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I previously blogged on the continuing existence of the independent tort doctrine in Florida.  In lawsuits between parties who bargained for their remedies in a contract, the independent tort doctrine will bar tort actions brought simply as a way around contract remedies.  To state a valid tort claim, the independent tort doctrine requires contracting parties to show a breach of a duty that exists separate and distinct from the contract.

Fraud is a tort action.  To state a claim for fraud, a plaintiff must show that:

  1. The defendant made a false representation concerning a material fact;
  2. The defendant knew the representation was false at the time it was made;
  3. The defendant intended that the representation would induce another to rely and act on it; and
  4. The plaintiff suffered injury in justifiable reliance on the representation.

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Often, a party attempts to assert a fraud action arising from representations made by another party in the course of contract negotiations.  But, false representations as to future conduct made during negotiations do not constitute actionable fraud.  Such a claim, known as “fraud in the performance,” is said to “merge” with the breach of contract claim.

For example, if the defendant promises to pay the plaintiff in the future in exchange for services performed today, and the defendant later fails to pay the plaintiff, the plaintiff would have a breach of contract action against the defendant.  The defendant’s broken promise, however, would not constitute fraud.

An exception exists where a representation is made as to future conduct without any intention of performing or “with the positive intention not to perform.”  Under these circumstances, a plaintiff would have an independent action for fraud.  In the example above, if the defendant did not have any intention of paying the plaintiff at the time the representation was made, the plaintiff would have a fraud action against the defendant.

A corporation is a legal entity separate and distinct from its shareholders.  The corporate form generally shields shareholders from personal liability for the corporation’s debts.

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However, shareholders cannot incorporate to limit their liability, and then use the corporate form to cover their fraud.  Under such circumstances, a party may seek to “pierce the corporate veil” and hold shareholders personally liable.  Florida courts are generally reluctant to disregard the corporate form and require a showing of improper conduct in the formation or use of the corporation.

To pierce the corporate veil, a plaintiff must prove three factors:

  1. The shareholder “dominated and controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent”  and the shareholders were alter egos of the corporation;
  2. The corporate form was used for a fraudulent or improper purpose; and
  3. The fraudulent or improper use of the corporate form caused injury to the plaintiff.

If a plaintiff can prove these three factors, then a court may pierce the corporate veil.  For example, in Eagle v. Benefield-Chappell, Inc., the Fourth DCA held two shareholders personally liable when the corporation was used to fraudulently increase construction costs to result in a higher fee to the corporation.  A court may also pierce the corporate veil where a controlling shareholder causes the corporation to make distributions or otherwise depletes corporate assets for his or her personal benefit while the corporation is unable to pay its debt.

However, in declining to pierce the corporate veil absent a finding of fraud, the Third DCA stated that “mere ownership of a corporation by a few shareholders, or even one shareholder, is an insufficient reason to pierce the corporate veil.”  In a recent opinion, the Third DCA also affirmed that “even if a corporation is merely an alter ego of its dominant shareholder or shareholders, the corporate veil cannot be pierced so long as the corporation’s separate identity was lawfully maintained.”

Other improper conduct that may justify piercing the corporate veil includes commingling funds of the corporation with funds of other corporations, commingling corporate funds with personal funds, utilizing corporate assets for personal use, failing to adequately capitalize the corporation, and using the corporate form to hide assets or otherwise avoid liability.

If a party successfully pierces the corporate veil, the corporation and shareholder will be treated as one person under the law and any acts committed by either the corporation or the shareholder are treated as the acts of both.  Thus, if either the corporation or shareholder is bound by a contract, judgment, or otherwise, both the corporation and the shareholder will be equally bound.

