Frank J. Strazzulla, Cheri D. Strazzulla and Frank J. Strazzulla, as Custodian for Austin J. and Francesca Strazzulla v. Riverside Banking Company and James Russakis

DISTRICT COURT OF APPEAL OF THE STATE OF FLORIDA
FOURTH DISTRICT

FRANK J. STRAZZULLA, individually, CHERI D. STRAZZULLA,
individually, and FRANK J. STRAZZULLA, as Custodian for AUSTIN J.
and FRANCESCA STRAZZULLA,
Appellants,

v.

RIVERSIDE BANKING COMPANY, a Florida corporation, and JAMES
RUSSAKIS, individually,
Appellees.

No. 4D14-768

[September 2, 2015]

Appeal from the Circuit Court for the Nineteenth Judicial Circuit,
Indian River County; Cynthia L. Cox, Judge; L.T. Case No.
312012CA000335.

Casey Walker of Murphy & Walker, P.L., Vero Beach, for appellants.

Curtis Alva of Law Office of Curtis Alva, Jupiter, for appellees.

HAIMES, DAVID A., Associate Judge.

Appellants Frank Strazzulla, et al. (“Shareholders”), appeal the trial
court’s order dismissing their amended complaint with prejudice and
granting final summary judgment. The Shareholders’ amended complaint
alleged claims of negligent and fraudulent misrepresentation by directors
of the Corporation. The sole issue on appeal is whether the Shareholders
can bring a direct action in their individual capacity for these claims or
whether they are required to bring a derivative action in the name of the
corporation. The trial court found that Shareholders lacked standing
because they should have filed the complaint as a derivative action.
Because the amended complaint alleges both a direct harm and a special
injury, Appellants have standing to bring a direct action. Therefore, we
reverse the trial court’s order.

I. BACKGROUND

In October 2012, Shareholders filed an amended complaint against
Riverside Banking Company (“Corporation”) and against two of its
directors, Martha Sneed and James Russakis (“Directors”). Shareholders
collectively owned approximately 11,000 shares of stock in the
Corporation. The Corporation’s assets were contained almost entirely in a
subsidiary, Riverside National Bank (“Bank”).

According to the amended complaint, in the mid-2000s, the Bank
began purchasing large amounts of high risk asset-backed securities,
including Collateralized Debt Obligations (CDO’s). In 2007, the collapse
of Bear Stearns hedge funds grabbed national headlines due to losses
related to these types of high risk investments. In March 2008, the
Corporation held a shareholders’ meeting. After the meeting adjourned,
Shareholders approached the two Directors and asked them what types of
assets the Bank was holding and whether the Bank owned asset-backed
securities similar to those that caused the downfall of Bear Stearns. The
Directors, both members of the Bank’s Investment Committee, assured
Shareholders that the Bank’s holdings consisted almost entirely of safe
investments such as municipal bonds, treasuries, and corporate bonds
and further denied the Bank’s ownership of any high risk asset-backed
securities. The only persons within earshot of this conversation were
Appellant Shareholders and another shareholder, who is not a party to
this action.

At the time the Directors made these assurances to Shareholders, the
Corporation had a buyback program where Shareholders could redeem
their shares. The buyback program had a prevailing rate of $550 per
share, meaning Shareholders’ 11,000 shares could have been sold for
approximately $6 million dollars. The amended complaint alleges that
because of these assurances by the Directors, Shareholders chose not to
redeem their shares in the Corporation’s buyback program. The Bank’s
investments, which did include risky CDO’s, subsequently declined and
lost substantially all of their value, and the Bank eventually collapsed. As
a result of the Bank’s failure, Shareholders’ stock in the Corporation
became essentially worthless. Shareholders filed the present action
alleging claims of negligent misrepresentation and fraudulent
misrepresentation against the Directors and a claim of vicarious liability
against the Corporation for the Directors’ actions.

The Corporation moved to dismiss Shareholders’ amended complaint
and for summary judgment, asserting that the amended complaint was
improperly filed as a direct action instead of a derivative action. The trial
court agreed. In reaching its decision, the trial court stated it “cannot
agree that the allegations [in the amended complaint] state a claim of direct
injury founded on fraud,” and it found that Shareholders’ injury “emanates

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from the gross mismanagement of the Bank’s investments, not fraud,”
making their injury common to all other shareholders. The trial court
further found that “every shareholder of the Bank suffered the same
alleged injury from the same wrong; the plaintiffs’ loss is not distinct and
cannot be separated from the injury suffered by the Bank and all other
stockholders.” The trial court then concluded that Shareholders lacked
standing because their suit should have been filed as a derivative action.
This appeal follows.

