florida book 2 8-4-17 - celebration bar review · 2018-09-18 · ©1995-2017celebration bar review,...

©1995-2017Celebration Bar Review, LLC Florida Book 2

Celebration Bar Review

Florida Outline Book 2

©1995-2018 Celebration Bar Review, LLC ALL RIGHTS RESERVED No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publishers.

©1995-2018 Celebration Bar Review, LLC Florida Book 2

This book is printed for the exclusive use of:

This Registered Celebration Bar Review Student

And may not be used by any other person without written permission of Celebration Bar Review. No Resale Permitted

©1995-2018 Celebration Bar Review, LLC Florida Book 2 3

TABLE OF CONTENTS

DOMESTIC RELATIONS 8 I. BEFORE MARRIAGE 8

A. CONTRACT TO MARRY 8 B. PROPERTY RIGHTS IN ENGAGEMENT RING 8 C. ANTENUPTIAL AGREEMENTS 8

II. MARRIAGE 10 A. LEGAL FORMALITIES 10 B. IMPEDIMENTS TO A VALID MARRIAGE 11 C. VALIDITY OF FOREIGN MARRIAGES 12 D. NULLITY AND ANNULMENT 13

III. LEGAL INCIDENTS OF THE MARITAL OR FAMILY RELATIONSHIP 17 A. HUSBAND AND WIFE 17 B. PARENTS AND CHILDREN 24

IV. DEPENDENCY 30 A. GENERAL ISSUES 30 B. PROTECTIVE INVESTIGATIONS 35 C. TAKING CHILDREN INTO CUSTODY AND SHELTER HEARINGS 37 D. PETITION FOR DEPENDENCY 40 E. ARRAIGNMENT HEARING 42 F. ADJUDICATORY HEARING 43 G. DISPOSITION HEARING 44 H. CASE PLAN APPROVAL 45 I. PERMANENCY HEARING 47 J. JUDICIAL REVIEWS 49 K. TERMINATION OF PARENTAL RIGHTS ADVISORY HEARING 49 L. ADOPTION 55

V. SEPARATE MAINTENANCE AND DISSOLUTION OF MARRIAGE 61 A. JURISDICTION AND VENUE 61 B. PROCEDURE 62 C. SEPARATE MAINTENANCE 63 D. DISSOLUTION OF MARRIAGE 66

VI. THE DISSOLUTION OF MARRIAGE DECREE 68 A. SEPARATION AND SUPPORT AGREEMENTS 68 B. EQUITABLE DISTRIBUTION 70 C. ALIMONY 77 D. CHILD SUPPORT AND CUSTODY 84


VII. EXTRATERRITORIAL RECOGNITION OF FOREIGN DIVORCE DECREES AND ORDERS 91

A. FULL FAITH AND CREDIT FOR FOREIGN DIVORCES 91 B. ENFORCEMENT/MODIFICATION OF FOREIGN SUPPORT DECREES 93 C. ENFORCEMENT AND MODIFICATION OF FOREIGN CHILD CUSTODY

ORDERS 94

BUSINESS ENTITIES 96 I. PARTNERSHIP 96

A. DEFINITION OF A PARTNERSHIP 96 B. FORMATION 96 C. LIABILITIES OF PARTNERS TO THIRD PARTIES 101 D. RELATIONS OF PARTNERS TO ONE ANOTHER 104 E. PARTNERSHIP PROPERTY AND PROPERTY RIGHTS 109 F. DISSOCIATION OF A PARTNER 112 G. DISSOLUTION AND WINDING UP 114

II. LIMITED PARTNERSHIPS 120 A. FORMATION 121 B. RIGHTS, POWERS AND LIABILITIES OF A LIMITED PARTNER 124 C. RIGHTS, POWERS AND LIABILITIES OF A GENERAL PARTNER 128 D. CANCELLATION/AMENDMENT/RESTATEMENT OF CERTIFICATE 129 E. DISSOLUTION AND DISTRIBUTION OF ASSETS 130 F. DISSOCIATED PARTNER’S ABILITY TO BIND LIMITED PARTNERSHIP131 G. FOREIGN LIMITED PARTNERSHIPS 131 H. ADDITIONAL PROVISIONS REGARDING PARTNERSHIPS AND LIMITED

PARTNERSHIPS/CONVERSIONS AND MERGERS 131 I. LIMITED LIABILITY PARTNERSHIPS 133

III. BUSINESS TRUSTS 133 IV. BUSINESS CORPORATIONS 135

A. PROMOTERS 136 B. INCORPORATORS AND THE INCORPORATION PROCESS 140 C. SHAREHOLDERS 152 D. DIRECTORS 176 E. OFFICERS 197 F. FUNDAMENTAL CORPORATE CHANGES 205 G. SHARE TRANSFER RESTRICTIONS 215 H. PREEMPTIVE RIGHTS 217 I. DEADLOCK AND LIQUIDATION 217 J. DISSOLUTION 217

V. FOREIGN CORPORATIONS 222 VI. CLOSE CORPORATIONS 224

A. INTRODUCTION 224 B. HIGH VOTE REQUIREMENTS 224


C. SHAREHOLDER MANAGEMENT 224 VII. LIMITED LIABILITY COMPANIES 225

A. INTRODUCTION 225 B. TAX STATUS 225 C. COMPARISON WITH SUBCHAPTER S CORPORATION 226 D. FORMATION 226 E. POWERS 227 F. MANAGEMENT 227 G. COMPANY CAPITAL AND PROPERTY 230 H. RIGHTS AND LIABILITIES OF MEMBERS 232 I. DISSOLUTION 233

UCC ARTICLE 3 237 I. IMPORTANCE OF “NEGOTIABILITY” 237

A. IN GENERAL 237 B. TYPES OF NEGOTIABLE INSTRUMENTS 238 C. REQUIREMENTS OF A NEGOTIABLE INSTRUMENT 240

II. LIABILITY OF THE DEFENDANT 244 A. IN GENERAL—SIGNATURES 244 B. LIABILITY OF THE MAKER OF A NOTE 246 C. LIABILITY OF THE DRAWER OF A DRAFT 247 D. LIABILITY OF THE DRAWEE OF A DRAFT 247 E. ACCOMMODATION PARTIES 248

III. HOLDER IN DUE COURSE 249 A. GENERALLY 249 B. BURDEN OF ESTABLISHING STATUS AS HOLDER IN DUE COURSE 250 C. HOLDER 250 D. VALUE 257 E. GOOD FAITH 258 F. NOTICE OF DISHONOR, OVERDUENESS, DEFENSES, AND CLAIMS 258 G. THE “UMBRELLA” OR “SHELTER” DOCTRINE 262 H. NON-HOLDERS IN POSSESSION 262 I. PERSONS NOT IN POSSESSION 262

IV. RIGHTS OF A HOLDER IN DUE COURSE—REAL AND PERSONAL DEFENSES 263

A. BURDENS OF PROOF 263 B. ADVERSE CLAIMS 264 C. DEFENSES 264 D. REAL DEFENSES 266 E. ALTERATIONS 267 F. FORGERY 268 G. DEFENSE OF ACCOMMODATION PARTIES 269 H. LACK OF DELIVERY 269


V. PERSONS TRANSFERRING A NEGOTIABLE INSTRUMENT 269 A. CONTRACT OF INDORSEMENT—QUALIFIED 269 B. PRESENTMENT, DISHONOR, AND NOTICE OF DISHONOR 270 C. WARRANTIES OF TRANSFEROR 274 D. INDORSERS 274 E. GUARANTORS 275 F. ACCOMMODATION INDORSERS 275

U.C.C. ARTICLE 9 (SECURED TRANSACTIONS) 284 I. SECURED TRANSACTIONS GENERALLY 284

A. NATURE OF SECURED TRANSACTIONS 284 II. CREATING A SECURITY INTEREST 286

A. THE SECURITY AGREEMENT 286 B. POSSESSION/PLEDGE 287 C. ATTACHMENT 288 D. PURCHASE MONEY SECURITY INTERESTS 290

III. TYPES OF COLLATERAL 290 A. NATURE OF COLLATERAL IN GENERAL 290 B. GOODS 291 C. TANGIBLE INTANGIBLES 293 D. INTANGIBLE INTANGIBLES 294 E. INVESTMENT PROPERTY 295

IV. REMEDIES OF THE SECURED PARTY UPON DEBTOR'S DEFAULT 296 A. GENERALLY 296 B. DEFAULT 297 C. OBTAINING POSSESSION 297 D. DEBTOR'S RIGHT TO REDEEM 297 E. SECURED PARTY'S RIGHT TO ACCEPT COLLATERAL IN SATISFACTION OF

OBLIGATION 298 F. DISPOSITION OF THE COLLATERAL BY THE SECURED PARTY 299 G. WAIVER OF DEFENSES CLAUSE 302

V. PERFECTION 302 A. PERFECTION BY FILING 303 B. PERFECTION BY POSSESSION 305 C. PERFECTION BY CONTROL 306 D. AUTOMATIC PERMANENT PERFECTION 307 E. AUTOMATIC TEMPORARY PERFECTION 307 F. GRACE PERIOD FOR PURCHASE MONEY SECURITY INTERESTS 309

VI. OTHER CLAIMANTS 310 A. IN GENERAL 310 B. CREDITORS 310 C. TRANSFEREES 311 D. TRUSTEE IN BANKRUPTCY 313


E. OTHER THIRD PERSONS 315 VII. PRIORITY RULES 315

A. IN GENERAL 315 B. SECURED PARTY VS. OTHER SECURED PARTIES 316 C. SECURED PARTIES VS. UNSECURED CREDITORS 320 D. SECURED PARTY VS. TRANSFEREES OF THE COLLATERAL 322


DOMESTIC RELATIONS I. BEFORE MARRIAGE

A. CONTRACT TO MARRY

Florida has abolished the right to sue for breach of contract to marry. F.S.A. §771.01. Any proceeding or attempt to settle such a claim, whether the cause of action occurred in Florida or in another state, is void as against public policy. Furthermore, a contract to marry entered into in Florida is not enforceable in another state.

B. PROPERTY RIGHTS IN ENGAGEMENT RING The donor of an engagement ring is entitled to recovery of the ring if the engagement is terminated by the donee or by mutual consent of the parties, since the gift of the ring is not absolute but is made upon the implied condition that a marriage will ensue. F.S.A. §771.01, which abolishes actions for breach of contract to marry, does not affect the rights of the parties relative to gifts passing between them. Gill v. Shivley, 320 So.2d 415 (Fla. App. 1975). In the Gill case, the court specifically declined to address the disposition of gifts other than the engagement ring made in contemplation of marriage.

C. ANTENUPTIAL AGREEMENTS 1. Validity in General

Contracts, including antenuptial agreements, intended to facilitate or promote the procurement of a dissolution of marriage are illegal as contrary to public policy. However, antenuptial agreements in which the intended spouses vary rights given by law in the property of the other spouse are enforceable in Florida. Marriage itself is a sufficient consideration to support an antenuptial agreement. In re Pope, 18 B.R. 125 (1982).

Thus, a transfer of property from one spouse to the other in consideration of marriage has been upheld even though the parties lived together only a few days after the marriage ceremony. Ray v. Ray, 44 So.2d 286 (Fla. 1950).


Although antenuptial agreements fall within the Statute of Frauds, partial performance is normally sufficient to remove the transaction from operation of the statute. O’Shea v. O’Shea, 221 So.2d 223 (Fla. App. 1969). Spouses may also contract with each other postnuptially, and these contracts do not necessarily fall within the Statute of Frauds.

2. Reasonableness While antenuptial agreements may be valid, courts scrutinize them with care, and parties must exercise the highest degree of good faith, candor and sincerity in all matters bearing on the terms and execution of the agreement, with fairness being the ultimate measure. Lutgert v. Lutgert, 338 So.2d 1111, appeal after remand, 362 So.2d 58 (Fla. 1976). In weighing fairness and reasonableness, courts consider the relative needs of the parties; their respective ages, health and experience; their respective properties, their family ties and connections, and factors tending to show whether the agreement was understandingly made. Del Vecchio v. Del Vecchio, 143 So.2d 17 (Fla. 1962). An antenuptial agreement benefiting one party in a grossly disproportionate manner, even where there is evidence of coercive circumstances surrounding its execution, does not raise a presumption of undue influence or overreaching when the validity of the agreement is subsequently tested in probate proceedings, as distinguished from dissolution of marriage proceedings. Evered v. Edsell, 464 So.2d 1197 (Fla. 1985).

3. Disclosure Requirements a. Probate Proceedings

F.S.A. §732.702(2), which requires no disclosure of the extent of one’s estate before execution of an antenuptial agreement, supplants the Del Vecchio standard in cases involving decedents’ estates but is not applicable to agreements involved in dissolution of marriage actions. Topper v. Stewart, 388 So.2d 1270 (Fla. App. 1980). Even an allegation of fraudulent nondisclosure cannot serve to invalidate an antenuptial agreement in probate proceedings. Stregack v. Moldofsky, 474 So.2d 206 (Fla 1985).

b. Divorce Proceedings To be valid in a marital dissolution action, an antenuptial agreement should make a fair and reasonable provision for the less affluent spouse, or, absent such a provision, full and frank disclosure should have been made to the spouse, before signing the agreement, of the other’s net worth. Since the


relationship of the parties is one of mutual trust and confidence, they must exercise a high degree of good faith and candor in matters bearing on the contract. Baker v. Baker, 394 So.2d 465 (Fla. 1981).