On June 27, a massive ransomware attack now known as “Petya” spread across the globe in a similar fashion to the WannaCry cyberattack in May. In our recent Privacy & Data Security alert, Fox Chief Privacy Officer and Partner Mark McCreary breaks down what we know about the attack, how to address it if your organization falls victim to it, and how to minimize the risks of future attacks:

Petya Cyberattack ScreenshotYesterday’s worldwide cyberattack once again exploited a vulnerability that has been known to experts for many months. These attacks are sure to continue and the best defense is knowledge. Awareness of how malware works and employee training to avoid the human error that may trigger an infection can prevent your organization from becoming a victim.

This latest ransomware variant, referred to as “Petya,” is similar in many respects to the “WannaCry” ransomware that affected hundreds of thousands of computers in mid-May, using the same Eternal Blue exploit to infect computers. The purpose of this Alert is to provide you some information believed or known at this time.

How Is a Computer Infected?

Experts believe the Petya malware is delivered in a Word document attached to an email. Once initiated by opening the Microsoft Word document, an unprotected computer becomes infected and the entire hard drive on that computer is encrypted by the program. This is notably different from WannaCry, which encrypted only files.

Once Petya is initiated, it begins seeking other unprotected computers in the same network to infect. It is not necessary to open the infected Microsoft Word document on each computer. An infection can occur by the malware spreading through a network environment.

To read Mark’s full discussion of the Petya attack, please visit the Fox Rothschild website.

Mark also notes that “I continue to stress to clients that in addition to hardening your IT resources, the absolute best thing your business can do is train employees how to detect and avoid malware and phishing.  In-person, annual privacy and security training is the best way to accomplish this.”

I previously blogged on the spoliation of evidence in Florida courts.  In federal cases, federal law governs the imposition of sanctions for spoliation of evidence.  Federal courts may consider state law in deciding whether to impose sanctions for spoliation, so long as it is consistent with federal law.

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Copyright: andreypopov / 123RF Stock Photo

In the Eleventh Circuit, the duty to preserve evidence arises when litigation is “pending or reasonably foreseeable.”  A party must preserve all relevant documents, including electronic communications like emails and text messages, once litigation is reasonably anticipated.

If a party fails to preserve evidence, a federal court may presume, or instruct the jury to presume, the information was unfavorable to the party.  This is known as an adverse inference instruction.

In the Eleventh Circuit, an adverse inference will be drawn “only when the absence of that evidence is predicated on bad faith.”  Federal courts will examine the circumstances surrounding the missing evidence to determine whether the party acted in bad faith.

To satisfy the bad faith requirement, the party must have acted with more than “mere negligence.”  The party does not necessarily have to act with malice for the absence of evidence to be predicated on bad faith, although malice is relevant to the degree of the party’s culpability.

Recently, the US District Court for the Southern District of Florida determined that a company’s failure to preserve the plaintiff’s employment application warranted an adverse inference instruction in an employment discrimination case.  However, the Court also recently found that a defendant’s failure to preserve text messages, despite a clear obligation to do so, was at worst negligent and did not warrant an adverse inference instruction.

Other sanctions that may be imposed due to a party’s spoliation of evidence include a dismissal of the action or entry of a default judgment.  As a result, once litigation is reasonably anticipated, even if not then pending, parties should take reasonable measures to preserve all relevant evidence, including text messages, to avoid an adverse inference sanction, or worse.

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“You have been served” – the famous phrase uttered by process servers everywhere, may never be heard by a bankruptcy defendant.

Why?

Well, Bankruptcy Rule 7004 bestows the rare privilege of nationwide service of process by FIRST CLASS U.S. MAIL of a Summons and Complaint on defendants (with a few exceptions).   In bankruptcy cases, a Summons and Complaint that comes in the mail is just as valid as if a process server knocked on your front door, handed you the lawsuit, looked you in the face and said, “you have been served.”

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Bankruptcy adversary proceedings move quickly, and generally an adversary defendant only has 30 days after the date of the issuance (not mailing, not receipt) of the Summons to respond to the Complaint.  A Scheduling Order often accompanies the Summons and Complaint and outlines all the substantive deadlines for discovery and trial leading up to the pretrial conference, which is generally within 90 days.