II. DISCUSSION

The present case raises the murky question under Florida law as to
when individual shareholders can bring a lawsuit in their individual
capacity, as a direct action, as opposed to a derivative action on behalf of
the corporation. “A direct or individual action is a suit by a stockholder to
enforce a right of action existing in the stockholder.” Salit v. Ruden,
McClosky, Smith, Schuster & Russell, P.A., 742 So. 2d 381, 388 (Fla. 4th
DCA 1999) (citing Fort Pierce Corp. v. Ivey, 671 So. 2d 206, 207 (Fla. 4th
DCA 1996)). “A derivative suit is an action in which a stockholder seeks
to enforce a corporate right or to prevent or remedy a wrong to the
corporation, where the corporation, because it is controlled by the
wrongdoers or for other reasons, fails and refuses to take appropriate
action for its own protection.” Id. (citing Fort Pierce Corp., 671 So. 2d at
207). However, resolving the question whether an action should be
brought as a direct or derivative action is not so clear.

A. Dinuro Investments, LLC v. Camacho

Recently, in Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla.
3d DCA 2014), the court conducted a detailed survey of the law in this
area in both Florida and throughout the country. The court noted that
three tests routinely have been applied to resolve the direct versus
derivative claim question.

1. Direct Harm Test

The first test is the direct harm test. Under this test, the court examines
“whether the harm from the alleged wrongdoing flows first to the company
and only damages the shareholders or members due to the loss in value
of their respective ownership interest in the company, or whether the harm
flows ‘directly’ to the shareholder or member in a way that is not secondary
to the company’s loss.” Id. at 735 (citations omitted). Under the direct
harm approach, the examining court “looks at the injury alleged by the
individual shareholder and determines whether that injury flows from

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some damage to the company itself.” Id. at 736. The examining court
then must “compare the individual’s harm to the company’s harm, [and] a
shareholder can only bring a direct suit if the damages are unrelated to
the damages sustained by the company and if the company would have no
right to recover in its own action. Id. (citations omitted). The Dinuro court
noted that “[t]his approach likely provides the greatest simplicity in
application, as the courts need only look to whether the alleged wrongful
conduct devalued the company as a whole or was directed specifically
towards the individual plaintiff.” Id.

2. Special Injury Test

The second test is the special injury test. Under this test, the examining
court must “compare the individual plaintiff’s alleged injury to those
injuries suffered by the other members or shareholders of the company
and then determine whether the plaintiff’s injury is separate and distinct
from other members or shareholders.” Id. (citations omitted). This
approach “require[s] a plaintiff to demonstrate that he has sustained a loss
that is substantially different from those losses sustained by other
shareholders or members before he can maintain an individual or direct
suit.” Id. at 737. The Dinuro court noted that “this test can be much more
difficult to apply, as the ‘special’ nature of the injury can be a nebulous
inquiry that is often not readily apparent.” Id.

3. Duty Owed Test

The third test is the duty owed test. Under this test, the examining
court “simply examines the statutory and contractual terms to determine
whether the duty at issue was owed to the individual member or
shareholder by a particular manager or member, or whether those duties
were owed to the company generally.” Id. (citations omitted). The Dinuro
court noted that “[m]any courts have also applied this test as an exception
to the general rule requiring either direct harm or special injury.” Id.
(citation omitted).

4. Florida’s Test (Two-Prong Test Plus Exception)

After discussing the various tests, the Dinuro court then surveyed
Florida law. The court first noted that the Florida Supreme Court has not
established a rule in this area. The court then cited to Citizens National
Bank of St. Petersburg v. Peters, 175 So. 2d 54 (Fla. 2d DCA 1965), as the
first Florida appellate court to enunciate a rule governing the direct versus
derivative suit issue as follows:

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 A Florida court has defined a derivative suit as an action in
which a stockholder seeks to enforce a right of action existing
in the corporation. Conversely, a direct action, or as some
prefer, an individual action, is a suit by a stockholder to
enforce a right of action existing in him.

What these definitions attempt to convey is that a stockholder
may bring a suit in his own right to redress an injury
sustained directly by him, and which is separate and
distinct from that sustained by other stockholders. If,
however, the injury is primarily against the corporation, or the
stockholders generally, then the cause of action is in the
corporation and the individual's right to bring it is derived
from the corporation.

Dinuro, 141 So. 3d at 738 (quoting Peters, 175 So. 2d at 56 (third emphasis
added) (internal citations omitted)). Under Peters, a shareholder can bring
a direct action only if the complaint alleges both a direct harm and a
special injury. The Dinuro court further noted that this two-prong
“language has essentially become canon in Florida corporate law, as nearly
all subsequent cases deciding whether an action is direct or derivative
have quoted Peters or one of its progeny.” Id. (citations omitted).

