Basic Fiduciary Duties Owed in Florida Professional Service Provider Companies
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Professional service providers in the state of Florida find themselves in precarious legal situations often given the nature of their work. Because these companies are providing advice, consulting, or other services based an employee’s individual qualifications or relationships, there is always an opportunity for the individual to act in his or her own best interest rather than in the interests of the professional service provider company or the client. This article outlines and explains how the basic fiduciary duties owed in Florida professional service provider companies are no different than the duties owed in other Florida corporate entities, navigating the overlapping statutory and judge-made law influencing the industry.
Introduction to Fiduciary Duties
Fiduciary duties sound complicated because of the obscure word “fiduciary,” but understanding this word can make these duties easier to understand. This word “fiduciary” has been used since the 16th century because it describes a concept that is so fundamental to our modern society: trust.
Simply stated, whenever someone is in a position where another person places trust in the former’s execution of some objective, then that person can be considered a fiduciary. If you consider what you would expect of a friend that you trust, you begin to approach what the law recognizes as fiduciary duties. We expect our friends to try their best and to be careful when they help us, and we expect our friends to be loyal to us by refusing opportunities to act against our interests. The law is not much more complicated than that.
Florida’s Statutory Fiduciary Duties Owed to the Company
Florida codified the fiduciary duties which are attached to various corporate actors. These fiduciary duty statutes are present in multiple chapters affecting different corporate entities, but their contents remain largely similar.
Statutes regulating professional service provider companies are found in Florida Statutes Chapter 621. To be clear, the types of companies that this article refers to as “professional service provider companies” is best explained in the statutory definition of such incorporated companies:
“any type of personal service to the public which requires as a condition precedent to the rendering of such service the obtaining of a license or other legal authorization. By way of example…certified public accountants, public accountants, chiropractic physicians, dentists, osteopathic physicians, physicians and surgeons, doctors of medicine, doctors of dentistry, podiatric physicians, chiropodists, architects, veterinarians, attorneys at law, and life insurance agents.”
However, unlike the other corporate entity chapters, Chapter 621 does not contain any enumerated fiduciary duties applicable to professional service provider companies. But this does not mean that professional service provider company employees are free from owing any fiduciary duties.
Instead of an explicit statute addressing fiduciary duties in these companies, Florida Statutes Section 621.07 reaffirms that “any officer, agent, member, manager, or employee of a [professional service provider company] shall be personally liable and accountable only for negligent or wrongful acts or misconduct committed by that person, or by any person under that person’s direct supervision and control, while rendering professional service on behalf of the corporation or limited liability company to the person for whom such professional services were being rendered.” Furthermore, Florida Statutes Section 621.13 expressly states that the statutes applying to other incorporated entities, Chapter 607 (corporations) and Chapter 605 (limited liability companies), are nevertheless applicable to professional service provider companies organized under Chapter 621. Finally, Florida Statutes Section 621.14 instructs the courts how to interpret Chapter 621, saying:
“[t]he provisions of this act shall not be construed as repealing, modifying, or restricting the applicable provisions of law…regulating the several professions enumerated in this act except insofar as such laws conflict with the provisions of this act.”
The significance of Section 621.14 is that it also requires professional service provider partnerships to be subject to regulations under Chapter 620. Sections 621.07, 621.13, and 621.14, when read together, lead to the conclusion that professional service provider companies are subject to the fiduciary duties which are imposed upon the actors of the same corporate entity constituting the professional service provider company.
The fiduciary duties owed by an actor are similar across all entities but do vary slightly. The chart below lists the fiduciary duties owed given the different corporate structures:
|Corporations||1) Obligated to act in good faith and in a manner the director reasonably believes to be in the best interests of the corporation
2) Duty to exercise care “that an ordinary prudent person in a like position would reasonably believe appropriate”
3) Entitled to rely on information or performance prepared by competent employees, legal counsel, accountants, or other experts
4) Entitled to consider long-term ramifications of strategic decisions and effects to the neighboring communities
5) Officers are subject to the duty to inform superior officers or the board of material information, including any actual or probable violation of law or breach of duty involving the corporation
|Limited Liability Companies (“LLCs”)
Fla. Stat. § 605.04091 (2015)
|1) Duty of loyalty to the LLC and members of the LLC, including:
2) Duty of care which “is to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law”
3) Obligation to discharge the duties of the LLC with good faith
4) Entitled to rely on information or performance prepared by competent employees, legal counsel, accountants, or other experts
5) Entitled to consider long-term ramifications of strategic decisions and effects to the neighboring communities
Fla. Stat. § 620.1408 (2006)
|1) Duty of loyalty to the partnership and other partners, including:
2) Duty to of care that is “limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law” (italics added)
3) Obligation to discharge the duties of the partnership with good faith
Given the Florida Legislature’s clear intent to define the standards of conduct and fiduciary duties owed by employees of various corporate entities, it seems that the courts would simply apply these standards when evaluating whether fiduciary duties have been breached. But do the courts exclusively rely on the statutory duties?