Accordingly, if you are served with a Summons in a bankruptcy case, notifying you that an adversary proceeding has been filed against you, best take it seriously and seek out legal advice from a qualified bankruptcy attorney as soon as possible!

  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

In Florida, the economic loss rule previously prevented parties who allocated their risks and remedies in a contract from bringing a tort action.  For many years, the economic loss rule only applied in two circumstances:

  1. When the parties negotiated remedies in a contract, and
  2. In products liability cases, when the defective product damaged only itself and not persons or other property.

Although seemingly straightforward, the rule proved problematic, as courts had difficulty determining when the rule barred a tort action between contracting parties.  As a result, numerous exceptions were created, such as in cases involving professional malpractice and negligent misrepresentation.

Then, in 2013, the Florida Supreme Court amended the economic loss rule.  In Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc., the Court receded from prior case law and held that the economic loss rule only applied to products liability cases.  The Court recognized the confusion surrounding the rule, stating that “its application and parameters are somewhat ill-defined.”

The Court focused on the origin of the rule and explained that it was intended to prohibit a party from bringing a tort action to recover purely economic losses to a product because contract, rather than tort, principles were more appropriate to resolve economic loss without personal injury or property damage.  The Court believed there had been an

unprincipled extension of the rule.

Although the Court in prior decisions tried to return the economic loss rule to its original purpose, it felt it simply had not gone far enough and held:

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Copyright: sifotography / 123RF Stock Photo

we now take this final step and hold that the economic loss rule applies only in the products liability context.

 

Many have interpreted the Court’s decision as an unsettling of Florida law, including Justice Canady in his dissenting opinion, who, along with critics of the decision, believe it undermined contract law while expanding tort law.  However, proponents of the decision believe it will have little impact on contract law.  As Justice Pariente stated in a concurring opinion:

“The majority’s conclusion that the economic loss rule is limited to the products liability context does not undermine Florida’s contract law or provide for an expansion in viable tort claims.  Basic common law principles already restrict the remedies available to parties who have specifically negotiated for those remedies, and, contrary to the assertions raised in dissent, our clarification of the economic loss rule’s applicability does nothing to alter these common law concepts.  For example, in order to bring a valid tort claim, a party still must demonstrate that all of the required elements for the cause of action are satisfied, including that the tort is independent of any breach of contract claim.“

(emphasis added).

Since the Court’s decision in Tiara, both state and federal courts deciding cases under Florida law have cited to Justice Pariente’s concurrence and required parties to show that the alleged tort is independent of any breach of contract claim.  Courts will continue to dismiss tort actions if they are “basically a repackaged breach of contract claim.”

In practice, it appears that more and more plaintiffs will be able to survive the dismissal stage post-Tiara by pleading an independent tort in a complaint.  Although the economic loss rule no longer applies to actions between contracting parties, the independent tort doctrine is alive and well in Florida and should continue to act as a barrier to tort actions brought simply to circumvent contract remedies.  Thus, depending on the stage of litigation, parties should move for dismissal, summary judgment, and directed verdict based on the independent tort doctrine if it becomes apparent that the damages sought in tort are identical to the damages for breach of contract.

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Punitive damages may be awarded in civil actions as a form of punishment to deter others from engaging in conduct similar to the defendant.  Punitive damages are only available for certain claims, such as intentional torts, and only if the defendant is personally guilty of the misconduct.  Actions for tortious interference, conversion, and other business torts may give rise to an award of punitive damages.

 

Before a claim for punitive damages may be asserted, Section 768.72 of the Florida Statutes requires “a reasonable showing by evidence in the record or proffered by the claimant which would provide a reasonable basis for recovery of such damages.”  In other words, a defendant cannot be subject to a claim for punitive damages, and financial worth discovery, unless and until the trial court determines that there is a reasonable evidentiary basis to recover punitive damages. The plaintiff must seek leave to amend the complaint and proffer a reasonable evidentiary basis for punitive damages before the court.

