Corporate Divorce–the break-up of partnerships, limited liability companies and corporations–generally starts with a lot of emotion. Just like a marital divorce. In the beginning, emotions can trump the exercise of good legal strategy and make your client forget the prospect of the whirlwind caused by its own actions: litigation is started out of anger or fear; a litigant’s demands run the gamut, including seeking a declaration of ownership or seeking dissolution and the statutory right to have the case allow a litigant to purchase the other party’s interest. See Fla. Stat. §605.0703(4)(b) and Fla. Stat. §607.1434(3). This may be a perfectly appropriate legal strategy. On the other hand, particularly when corporate formalities have not been followed–formal votes not recorded, stock books not kept, for example–it may also simply open the door to the remedy requested being used against your client. The recent decision of the Third DCA in Hyman v. Daoud, 2016 WL 1125826, points out this prospect.
In Hyman v. Daoud, Hyman’s corporate break-up with Daoud (her father) involved a multi-count action whereby, among other things, Hyman sought a declaratory judgment as to the ownership and corporate structure of the corporation the parties were fighting over. There was no written agreement or corporate record. As is often the case, the corporation’s affairs had been handled irregularly: a company Daoud owned had paid closing costs on the property the corporation had purchased; Daoud moved into the property and then managed the rental units; and Daoud’s trust paid certain expenses related to the property after it was purchased.
Hyman claimed a 100% interest and that Daoud’s financial contributions through his company and trust were advances, not investments. After a two-day non-jury trial, the trial court declared that each party was a 50% owner of the corporation and, worse for Hyman, that the shares of the corporation would be held by Daoud in his trust, that Daoud could continue to live in the property for his lifetime, and that no one could take actions to sell or dispose of the property owned by the corporation without the other’s consent.
On appeal, Hyman challenged the trial court’s decreed remedy relating to the corporate stock being held by the trust, precluding sale without joint consent and granting Daoud a life estate, claiming the remedy was beyond what was authorized by the Declaratory Judgments Act. As the headnote above would foreshadow, Hyman lost.
The Third District Court of Appeal Opinion first explained the expansive nature of the Declaratory Judgments Act, and then to the point here, concluded that “the trial court accomplished…precisely what it was called upon to do by the parties: to declare the ownership structure of the corporation.”
Be careful what you ask for.