In 2015, the Legislature amended the LLC statutes expressly allowing the courts to utilize judge-made case law when analyzing fiduciary duties applied to LLCs. Louis T. M. Conti, Un-Cabined Fiduciary Duties in Florida LLCs: The Common Law and Equity Opens the Door to Expanded Liability and the Manifestly Unreasonable Standard, The Florida Bar Journal (2017) (citing Fla. Stat. § 605.0111(3) (2015) (“Unless displaced by particular provisions of this chapter, the principles of law and equity, including the common law principles relating to the fiduciary duties of loyalty and care, supplement this chapter.”)).
It should be noted that although Florida Statutes Section 605.0111(3) undermines the exclusive authority of the statutory fiduciary duties defined in the LLC regulations, it does not undermine the exclusive authority of the fiduciary duties regulating other corporate entities.
Fiduciary Duties Applied in the Courts
The statutory duties lay the groundwork for the caselaw that analyzes fiduciary duties in the state of Florida. The following cases demonstrate how those fiduciary duties are applied in the courts, and demonstrate that the courts are not consistently following the same analytical framework.
Fiduciary Duties of a Professional Service Provider LLC: In re DeMasi
In re DeMasi provides an example of fiduciary duties that apply to Florida professional service provider firms. In DeMasi, two medical practices, Gulf Coast Endoscopy Center of Vince, LLC (“GCEC”) and Anesthesia Associates of Southwest Florida, LLC (“Anesthesia Associates”), were started in 1999 and 2000, respectively, by five (5) doctors. In re DeMasi, 542 B.R. 13, 17 (Bankr. M.D. Fla. 2015). Dr. DeMasi served initially on the board of directors for both medical practices, but then just as a Co-Medical Director of GCEC. Id. at 17. In 2002, GCEC began working with Surgical Support Services, LLC. (“SSS”), a management company that oversaw GCEC’s billing and collections operations. Id. at 18.
Eventually, SSS was audited to determine whether they were performing well as GCEC’s collectors. The audit was initially reported favorably to the GCEC board of directors in February 2004, but that report came before the audit was completed in March 2004. Id. at 18-19. The March 2004 results of the audit showed that SSS was not performing well for GCEC. Id. at 18-19. Dr, DeMasi eventually received this unfavorable report, but refrained from informing the board of the report’s true contents. Id. at 19.
In April 2005, Dr. DeMasi met with SSS’s parent company, Surgical Synergies, Inc. (“SSI”), to discuss a joint venture with Dr. DeMasi’s newly formed company, named Surgical Synergies Endoscopy, LLC (“SSE”). Id. at 19-20. Dr. DeMasi would profit whenever SSE signed up an endoscopic surgery center for SSI. Id. at 23. The plaintiffs alleged that GCEC was SSI’s only endoscopic surgery center, and because SSE could not market itself to other endoscopic surgery centers if it lost its only client, that Dr. DeMasi had a conflict of interest with GCEC which forced him to hide SSS’s poor performance and his relationship with SSE. Id. at 23.
Dr. DeMasi agreed with the plaintiffs that he owed GCEC the fiduciary duties of loyalty, care and good faith because he was one of GCEC’s managing members. Id. at 29. The court looked to Florida Statutes 608 as a starting point. Id. at 29 (noting that the timing of the facts of the case required the court to consider the repealed Chapter 608 rather than the effective Chapter 605, mentioning also that there is no material difference between the two chapters in the sections at issue). Specifically, the court noted how the statute limits the duty of loyalty to “refraining from dealing with the Plaintiffs on behalf of an adverse party or competing with the Plaintiffs before dissolution.” Id. at 29. Furthermore, the duty of good faith is not violated “merely because his conduct furthers his own interest.” Id. at 29.