4. Property Rights vs. Support Rights An antenuptial agreement cannot absolve the duty to provide spousal and child support during marriage. Support agreements can be modified by the court, but property settlements are not modifiable if they meet the requisites of fairness and disclosure. II. MARRIAGE

A. LEGAL FORMALITIES

1. Ceremonial Marriage

A marriage ceremony is necessary for a valid marriage in Florida. The parties must obtain a marriage license from either the county court judge or the clerk of the circuit court, who will issue the license upon payment of the required fees, if there appears to be no impediment to the marriage. F.S.A. §741.01. The parties must provide their social security numbers and a statement as to whether they have completed a premarital preparation course. If they do not submit valid certificates of completion of such a course, the effective date of the license is delayed by three (3) days, unless the requirement is waived by a county court judge for good cause. Persons showing they have completed such a course may marry immediately upon receipt of the license. F.S.A. §741.04. A marriage license is valid for 60 days. F.S.A. §741.041. All regularly ordained ministers or elders, and all judicial officers, retired judicial officers, clerks or deputy clerks of the circuit courts and notaries public of Florida may perform a marriage ceremony. F.S.A. §741.07. A judge of compensation claims is not a judicial officer within the meaning of the statute. Op. Atty. Gen. 92-62, Sept. 3, 1992. Any form of ceremony that the parties choose ordinarily suffices, so long as there is an agreement by words of present assent. Marsicano v. Marsicano, 79 Fla. 278, 84 So. 156 (1920). Lack of authority on behalf of the official performing the ceremony, or an irregularity in or an omission of the license does not render the marriage invalid if it is consummated with the full belief of either party that there has been a lawful marriage.

2. Common Law Marriage


At common law, a formal ceremony was not essential to a valid marriage, and an agreement between the parties by words of present assent to be husband and wife constituted marriage. F.S.A. §741.211 abolished common-law marriages entered into, or proved by conduct engaged in, after January 1, 1968. Common-law marriages in existence on that date carry the same rights and incidents of ceremonial marriages. In addition, common-law marriages validly entered into in another state are valid in Florida, since the law of the state in which the marriage was performed is controlling. However, a “union marital de hecho” under Colombian law is not the equivalent of a common law marriage in the United States for this purpose. American Airlines, Inc. v. Mejia, 766 So.2d 305 (Fla. App. 2000).

B. IMPEDIMENTS TO A VALID MARRIAGE 1. Age

Parties between the ages of 16 and 18 may marry with the written consent of both parents or a guardian, with the exception that consent is not required if both parents of the minor are deceased or if the minor has been married previously. It is within the discretion of a county court judge to issue a marriage license to underage parties who swear under oath that they are the parents of a child or are expecting a child. F.S.A. §741.0405.

2. Consanguinity Florida law prohibits marriages between persons related by lineal consanguinity and between brother and sister, aunt and nephew, and uncle and niece. F.S.A. §741.21. Marriages between first cousins are not prohibited. Incestuous marriages are not void but are merely voidable. Johnson v. Landefeld, 138 Fla. 511, 189 So. 666 (1939). The law does not prohibit the marriage of a natural child to a child of the opposite sex adopted by the same parents, or the marriage of two children of different sexes adopted by the same parents where the two children were not related at the time of their adoption. Op. Atty. Gen., 066-81, August 11, 1966.

3. Mental Capacity An essential qualification for marriage is the possession of sufficient mental capacity to agree or consent to the creation of the marital status. Mahan v. Mahan, 88 So.2d 545 (Fla. 1956).


Mental incapacity to enter into a marriage does not rest on legal adjudication of incompetency, without restoration of competency, but on whether the person entering the marriage relation has sufficient capacity to understand the nature of the contract, the duties and responsibilities thereof, and the probable consequences. Crews v. Norris, 13 Fla. Supp. 151 (1959). It is the condition of the party’s mind at the time of the marriage itself that governs the question of capacity. Prine v. Prine, 36 Fla. 676, 18 So. 781 (1895). Thus, the marriage of a person subject to temporary or periodic insanity is valid if contracted during a lucid interval. Abbe v. Abbe, 68 So.2d 565 (Fla. 1953). A person so intoxicated as to be deprived of all sense and volition and to be rendered incapable of knowing what he is doing is similarly incapable of entering into marriage. Prine, supra. While the marriage of a person lacking necessary mental capacity to marry is void, and that of an intoxicated person voidable, the marriage may nevertheless be ratified or affirmed, after the person regains the required mental capacity, by any act or conduct which recognizes the marriage. Crews v. Norris, supra.

4. Prior Marriage Still in Force A marriage between persons, one of whom is married to another, is void. Groover v. Groover, 383 So.2d 280 (Fla. 1980). This is true even when the parties erroneously believe they have obtained valid divorces from their prior marriages. Burger v. Burger, 156 So.2d 905, conformed to, 166 So.2d 694 (1963).

5. Same Sex Marriages Attempted marriages between persons of the same sex are not recognized in Florida. F.S.A. §741.212.

C. VALIDITY OF FOREIGN MARRIAGES As a general rule, the validity of a marriage is determined by reference to the law of the state where it was contracted. The reason for this uniformity in the recognition of the marriage status is so that persons legally married according to the law of one jurisdiction are not considered as living in adultery in another, and so that children from a lawful marriage are not regarded as illegitimate in another state. Therefore, a marriage which is valid where contracted is valid in other states, unless it is contrary to the laws or public policy of the forum. Whittington v. McCaskill, 65 Fla. 162, 61 So. 236 (1913). (Same-sex marriages


area deemed against public policy in Florida, and are not recognized regardless of where entered or how the relationship was treated in that other jurisdiction.) Conversely, if the parties to a purported marriage are not considered validly married at the place where they attempted to contract a marriage, the marriage will not be recognized in Florida. Goldman v. Dithrich, 131 Fla. 408, 179 So. 715 (1938). Florida will not recognize a marriage validly contracted in a foreign jurisdiction if a person residing in and intending to continue to reside in Florida goes to the foreign state with the intent of evading Florida statutes concerning marriage. See Whittington, supra.

D. NULLITY AND ANNULMENT 1. Void Marriages

An invalid marriage may be void or it may be merely voidable, depending on the nature of the defect. The marriage of a person lacking necessary mental capacity to marry or of a person with a prior existing marriage to another is void. Hoffman v. Kohns, 385 So.2d 1064 (Fla. 1980); Day v. Day, 331 So. 2d 335 (Fla. 1976).

In Florida National Bank of Palm Beach County v. Genova, 460 So. 2d 895 (Fla. 1984), the Florida Supreme Court disagreed with the result reached in Hoffman v. Kohns, 385 So. 2d1064 (Fla. 1980). The supreme court stated that courts have no place trying to save a competent settlor of a revocable trust from what may or may not be his or her own imprudence with his or her own assets. However, the Florida Supreme Court’s decision in Genova did not effect the decision in Hoffman regarding the marriage of a person lacking the necessary mental capacity to marry.

The issue of voidness of a marriage can be raised in any proceeding in which the fact of marriage may be material, either directly or collaterally, in any court, and between any parties at any time, whether before or after the death of either or both the husband and wife. Kuehmsted v. Turnwall, 103 Fla. 1180, 138 So. 775 (1932). Once the marriage has been proved void, it will be disregarded or treated as nonexistent by the court. The effect of a void marriage, with regard to the conferring of legal rights on the parties, is as though no marriage had ever taken place.


A marriage void in its inception may, but need not, be annulled. Burger v. Burger, 166 So.2d 433 (Fla. 1964), conformed to, 166 So.2d 694. Although no judicial decree is necessary to restore the parties to their original rights or to make the marriage void, a court of competent jurisdiction will ordinarily ascertain and decree the nullity of a void marriage, for the sake of the good order of society and for the peace of mind of the people concerned. Young v. Young, 97 So.2d 470 (Fla. 1957). The purpose of an annulment proceeding is to judicially declare that, because of a defect or disability which existed at the time of the marriage ceremony, no valid marriage ever took place between the parties.

2. Voidable Marriages A voidable marriage is valid for all purposes until annulled, and, although it may be raised as an issue in direct proceedings in the same manner as a void marriage, it cannot be attacked collaterally. Kuehmsted, supra. Annulment proceedings are the same for voidable as for void marriages, with the exception that if the party who is entitled to an annulment dies, his heirs may maintain an action for annulment only if the marriage is absolutely void. Savage v. Olson, 151 Fla. 241, 9 So.2d 363 (1942). A voidable marriage may be ratified or confirmed by the spouse who has a cause of action, and such conduct will be a complete defense to an action for annulment. Cooper v. Cooper, 120 Fla. 607, 163 So. 35 (1935). A person who lacked mental capacity to enter into a marriage may ratify or affirm the marriage upon regaining his mental capacity, and a person purportedly married to another with an existing marriage may ratify the subsequent marriage by cohabitation after removal of the impediment. Nottingham v. Denison, 63 So.2d 269 (Fla. 1953).

a. Nonage Although there is no Florida case authority concerning the annulment of a marriage of one who is below the age of consent, it is generally held in other jurisdictions that annulment on the basis of nonage lies in the court’s discretion and the marriage is valid until annulled.

b. Consanguinity Incestuous marriages, between brother and sister, aunt and nephew, and uncle and niece, and between persons related by “lineal consanguinity” are voidable. Johnson v. Landefeld, 138 Fla. 511, 189 So. 666 (1939).


c. Marriage in Jest A marriage which was not intended to be a true marriage may be annulled.

Thus, where a couple was married only to prevent the woman’s child from being born out of wedlock, with no intention of consummation or cohabitation, the marriage was properly annulled. Stone v. Stone, 159 Fla. 624, 32 So.2d 278 (1947).

d. Fraud

Deceit or gross fraud, going to the essence of the marriage contract, renders the marriage voidable by the defrauded party during his or her lifetime, if the marriage was not consummated. Cooper v. Cooper, 120 Fla. 607, 163 So. 35 (1935). See, Savini v. Savini, 58 So. 2d 193 (Fla. 1952) (holding that although appellee committed fraud upon appellant, the marriage was consummated and fraud alone is not sufficient to grant annulment). A fraudulent marriage which is consummated prior to discovery of the fraud may be annulled, if application for annulment is made promptly upon discovery of the fraud and there is no consummation after such discovery. Jones v. Jones, 119 Fla. 824, 161 So. 836 (Fla. 1935).

The fraud must be vital to the marriage relationship as where a wife, having no intention of consummating the marriage, marries solely for financial benefits, Titcomb v. Titcomb, 160 Fla. 320, 34 So.2d 742 (1948), or to secure the benefit of the married name, Stone, supra. Concealment or misrepresentation of a prospective spouse’s prior marital status, Dandy v. Dandy, 234 So.2d 728 (Fla. 1970), or premarital unchastity or parenthood may be grounds for annulment. However, in Brandt v. Brandt, 123 Fla. 680, 167 So. 524 (1936), where the parties had frequent sexual intercourse, and the woman induced the man to marry her falsely and fraudulently claiming to be pregnant, the court held the fraud not sufficient to warrant an annulment.

The party alleged to have concealed a material fact must have known or had good reason to know the fact at the time of the marriage. Ball v. Ball, 160 Fla. 601, 36 So.2d 172 (1948). A marriage induced by fraud may be ratified by voluntary cohabitation of the parties as husband and wife with full knowledge of the facts constituting the fraud. Cooper, supra. See also, Adler v. Adler, 805 So.2d 952 (Fla. App. 2001)


(wife’s concealment of four prior divorces not grounds for annulment after ten years of married cohabitation).

e. Duress Like other contracts, a marriage may be invalid if one of the parties was induced to enter it under duress. Duress, in the form of force, restraint or threats, must have been the inducing cause of the marriage, and must have brought about a marriage to which consent would not otherwise have been given. The duress must have dominated the transaction, including the marriage ceremony, so as to disable the one influenced from acting as a free agent. Beeks v. Beeks, 66 Fla. 256, 63 So. 444 (1913). The injured party may ratify and confirm the marriage after becoming free from the influence of fear or duress. In re Ruff’s Estate, 159 Fla. 777, 32 So.2d 840 (1947).

f. Physical Incapacity or Disease Impotency may be a ground for annulment, but this does not extend to mere sterility or the inability to procreate. Cott v. Cott, 98 So.2d 379 (Fla. 1957). The fact that a woman has been rendered sterile by an operation is not a ground for annulment. Ball, supra. While there is authority in other jurisdictions that concealment of a disease may be grounds for an annulment, such authority is lacking in Florida. See Tsapelas v. Tsapelas, 69 So.2d 315 (Fla. 1954).

3. Effect of a Void or Annulled Marriage Since the basis for permanent alimony is a duty of maintenance imposed by the marriage relation, permanent alimony cannot be granted where the marriage between the parties is annulled. Therry v. Therry, 117 Fla. 453, 158 So.120 (1934). However, a trial court may award temporary alimony and attorney's fees to a putative spouse, even when she is the wrongdoer, such as the one with an existing marriage. Such an award is within the sound discretion of the court, depending on the particular facts of each case. See Smithers v. Smithers, 804 So.2d 489 (Fla. App. 2001); Burger v. Burger, 166 So. 2d 433, 436 (Fla. 1964). Under common law, a child of a void marriage is regarded as illegitimate, while the child of a voidable marriage is legitimate. Thus, the annulment of a voidable marriage does not make children born prior to the annulment illegitimate. Jones v. Jones, 119 Fla. 824, 161 So. 836 (1935).