The Dinuro court noted that, “Florida courts also recognize an exception
to the Peters test when an individual member or manager owes a specific
duty to another member or manager apart from the duty owed to the
company.” Id. (citations omitted). After further surveying Florida law, the
court adopted a two-prong test with an exception for a special duty as
follows:

In our view, the only way to reconcile nearly fifty years of
apparently divergent case law on this point is by holding that
an action may be brought directly 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. . . .

We also find that there is an exception to this rule under
Florida law. A shareholder or member need not satisfy this
two-prong test when there is a separate duty owed by the
defendant(s) to the individual plaintiff under contractual or
statutory mandates. Thus, if the plaintiff has not satisfied the

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 two-prong test (direct harm and special injury) or
demonstrated a contractual or statutory exception, the action
must be maintained derivatively on behalf of the corporation
or company.

Dinuro, 141 So. 3d at 739-40 (emphasis in original) (citations omitted).

B. Fourth DCA Cases

After reviewing prior cases in our district, we agree with the Third
District and adopt a two-prong test as follows: In order for shareholders
to bring a direct action in their individual capacity, the shareholders must
allege both a direct harm and a special injury. The two-prong test is
consistent with our prior decisions requiring both a direct harm and a
special injury. See Fort Pierce Corp., 671 So. 2d at 207 (holding
“stockholders may bring a suit in their own right to redress an injury
sustained directly by them individually and which is separate and distinct
from that sustained by other stockholders.”); see also Chemplex Fla. v.
Norelli, 790 So. 2d 547 (Fla. 4th DCA 2001). A shareholder may bring an
individual action as an exception to the two-prong test where there is a
separate statutory or contractual duty owed by the wrongdoer to the
individual shareholder. See Braun v. Buyers Choice Mortg. Corp., 851 So.
2d 199, 203 (Fla. 4th DCA 2003) (“Generally, a shareholder cannot sue in
the shareholder’s name for injuries to a corporation unless there is a
special duty between the wrongdoer and the shareholder, and the
shareholder has suffered an injury separate and distinct from that suffered
by other shareholders.”). This approach provides a consistent framework
and also “comports with general standards of corporate and LLC law by
protecting 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.” Dinuro, 141 So. 3d at 740.

C. Present Case

Turning to the present case, the parties are operating under two
completely different theories as to the nature of the harm alleged in the
complaint. Shareholders contend the harm is their decision not to sell
back their shares to the Corporation because of the Directors’
misrepresentations. The Corporation contends the harm is the
investment’s lost value because of the Bank’s collapse due to poor
management. To resolve the question of whether Shareholders have
standing to file the present case as a direct action, we must look to the
actual allegations contained in Shareholders’ amended complaint to
determine whether it properly alleges both a direct harm and a special

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injury. Karten v. Woltin, 23 So. 3d 839, 841 (Fla. 4th DCA 2009).

With respect to the underlying injuries, the amended complaint alleges
that if the Shareholders had “been told the truth, [the Shareholders] would
have redeemed [their] shares at the then prevailing rate of $550 per share.”
The amended complaint further alleges that “[b]ecause these investments
were not disclosed, however, [Shareholders] did not redeem these shares
before the buyback program ended in May 2008,” and the shares are
essentially worthless. Although the amended complaint alleges
mismanagement of the Bank, these allegations regarding the
mismanagement and subsequent decline in stock value only provide
context to the separate misrepresentation claims.

With respect to the first prong, direct harm, a shareholder can bring a
direct suit only if the damages are unrelated to the damages sustained by
the company, and if the company would have no right to recover in its own
action. Dinuro, 141 So. 3d at 736. Here, the alleged harm from the
misrepresentation claims are direct to Shareholders and could not belong
to the Corporation. Moreover, it is clear under Shareholders’ theory that
the Corporation would have no right to recover in its own action against
the Directors. Therefore, the first prong is met.

With respect to the second prong, we must determine whether
Shareholders’ injuries are separate and distinct from the other
shareholders. Here, the alleged injuries are based upon Shareholders
being fraudulently induced to not sell their stock. This injury was distinct
from any injury suffered by other shareholders, who did not receive these
same representations. Therefore, the second prong also has been met.

III. Conclusion

We hold that in order for shareholders to bring a direct action in their
individual capacity, the complaint must satisfy a two prong test and allege
both a direct harm and a special injury, or must meet the exception of
alleging a special duty to the individual shareholders. In the present case,
Shareholders’ amended complaint properly alleged both a direct harm and
a special injury.1 Therefore, we reverse the trial court’s order dismissing
their amended complaint with prejudice and granting final summary
judgment. We further remand this matter to the trial court for additional
proceedings consistent with this opinion.

1Because we reverse on the issue of a direct action, we do not reach Shareholders’
alternative argument that the amended complaint adequately alleged a breach of
a special duty to Shareholders.

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 Reversed and remanded.

DAMOORGIAN and GERBER, JJ., concur.

* * *

Not final until disposition of timely filed motion for rehearing.

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