The Fourth DCA recently confirmed that the Florida statute requires more than mere allegations and stated:

an evaluation of the evidentiary showing required by section 768.72 does not contemplate the trial court simply accepting the allegations in a complaint or motion to amend as true.

Instead, trial courts must determine whether the plaintiff established a reasonable evidentiary basis to recover punitive damages and to show that the misconduct rises to a level of culpability that supports punishment.  Without such a showing, a claim for punitive damages is precluded.

Defendants faced with claims for punitive damages should closely scrutinize whether the plaintiff has established the necessary evidentiary basis and be prepared to challenge any unsupported claims.

 

Contractual forum selection clauses may be “mandatory” or “permissive”.  However, there are times when a forum selection clause that appears to be permissive is actually mandatory.  Florida’s Third District Court of Appeal recently addressed such a situation in Quick Cash, LLC, v. Tradenet Enterprises Inc., 3rd DCA Case No. 3D16-1640 (Fla. 3d DCA Feb. 22, 2017).

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In Quick Cash, the Third DCA was asked to consider whether this clause required the parties to litigate in California:

This purchase order shall be deemed entered into and performed in the State of California and Buyer consents to the jurisdiction of the State of California for purposes of enforcement of the terms hereof.

The Court noted that there are no “magic words” that need to be used to make a forum selection clause mandatory, but stated that:

the test is whether, when read as a whole, the forum selection clause indicates that the parties intended to try a case in the specified forum and to the exclusion of all others.

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Finding that allowing the case to proceed in Florida would “render meaningless” the exclusivity language in the forum selection clause, the Court ruled that the trial court properly dismissed the case for lack of jurisdiction and improper venue.  So, while no specific language is required to make a forum selection clause mandatory, viewing such a clause in a way that makes “words of exclusivity” meaningless is not proper.

Copyright: pockygallery / 123RF Stock Photo
Copyright: pockygallery / 123RF Stock Photo

In Florida, the duty to preserve evidence relevant to a case may arise long before a complaint is filed.  A party’s duty to preserve evidence is triggered once litigation is reasonably anticipated.  The duty extends to any evidence that a party:

  • knows, or
  • reasonably should know

is relevant to the anticipated action, including electronically stored information.

The failure to preserve relevant evidence, also known as the spoliation of evidence, may result in the imposition of sanctions and a rebuttable presumption shifting the burden of proof in the underlying action.  A court may exercise a “leveling mechanism” due to the spoliation of evidence if it finds that:

  • the evidence existed at one time;
  • the party had a duty to preserve the evidence; and
  • the evidence was critical to the opposing party’s ability to prove its prima facie case or defense.

Under Rule 1.380(e) of the Florida Rules of Civil Procedure, a party cannot be sanctioned for the failure to produce electronically stored information that was lost due to the “routine, good faith operation of an electronic information system.”  However, the Committee Notes to Rule 1.380 are clear that a party cannot avoid discovery obligations by allowing relevant evidence to be destroyed in the routine operation of an electronic information system.

To avoid becoming a spolier, companies and other large institutions that routinely destroy electronically stored information, such as emails, should consider implementing procedures to save and preserve relevant electronic information.

Can a foreclosure sale be held when interrelated counterclaims remain pending?  Florida’s Second District Court of Appeal recently addressed this issue in DeLong v. Paradise Lakes Condominium Association, Inc., 2nd DCA Case No. 2D16-547 (Fla. 2nd DCA Feb. 22, 2017).

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In DeLong, a condominium association was granted a summary final judgment of foreclosure.  However, the condominium Owner’s interrelated counterclaims had not been resolved.  Accordingly, the appellate court found that the Association’s summary final judgment was neither final, nor appealable.

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The Second DCA, treating the appeal as a proceeding for writ of certiorari, concluded that the trial court

departed from the essential requirements of law when it authorized the sale of the property prior to the rendition of an appealable final judgment … .

DeLong should serve as a reminder that a foreclosure sale may not proceed until a final appealable order has been entered and all interrelated claims have been resolved.