III. LEGAL INCIDENTS OF THE MARITAL OR FAMILY

RELATIONSHIP A. HUSBAND AND WIFE

1. Property Rights

a. Separate Property

At common law, a married woman had no separate existence; her existence was merged in her husband’s insofar as property was concerned. Omwake v. Omwake, 70 So.2d 565 (Fla. 1954). However, by statute, both husband and wife are entitled to manage and control their separate property without joinder or consent of the spouse in all respects as if the parties were unmarried. F.S.A. §708.08; Holland v. Holland, 406 So.2d 496 (Fla. 1981). The Florida Constitution further provides that “there shall be no distinction between married women and married men in the holding, control, disposition, or encumbering of their property, both real and personal.” Fla. Const., Art. 10, §5. A husband is not entitled to rents and profits from his wife’s separate property. In re Application of Jensch, 134 So.2d 285 (Fla. App. 1961). A trustee is not necessary to secure the wife’s separate property to her, and she has a legal right at any time to oust her husband from the management of the property. Miller v. Ellenwood, 121 Fla. 551, 164 So. 140 (1935). The property may have been acquired before or during marriage by bequest, devise, gift, purchase or distribution. Commercial Building Co. v. Parslow, 93 Fla. 143, 112 So. 378 (1927). Thus, real estate purchased by a married woman, with the deed made to her, is her separate property. O’Neil v. Percival, 25 Fla. 118, 5 So. 809 (1889).

b. Tenancy by the Entirety In general, property deeded to the husband and wife jointly creates an estate by the entireties. In re Suggs’ Estate, 405 So.2d 1360 (Fla. App. 1981). Originally, the presumption of a tenancy by the entireties applied only to real property deeded to husband and wife, but the Florida courts have expanded this rule to include certain forms of personal property as well. With respect to a bank account held in both spouses’ names, if the signature card of the account does not expressly disclaim the tenancy by the entireties form of ownership, a presumption arises that the account is held as a tenancy by the entireties so long as the account is established by husband and wife in accordance with the unities


of possession, interest, title, and time and with right of survivorship. The presumption affects the burden of proof pursuant to section F.S.A. §90.304, thus shifting the burden to the creditor to prove by a preponderance of evidence that a tenancy by the entireties was not created. Beal Bank, SSB v. Almand & Associates, 780 So. 2d 45 (Fla. 2001). Cacciatore v. Fisherman’s Wharf Real Estate Realty Limited Partnership, 821 So.2d 1251 (Fla. App. 2002), expanded the rule to include a stock certificate held in the names of both spouses. An estate by the entireties vests in the husband and wife as one person and neither spouse can sell, forfeit or encumber any part of the estate without the consent of the other, nor can one spouse alone lease it or contract for its disposition without such consent. Douglass v. Jones, 422 So.2d 352 (Fla. App. 1982). However, a valid sale of the property may be made by separate deeds.

See MacGregor v. MacGregor, 323 So.2d 35 (Fla. App. 1975), where identical quit-claim deeds, separately executed six weeks apart by husband and wife to the same grantee, were effective to pass title to property held by the entireties, where the subsequently executed deed was unambiguous and tracked the prior conveyance, thereby evidencing consent to the earlier transfer.

Under Florida law, property held as a tenancy by the entirety is immune from claims by creditors of one of the tenants. Ohio Butterine Co. v. Hargrave, 79 Fla. 458, 84 So. 376 (1920). In the absence of fraud, the estate cannot be charged with the individual debts of either spouse, since neither spouse has any separate interest in the property on which a lien can attach or an execution be had. Lapp v. U.S., 316 F. Supp. 386 (D. Fla. 1970). If property is held as a joint tenancy with right of survivorship, a creditor of one of the joint tenants may attach the joint tenant's portion of the property to recover that joint tenant's individual debt. However, when property is held as a tenancy by the entireties, only the creditors of both the husband and wife, jointly, may attach the tenancy by the entireties property. See Winters v. Parks, 91 So. 2d 649, 651 (Fla. 1956). Dissolution of the marriage automatically converts the tenancy by the entireties into a tenancy in common. Bergh v. Bergh, 121 So.2d 481 (Fla. App. 1961).

c. Interspousal Transfers A conveyance of real estate, including an interest in an estate by the entirety, by one spouse to another, conveys legal title in all cases in which it would be effectual if the parties were not married. The grantee need not join in the


execution of the conveyance, and it is not necessary to convey to a third person as a conduit between spouses. F.S.A. §689.11. However, the conveyance cannot be used as a fraud on creditors. A husband or wife may make a gift of property to the other. There must be clear and convincing evidence of a delivery of the property with the intention of divesting dominion and control over it and of vesting such dominion and control in the other spouse. Testimony from the recipient spouse that the other intended a gift is admissible, and the question of donative intent is one of a preponderance of credible evidence. Merrill v. Merrill, 357 So.2d 792 (Fla. App. 1978).

d. Upon Death i. Intestate Inheritance.The intestate share of the surviving spouse under the Florida Probate Code is as follows: (1) if there are no surviving lineal descendants, the surviving spouse takes the entire estate; (2) if there are surviving lineal descendants of the decedent, all of whom are lineal descendants of the surviving spouse also, that spouse takes the first $60,000 plus one-half of the balance of the intestate estate; (3) if there are surviving lineal descendants, one or more of whom are not lineal descendants of the surviving spouse, the surviving spouse takes one-half of the intestate estate. F.S.A. §732.102(1). ii. Elective Share.The Florida Probate Code abolishes the doctrines of dower and curtesy and provides that the surviving spouse of a person who dies domiciled in Florida has the right to a share of the estate of the deceased spouse, called the elective share. F.S.A. §732.201. The election must be filed within four months from the date of the first publication of notice of administration or within 40 days from the date of termination of proceedings during which the extent of the estate subject to the elective share was in doubt. F.S.A. §732.212. The elective share is computed by taking into account property interests such as the cash value of life insurance policies, joint accounts and revocable trusts retained by the decedent wherever located, except real property not located in Florida, and consists of an amount equal to 30 percent of the fair market value on the date of death of these assets, computed after deducting from the total value of the assets all valid claims against the estate paid or payable from the estate. F.S.A. §§732.206, 207. The elective share is in addition to exempt property and allowances. F.S.A. §732.208.


2. Contract Rights and Obligations a. Between Husband and Wife

By statute in Florida, a person may enter into agreements and contracts with his or her spouse. F.S.A. §708.09. A post-nuptial agreement regarding property and support obligations between the spouses can be set aside on a showing of fraud, overreaching, or inadequate knowledge or concealment of assets. Casto v. Casto, 508 So.2d 330 (Fla. 1987).

b. Liability for Debts At common law, a husband was liable for his wife’s debts, even if an obligation was incurred before marriage. The general rule under the Married Women’s Act, F.S.A. §§708.05, 708.08-708.10, is that a husband is not bound by the obligations of his wife, and specifically not for debts contracted before marriage. The wife’s funeral expenses, once the responsibility of the husband, are now a charge against her estate. Coral Gables First Nat. Bank v. Colee, 155 Fla. 498, 20 So.2d 675 (1945). However, a husband or wife is legally responsible for necessaries of his or her spouse. Manatee Convalescent Center, Inc. v. McDonald, 392 So.2d 1356 (Fla. 1980); Parkway General Hospital, Inc. v. Stern, 400 So.2d 166 (Fla. App. 1981). However, in Shands Teaching Hospital and Clinics, Inc. v. Smith, 497 So. 2d 644 (Fla. 1986), the Florida Supreme Court disapproved Manatee and Parkway General Hospital. The court approved the decision of the lower court in Shands which held that the common law doctrine of necessaries had not been altered, and therefore did not permit a wife to be held liable to a third party for providing food, shelter, and medical services to her husband. The supreme court therefore held that a hospital could not hold a wife responsible for her deceased husband’s unpaid medical bills on the theory that a wife is responsible for providing necessaries to her husband. The court in Manatee specifically left open the question of whether one spouse would be responsible for the necessities of the other only if the resources of the spouse incurring the debt are insufficient to pay it. Manatee, 392 So.2d at 1359.

3. Torts a. Between Spouses


In 1985, the Florida legislature abrogated the common-law doctrine of interspousal tort immunity in cases of the intentional tort of battery. F.S.A. §741.235. Florida now permits tort actions between members of a family unit; thus, spouses may sue each other on any tort cause of action. The doctrine of interspousal immunity is no longer part of Florida common law. Waite v. Waite, 618 So.2d 1360 (Fla. 1993).

b. Torts to the Marital Relationship by Third Persons The Florida legislature has abolished the rights of action for alienation of affections, criminal conversation and seduction. F.S.A. §771.01. Furthermore, a civil proceeding for conspiracy based on any of the abolished causes of action cannot be maintained. De la Portilla v. De la Portilla, 287 So.2d 345 (Fla. App. 1973).

c. Liability for Torts Committed Against Third Parties

The common law doctrine whereby a husband is liable for the torts of his wife has been abrogated in Florida. F.S.A. §741.23.

d. Consequential Damages Against Third Persons A personal injury to a married person caused by the tort of a third person gives rise to two causes of action, one for personal pain and suffering, the other for the spouse’s consequential damages—loss of society and services, and expenses incurred for medical and nursing attention. Dixon v. Wright, 214 So.2d 787 (Fla. App. 1968). Either spouse may recover damages for loss of consortium when his or her spouse has been injured by the negligence of another. Ripley v. Ewell, 61 So.2d 420 (Fla. 1952); Gates v. Foley, 247 So.2d 40 (Fla. 1971). “Consortium” has been held to encompass, in addition to sexual relations, affection, solace, comfort, companionship, conjugal life, fellowship, society, and assistance as necessary to a successful marriage. Vazquez v. State, 350 So.2d 1094 (Fla. App. 1977). A surviving spouse may recover damages for the wrongful death of his or her spouse. F.S.A. §768.19–§768.20. Damages include: the value of lost support and services from the date of the decedent’s injury to his or her death, with interest, and future loss of support and services from the date of death, reduced to present value; the loss of the decedent’s companionship and protection; recovery for mental pain and suffering (of the surviving spouse) from the date of


the injury; and reimbursement for medical or funeral expenses due to the decedent’s injury or death. F.S.A. § 768.21. In addition, the decedent’s estate may recover loss of earnings of the deceased from the date of injury to the date of death, less lost support of survivors excluding contribution in kind, with interest, and loss of the prospective net accumulations of an estate, which might reasonably have been expected but for wrongful death, reduced to present money value. F.S.A. §768.21(6).

4. Support Obligations Traditionally, a husband had a common law duty to support his wife. So long as the marriage continued, the husband was under an obligation to support his wife in a manner approximating that which he had established, giving due regard to financial condition, earning capacity, and other circumstances of either spouse that might bear on the discharge of the obligation. Astor v. Astor, 89 So.2d 645 (Fla. 1956). The duty of support is a continuing obligation, which may be enforced in equity. Egland v. Egland, 92 So.2d 647 (Fla. 1957). Florida statutes now allow either spouse to petition a court for support from a spouse who has the ability to contribute spousal or child support but has failed to do so. The right is not contingent on seeking a dissolution decree. F.S.A. §61.09. The holding of Orr v. Orr, 440 U.S. 268 (1979), that states cannot impose alimony obligations on husbands alone indicates that duties of support during marriage must be sex-neutral. A spouse is not compelled to sustain a tremendous work load or to work unusually long hours in order to earn an exorbitant income to support familial obligations. Norton v. Norton, 328 So.2d 484 (Fla. 1976). Nor may he so reduce his family’s standard of living that his spouse is driven to leave him, and then use the lowered standard to measure the support he owes. Kaufman v. Kaufman, 63 So.2d 196 (Fla. 1953). A spouse is relieved of the duty of support when the parties live apart by mutual assent or when the other spouse leaves voluntarily without justifiable cause. Hagen v. Viney, 124 Fla. 747, 169 So. 391 (1936); Fisher v. Fisher, 134 So.2d 277 (Fla. App. 1961). In addition to civil remedies, there are criminal penalties for nonsupport. Desertion of, or withholding support from, a wife is a felony in Florida. F.S.A. §856.04. A financially able spouse who, after notice, fails to provide support to


the other spouse, in the absence of proceedings to dissolve the marriage, is guilty of a misdemeanor. F.S.A. §827.06(1). The object of these statutes is to prevent dependents from becoming public charges.

5. Protection from Domestic Violence A spouse or former spouse who is the victim of, or who has reasonable cause to believe he or she is about to become the victim of, any act of domestic violence has standing in the Circuit Court to file a sworn petition for an injunction for protection against domestic violence, whether or not the victim has already left the residence or household to avoid such violence. F.S.A. §741.30. In addition to restraining the respondent from committing acts of domestic violence, the injunction may award the petitioner temporary exclusive use and possession of the home, exclude the respondent from the residence, direct the respondent to participate in counseling services, temporarily suspend child time-sharing, and award temporary support. An injunction for protection against domestic violence may be sought between any persons who have a child in common or are related by blood or marriage who are or were residing in the same dwelling. F.S.A. §741.28(3). A brother’s physical violence toward his sister was domestic violence, even though they had not resided in the same household for 40 years. Rosenthal v. Roth, 816 So.2d 667 (Fla. App. 2002), reh. denied, 816 So.2d 668. Domestic violence could not occur between a sister-in-law and brother-in-law who had never lived in the same household. Sharpe v. Sharpe, 695 So.2d 1302 (Fla. App. 1997). If it appears to the court that an immediate and present danger of domestic violence exists, the court may grant a temporary injunction ex parte, but no evidence other than the verified pleading or affidavit may be used as evidence unless the respondent appears or has received reasonable notice of the hearing. Any ex parte temporary injunction will be effective only for a fixed period not to exceed 30 days, during which time a full hearing must be held. Any relief granted by a final injunction after notice and hearing must be for a fixed period or successive fixed periods not to exceed one year. Conviction of a crime of domestic violence where the defendant intentionally caused bodily harm requires a minimum stay of five (5) days in the county jail. F.S.A. §741.283.


