fla. Hurricane Prot. & Awning, Inc., 43 So. 3d at 894. The contractual provision is not reciprocal, i.e., it grants only the contractor the right to recover attorney’s fees from the homeowner. After the contractor failed to install the shutters, the homeowner sued for breach of contract and prevailed. Relying on Florida’s reciprocity statute, the homeowner sought attorney’s fees from the contractor. While the trial court agreed with the homeowner and awarded her attorney’s fees, the appellate court disagreed.

The appellate court in Fla. Hurricane Prot. & Awning, Inc. found that the contract between the homeowner and the contractor allowed the contractor to recover attorney fees only in relation to a “collection” action, not a general breach of contract action. As the court found, Florida’s reciprocity law “is designed to even the playing field, not expand it beyond the terms of the agreement.” Fla. Hurricane Prot. & Awning, Inc., 43 So. 3d at 895. Had the contractor brought a collection action against the homeowner and lost, Florida’s reciprocity law would have required that the homeowner be entitled to her attorney’s fees. However, because the homeowner brought suit alleging a breach of contract, the contractual attorney’s fees provision was never triggered. In the absence of a contractual provision holding otherwise, the American rule controls, and the homeowner must pay for her own attorney’s fees. As the court found, “[t]o rule otherwise would be tantamount to re-writing the contract between the parties. This we will not do.” Fla. Hurricane Prot. & Awning, Inc., 43 So. 3d at 895-96.

Florida’s reciprocity law will grant reciprocity, nothing more. As the above case demonstrates, courts will not use Florida’s reciprocity rule to rewrite or expand a contract. As with many contractual disputes, proper drafting is key.