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Florida’s Fourth District Test for Determining Whether Shareholders May Bring Direct Actions Against a Corporation
In the recent decision of Strazzulla v. Riverside Banking Co., Florida’s Fourth District Court of Appeal (“DCA”) has adopted a two-prong test for determining when shareholders may bring direct actions in their individual capacity against corporations, as opposed to derivative actions on behalf of the corporation.1 In doing so, the Fourth DCA follows the Third DCA’s 2014 decision in Dinuro Investments, where that court held similarly. 2
In Strazzulla, a group of shareholders filed a complaint against two of Riverside Banking Company’s directors for negligent misrepresentation and fraudulent misrepresentation, and against Riverside Banking Company itself, under a theory of vicarious liability for the directors’ actions.3 After the collapse of Bear Stearns, the shareholders approached the directors to be sure that their money was not invested in collateralized debt obligations (CDOs).4 The directors assured those shareholders that it was not.5 At this time, the company had a buyback program to buy company shares at $580 each.6 Based on the directors’ assurances, those select shareholders who approached the directors decided not to sell.7 When the value of the asset-backed securities crashed, the shareholders lost approximately $6,000,000.8
The directors sought to have their complaint dismissed, arguing that the action should have been properly brought as a shareholder derivative action instead of a direct action.9 The trial court agreed, but the Fourth DCA reversed.10 Before explaining its reasoning, the court quoted Dinuro’s review of the law in this area, both in Florida and nationwide.11 It recognized that four different tests generally exist to determine the existence of a corporation’s direct liability to shareholders.12
The first test is the direct harm test.13 Under this test, the court considers whether the harm is directly to the company, and only damages the shareholders as a corollary to that direct harm.
The second test is14 the special injury test, and this test asks whether shareholders can show that they have been injured by the corporation’s actions in a way that is distinct from any injury sustained by other shareholders.
The third test is the duty owed test, which asks whether the corporation owed any special duty to a shareholder, and then failed to fulfill that duty.
The fourth test is the two-prong test, which asks whether a shareholder has alleged both a direct harm and a special injury. This test generally comes with an exception, which is borrowed from the duty owed test. If a shareholder alleges that it was owed a duty by the corporation, which the corporation then shirked, he or she does not need to meet the two-prong requirement.
The Fourth DCA decided to explicitly adopt the two-prong test, reasoning that doing so provides a consistent framework and protects “individuals from the obligations arising out of their relationship to the company, while also allowing the parties greater freedom to contractually set their respective obligations.”
Prior to this opinion, and the Third DCA’s recent Dinuro opinion, the Florida courts’ analysis of this issue was varying, with some courts choosing one of the four tests and other courts mentioning the two prong test but then only performing an analysis under one of the prongs. The Fourth DCA’s opinion will hopefully bring some additional clarity and consistency to Florida’s shareholder derivative case law.
- Albert I. Manca is a complex commercial litigation attorney with Hackleman, Olive & Judd. His practice focuses on complex commercial litigation, including breach of contract defense, shareholder derivative litigation, class action defense, and labor and employment defense.
 See 40 Fla. L. Weekly D2039a (Fla. Sept. 2, 2015).
 See Dinuro Invs., LLC v. Camacho, 141 So. 3d 731, 740–43 (Fla. 3d DCA 2014).