An interesting case came out of Florida’s Fourth District Court of Appeal that touches upon two important points.
First, the independent tort doctrine does not apply when there is not a contract between the parties.
Second, an officer cannot escape fraud simply by claiming his or her actions were done as an officer of the company when he or she actively participated in the fraud.
Both of these points are best explained by initially going into the facts of this case. As you will see, the Court’s rationale relates to the premise that a party should not be able to skirt out of the very fraud it perpetrates.
Costa Investors, LLC v. Liberty Grande, LLC, 48 Fla.L.Weekly D7b (Fla. 4th DCA 2022) involved the ultimate development and construction of four adjacent properties into the Costa Hollywood Hotel. The properties were purchased by a company called Liberty Grande. Its president / manager was also the president of Liberty Grande’s wholly owned subsidiary called Costa Hollywood Property. Liberty Grande transferred the properties to Costa Hollywood Property and the deed was signed by the president / manager.
Shortly after the properties were transferred to Costa Hollywood Property, a group of investors (EB-5 investors) entered into a loan agreement with Liberty Grande for the development of the Costa Hollywood Hotel. The investors were granted a security interest and mortgage in consideration for the loan. However, the real properties at-issue subject to the loan and security interest were the properties Liberty Grande previously transferred to its wholly owned subsidiary, Costa Hollywood Property. The loan agreement was signed by the president / manager.
Liberty Grande defaulted under its loan agreement with its investors. The investors learned that Liberty Grande’s president / manager’s representation that Liberty Grande owned the properties at the time of the loan agreement was untrue. The investors filed an affidavit in the official records with a copy of the loan agreement stating they entered into the loan agreement for the development of the properties.
Costa Hollywood Property sued the investors for slander of title due to the recording of the affidavit. The investors filed a third-party complaint against Liberty Grande and its president / manager. The investors claimed the president / manager committed fraud.
The president / manager moved for summary judgment arguing the fraud claim should be barred by the independent tort doctrine and because the president / manager was not a party to the loan agreement in his individual capacity. The trial court granted summary judgment for the president / manager. This was reversed on appeal.
Fourth District Court of Appeal’s Opinion on Two Important Points
First, the Fourth District Court of Appeal held that the independent tort doctrine did NOT apply in this context.
The independent tort doctrine is a general principle of law that provides “a plaintiff may not recover in tort for a contract dispute unless the tort is independent of any breach of contract.” “This principle only applies, however, to the parties to the contract.”
Here, as [the president / manager] stated below in his statement of undisputed facts and as is apparent from the loan agreement, he was only the signatory for Liberty [Grande]; he was not a party to the Agreement. Accordingly, the trial court’s reliance on the independent tort doctrine to determine that [the president / manager] was not liable was error.
Instead, the court should have analyzed the complaint to determine whether the evidence was sufficient to show that fraud occurred and whether [the president / manager] could be liable for fraud or negligent conduct when he actively participated in the fraud, even when he signed as a corporate officer.
Costa Investors, LLC, supra (internal citations omitted).
Second, the Fourth District Court of Appeal held that the president / manager was NOT excused from fraud simply because he signed the loan agreement in an officer (versus personal) capacity.
“As a general rule, ‘a false statement of fact, to be a ground for fraud, must be of a past or existing fact, not a promise to do something in the future.’ ” “[F]raudulent (‘knowingly false’) representations . . . of a present fact . . . constitute[ ] fraud in the inducement.”
The agreement and Borrower’s Certificate, both signed by [the president / manager] on behalf of Liberty [Grande], made false statements of “existing fact.” Prior to [the president / manager] signing those documents on behalf of Liberty [Grande], he had previously transferred title to the [properties] from Liberty [Grande] to another one of his entities, Costa Hollywood Property. The agreement represented Liberty [Grande] as the owner of [the properties] which was an existing false statement of fact, and the agreement falsely purported to give [the investors] a security interest and mortgage on the [properties]. The Borrower’s Certificate, which [the president / manager] also signed on behalf of Liberty [Grande], made additional false statements of existing fact, including that “all ‘representations and warranties’ made by Liberty [Grande] in the loan agreement were “true and correct in all material respects.” Thus, [the president / manager] was not entitled to summary judgment based upon the court’s conclusion that [he] had not made any false statements of material fact.
The central question is whether [the president / manager] can be held individually liable for this fraud evidenced by the agreement and certificate when he signed as the corporate officer of Liberty [Grande]. We hold that he can.
Generally, courts have applied an “active participation theory” in holding officers and directors individually liable when they actively participated in the torts of the corporation. “Under the participation theory, the court imposes liability on the individual as an actor rather than as an owner . . . not predicated on a finding that the corporation is a sham and a mere alter ego of the individual corporate officer.” “Instead, liability attaches where the record establishes the individual’s participation in the tortious activity.”
[The president / manager] actively participated in the wrong, i.e., fraud and misrepresentation, by signing the agreement and Borrower’s Certificate purporting to show Liberty [Grande] as the owner of [the properties] when [he] had, on behalf of Liberty [Grande], previously transferred the title from Liberty [Grande] to another one of his entities. [The president / manager] actively participated in offering to [the investors] in the agreement a “security interest, Lien and mortgage” in the “assets that comprise the Project” including “the Land and Improvements thereon” in order to obtain loans from [the investors]. Under the active participation theory, [the president / manager] can be personally liable for his fraudulent statements even though he signed on behalf of Liberty [Grande]. Otherwise, [the president / manager] would be able to perpetrate this flagrant fraud and escape liability behind the shield of his representative character.
Costa Investors, LLC, supra (internal citations omitted).
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