Article Courtesy of The Law Website
By Roger Slade and Jonathan Goldstein
Published September 5, 2018
A recent decision from an appellate court in Tallahassee will likely create
significant hurdles for condominium unit owners who wish to sue their
association and its directors for wrongdoing that affects the entire
membership. In Iezzi v Edgewater, the First District Court of Appeal held
that members of a not-for-profit condominium association must comply with
the pre-suit notice requirements for shareholder’s derivative suits before
commencing a lawsuit against the association and its directors.The court
recognized an exception for those lawsuits which seek “equitable relief,”
such as an injunction, and distinguished the standing of owners to seek
relief that would represent and benefit an entire class, also explaining
historical standing to seek relief in a “representative capacity” for such
things as construction defects related to the association’s common elements.
Historically, the pre-suit notice requirements of the shareholder’s
derivative statute have been applicable to lawsuits brought by shareholders
for the benefit of not-for-profit corporations. Iezzi signifies a recent
trend developing in the Florida courts which provides that the pre-suit
notice requirements of the shareholder’s derivative statute applies to
lawsuits against condominium associations and their directors in particular.
This trend runs counter to recent attempts by the Florida Legislature to
crack down on perceived corruption in some condominium associations, as
identified in a Miami-Dade Grand Jury Report released in 2017.
In Iezzi, the plaintiff, a condominium unit owner, filed a 27-count
complaint against the association and seven current or former directors
alleging, among other things, that the association acted improperly and that
the directors breached their fiduciary duties resulting in various illegal
expenditures and assessments. The association filed a Motion to Dismiss the
complaint and argued that the plaintiff was required to follow the pre-suit
notice requirements under the Florida derivative statute before filing suit.
Notably, the plaintiff conceded that the action was derivative in nature,
but argued that a direct statutory cause of action against directors and
associations contained in Chapter 718 conflicted with the derivative
statutory requirements and applied instead.
The court found that the procedures in Florida statute Section 617.07401
applied. The statute requires that before a person commences a proceeding
against a condominium association seeking damages common to all other
unrepresented shareholders, certain requirements must be met. First, the
plaintiff must have been a member of the corporation at the time that the
actions complained of took place or received a transfer from someone who was
a member at that time. Second, the statute requires that a plaintiff must
send a “demand“ for action by the board and demonstrate that the board
refused or ignored the demand for at least 90 days before filing suit. One
exception is if the plaintiff can demonstrate that waiting the 90 days would
cause “irreparable injury” to the entity.
Thereafter, the statute gives the corporate-defendant the option to commence
an investigation and seek a stay in court of any proceedings until the
investigation is complete. The court may also dismiss the action if it
determines that the litigation is not in the best interest of the entity as
determined by a majority vote of independent directors following an
investigation. The statute allows a court to dismiss a lawsuit if a
plaintiff fails to comply with the pre-suit notice requirements.
The court explained that derivative lawsuits are traditionally those brought
by a stockholder to enforce a claim belonging to their corporation. One
example of this would be where a shareholder files a lawsuit against the
directors of a corporation in connection with the directors’ theft from the
corporation. The damage in that case has been suffered by the corporation
directly and the shareholder only indirectly.
At the time of writing, the decision is not final. If it stands, the
consequences of this decision, if applied statewide, could be significant.
Condominium associations would be given an opportunity to remedy any
complained-of problems before a derivative lawsuit can be filed in court.
While the Iezzi decision may provide a way for condominium associations to
avoid or limit costly litigation, it also could create an added layer of
complexity and expense if the independence of the directors making such
decision and the wisdom of such course of action is in dispute. It is only
through future litigation at the appellate level that the impact and
application of this decision will be determined.
FAMILY LIMITED PARTNERSHIP v. EDGEWATER BEACH OWNERS ASSOCIATION, INC. --