B. PARENTS AND CHILDREN 1. Legitimacy and Paternity

a. Presumption of Legitimacy

Children born or conceived in wedlock are presumed to be legitimate. In re Ruff’s Estate, 159 Fla. 777, 32 So.2d 840 (1947); Illgen v. Carter, 123 So.2d 368 (Fla. App. 1960). The presumption is so strong that it was not overcome in Ruff, supra, where the child was conceived out of wedlock and the marriage of its parents contracted before its birth was subsequently annulled. The purpose of the strong presumption in favor of legitimacy is to protect the interest and the welfare of the child. Blitch v. Blitch, 341 So.2d 251 (Fla. App. 1976). However, the presumption of legitimacy is rebuttable, and both the child’s mother and her husband may successfully rebut the presumption. Purvis v. State, 377 So.2d 674 (1979); Smith v. Wise, 234 So.2d 145 (Fla. App. 1970). A husband is not required to prove his contention beyond all reasonable doubt, but his proof must do more than cast a strong suspicion or grave doubt on the paternity of the child; it must be sufficiently strong to clearly remove the presumption of legitimacy. Eldridge v. Eldridge, 153 Fla. 873, 16 So.2d 163 (1944). The presumption is not weakened by evidence that the child was conceived prior to wedlock or might have been conceived after dissolution of the marriage, although in the latter case, the court is likely to take judicial notice of the medically recognized gestation period. Smith v. Wise, supra. A child’s mother may, by competent evidence in appropriate situations, rebut the presumption of legitimacy in proceedings to establish paternity in seeking child support and in asserting the child’s right to inherit from the putative father. Williams v. Estate of Long, 338 So.2d 563 (Fla. App. 1976). A woman may even contest that she is the mother of a child. (See Gossett v. Ullendorff, 114 Fla. 159, 154 So. 177 (1934), where the wife contended twins had been given to her by the natural parents.) A child born within wedlock who was conceived by artificial or in vitro insemination consented to in writing by both the husband and the wife is irrebuttably presumed to be legitimate. F.S.A. §742.11.

b. Proof of Paternity A mother or expectant mother may bring an action to determine the paternity of her child. F.S.A. §742.011. A man who reasonably believes he is the father of a child or the child herself may also initiate proceedings pursuant


to F.S.A. §742.011. In 1993, the Florida Supreme Court held that the State Constitution preserves the right to a jury trial in paternity proceedings, and declared unconstitutional the portion of F.S.A. §742.031 that required proceedings to be tried only by a judge. B.J.Y. v. M.A., 617 So.2d 1061 (Fla. 1993). Paternity is generally established for the purpose of compelling the child’s father to contribute to his support. The Florida statute of limitations for a paternity action was four years from the child’s birth, but the Supreme Court held that the limitation denied children born out of wedlock equal protection of the laws, since the right to support continues until the child reaches the age of 18 and there is no other time limitation on legitimate children to compel support. State Dept. of Health & Rehab. Services v. West, 378 So.2d 1220 (Fla. 1979); Pickett v. Brown, 462 U.S. 1 (1983). Evidence to determine paternity includes acts, declarations and admissions of the mother, the alleged father and other persons, evidence of the intimacy and relations of the parties, the reputation and character of the mother and alleged father, the mother’s relations with other men, bloodgrouping tests, and the resemblance of the child to the alleged father. When an affidavit acknowledging paternity or a stipulation of paternity is executed by both parties and filed with the clerk of the court, or when an affidavit or notarized voluntary acknowledgment of paternity is executed by both parties, it establishes paternity. If no adjudicatory proceeding is held, a notarized voluntary acknowledgment of paternity creates a rebuttable presumption of paternity and is subject to the right of any signatory to rescind the acknowledgment within 60 days of the date the acknowledgment was signed or the date of an administrative or judicial proceeding relating to the child, including a proceeding to establish a support order, in which the signatory is a party, whichever is earlier. F.S.A. §742.10. The parties may be compelled to submit to any type of paternity tests that are generally acceptable within the scientific community. Test results yielding a statistical probability of paternity of at least 95% create a rebuttable presumption that the alleged father is the natural father, but if the statistical probability of paternity is less than 95% the court must weigh other evidence of paternity. If the test results show the alleged father cannot be the biological father, the case will be dismissed with prejudice. F.S.A. §742.12.

c. Rights of Support and Inheritance of Children Born

Out of Wedlock


i. Support.Children born out of wedlock are entitled to support from their natural fathers:

(1) When a judicial proceeding has established paternity; (2) When the father has acknowledged paternity in writing before the court,

without regard to the marital status of the mother; (3) When paternity has been adjudicated in a foreign jurisdiction; (4) Vicariously, under workers’ compensation provisions, where the child

has been acknowledged, even as shown by circumstantial evidence, by the father;

(5) Vicariously, through a wrongful death action, where the father is responsible for the child’s support; or

(6) When the father and mother marry. In addition, the father must pay attorney fees in the paternity action, hospital or medical expenses, costs of confinement and other expenses incident to the birth of the child. ii. Intestate Succession.For the purpose of intestate succession, a child born out of wedlock is a lineal descendant of his mother and is one of the natural kindred of all members of the mother’s family. This relationship extends to the father and the father’s family if (1) the natural parents married before or after the birth of the child, even though the marriage is void; (2) the deceased acknowledged paternity in writing; or (3) the paternity of the deceased is established by an adjudication before or after the death of the father. F.S.A. §732.108(2). A putative heir may also prove paternity by evidence other than the statutory guidelines. Breedlove v. Estate of Breedlove, 586 So.2d 466 (1991). iii. Wills.There is no restriction on the power of a parent to give, devise or bequeath his property to a child born out of wedlock. However, a gift to “issue” or “children” generally means legitimate children, and inclusion of a child born out of wedlock must be evident in the language of the instrument. Kingsley v. Broward, 19 Fla. 722 (1883). iv. Statutory Rights of Action.Children born out of wedlock have a right of action equal to that of legitimate children for the wrongful death of their mother. Levy v. Louisiana, 391 U.S. 68 (1968). However, unacknowledged children born out of wedlock have no standing to recover for the wrongful death of their father, Young v. De Garcia, 172 So.2d 243 (Fla. App. 1965), nor does a father who has not legitimated or supported the child have a right to sue for wrongful death of the child. Parham v. Hughes, 441 U.S. 347 (1979). A state which provides welfare or rights of support for legitimate children cannot deny them to children born out of wedlock. Gomez v. Perez, 409 U.S. 535 (1973);


New Jersey Welfare Rights Organization v. Cahill, 411 U.S. 619 (1973). A state may not bar unacknowledged children born out of wedlock from sharing in their father’s Workers’ Compensation benefits. Weber v. Aetna Cas. & Sur. Co., 406 U.S. 164 (1972).

d. Surrogate Mothers Within three days after the birth of a child delivered by a surrogate mother, the couple that commissioned her services may petition a court for an affirmation of their parental rights. After a hearing, the court will enter an order stating that the commissioning couple are the legal parents of the child if the court determines that a binding and enforceable gestational surrogacy contract has been executed and that at least one member of the couple is the genetic parent of the child. F.S.A. §742.16.

2. Support Obligations The parents of a minor child have a legal duty to support the child. The obligation of support includes obligations to nurture, educate and protect the child and to provide food, clothing, shelter and medical treatment. While the primary duty of support and maintenance has traditionally rested upon the father, more recent cases have placed the duty of support on both the mother and father jointly as natural guardians of their natural and adopted children. See O’Brien v. O’Brien, 424 So.2d 970 (Fla. App. 1983); Kern v. Kern, 360 So.2d 482 (Fla. 1978). The primary criteria by which the degree of support is measured are the child’s needs and the parents’ ability to pay. Page v. Page, 371 So.2d 543 (Fla. 1979). A parent’s primary responsibility is to his own offspring, regardless of obligations or desires to aid others, including his parents. Land v. State, 71 Fla. 270, 71 So. 279 (1916). While parents have a duty to assure children an education, in general a parent has no obligation to provide a college education for his children. Leaird v. Leaird, 540 So.2d 243 (Fla. App. 1989); Genoe v. Genoe, 373 So.2d 940 (Fla. 1979). A parent may not contractually obviate or impair either his own or another’s obligation to support his minor children. Schottenstein v. Schottenstein, 384 So.2d 933 (Fla. 1980). Parents may agree between themselves on provision or procurement of support for their child, but a court will consider the best interests of the child and find an agreement valid only if it insures proper care


and maintenance of the child. Warrick v. Hender, 198 So.2d 348 (Fla. App. 1967). A parent’s duty to support a child terminates on the parent’s death, absent a court judgment or agreement by the parent extending the duty as a charge against his estate. It also terminates when the child is adopted by another, when the child becomes emancipated, when a child reaches the age of majority (18), provided a court has not ordered that support continue beyond that age, or, in the case of mentally or physically incapacitated adult children, until the need for support no longer exists. Kern, supra; F.S.A. §743.07. A court may require support beyond age 18 if the child has a mental or physical incapacity which began prior to age 18, or if the child is actually dependent, between ages 18 and 19, still in high school and reasonably expects to graduate before age 19. F.S.A. §743.07(2); Hill v. Hooten, 776 So.2d 1004 (Fla. App. 2001).

3. Consent to Abortion Statutes requiring the consent of the husband of a married woman who seeks an abortion have been held unconstitutional. Planned Parenthood v. Danforth, 428 U.S. 52 (1976). However, the requirement of a Florida statute, F.S.A. §390.001(4)(a), that the husband receive notice and an opportunity to consult with his wife before her abortion has been held constitutional in Florida. Scheinberg v. Smith, 659 F.2d 476 (5th Cir. 1981). This holding may be suspect under Akron v. Akron Center for Reproductive Health, 462 U.S. 416 (1983), in which a provision prohibiting a physician from performing an abortion until 24 hours after the pregnant woman signs an “informed consent” form was found invalid on the ground that no legitimate state interest was furthered by an arbitrary and inflexible waiting period.

In Planned Parenthood of Southeastern Pennsylvania v. Casey, 505 U.S. 833 (1992), the United States Supreme Court held that to the extent that Akron v. Akron Center for Reproductive Health, 462 U.S. 416 (1983), finds a constitutional violation when the government requires the giving of truthful, nonmisleading information about the nature of the abortion procedure, the attendant health risks and those of childbirth , and the “probable gestational age” of the fetus, that case is inconsistent with Roe v. Wade’s acknowledgment of an important interest in potential life, and is overruled.


A state cannot require parental consent before an abortion can be performed on an unmarried minor. Bellotti v. Baird, 443 U.S. 662 (1979). A statutory requirement that a minor’s parents be notified once a petition to obtain judicial approval of an abortion has been filed is unconstitutional in the case of a mature minor seeking an abortion; there must be a case by case evaluation of the ability of the minor to make a mature and informed decision on her own. Akron, supra. The Florida Supreme Court has found that there is no compelling state interest in intruding upon a minor’s right to privacy as guaranteed by Article I, §23 of the Florida Constitution. In re T.W., 551 So.2d 1186 (Fla. 1989).

4. Rights and Liabilities of Minors The disability of nonage has been generally removed for all persons age 18 or older, except when otherwise provided by the Florida Constitution or the Beverage Law. F.S.A. §743.07(1).

a. Contracts In general, an unmarried minor cannot bind himself by contract. Such contracts are not void, but are voidable by the minor. If the minor adheres to the contract, the other party is bound to perform. Orange Motors of Miami, Inc. v. Miami Nat. Bank, 227 So.2d 717 (Fla. App. 1969). However, a minor is liable for the value of necessaries furnished him. Lee v. Thompson, 124 Fla. 494, 168 So. 848 (1936). A minor over the age of 16 is also liable for money borrowed for the purpose of obtaining a higher education. F.S.A. §743.05. A minor may disaffirm contracts made during his minority even after he has reached his majority (age 18). If, however, he ratifies the contract after reaching majority, his right to disaffirm is lost. Lee, supra.

b. Torts In general, a minor is liable for personal torts committed by him. However, a young child may not be held to have malicious intent, which is an element of some torts. Scott v. Southeast Title and Ins. Co., 22 Fla. Supp. 87 (1962). At common law, parent is not vicariously liable for the torts of his child; however, a parent could be held liable in some cases: (1) where he entrusts the child with an instrumentality which, because of youth or inexperience of the child, may become a danger to others (see


Seabrook v. Taylor, 199 So.2d 315 (Fla. App. 1967), where parents were found guilty of negligence for placing a loaded pistol in a place where their 14-year-old son had access to it during a time of unsupervised activity); (2) where the child, in the commission of a tortious act, occupies the position of servant or agent of its parents

See Fernandez v. Valle, 364 So.2d 835 (Fla. App. 1978), where a gas station operator and his wife were held liable for injuries sustained when their minor son accidentally squirted gas into a motorist’s eyes.

