John D. Willbur, Esq.
Why Can’t We be (Just) Friends? How to (maybe not) Ruin Friendships With Business "Opportunities"
PART 2 of 3
Part II: “Well, it Depends,” Said the Lawyer, Always.
You’ve almost certainly heard the expression “jack of all trades, master of none.” However, according to some sources, this is inaccurate. The actual expression is “jack of all trades, master of none, often times better than a master of one.” Significantly this expression comes off complimentary, while the previous version is most often intended as a slight.
(It should be noted that which is the “correct” version is a hotly contested online. I know, it’s shocking.)
Like the supposed misquote of “jack of all trades.” I’ve always thought the expression, “Well, it Depends, Said the Lawyer, Always,” should be followed by “Because it Does.”
Clear, correct, and direct communication with a client is critical for lawyers. Thus, although a definitive answer might be desired, (and who doesn’t want to keep their clients happy!?) an accurate answer takes a far higher priority.
But, let’s be honest, no matter how accurate the answer “it depends” may be, it has satisfied no question at all.
So, here in Part II, we’ll seek out more substantive answers to the issues presented in the previous post. First, to briefly recap, in our last post four friends had come up with a business idea. They, without the aid of legal counsel, formed a business entity. Specifically, a Limited Liability Company. (“LLC”). Each were granted an equal ownership interest and voting rights to match.
However, of the four friends, only one, Luis Lucky, ever truly did any work at the LLC, and the other friends were absent for several years. Then, through the magic of the internet, Fred Watson, Oliver Sherlock, and Oriel Smith (“Other Friends”) become aware that the LLC is doing rather well and decide they’d like to speak with Luis Lucky about their share of the pie.
This doesn’t go over well with Luis Lucky, who after a brief confrontation at the LLC’s place of business, has the Other Friends trespassed from the premises.
Very soon Luis Lucky is served with a lawsuit filed against him personally for various causes of action relating to his operation of the LLC.
But! Luis Lucky isn’t worried. He completed half a semester of law school and he knows that the other Friends can’t sue him individually, they have to sue the LLC in a type of law suit called a derivative action. Right?....Right?!
Part II: “Well, it Depends,” Said the Lawyer, Always, Because it Does
Well, it depends. In Florida, when alleging damages stemming from membership or ownership in an LLC, said members lack standing to bring a cause of action directly, and must instead bring a derivative suit on behalf of the LLC itself. Dinuro Investments, LLC v. Camacho, 141 So. 3d 731(Fla. 3d DCA 2014).
However, a member or shareholder may bring a direct action but, “only if (1) there is a direct harm to the shareholder or member such that the alleged injury does not flow subsequently from an initial harm to the company and (2) there is a special injury to the shareholder or member that is separate and distinct from those sustained by the other shareholders or members.” Dinuro, 141 So. 3d at 739-40.
In explaining the first prong of the test, the Dinuro court held that, “[i]f the damages are only indirectly sustained by the stockholder as a result of injury to the corporation, the stockholder does not have a cause of action as an individual.” Id, at 739.
Turning next to the special injury prong, the Dinuro Court provided that “[a] special injury is a wrong that is separate and distinct from that suffered by other shareholders. Dinuro, at 737-738.
Thus, to establish standing to bring a direct action stemming from loss related to membership or ownership interest in an LLC, the Other Friends must demonstrate that their individual respective loss is a direct harm separate and distinct to general devaluation of ownership value flowing from company loss, and that the Other Friends loss is a special injury distinct from other members of the LLC.
See? I told you all the way back in the beginning of Part I of this series there would be dry, boring legal analysis involved.
Applying the Two Prong Test to the Sad Story of Luis Lucky and the Other Friends
Let’s apply the two-prong test, as set forth in the Dinuro case, to the facts of our story. First up, the “direct harm.” Essentially, “direct harm” means a claimant must demonstrate a harm that does not first touch the business entity in question. In other words, it would be insufficient for the Other Friends to allege Luis Lucky was doing a poor job running the LLC, and as a result the value of each of the Other Friends ownership interest was suffering.
However, as luck would have it, Lucky isn’t very lucky, is he? As you’ll recall from our riveting tale, Lucky did a rather good job of running the LLC. Therefore, the Other Friends have no claim as to their ownership interest suffering, derivative or otherwise.
Yet, Lucky was “directly” interfering with the Other Friends’ ability to manage, operate, or have input on the LLC. Moreover, he trespassed the Other Friends from the LLC’s premises. These facts do indeed satisfy the “direct harm” part of the test.
The special injury prong requires that the injury be one that is special injury, not uniform across all members. Yet all of the Other Friends are alleging the same injury. How can they satisfy this prong? As you’ve likely surmised, it is because, in addition to the Other Friends, there is one other member of the LLC who is not suffering from the alleged injury, Mr. Lucky. Thus, with both prongs satisfied, the Other Friends would satisfy standing, and be permitted to carry forward with their claims.
Next up, it’s over, the Other Friends eventually prevail on the merits of their claim. Yet, in Part I of this series we learned Luis Lucky made a personal loan to the LLC during slow economic times. Does he have any claim to said loan after this debacle?
What if an entirely different scenario had played out, and all of our players got along at first, but later had division amongst them as which to direction the business should go? With two friends thinking one thing, and two thinking another. How do you break the voter tie?
We’ll get into it. Next week, in Part III.