The difficulty of a member of a Florida not for profit community association corporation to prosecute a claim on behalf of the community association was illustrated in a recent decision by the Third District Court of Appeal in Cornfeld v. Plaza of the Americas Club, Inc., Case No. 3D18-270 (Fla. 3D DCA May 1, 2019).
Cornfeld owned a unit within the Plaza of the Americas Condominium. Cornfeld was also the owner/manager of the Cornfeld Group which owned a resort across the street from the Condominium. The Cornfeld Group which leased a Plaza of the America’s condominium parcel for resort parking.
Cornfeld sued the Association and the Association’s directors alleging breach of fiduciary duty to the unit owners, and seeking injunctive relief, asserting:
· The Club wrongfully refused to accept an offer of $2.5 million to purchase the property;
· The Club refused to assert a claim against a neighboring business, RK Centers, for failing to repair a sewer main causing damage to the Club.
Cornfeld brought his claim as a shareholder derivative action pursuant to § 617.07401 Fla. Stat. (2016).
Pursuant to the derivative action statute, the trial court had three options for determining whether the claim is in the best interest of the corporation as a predicate for the claim to proceed:
1. Majority vote of independent directors at a Board meeting;
2. Majority vote of a committee of two or more independent directors appointed by a majority vote at a Board meeting; or
3. Appointment of one or more independent persons appointed by the court upon motion by the corporation.
The Association chose the latter, the independent investigation option, without objection from Cornfeld.
The investigator, after a significant time investigating, over five months and reviewing thousands of documents filed a report recommending that the lawsuit be dismissed because:
· Cornfeld does not actually represent the unit owners because of his personal motivations which are contrary to the Club’s members interests;
· Directors decisions were reasonable, guided by legal advice and protected by the business judgment rule; and,
· That the litigation was barred because Cornfeld failed to serve a statutory pre-suit demand.
The trial court adopted the investigator’s filings and dismissed the case with prejudice.
Cornfeld did not challenge the independence of the investigator, but did assert that the dismissal should not have occurred because there were material issues of disputed fact concerning the reasonableness and good faith of the investigation.
The trial court accepted the investigator’s findings, including that personal interest guided Cornfeld, and that following the attorney’s conservative advice did not show any requisite basis for a derivative action. An essential element of a derivative claim, either fraud illegality oppression or bad faith by the corporation or officers was not pled or proven. Further, the trial court’s reliance on the business judgment rule produced no error. Thus, the trial court’s dismissal was affirmed.
Community associations may see more derivative actions in light of Iezzi Family L.P. v. Edgewater Beach Owners Ass’n., Inc., 254 So. 3d 584 – Fla 1st DCA, 2018). Procedurally, a plaintiff will have to address statutory prerequisites, including notice and investigation, and the expense of both. Substantively, a plaintiff must consider with what the Iezzi Court referred to in the condominium (and presumably homeowners’) context as “the association has broad powers and duties, including all of those set forth in chapter 617, unless otherwise noted.” Id. at 585. In addition, if a claim is against an individual director, then also the high threshold for claims against directors stated in Sonny Boy, LLC v. Asnani, 876 So. 2d 25, 27 (5th DCA 2004) and Perlow v. Goldberg, 700 So.2d 148 (Fla. 3d DCA 1997). Further, the Cornfeld decision brings to the surface the potential disqualifier of a plaintiff’s personal motivations that may be contrary to the interests of the other Association members, motivations that may be just under, if boiling on on the surface of many disputes.
In passing, a reader of the decision may have scratched her or his head at the Court’s apparently unfortunate references: to the Association that “owns and operates” the condominium complex; and, to the action being brought pursuant to “section 617.0740” which is not that correct statute. Perhaps on a rehearing, the Court may correct these references.
Michael J. Gelfand
Real Property, Probate and Trust Law Section of The Florida Bar
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Note: This article is not legal advice. Statements and comments made are not those of The Florida Bar or the RPPTL Section
© 2019 Michael J. Gelfand
Michael J. Gelfand
Florida Bar Board Certified Real Estate Attorney
Florida Supreme Court Certified Mediator:Civil Circuit Court & Civil County Court
Fellow, American College of Real Estate Attorneys