(3) where the parent knows of the child’s wrongdoing and consents to it, or directs or sanctions it; or (4) where the parent fails to exercise parental control over the child, although he knows, or by exercising due care should have known, that injury to another is a probable consequence. However, under this theory the child must be in the habit of doing the particular type of wrongful act that resulted in the injury. Gissen v. Goodwill, 80 So.2d 701 (Fla. 1955). Florida narrowly construes this exception to the rule of parental nonliability. See also, Snow v. Nelson, 475 So.2d 225 (Fla. 1985). F.S.A. §741.24 permits the recovery of damages from the parents of any minor, living with the parents, who maliciously or willfully destroys or steals property. The recovery is limited to actual damages (no set dollar limit) and court costs. The statute is strictly construed, so a noncustodial parent who has only occasional visitation rights with the child would not be held liable under this statute. Canida v. Canida, 751 So.2d 647 (Fla. App. 1999). A parent cannot maintain a tort action against his unemancipated minor child. Meehan v. Meehan, 133 So.2d 776 (Fla. App. 1961). However, parent-child immunity has been abrogated, allowing a minor child to bring suit against his parent, to the extent of the parent’s insurance coverage. Ard v. Ard, 414 So.2d 1066 (Fla. 1982). IV. DEPENDENCY

A. GENERAL ISSUES

1. Responsibilities of Public Agencies


All state, county, and local agencies shall cooperate, assist, and provide information to the Office of Adoption and Child Protection enabling them to fulfill their responsibilities. F.S.A. §39.0014. 2. Records Concerning Children The case record of every child under the supervision of or in the custody of the Department of Children and Families, the department’s authorized agents, or providers contracting with the department, including community-based care lead agencies and their subcontracted providers, must be maintained in a complete and accurate manner. The case record must contain, at a minimum, the child’s case plan and the full name and street address of all shelters, foster parents, group homes, treatment facilities, or locations where the child has been placed. F.S.A. §39.00145. A complete and accurate copy of any record in a child’s case record must be provided, upon request and at no cost, to the child who is the subject of the case record and to the child’s caregiver, guardian ad litem, or attorney. If a child, child’s caregiver, guardian ad litem, or attorney requests access to the child’s case record, any person or entity that fails to provide any record in the case record under assertion of a claim of exemption from the public records requirements, or fails to provide access within a reasonable time, is subject to sanctions and penalties. F.S.A. §39.00145. The information will be released in a manner and setting that is appropriate to the age and maturity of the child and the nature of the information being released, which may include the release of information in a therapeutic setting, if appropriate. F.S.A. §39.00145. If a court determines that sharing information in the child’s case record is necessary to ensure access to appropriate services for the child or for the safety of the child, the court may approve the release of confidential records or information contained in them. This does not apply to information concerning clients and records of certified domestic violence centers, which are confidential. F.S.A. §39.00145. 3. Child Abuse, Abandonment, Neglect or Surrendered Newborn When a child is brought to the attention of the courts, because of neglect or mistreatment, the state is statutorily ordered to preserve and strengthen the child’s family ties whenever possible, and to remove the child from his parent’s custody only when his welfare cannot be adequately safeguarded without it. F.S.A. §39.001. A child may be taken away from his parent’s custody when the parent is shown to be unfit or when the child has been abandoned, abused or


neglected. See Meyers v. Shifrin, 146 So.2d 770 (Fla. 1962). A child is abandoned when a parent, who is able, makes no provision for the child’s support and makes no effort to communicate with the child for a period of six months or longer. The court may declare a child abandoned, if it finds the parent’s efforts only marginal and not evincing a settled purpose to assume all parental duties. F.S.A. §39.01(1). While abandonment is not automatically shown by leaving the child with others, by failing to support the child, or by imprisonment of the parent, these circumstances may establish parental purpose to abandon a child. Solomon v. McLucas, 382 So.2d 339 (Fla. App. 1980); Harden v. Thomas, 329 So.2d 389 (Fla. App. 1976). The term “abandoned” does not include a surrendered newborn infant. F.S.A. 39.01(1). A child is abused when any willful act results in a physical, mental, or sexual injury that causes or is likely to cause significant impairment to the child’s physical, mental, or emotional health. Florida Statutes §39.01(2). Neglect occurs when a parent or other legal custodian, though able, deprives or allows a child to be deprived of necessary food, clothing, shelter, or medical treatment, or permits a child to live in an environment when such deprivation or environment causes the child’s physical, mental, or emotional health to be significantly impaired or to be in danger of significant impairment. F.S.A. §415.503. A parent or guardian legitimately practicing his religious beliefs in accordance with a recognized church religious organization who does not provide medical treatment for a child shall not, for that reason alone, be considered a negligent parent or guardian; however, a court may order medical services or may order treatment by an accredited spiritual practitioner when the child’s health requires it. F.S.A. §39.01(37). Parental unfitness might, in some cases, be established by the parent’s conviction of a serious crime ( In re Adoption by Cooper, 242 So.2d 196 (Fla. App. 1970), where the natural father shot and killed child’s mother), or by the parent’s incompetency. However, the court may not compel the parents to submit to psychological or psychiatric evaluations to determine their emotional fitness. Fruh v. State Dept. of Health and Rehabilitative Services, 430 So.2d 581 (Fla. App. 1983). The term “newborn infant” means a child who a licensed physician reasonably believes is approximately seven days old or younger at the time the child is left at a hospital, emergency medical services station, or fire station. F.S.A. 383.50(1). There is a presumption that the parent who leaves the newborn infant at a hospital, fire station or an emergency services medical


station intended to leave the newborn infant and consented to termination of parental rights. F.S.A. 383.50(2). The parent may claim the newborn infant up until the court enters judgment terminating the parent's rights to the newborn infant. F.S.A 383.50(6). 4. Jurisdiction The Circuit Court has exclusive original jurisdiction of all proceedings of a child voluntarily placed with a licensed child caring agency, a licensed child placing agency, or the Department of Children and Families. Jurisdiction attaches when the initial shelter petition, dependency petition, or termination of parental rights petition is filed or when a child is taken into the custody of the Department. The Circuit Court may assume jurisdiction over any such proceeding regardless of whether the child was in the physical custody of both parents, was in the sole legal or physical custody of only one parent, caregiver, or some other person, or was in the physical or legal custody of no person when the event or condition occurred that brought the child to the attention of the court. When the court obtains jurisdiction of any child who has been found to be dependent, the court shall retain jurisdiction, unless relinquished by its order, until the child reaches 18 years of age. However, if a youth petitions the court at any time before his 19th birthday requesting the court’s continued jurisdiction, the juvenile court may retain jurisdiction for a period not to exceed 1 year following the youth’s 18th birthday for the purpose of determining whether appropriate aftercare support, transitional support, mental health, and developmental disability services have been provided to the formerly dependent child who was in the legal custody of the department immediately before his 18th birthday. F.S.A. §39.013(2). 5. Procedural Paperwork Intitials, rather than the names, of the child and parents are used in docketing and in all references in briefs, other papers, or court decisions. Florida Rules of Juvenile Procedure 9.146(e). All papers remain sealed in the clerk’s office and are not open to inspection except by parties and their counsel, or by order of the court. Florida Rules of Juvenile Procedure 9.146(f). 6. Parents Right to Counsel At each stage of the proceedings relating to the dependency, the court shall advise the parents of the right to counsel. The court shall appoint counsel for indigent parents. The court shall ascertain whether the right to counsel is understood. When right to counsel is waived, the court shall determine whether the waiver is knowing and intelligent. The court shall enter its findings in


writing with respect to the appointment or waiver of counsel for indigent parents or the waiver of counsel by non-indigent parents. F.S.A. §39.013(9)(a). A waiver of counsel may not be accepted if it appears that the parent is unable to make an intelligent and understanding choice, because of mental condition, age, education, experience, the nature or complexity of the case, or other factors. A waiver of counsel made in court must be of record. If a waiver of counsel is accepted at any hearing or proceeding, the offer of assistance of counsel must be renewed by the court at each subsequent stage of the proceedings at which the parent appears without counsel. F.S.A. §39.013(9)(c).

Once counsel has entered an appearance or has been appointed by the court to represent the parent of the child, the attorney shall continue to represent the parent throughout the proceedings. If the attorney-client relationship is discontinued, the court shall advise the parent of the right to have new counsel retained or appointed for the remainder of the proceedings. F.S.A. §39.031(9)(b).

This right to counsel does not apply to any parent who has voluntarily executed a written surrender of the child and consents to the entry of a court order terminating parental rights. F.S.A. §39.031(9)(d). 7. Continuances The Legislature finds that time is of the essence for establishing permanency for a child in the dependency system. Time limitations are a right of the child which may not be waived, extended, or continued at the request of any party. F.S.A. §39.0136(1). In order to expedite permanency for a child, the total time allowed for continuances or extensions of time may not exceed 60 days within any 12 month period for any proceedings. A continuance or extension of time may be granted only for extraordinary circumstances in which it is necessary to preserve the constitutional rights of a party or if substantial evidence exists to demonstrate that without granting a continuance or extension of time the child’s best interests will be harmed. F.S.A. §39.0136(3). A continuance or an extension of time is limited to the number of days absolutely necessary to complete a necessary task in order to preserve the rights of a party or the best interests of a child. F.S.A. §39.0136(4). 8. Appeals Any party to a dependency proceeding who is affected by a dependency order may appeal from the order to the appropriate District Court of Appeal. F.S.A. §39.510(1). The taking of an appeal shall not operate as a supersedeas in any case unless pursuant to an order of the court, except that a permanent


order of commitment to a licensing child placing agency or the Department of Children and Families for subsequent adoption shall be suspended while the appeal is pending, but the child shall continue in custody until the appeal is decided. F.S.A. §39.510(3). 9. Guardian ad Litem A guardian ad litem is a duly certified volunteer; a staff attorney, contract attorney, or certified pro bono attorney working on behalf of a guardian ad litem or the program; staff members of the program office; a court appointed attorney; or a responsible adult who is appointed by the court to represent the best interests of a child in a proceeding who is a party to any judicial proceeding as a representative of the child, and who serves until discharged by the court. F.S.A. §39.820(1). A guardian ad litem has the following responsibilities: (1) gathering information concerning the allegations of the petition and filing a written report, at least 72 hours prior to the applicable hearing; (2) being present at all court hearings; (3) representing the best interests of the child; and (4) performing other duties consistent with appointment. F.S.A. §§39.822(3), (4).

B. PROTECTIVE INVESTIGATIONS

1. Initiation of Protective Investigations Upon receiving a report of known or suspected child abuse, abandonment, neglect, or that a child is in need of supervision and care and has no parent, legal custodian, or responsible adult relative immediately known and available to provide supervision and care, the central abuse hotline shall determine if the report requires an immediate on-site protective investigation. For reports requiring an immediate on-site protective investigation, the central abuse hotline shall immediately notify the Department of Children and Families’ designated district staff responsible for protective investigations to ensure that an on-site investigation is promptly initiated. For reports not requiring an immediate on-site protective investigation, the central abuse hotline shall notify the Department’s designated district staff responsible for protective investigations in sufficient time to allow for an investigation. At the time of notification, the central abuse hotline shall also provide information to district staff on any previous report concerning a subject of the present report or any pertinent information relative to the present report or any noted earlier reports. F.S.A. §39.301(1). The Department shall immediately forward allegations of criminal conduct to the municipal or county law enforcement agency of the


municipality or county in which the alleged conduct has occurred. F.S.A. §39.301(2). Upon commencing an investigation, the child protective investigator shall inform any subject of the investigation of the following:

(1) The names of the investigators and identifying credentials from the Department of Children and Families;

(2) The purpose of the investigation; (3) The right to obtain his or her own attorney and ways that the information

provided by the subject may be used; (4) The possible outcomes and services of the Department’s response shall

be explained to the parent or legal custodian; (5) The right of the parent or legal custodian to be involved to the fullest

extent possible in determining the nature of the allegation and the nature of any identified problem; and

(6) The duty of the parent or legal custodian to report any change in the residence or location of the child to the investigator and that the duty to report continues until the investigation is closed. F.S.A. §39.301(5)(a).

If it is determined that the child is in need of the protection and supervision of the court, the Department of Children and Families shall file a petition for dependency. A petition for dependency shall be filed in all cases classified by the Department as high-risk. Factors that the Department may consider in determining whether a case is high-risk include, but are not limited to, the young age of the parents or legal custodians; the use of illegal drugs; the arrest of the parents or legal custodians on charges of manufacturing, processing, disposing of, or storing, either temporarily or permanently, any substances that are illegal; or domestic violence. If a petition for dependency is not being filed by the Department, the person or agency originating the report shall be advised of the right to file a petition. F.S.A. §39.301(9). On-site visits and face-to-face interviews with the child or family shall be unannounced unless it is determined by the Department, its agent, or contract provider that such unannounced visit would threaten the safety of the child. F.S.A. §39.301(14). When a child is taken into custody, the authorized agent of the Department of Children and Families shall request that the child’s parent, caregiver, or legal custodian disclose the names, relationships, and addresses of all parents and prospective parents and all next of kin, so far as are known. F.S.A. §39.301(16).


C. TAKING CHILDREN INTO CUSTODY AND SHELTER HEARINGS

1. Detaining a Child Any person in charge of a hospital or similar institution, or any physician or licensed health care professional treating a child may detain that child without the consent of the parents, caregiver, or legal custodian, whether or not additional medical treatment is required, if the circumstances are such, or if the condition of the child is such, that returning the child to the care or custody of the parents, caregiver, or legal custodian presents an imminent danger to the child’s life or physical or mental health. Any such person detaining a child shall immediately notify the Department of Children and Fam ilies, whereupon the Department shall immediately begin a child protective investigation and shall make every reasonable effort to immediately notify the parents or legal custodian that such child has been detained. If the Department determines that the child should be detained longer than 24 hours, it shall petition the court through the attorney representing the Department as quickly as possible and not to exceed 24 hours, for an order authorizing such custody in the same manner as if the child were placed in a shelter. F.S.A. §39.395. 2. Taking a Child into Custody A law enforcement officer, or an authorized agent of the Department of Children and Families, if the officer or authorized agent may take a child into custody if he has probable cause to support a finding:

(1) That the child has been abused, neglected, or abandoned, or is suffering from or is in imminent danger of illness or injury as a result of abuse, neglect, or abandonment;

(2) That the parent or legal custodian of the child has materially violated a condition of placement imposed by the court; or

(3) That the child has no parent, legal custodian, or responsible adult relative immediately known and available to provide supervision and care.

For cases involving allegations of abandonment, abuse, or neglect, or other

dependency cases, within 3 days after such release or within 3 days after delivering the child to an authorized agent of the Department of Children and Families, the law enforcement officer who took the child into custody shall make a full written report to the Department. If the child is taken into custody by, or is delivered to, an authorized agent of the Department, the agent shall review the facts supporting the removal with an attorney representing the Department.