The court also engages in interpretation of the LLC’s operating agreement to determine whether Dr. DeMasi violated his fiduciary duties. This is because, the court reasons, “[w]hile limited liability company members may not agree to eliminate any of those duties by contract, they may limit them in their operating agreement.” Id. at 29. The GCEC and Anesthesia Associates operating agreements provided that “no member is obligated to present his own investment opportunities to GCEC or Anesthesia Associates.” Id. at 29-30.
The court found that Dr. DeMasi did not violate his fiduciary duties when he failed to disclose the unfavorable SSS audit to the GCEC board. Id. at 30. Dr, DeMasi disclosed three (3) audits of SSS to the board, and although he withheld the second audit in that group, the court relied on the fact that he did disclose the third audit which was no more favorable than the second audit that he withheld. Id. at 30. So, Dr. DeMasi ultimately did not withhold the unfavorable nature of SSS’s services from the GCEC board. Furthermore, the court did not believe the plaintiffs’ assertion that Dr. DeMasi withheld his relationship with SSE from the GCEC board, because he disclosed to the board in October 2005 that he intended to engage in business to help manage and develop surgical centers with SSI. Id. at 20, 30.
The court decided that Dr. DeMasi did not breach his fiduciary duties to GCEC because of the language in the operating agreement allowing members to participate in other business ventures, the Florida Statutes expressly disallowing breach simply because members take actions that further their own interests, and because Dr. DeMasi would only benefit from GCEC’s financial success which would propel his allegedly illegal business partner, SSS, to collect and remit more bills. Id. at 30-31. Dr. DeMasi’s interests, therefore, were always consistent with GCEC’s.
Furthermore, the court relied on evidence from trial to solidify its holding that no duties were breached. The court noted how Dr. DeMasi advocated to keep SSI and SSS as GCEC’s and Anesthesia Associates’s management companies not because of his own financial interests but because: 1) the Plaintiffs initially managed their own centers and experienced significant problems; 2) Dr. DeMasi held a philosophical belief that the centers should be managed by a management company; and 3) the Plaintiffs threatened to terminate SSI’s management agreements unless there was improvements in collections, and in response, SSI made improvements. Id. at 31. The court believed it may have been more likely that Dr. DeMasi kept SSI and SSS on board because it was in the Plaintiffs’ best interest than because he had any financial gain. Id. at 31. Thus, the plaintiffs failed to prove that Dr. DeMasi breached his fiduciary duties. Id. at 31.
This first case involves a co-founder of a professional service provider company, Dr. DeMasi, who starts a second professional service provider company which benefits from his first company that he founded. Although the court finds that Dr. DeMasi did not violate any fiduciary duties, one could argue that Dr. DeMasi was only let off the hook because his first company was not significantly harmed by his dealings with his second company. Had the facts of In re DeMasi been different, it is an open question how the court would resolve the issue.
Fiduciary Duties of Surviving Termination: Rehabilitation Advisors, Inc. v. Floyd
Although the court in DeMasi found that there was no breach of loyalty or good faith, some co-founders, or directors may be liable for breaching their duties even after the expiration of their employment with the company. Two women, Floyd and Reid, started Rehabilitation Advisors, Inc. (“Rehab”) in 1981. Rehabilitation Advisors, Inc. v. Floyd, 601 So.2d 1286 (Fla. 5th DCA 1992). However, over time their relationship deteriorated, and Floyd agreed to sell her interest in Rehab to Reid on October 1, 1990. Id. at 1287.
On November 7, 1990, one of Rehab’s partner companies, Claims Center, informed Floyd that Rehab was no longer on their approved list of companies to receive referrals. Id. at 1287. This was a significant blow for Rehab. For years Rehab had received “approximately 70% of its revenues from Claims Center referrals.” Id. at 1287. Although the parties have conflicting testimony, Reid claims that after the meeting Floyd reported that “the meeting went fine and that she was to call [Claims Center] ‘about the change in highlighting certain counselors to get cases.’” Id. at 1287.
On November 14, 1990, Rehab redeemed Floyd’s stock to execute her departure from the company. Id. at 1287. The agreement for redemption provided for a full disclosure. Id. at 1287. It was not until January 1991 that Reid contacted Claims Center and discovered that Rehab was taken of the approved list of referrals. Id. at 1287. Reid filed a complaint alleging Floyd had breached her fiduciary duty to Rehab by failing to disclose that information. Id. at 1287.
