Court clarifies Florida standards for distinguishing between direct and derivative investor claims; in the absence of authorizing language in an LLC operating agreement, an LLC member could not sue another member directly for breach of the operating agree

When a real estate development limited liability company owned by three members began struggling to meet its mortgage loan obligations, its lender agreed to modify the loan on the condition that each of the three members make additional contributions to the LLC. Only two of the members complied. Because the two funding members refused to advance the other member’s portion of the requisite contribution, the loan went into default. The two funding members then created a separate company through which they purchased the loan from the lender and subsequently foreclosed on the mortgaged properties. This acquisition left the original LLC without any viable assets and the non-funding member’s investment in the LLC worthless. The non-funding member then brought suit against the other two members for, among other things, breach of the LLC operating agreement, alleging that they intentionally allowed the original LLC to default on the loan so that they could purchase the loan at a discount and foreclose on the mortgaged properties. The trial court dismissed on the grounds that the plaintiff’s claims were derivative, not direct, and that he therefore lacked standing.

On appeal, the Florida Court of Appeals noted a lack of clarity in Florida case law regarding the standard to apply in determining whether a damage claim can be brought directly or must be brought derivatively. The court reviewed three different tests used in other jurisdictions, as well as prior Florida case law. The court then reconciled the “incredibly opaque” Florida law, holding that Florida law allows a member of an LLC or shareholder of a corporation to bring a direct action for damages only if both (i) there is direct harm to the member or shareholder such that the injury does not flow subsequently from an initial harm to the company and (ii) there is a special injury to the member or shareholder that is separate and distinct from those sustained by the other members or shareholders. The court also held that Florida law contains an exception to this rule; the member or shareholder need not satisfy this two-pronged test when there is a separate duty owed by the defendant to the member or shareholder under a contract or statute.

Here, because the plaintiff member did not satisfy either the two-pronged general test or the “duty owed” exception, the appellate court affirmed the lower court’s dismissal, holding that the plaintiff member’s claims should have been brought derivatively. The court found that the member’s claims were for indirect harm, because the plaintiff’s injuries were merely a result of the direct harm to the LLC (the devaluation of the company). Furthermore, no separate duty was owed by the defendant members to the plaintiff under the LLC operating agreement, and the “duty owed” exception was therefore inapplicable. Significantly, the court indicated that the claim could have proceeded as a direct claim if the operating agreement had contained a provision stating that the members would be directly liable to each other for breaches. In the court’s view, unlike the typical bilateral contract, where both signing parties owe each other duties, an LLC operating agreement establishes “a more complicated and nuanced set of contractual rights and duties.” In the absence of a provision stating that members are liable to each other, the court would presume that members are not liable for any obligations or decisions of the LLC. The court also noted that the plaintiff may have been able to maintain a direct suit for breach of a fiduciary duty of loyalty and care under the applicable Florida statute, but the plaintiff had abandoned such a claim early in the litigation.