The purpose of the review is to determine whether there is probable cause for the filing of a shelter petition. If the facts are not sufficient, the child shall immediately be returned to the custody of the parent or legal custodian. If the facts are sufficient and the child has not been returned to the custody of the parent or legal custodian, the Department of Children and Families shall file the petition and schedule a hearing, and the attorney representing the Department shall request that a shelter hearing be held within 24 hours after the removal of the child. While awaiting the shelter hearing, the authorized agent of the department may place the child in licensed shelter care or may release the child to a parent or legal custodian or responsible adult relative or the adoptive parent of the child’s sibling who shall be given priority consideration over a licensed placement, or a responsible adult approved by the Department if this is in the best interests of the child. Placement of a child which is not in a licensed shelter must be preceded by a criminal history records check. In addition, the Department may authorize placement of a housekeeper in the home of a child alleged to be dependent until the parent or legal custodian assumes care of the child. 3. Placement in a Shelter Whenever a child is taken into custody, the Department of Children and Families shall immediately notify the parents or legal custodians, shall provide the parents or legal custodians with a statement setting forth a summary of procedures involved in dependency cases, and shall notify them of their right to obtain their own attorney. The parents or legal custodians of the child shall be given such notice as best ensures their actual knowledge of the date, time, and location of the shelter hearing. If the parents or legal custodians are outside the jurisdiction of the court, are not known, or cannot be located or refuse or evade service, they shall be given such notice as best ensures their actual knowledge of the date, time, and location of the shelter hearing. The person providing or attempting to provide notice to the parents or legal custodians shall, if the parents or legal custodians are not present at the hearing, advise the court either in person or by sworn affidavit, of the attempts made to provide notice and the results of those attempts. F.S.A. §39.402(5). A child may not be removed from the home or continued out of the home pending disposition if, with the provision of appropriate and available early intervention or preventive services, including services provided in the home, the child could safely remain at home. If the child’s safety and well-being are in danger, the child shall be removed from danger and continue to be removed until the danger has passed. If the child has been removed from the home and the reasons for his removal have been remedied, the child may be returned to


the home. If the court finds that the prevention or reunification efforts of the Department of Children and Families will allow the child to remain safely at home, the court shall allow the child to remain in the home. F.S.A. §39.402(7). A child may not be held in a shelter longer than 24 hours unless an order so directing is entered by the court after a shelter hearing. In the interval until the shelter hearing is held, the decision to place the child in a shelter or release the child from a shelter lies with the protective investigator. F.S.A. §39.402(8)(a). The shelter hearing order shall contain a written determination as to whether the Department of Children and Families has made a reasonable effort to prevent or eliminate the need for removal or continued removal of the child from the home. This determination must include a description of which specific services, if available, could prevent or eliminate the need for removal or continued removal from the home and the date by which the services are expected to become available. If services are not available to prevent or eliminate the need for removal or continued removal of the child from the home, the written determination must also contain an explanation describing why the services are not available for the child. If the Department has not made an effort to prevent or eliminate the need for removal, the court shall order the Department to provide appropriate and available services to ensure the protection of the child in the home when the services are necessary for the child’s health and safety. F.S.A. §39.402(10). A child may not be held in a shelter under an order so directing for more than 60 days without an adjudication of dependency. A child may not be held in a shelter for more than 30 days after the entry of an order of adjudication unless an order of disposition has been entered by the court. F.S.A. §39.402(13). At the conclusion of a shelter hearing, the court shall notify all parties in writing of the next scheduled hearing to review the shelter placement. The hearing shall be held no later than 30 days after placement of the child in shelter status, in conjunction with the arraignment hearing, and at such times as are otherwise provided by law or determined by the court to be necessary. F.S.A. §39.402(16). At the shelter hearing, the court shall inquire of the parent whether the parent has relatives who might be considered as a placement for the child. The parent shall provide to the court and all parties identification and location information regarding the relatives. The court shall advise the parent that the parent has a continuing duty to inform the Department of Children and Families of any relative who should be considered for placement of the child. F.S.A. §39.402(17). The court shall advise the parents that, if the parents fail to substantially comply with the case plan, their parental rights may be terminated


and that the child’s out-of-home placement may become permanent. F.S.A. §39.402(18).

D. PETITION FOR DEPENDENCY

1. Purpose and Contents of Petition for Dependency The purpose of a petition seeking the adjudication of a child as a dependent child is the protection of the child and not the punishment of the person creating the condition of dependency. F.S.A. §39.501(2). The petition shall be in writing, shall identify and list all parents, if known, and all current legal custodians of the child, and shall be signed by the petitioner under oath stating the petitioner’s good faith in filing the petition. When the petition is filed by the Department of Children and Families, it shall be signed by an attorney for the department. F.S.A. §39.501(3)(a). The petition must specifically set forth the acts or omissions upon which the petition is based and the identity of the person or persons alleged to have committed the acts or omissions, if known. The petition need not contain allegations of acts or omissions by both parents. F.S.A. §39.501(c). The petitioner must state in the petition, if known, whether:

(1) A parent or legal custodian named in the petition has previously unsuccessfully participated in voluntary services offered by the Department of Children and Families;

(2) A parent or legal custodian named in the petition has participated in mediation and whether a mediation agreement exists;

(3) A parent or legal custodian has rejected the voluntary services offered by the department; or

(4) The department has determined that voluntary services are not appropriate for the parent or legal custodian and the reasons for such determination. F.S.A. §39.501(d).

When a child has been placed in shelter status by order of the court, a

petition alleging dependency must be filed within 21 days after the shelter hearing, or within 7 days after any party files a demand for the early filing of a dependency petition, whichever comes first. In all other cases, the petition must be filed within a reasonable time after the date the child was referred to protective investigation. The child’s parent or legal custodian must be served with a copy of the petition at least 72 hours before the arraignment hearing. F.S.A. §39.501(4). A petition for termination of parental rights may be filed at any time. F.S.A. §39.501(5).


2. Notice, Process, and Service Unless parental rights have been terminated, all parents must be notified of all proceedings or hearings involving the child. F.S.A. §39.502(1). The summons shall require the person on whom it is served to appear for a hearing at a time and place specified, not less than 72 hours after service of the summons. A copy of the petition shall be attached to the summons. F.S.A. §39.502(4). It is not necessary to the validity of a proceeding that the parents be present if their identity or residence is unknown after a diligent search has been made, but in this event the petitioner shall file an affidavit of diligent search prepared by the person who made the search and inquiry, and the court may appoint a guardian ad litem for the child. F.S.A. §39.502(8). 3. Identity or Location of Parent Unknown If the identity or location of a parent is unknown and a petition for dependency or shelter is filed, the court shall conduct the following inquiry of the parent or legal custodian who is available, or, if no parent or legal custodian is available, of any relative or custodian of the child who is present at the hearing and likely to have the information:

(1) Whether the mother of the child was married at the probable time of conception of the child or at the time of birth of the child;

(2) Whether the mother was cohabiting with a male at the probable time of conception of the child;

(3) Whether the mother has received payments or promises of support with respect to the child or because of her pregnancy from a man who claims to be the father;

(4) Whether the mother has named any man as the father on the birth certificate of the child or in connection with applying for or receiving public assistance; and

(5) Whether any man has acknowledged or claimed paternity of the child in a jurisdiction in which the mother resided at the time of or since conception of the child, or in which the child has resided or resides. F.S.A. §39.503(1).

If the inquiry identifies any person as a parent or prospective parent, the

court shall require notice of the hearing to be provided to that person. F.S.A. §39.503(3). If the inquiry fails to identify any person as a parent or prospective parent, the court shall so find and may proceed without further notice. F.S.A. §39.503(4). If the inquiry identifies a parent or prospective parent, and that person’s location is unknown, the court shall direct the petitioner to conduct a


diligent search for that person before scheduling a disposition hearing regarding the dependency of the child unless the court finds that the best interest of the child requires proceeding without notice to the person whose location is unknown. F.S.A. §39.503(5). If the inquiry and diligent search identifies a prospective parent, that person must be given the opportunity to become a party to the proceedings by completing a sworn affidavit of parenthood and filing it with the court or the Department of Children and Families. A prospective parent who files a sworn affidavit of parenthood while the child is a dependent child, but no later than at the time of or prior to the adjudicatory hearing in any termination of parental rights proceeding for the child, shall be considered a parent for all purposes unless the other parent contests the determination of parenthood. If the known parent contests the recognition of the prospective parent as a parent, the prospective parent shall not be recognized as a parent until proceedings have been concluded. However, the prospective parent shall continue to receive notice of hearings as a participant pending results of the proceedings. F.S.A. §39.503(8).

E. ARRAIGNMENT HEARING

When a child has been sheltered by order of the court, an arraignment hearing must be held no later than 28 days after the shelter hearing, or within 7 days after the date of filing of the dependency petition if a demand for early filing has been made by any party, for the parent or legal custodian to admit, deny, or consent to findings of dependency alleged in the petition. If the parent or legal custodian admits or consents to the findings in the petition, the court shall conduct a disposition hearing within 15 days after the arraignment hearing. However, if the parent or legal custodian denies any of the allegations of the petition, the court shall hold an adjudicatory hearing within 30 days after the date of the arraignment hearing unless a continuance is granted. F.S.A. §39.506(1). At the arraignment hearing, the court shall review the necessity for the child’s continued placement in the shelter. The court shall also make a written determination regarding the child’s continued placement in shelter within 24 hours after any violation of the time requirements for the filing of a petition or prior to the court’s granting any continuance. F.S.A. §39.506(8). At the conclusion of the arraignment hearing, all parties and the relatives who are providing out-of-home care for the child shall be notified in writing by the court of the date, time, and location for the next scheduled hearing. F.S.A. §39.506(9).


F. ADJUDICATORY HEARING

The adjudicatory hearing shall be held as soon as practicable after the petition for dependency is filed and in accordance with the Florida Rules of Juvenile Procedure, but no later than 30 days after the arraignment. F.S.A. §39.507(1)(a). Adjudicatory hearings shall be conducted by the judge without a jury, and adjourning the hearings from time to time as necessary. In a hearing on a petition in which it is alleged that the child is dependent, a preponderance of evidence will be required to establish the state of dependency. Any evidence presented in the dependency hearing which was obtained as the result of an anonymous call must be independently corroborated. In no instance shall allegations made in an anonymous report of abuse, abandonment, or neglect be sufficient to support an adjudication of dependency in the absence of corroborating evidence. F.S.A. §39.507(1)(b). All hearings shall be open to the public, and a person may not be excluded except on special order of the judge, who may close any hearing to the public upon determining that the public interest or the welfare of the child is best served by so doing. The parents or legal custodians shall be allowed to obtain discovery. Hearings involving more than one child may be held simultaneously when the children involved are related to each other or were involved in the same case. The child and the parents, caregivers, or legal custodians of the child may be examined separately and apart from each other. F.S.A. §39.507(2). If the court finds at the adjudicatory hearing that the child named in a petition is not dependent, it shall enter an order so finding and dismissing the case. F.S.A. §39.507(4). If the court finds that the child named in the petition is dependent, but finds that no action other than supervision in the child’s home is required, it may enter an order briefly stating the facts upon which its finding is based, but withholding an order of adjudication and placing the child’s home under the supervision of the Department of Children and Families. If the court later finds that the parents of the child have not complied with the conditions of supervision imposed, the court may, after a hearing to establish the non-compliance, but without further evidence of the state of dependency, enter an order of adjudication and shall thereafter have full authority to provide for the child as adjudicated. If the child is to remain in an out-of-home placement by order of the court, the court must adjudicate the child dependent. F.S.A. §39.507(5). At the conclusion of the adjudicatory hearing, if the child named in the petition is found dependent, the court shall schedule the disposition hearing within 30 days after the last day of the adjudicatory hearing. All parties shall be notified in writing at the conclusion of the adjudicatory hearing by the clerk of


the court of the date, time, and location of the disposition hearing. F.S.A. §39.507(8).

G. DISPOSITION HEARING

1. Disposition Hearing Procedure A disposition hearing shall be conducted by the court, if the court finds that the facts alleged in the petition for dependency were proven in the adjudicatory hearing, or if the parents or legal custodians have consented to the finding of dependency or admitted the allegations in the petition, have failed to appear for the arraignment hearing after proper notice, or have not been located despite a diligent search having been conducted. F.S.A. §39.521(1). At the conclusion of the disposition hearing, the court shall schedule the initial judicial review hearing which must be held no later than 90 days after the date of the disposition hearing or after the date of the hearing at which the court approves the case plan, whichever occurs earlier, but in no event shall the review hearing be held later than 6 months after the date of the child’s removal from the home. F.S.A. §39.521(1)(c). The court shall, in its written order of disposition, include all of the following:

(1) The placement or custody of the child; (2) Special conditions of placement and visitation; (3) Evaluation, counseling, treatment activities, and other actions to be taken

by the parties, if ordered; (4) The persons or entities responsible for supervising or monitoring services

to the child and parent; (5) Continuation or discharge of the guardian ad litem, as appropriate; (6) The date, time, and location of the next scheduled review hearing; and (7) If the child is in an out-of-home placement, child support to be paid by

the parents, or the guardian of the child’s estate if possessed of assets which under law may be disbursed for the care, support, and maintenance of the child. F.S.A. §39.521(1)(d).