The trial court granted Floyd’s motion for a directed verdict, finding that the October 1, 1990 agreement to terminate her employment at Rehab rendered Floyd’s conduct after October 1st immaterial, therefore diminishing the value of Floyd learning the detrimental information about Claims Center’s changed list on November 7, 1990. Id. at 1288. The 5th District Court of Appeals disagreed, however, holding that “Floyd, pursuant to her status as an officer and director of Rehab, had a fiduciary duty to inform Rehab of the Claims Center’s decision to remove Rehab from their approved list.” Id. at 1288.
The court relied on Florida Statutes Section 607.0830(1), which requires corporate directors to act in good faith, with the care an ordinarily prudent person in a like position would exercise, and in a manner that she reasonably believes to be in the best interests of the corporation. Id. at 1288. According to the court, the existence of the agreement to terminate her interest in the corporation did not extinguish her fiduciary duties to Rehab as an officer and director. Id. at 1288. Given these duties, the court believed that it “logically follows that Floyd had a duty to inform Rehab of the Claims Center’s decision to eliminate Rehab from its approved list.” Id. at 1288.
This second case arises from one disgruntled director who withholds some critical information from her co-founder just after she is cut out of the business. The court finds that there is enough evidence to overcome a motion for directed verdict. Is disallowing a disgruntled director to withhold information to the detriment of the company, even after being terminated, bad policy or a simply a cost of doing business and “burning bridges?” The court in Floyd held that it was a breach of fiduciary duties, but what makes Floyd different from DeMasi?
Staying on Top of Fiduciary Duties Owed to Professional Service Provider Companies
When reading the sections of Florida Statutes Chapter 621 together, it becomes clear that professional service provider companies are owed the same fiduciary duties owed to other corporate entities that are covered by Florida statutes. Because of this reality, employees, managers, directors, partners, and others need to understand the fiduciary duties that are owed to their particular corporate entity.
Although each Florida Statutes chapter regulating corporate entities has its own section enumerating specific fiduciary duties, all fiduciary duties cover similar ground with only minor differences. Generally speaking, the duties of care, loyalty, and an obligation to act in good faith, will always be present.
Knowing how a court will come down on certain actions is not predictable. A DeMasi court may poke and prod through the facts to determine where an actor’s interests are aligned. As noted in that case, a founder of two companies can gain benefit from both companies interacting with each other and not violate fiduciary duties owed to a former company as long as his objectives beneficially advance that company’s interests. Yet in Floyd, a court skips this interest-balancing analysis entirely and just focuses on what duties were owed. If a certain action, like disclosing detrimental information, “logically flows” from the director’s duty, then failing to disclose that detrimental information qualifies as a breach of her fiduciary duty.
What to Consider for Today’s Challenges
The development of COVID-19 has radically shaken up the workplace as we know it. Many professional service providers, like consulting firms or even lawyers, can operate from home without losing much effectiveness. Other professional service companies work in industries that necessitate physical interaction or operational spaces, like doctors and engineers. Navigating that boundary between needing to return to the office or taking more time at home can be difficult.
Adding to the anxiety that comes with this uncertainty, there could be a significant cost to making the wrong decision. Lawsuits are being filed all over the country against entities alleging that they negligently or wrongfully exposed their employees, agents, or clients to the Coronavirus. Furthermore, where legislative protections have not been codified, directors or key decisionmakers could be sued if their decisions are perceived to cut against their company and not serve its “best interests” as required by statute.
Fortunately, strong attorneys know how to navigate Florida’s fiduciary duty statutory framework and can utilize some of the provisions outlined in the chart above. Managers and directors should lean into the provisions of Chapters 605 and 607 which allow them to rely on opinions or information from experts to make their decisions. Beyond that, provisions mentioned in the chart above allow decisionmakers to consider the ramifications on the neighboring community and on our nation. Even partners can find solace in the “limited” duty of care enumerated in Chapter 620, merely requiring them to avoid gross negligence or reckless conduct, intentional misconduct, or a knowing violation of law. With effective advocacy, these provisions can be critical components to a defense strategy if these business and welfare decisions come under scrutiny.
To be most adequately prepared to tackle all of these issues stemming from fiduciary duties as they arise, and to write operating agreements that can truly determine the outcomes of future litigation (as in DeMais), professional service provider companies should obtain knowledgeable legal counsel that can tip the scales in their favor.