The state of Florida has 1,971,003 limited liability companies. The reason this business entity is so popular is the protection it provides your assets. When forming a business in Florida, the recommendation is to establish your business as an LLC.
When operating a corporation there is always the possibility a dispute will arise among members. Florida law allows the LLC operating agreement to contain provisions for one member to sue another member. This can be done even if circumstances meet the requirements for a derivative claim.
Rather than litigation, there are less costly ways of resolving LLC member disputes. Keep reading to learn when to resort to litigation and when mediation and arbitration may be the better option.
Don’t Ignore the Problem
It doesn’t matter whether it is partnership disputes or a conflict among several staff members, trying to ignore the problem in hopes it will go away will likely backfire. When the main operating personnel of a business is involved in a conflict, the daily operations and survival of the business are at risk.
The best course of action is to take the time to sit down and talk the problem through. Work to reach a solution that is acceptable to everyone. This allows business operations to move forward.
Before Filing a Lawsuit
If an attempt to sit down and work out a resolution amongst the members in conflict is unsuccessful, consider using outside dispute resolution services. While you will be paying alternative dispute resolution or mediation services, it is considerably less expensive than litigation.
The advantage of mediation and arbitration is that it allows you to work out a resolution without having the publicity of a lawsuit. A clause in your operating agreement that requires arbitration prior to litigation is recommended when setting up your business entity.
You may wish to have a civil litigation lawyer accompany you to the mediation. At Boyer Law Firm our goal is to reach a resolution outside the courtroom if at all possible. Having someone at your side who understands all legal aspects of the problem may help move things forward in a positive nature.
Litigation, Mediation, and Arbitration
The Florida court system has been using Alternative Dispute Resolution as a means of resolving conflicts for more than 30 years, with the process first being used in Dade County in 1975.
The Florida Rules for Certified and Court-Appointed Mediators require all mediators to be of good moral character, pass a criminal background check, and be fingerprinted. Grievances filed against mediators are overseen by the Mediator Qualifications & Discipline Review Board.
The board members consist of family mediators, county mediators, judges, dependency mediators, appellate mediators, and non-mediator attorneys. Those members meet in hearing panels and committees when a grievance is received. Mediators found in violation of the rules and standards are subject to sanctions.
When you hear the terms litigation, mediation, and arbitration many think they are different names for the same procedures. While there are some similarities, each is unique.
In Florida, the term litigation refers to the rules and practices of resolving a conflict in the court system. It is time-consuming, expensive, and unpredictable.
The process involves the filing of a lawsuit and then going through the legal requirements as set forth in the Florida Court Rules.
Because of the lengthy process of discovery, court hearings, and trial, many judges require the parties to attempt resolution in some form of a settlement conference. The majority of cases that enter into litigation reach an out-of-court settlement.
Mediation involves the parties meeting with a neutral third party. The third-party oversees the parties’ attempt to reach a resolution. The desire is to reach an agreement, which will be put forth into a binding agreement.
The mediator does not make any decisions for the parties. Their purpose is to provide guidance in helping the parties reach an agreement. The mediator does not voice a personal opinion regarding their thoughts on an appropriate outcome.
Because the parties are meeting in a neutral environment and presenting their respective positions before a neutral party, they often obtain a better understanding of the other party’s viewpoint and are able to work out a compromise.
Arbitration is a form of dispute resolution held before a certified, neutral arbitrator or a panel of arbitrators. The setting is similar to a hearing with each party presenting their case and evidence.
The arbitrators make a determination on the case using a majority vote method. The decision made by the arbitrators is binding and will be set forth in a court order. The authority for the panel’s decision to be binding is granted by Florida statute because the process is voluntary.
Arbitration is considerably faster than litigation. Because the hearings do not take place in open court they are not part of a public record. This provides the business with a higher level of confidentiality.
This method of resolution is difficult to overturn. Florida Statute § 44.104 allows arbitration to be appealed to the State Circuit Court, but no further. If you are considering arbitration speak with your business civil litigation attorney for their recommendations regarding your particular issue.
You Must Prove Discrete Harms
While the idea of filing a lawsuit sounds simple, Florida doctrine on whether a member could bring a claim directly or derivatively was so clouded that the Florida District Court of Appeal set forth the requirements an LLC member suing another member must prove:
- If there is direct harm to the member or shareholder and that the alleged injury does not flow to the company
- That the injury to the member or shareholder is separate from any harm sustained by other members or shareholders
Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. Dist. Ct. App. 2014.
There are exceptions to this rule and the best course of action is to discuss the specifics of your case with your business litigation attorney.
Reduce the Risk of Member Disputes
One of the mistakes people make in establishing their LLC is not following through with the paperwork. When you have a comprehensive Operating Agreement in place it reduces the risk of conflicts arising within the business. A good operating agreement may include the following:
- Management of the LLC
- The role of each LLC member
- The duties and obligations of each member
- Procedures for making important business decisions
- The process for adding new members
- The method for authorizing and transferring a member’s interest
- Procedures for removing a member
- Circumstances for dissolving the LLC and steps to complete the process
- Dispute resolution steps in the event of a conflict
The best way to make sure your operating agreement meets all legal requirements and provides appropriate protection for the business is to have it drafted by a reputable business attorney. They will have the knowledge to provide protection for common disputes that arise in your type of business.
Litigation Is the Last Resort for Resolving LLC Member Disputes
Resolving LLC member disputes through litigation is costly and time-consuming. If an internal business dispute is growing out of control, contact the Boyer Law Firm. With experience in both business law and civil litigation, we can provide the assistance you need to resolve the problem, and take steps to avoid conflict in the future.