If the court finds that the prevention or reunification efforts of the Department of Children and Families will allow the child to remain safely at home or be safely returned to the home, the court shall allow the child to remain in or return to the home after making a specific finding of fact that the reasons for removal have been remedied to the extent that the child’s safety, well-being, and physical, mental, and emotional health will not be endangered. F.S.A. §39.521(1)(e). If the court places the child in an out-of-home placement, the disposition order must include a written determination that the child cannot


safely remain at home with reunification or family preservation services and that removal of the child is necessary to protect the child. If the child is removed before the disposition hearing, the order must also include a written determination as to whether, after removal, the Department made a reasonable effort to reunify the parent and child. F.S.A. §39.521(1)(f). 2. Post-Disposition Change of Custody The court may change the temporary legal custody or the conditions of protective supervision at a postdisposition hearing, without the necessity of another adjudicatory hearing. A child who has been placed in the child’s own home under the protective supervision of an authorized agent of the Department of Children and Families, in the home of a relative, in the home of a legal custodian, or in some other place may be brought before the court by the Department or by any other interested person, upon the filing of a petition alleging a need for a change in the conditions of protective supervision or the placement. If the parents or other legal custodians deny the need for a change, the court shall hear all parties in person or by counsel, or both. Upon the admission of a need for a change or after such hearing, the court shall enter an order changing the placement, modifying the conditions of protective supervision, or continuing the conditions of protective supervision as ordered. The standard for changing custody of the child shall be the best interest of the child. F.S.A. §39.522(1). In cases where the issue before the court is whether a child should be reunited with a parent, the court shall determine whether the parent has substantially complied with the terms of the case plan to the extent that the safety, well-being, and physical, mental, and emotional health of the child is not endangered by the return of the child to the home. F.S.A. §39.522(2).

H. CASE PLAN APPROVAL

1. Case Plan Development The Department of Children and Families shall prepare a draft of the case plan for each child receiving services. A parent of a child may not be threatened or coerced with the loss of custody or parental rights for failing to admit in the case plan that there was abuse, neglect, or abandonment a child. Participating in the development of a case plan is not an admission to any allegation of abuse, abandonment, or neglect, and it is not a consent to a finding of dependency or termination of parental rights. F.S.A. §39.6011(1). Each case plan must contain: (1) a description of the identified problem being addressed, including the parent’s behavior or acts resulting in risk to the


child and the reason for the intervention by the department; (2) permanency goal; (3) date the compliance period expires; and (4) written notice to the parent that failure of the parent to substantially comply with the case plan may result in the termination of parental rights, and that a material breach of the case plan may result in the filing of a petition for termination of parental rights sooner than the compliance period set forth in the case plan. F.S.A. §39.6011(2). When the permanency goal for a child is adoption, the case plan must include documentation of the steps the agency is taking to find an adoptive family or other permanent living arrangement for the child. F.S.A. §39.6011(5). The case plan must be filed with the court and copies provided to all parties, including the child if appropriate, not less than 3 business days before the disposition hearing. F.S.A. §39.6011(7). 2. Parents Not Participating in Case Plan In the event the parents will not or cannot participate in preparation of a case plan, the Department of Children and Families shall submit a full explanation of the circumstances and state the nature of its efforts to secure such persons’ participation in the preparation of a case plan. F.S.A. §39.602(1). In a case in which the physical, emotional, or mental condition or physical location of the parent is the basis for the parent’s non-participation, it is the burden of the Department to provide substantial evidence to the court that such condition or location has rendered the parent unable or unwilling to participate in the preparation of a case plan, either pro se or through counsel. The supporting documentation must be submitted to the court at the time the plan is filed. F.S.A. §39.602(2).

At least 72 hours prior to the hearing in which the court will consider approval of the case plan, all parties must be provided with a copy of the plan developed by the Department of Children and Families. If the location of one or both parents is unknown, this must be documented in writing and included in the plan submitted to the court. After the filing of the plan, if the location of an absent parent becomes known, that parent must be served with a copy of the plan. F.S.A. §39.602(4)(a).

3. Court Approval of Case Plan All case plans and amendments to case plans must be approved by the court. At the hearing on the case plan, which shall occur in conjunction with the disposition hearing unless otherwise directed by the court, the court shall determine:

(1) All parties who were notified are in attendance at the hearing;


(2) If the plan is consistent with previous orders of the court placing the child in care;

(3) If the plan is consistent with the requirements for the content of a plan; (4) In involuntary placements, whether each parent was notified of the right

to counsel at each stage of the dependency proceedings; (5) Whether each parent whose location was known was notified of the right

to participate in the preparation of a case plan and of the right to receive assistance from any other person in the preparation of the case plan; and

(6) Whether the plan is meaningful and designed to address facts and circumstances upon which the court based the finding of dependency in involuntary placements or the plan is meaningful and designed to address facts and circumstances upon which the child was placed in out-of-home care voluntarily. F.S.A. §39.603(1).

I. PERMANENCY HEARING

1. Permanency Determination by the Court Time is of the essence for permanency of children in the dependency system. A permanency hearing must be held no later than 12 months after the date the child was removed from the home or no later than 30 days after a court determines that reasonable efforts to return a child to either parent are not required, whichever occurs first. The purpose of the permanency hearing is to determine when the child will achieve the permanency goal or whether modifying the current goal is in the best interest of the child. A permanency hearing must be held at least every 12 months for any child who continues to receive supervision from the Department of Children and Families or awaits adoption. F.S.A. §39.621(1). At the permanency hearing, the court shall determine: whether the current permanency goal for the child is appropriate or should be changed; when the child will achieve one of the permanency goals; and whether the Department of Children and Families has made reasonable efforts to finalize the permanency plan currently in effect. F.S.A. §39.621(4). The best interest of the child is the primary consideration in determining the permanency goal for the child. F.S.A. §39.621(5). If a child will not be reunited with a parent, adoption is the primary permanency option. If the child is placed with a relative or with a relative of the child’s half-brother or half-sister as a permanency option, the court may recognize the permanency of this placement without requiring the relative to adopt the child. If the court approves a permanency goal of permanent guardianship of a dependent child, placement with a fit and willing relative, or another planned permanent living arrangement, the court shall make findings as


to why this permanent placement is established without adoption of the child to follow. F.S.A. §39.621(6). The permanency placement is intended to continue until the child reaches the age of majority and may not be disturbed absent a finding by the court that the circumstances of the permanency placement are no longer in the best interest of the child. If a parent who has not had his parental rights terminated makes a motion for reunification or increased contact with the child, the court shall hold a hearing to determine whether the dependency case should be reopened and whether there should be a modification of the order. At the hearing, the parent must demonstrate that the safety, well-being, and physical, mental, and emotional health of the child is not endangered by the modification. F.S.A. §39.621(9). The court shall base its decision concerning any motion by a parent for reunification or increased contact with a child on the effect of the decision on the safety, well-being, and physical and emotional health of the child. F.S.A. §39.621(10). Placement of a child in a permanent guardianship, with a fit and willing relative, or in another planned permanent living arrangement does not terminate the parent-child relationship. F.S.A. §39.621(11). 2. Permanent Guardianship a. Permanent Guardian If a court determines that reunification or adoption is not in the best interest of the child, the court may place the child in a permanent guardianship with a relative or other adult approved by the court if all of the following conditions are met:

(1) The child has been in the placement for not less than the preceding 6 months;

(2) The permanent guardian is suitable and able to provide a safe and permanent home for the child;

(3) The court determines that the child and the relative or other adult are not likely to need supervision or services of the Department of Children and Families to ensure the stability of the permanent guardianship;

(4) The permanent guardian has made a commitment to provide for the child until the child reaches the age of majority and to prepare the child for adulthood and independence; and

(5) The permanent guardian agrees to give notice of any change in his residential address or the residence of the child by filing a written document in the dependency file of the child with the Clerk of the Court. F.S.A. §39.6221(1).


b. Fit and Willing Relative The court may place the child with a fit and willing relative as a permanency option if: the child has been in the placement for at least the preceding 6 months; the relative has made a commitment to provide for the child until the child reaches the age of majority and to prepare the child for adulthood and independence; the relative is suitable and able to provide a safe and permanent home for the child; and the relative agrees to give notice of any change in his residence or the residence of the child by filing a written document with the Clerk of Court. F.S.A. §39.6231(1). c. Another Permanent Living Arrangement The court may approve placement of the child in another planned permanent living arrangement if: the court finds a more permanent placement, such as adoption, permanent guardianship, or placement with a fit and willing relative, is not in the best interests of the child; the Department of Children and Families documents reasons why the placement will endure and how the proposed arrangement will be more stable and secure than ordinary foster care; the court finds that the health, safety, and well-being of the child will not be jeopardized by such an arrangement; and there are compelling reasons to show that placement in another planned permanent living arrangement is the most appropriate permanency goal. F.S.A. §39.6241(1).

J. JUDICIAL REVIEWS

The court shall have continuing jurisdiction and shall review the status of the child at least every 6 months or more frequently if the court deems it necessary or desirable. F.S.A. §39.701(1)(a). The court shall retain jurisdiction over a child returned to his parents for a minimum period of 6 months following the reunification, but, at that time, based on a report of the social service agency and the guardian ad litem, if one has been appointed, and any other relevant factors, the court shall make a determination as to whether supervision by the department and the court’s jurisdiction shall continue or be terminated. F.S.A. §39.701(1)(b).

K. TERMINATION OF PARENTAL RIGHTS ADVISORY HEARING

1. Procedure Before the court may terminate parental rights, the following requirements must be met:


(1) Notice of the date, time, and place of the advisory hearing for the petition to terminate parental rights and a copy of the petition must be personally served upon the following persons, specifically notifying them that a petition has been filed: (a) The parents of the child; (b) The legal custodians of the child; (c) If the parents who would be entitled to notice are dead or unknown,

a living relative of the child, unless upon diligent search and inquiry no such relative can be found;

(d) Any person who has physical custody of the child; (e) Any grandparent entitled to priority for adoption; (f) Any prospective parent who has been identified; and (g) The guardian ad litem for the child or the representative of the

guardian ad litem program, if the program has been appointed. F.S.A. §39.801(3)(a).

If the person served with notice fails to personally appear at the advisory hearing, the failure to personally appear shall constitute consent for termination of parental rights by the person given notice. If a parent appears for the advisory hearing and the court orders that parent to personally appear at the adjudicatory hearing for the petition for termination of parental rights, stating the date, time, and location of said hearing, then failure of that parent to personally appear at the adjudicatory hearing shall constitute consent for termination of parental rights. F.S.A. §39.801(3)(d). 2. Petition All proceedings seeking an adjudication to terminate parental rights must be initiated by the filing of an original petition by the Department of Children and Families, the guardian ad litem, or any other person who has knowledge of the facts alleged or is informed of them and believes that they are true. F.S.A. §39.802(1). The petition must be in writing and signed by the petitioner or, if the Department is the petitioner, by an employee of the Department, under oath stating the petitioner’s good faith in filing the petition. F.S.A. §39.802(2). When a petition for termination of parental rights has been filed, the Clerk of the Court shall set the case before the court for an advisory hearing. F.S.A. §39.802(3). A petition for termination of parental rights filed must contain facts supporting the following allegations:

(1) That at least one of the grounds listed in the statutes has been met;


(2) That the parents of the child were informed of their right to counsel at all hearings that they attended and that a dispositional order adjudicating the child dependent was entered in any prior dependency proceeding relied upon in offering a parent a case plan; and

(3) That the manifest best interests of the child would be served by the granting of the petition. F.S.A. §39.802(4).

3. Grounds for Termination of Parental Rights Grounds for the termination of parental rights may be established under any of the following circumstances:

(1) When the parent or parents have voluntarily executed a written surrender of the child and consented to the entry of an order giving custody of the child to the Department of Children and Families for subsequent adoption and the Department is willing to accept custody of the child;

(2) Abandonment or when the identity or location of the parent or parents is unknown and cannot be ascertained by diligent search within 60 days;

(3) When the parent or parents engaged in conduct toward the child or toward other children that demonstrates that the continuing involvement of the parent or parents in the parent-child relationship threatens the life, safety, well-being, or physical, mental, or emotional health of the child irrespective of the provision of services;

(4) When the parent of a child is incarcerated; (5) When a child has been adjudicated dependent, a case plan has been filed

with the court; (6) The parent or parents engaged in egregious conduct or had the

opportunity and capability to prevent and knowingly failed to prevent egregious conduct that threatens the life, safety, or physical, mental, or emotional health of the child or the child’s sibling;

(7) The parent or parents have subjected the child or another child to aggravated child abuse, sexual battery or sexual abuse, or chronic abuse;

(8) The parent or parents have committed the murder, manslaughter, aiding or abetting the murder, or conspiracy or solicitation to murder the other parent or another child, or a felony battery that resulted in serious bodily injury to the child or to another child;

(9) The parental rights of the parent to a sibling of the child have been terminated involuntarily;

(10) The parent or parents have a history of extensive, abusive, and chronic use of alcohol or a controlled substance which renders them incapable of caring for the child, and have refused or failed to complete available treatment for such use during the 3-year period immediately preceding the filing of the petition for termination of parental rights;


(11) A test administered at birth that indicated that the child’s blood, urine, or meconium contained any amount of alcohol or a controlled substance or metabolites of such substances, the presence of which was not the result of medical treatment administered to the mother or the newborn infant, and the biological mother of the child is the biological mother of at least one other child who was adjudicated dependent after a finding of harm to the child’s health or welfare due to exposure to a controlled substance or alcohol, after which the biological mother had the opportunity to participate in substance abuse treatment; or

(12) On three or more occasions the child or another child of the parent or parents has been placed in out-of-home care, and the conditions that led to the child’s out-of-home placement were caused by the parent or parents. F.S.A. §39.806(1).

4. Advisory Hearing An advisory hearing on the petition to terminate parental rights must be held as soon as possible after all parties have been served with a copy of the petition and a notice of the date, time, and place of the advisory hearing for the petition. F.S.A. §39.808(1). At the hearing the court shall inform the parties of their rights, shall appoint counsel for the parties in accordance with legal requirements, and shall appoint a guardian ad litem to represent the interests of the child if one has not already been appointed. F.S.A. §39.808(2). The court shall set a date for an adjudicatory hearing to be held within 45 days after the advisory hearing, unless all of the necessary parties agree to some other hearing date. F.S.A. §39.808(3). An advisory hearing is not required if a petition is filed seeking an adjudication for termination of parental rights based on a voluntary surrender of parental rights. Adjudicatory hearings for petitions for voluntary termination must be held within 21 days after the filing of the petition. F.S.A. §39.808(4). Not less than 10 days before the adjudicatory hearing on a petition for involuntary termination of parental rights, the court shall conduct a pretrial status conference to determine the order in which each party may present witnesses or evidence, the order in which cross-examination and argument shall occur, and any other matters that may aid in the conduct of the adjudicatory hearing to prevent any undue delay in the conduct of the adjudicatory hearing. F.S.A. §39.808(5). 5. Adjudicatory Hearing In a hearing on a petition for termination of parental rights, the court shall consider the elements required for termination. Each of these elements must be established by clear and convincing evidence before the petition is granted. F.S.A. §39.809(1). The adjudicatory hearing must be held within 45 days after


the advisory hearing, but reasonable continuances for the purpose of investigation, discovery, or procuring counsel or witnesses may, when necessary, be granted. F.S.A. §39.809(2). The adjudicatory hearing must be conducted by the judge without a jury. F.S.A. §39.809(3). All hearings involving termination of parental rights are confidential and closed to the public. Hearings involving more than one child may be held simultaneously when the children involved are related to each other or were involved in the same case. The child and the parents may be examined separately and apart from each other. F.S.A. §39.809(4). The judge shall enter a written order with the findings of fact and conclusions of law. F.S.A. §39.809(5). 6. Manifest Best Interests of the Child In a hearing on a petition for termination of parental rights, the court shall consider the manifest best interests of the child. For the purpose of determining the manifest best interests of the child, the court shall consider and evaluate all relevant factors, including, but not limited to:

(1) The ability and disposition of the parent or parents to provide the child with food, clothing, medical care or other remedial care recognized, and other material needs of the child;

(2) The capacity of the parent or parents to care for the child to the extent that the child’s safety, well-being, and physical, mental, and emotional health will not be endangered upon the child’s return home;

(3) The present mental and physical health needs of the child and such future needs of the child to the extent that such future needs can be ascertained based on the present condition of the child;

(4) The love, affection, and other emotional ties existing between the child and the child’s parent or parents, siblings, and other relatives, and the degree of harm to the child that would arise from the termination of parental rights and duties;

(5) The child’s ability to form a significant relationship with a parental substitute and the likelihood that the child will enter into a more stable and permanent family relationship as a result of permanent termination of parental rights and duties;

(6) The length of time that the child has lived in a stable, satisfactory environment and the desirability of maintaining continuity;

(7) The reasonable preferences and wishes of the child, if the court deems the child to be of sufficient intelligence, understanding, and experience to express a preference; and

(8) The recommendations for the child provided by the child’s guardian ad litem or legal representative. F.S.A. §39.810.


7. Order of Disposition If the child is in the custody of the Department of Children and Families and the court finds that the grounds for termination of parental rights have been established by clear and convincing evidence, the court shall, by order, place the child in the custody of the department for the purpose of adoption. F.S.A. §39.811(2). If the child is in the custody of one parent and the court finds that the grounds for termination of parental rights have been established for the remaining parent by clear and convincing evidence, the court shall enter an order terminating the rights of the parent for whom the grounds have been established and placing the child in the custody of the remaining parent, granting that parent sole parental responsibility for the child. F.S.A. §39.811(3). If the child is neither in the custody of the Department of Children and Families nor in the custody of a parent and the court finds that the grounds for termination of parental rights have been established for either or both parents, the court shall enter an order terminating parental rights for the parent or parents for whom the grounds for termination have been established and placing the child with the Department or an appropriate legal custodian. If the parental rights of both parents have been terminated, or if the parental rights of only one parent have been terminated and the court makes specific findings based on evidence presented that placement with the remaining parent is likely to be harmful to the child, the court may order that the child be placed with a legal custodian other than the Department after hearing evidence of the suitability of the intended placement. F.S.A. §39.811(4). If the court terminates parental rights, the court shall enter a written order of disposition briefly stating the facts upon which its decision to terminate the parental rights is made. An order of termination of parental rights, whether based on parental consent or after notice served as prescribed in this part, permanently deprives the parents of any right to the child. F.S.A. §39.811(5). The termination of parental rights does not affect the rights of grandparents unless the court finds that continued visitation is not in the best interests of the child or that such visitation would interfere with the permanency goals for the child. F.S.A. §39.811(7)(a). 8. Appeal Any child, any parent or guardian ad litem of any child, any other party to the proceeding who is affected by an order of the court, or the Department of Children and Families may appeal to the appropriate District Court of Appeal within the time and in the manner prescribed by the Florida Rules of Appellate Procedure. The District Court of Appeal shall give an appeal from an order


terminating parental rights priority in docketing and shall render a decision on the appeal as expeditiously as possible. F.S.A. §39.815(1). The taking of an appeal does not operate as a supersedeas in any case unless the court so orders. However, a termination of parental rights order with placement of the child with a licensed child placing agency or the Department of Children and Families for subsequent adoption is suspended while the appeal is pending, but the child shall continue in an out-of-home placement under the order until the appeal is decided. F.S.A. §39.815(3). The case on appeal must be docketed and any papers filed in the appellate court must be titled with the initials, but not the name, of the child and the court case number, and the papers must remain sealed in the office of the clerk of the appellate court when not in use by the appellate court and may not be open to public inspection. The decision of the appellate court must be likewise titled and may refer to the child only by initials and court case number. F.S.A. §39.815(4). The original order of the appellate court, with all papers filed in the case on appeal, must remain in the office of the clerk of the appellate court, sealed and not open to inspection except by order of the appellate court. The clerk of the appellate court shall return to the circuit court all papers transmitted to the appellate court from the circuit court, together with a certified copy of the order of the appellate court. F.S.A. §39.815(5).

L. ADOPTION

1. Eligible Persons Any person, whether a minor or an adult, may be adopted. F.S.A. §63.042. The following persons may adopt:

(1) A husband and wife jointly; (2) An unmarried adult, including the birth parent of the person to be

adopted; (3) The unmarried minor birth parent of the person to be adopted; (4) A married person without the other spouse joining as a petitioner, if the

person to be adopted is not his spouse, and if the other spouse is a parent of the person to be adopted and consents to the adoption, or if the failure of the other spouse to join in the petition or to consent to the adoption is excused by the court for prolonged unexplained absence, unavailability, incapacity or circumstances constituting an unreasonable withholding of consent. F.S.A. §63.042(1), (2).


In addition, a grandparent who has cared for a child for at least six months has the right to petition the court to adopt the child before the child is placed for adoption elsewhere, and the grandparent must be given priority to adopt unless the deceased parent’s testamentary intent is otherwise or the other party seeking to adopt is a stepparent of the child. F.S.A. §63.0425. A person otherwise eligible to adopt may not be prohibited solely because he has a physical disability or handicap, unless the disability or handicap renders the person incapable of serving as an effective parent. F.S.A. §63.042(4). Advanced age alone will not disqualify an adoption petitioner, although it is an important factor to be weighed. In re Adoption of Christian, 184 So.2d 657 (Fla. 1966). Homosexuals are not eligible to adopt by statute, F.S.A. §63.042(3), but the statute may be unconstitutional in light of Seebol v. Farie.

2. Consent and Notice Unless consent is excused by the court, a petition to adopt a minor may be granted only if written consent has been executed by the mother after the birth of the minor. F.S.A. §63.062(1)(a). Consent is also required of the minor’s father if:

(1) The minor was conceived or born while the father was married to the mother;

(2) The minor is his child by adoption; (3) The minor has been established by court proceeding to be his child; (4) He has acknowledged in a signed, witnessed writing that he is the

father of the minor and has filed the acknowledgment with the Vital Statistics Office of the Department of Health and Rehabilitative Services: or

(5) He has provided the child with support in a repetitive, customary manner. F.S.A. §63.062(1)(b).

Under F.S.A. §63.062, consent of the natural mother of a child born out of wedlock is required in all cases unless excused by the court; however, the natural father is required to take some affirmative action in order to make his consent, or the excuse of it, a prerequisite for the child’s adoption. Wylie v. Botos, 416 So.2d 1253 (Fla. 1982). This is consistent with the holding of the U.S. Supreme Court in Caban v. Mohammed, 441 U.S. 380 (1979), that a state may withhold from the father of a child born out of wedlock the privilege of vetoing the adoption of the child in cases where the father has never come forward to participate in the rearing of the child. See also Stevens v. Johnson, 427 So.2d 227 (Fla. App. 1983).


Unless the court dispenses with it in the minor’s best interest, the consent of a minor over 12 years of age to his own adoption is a prerequisite to the adoption. F.S.A. §63.062(1)(c). To adopt an adult, written consent must be given by the adult and the adult’s spouse, if any, and either written consent must be obtained from, or notice given to, the natural parents. F.S.A. §63.062(5). The court may excuse the consent of the following individuals to an adoption: (1) a parent who has deserted a child without affording means of identification or who has abandoned a child; (2) a parent whose parental rights have been terminated by court order; (3) a parent judicially declared incompetent, for whom restoration of competency is medically improbable; (4) a legal guardian or lawful custodian of the person to be adopted, other than a parent, who has failed to respond in writing to a request for consent for 60 days or who is found to be withholding his consent unreasonably; or (5) the spouse of the person to be adopted, if the failure of the spouse to consent is excused by reason of prolonged, unexplained absence, unavailability, incapacity or circumstances that are found to constitute unreasonable withholding of consent. F.S.A. §63.072. The court may consider a parent’s failure to provide support for a child prior to birth as evidence of abandonment. Matter of Adoption of Doe, 543 So.2d 741 (1989). Consent to adoption may be withdrawn when the court finds the consent was obtained by fraud or duress. F.S.A. §63.082(5). Parental consent to adoption must be freely and voluntarily given in order to be binding. Petition of Gaban, 158 Fla. 597, 30 So.2d 176 (1947). The court may consider the physical and psychological stress of drugs and childbirth on the mother of the child in determining whether consent was freely and knowingly given. See In re Adoption of Gort, 6 Fla. Supp. 68 (1953). Where the adoption is handled through an intermediary instead of an agency, the natural parent’s consent to the adoption must be given as to specific adoptive parents. Adoption of Gort, supra. However, a consent that does not identify the adopting parent is valid if the consent contains a statement that the consent is voluntary and that identification of the adopting parent is not required for granting the consent. F.S.A. §63.082(2). Consent to an adoption may be executed only after the birth of the child either by a notarized affidavit signed before two witnesses or in court. F.S.A. §63.082.

3. Procedural Requirements


Florida circuit courts have exclusive jurisdiction in adoption proceedings. F.S.A. §63.032(3). A petition for adoption must be filed in the county in which the petitioners reside, or in which the child resides, unless either of these would endanger the privacy of the petitioners or the child, or in which the agency with which the child has been placed is located. F.S.A. §63.102(2), (4). The petition must be filed within 30 days of placement of the child. If no petition is filed, any interested party, including the state, may challenge the prospective parent’s physical custody of the child. F.S.A. §63.102(3). To protect the best interest of the child, the Court may order an appropriate investigation to determine whether the adoption is in the best interest of the persons involved. F.S.A. §63.122(5). The petitioner and any intermediary must file an accounting of all disbursements and receipts of anything of value, including professional fees, made or agreed to, by or on behalf of the petitioner and the intermediary in connection with the adoption. F.S.A. §63.132. Expenses include medical care and living expenses of the natural mother and the child. It is illegal to sell or to receive a child for money. F.S.A. §63.212(1)(d). It is also illegal to contract to sell or transfer custody or parental rights regarding any child, whether born or yet unborn. However, persons may enter a preplanned adoption arrangment by which a woman volunteers to become pregnant by a fertility technique such as artificial insemination or egg donation, to bear a child, and to terminate her parental rights and responsibilities following the birth. The “volunteer mother” has the right to rescind the agreement until seven days after the birth of the child. Any of the parties may terminate the agreement at any time prior to final adoption, except that the intended parents may not reject custody on the ground the child is born impaired. If the agreement is terminated, the volunteer mother assumes parental rights and responsibilities, except that an intended father who is also the biological father of the child also assumes such rights and responsibilities. The only compensation the intended parents may make to the volunteer mother pursuant to the agreement are reasonable legal, medical, and psychiatric expenses and reasonable living expenses. F.S.A. §63.212(1)(i). The adoption hearing must be held not sooner than 90 days after the child is in the supervised custody of the adoptive parents, unless the petitioner is a spouse of the natural parent. F.S.A. §63.122. All hearings are held in closed court. F.S.A. §63.162.

4. Effect of Decree of Adoption


A judgment of adoption relieves the birth parents of the adoptee, except a petitioner or a spouse of a petitioner, of all parental rights and responsibilities. F.S.A. §63.172(1)(a). It also terminates all legal relationships between the adoptee and his relatives, including inheritance rights and the interpretation or construction of documents, statutes and instruments, whether executed before or after the adoption, that do not expressly include the adoptee. F.S.A. §63.172(1)(b). However, children born to an adopted adult prior to his adoption retain their relationship to their natural relatives, and such relatives are entitled to visitation rights. Worley v. Worley, 534 So.2d 862 (Fla. App. 1988). An adoption creates the relationship between the adopted person and the adoptive parents and their relatives that would have existed if the adoptee were a blood descendant of the petitioner born within wedlock. F.S.A. §63.172(1)(c). This relationship is created for all purposes, including testate and intestate inheritance and the applicability of statutes, documents and instruments executed before or after the adoption that do not expressly exclude the adopted person. If a parent of a child dies without the parent-child relationship having been previously terminated and a spouse of the living parent adopts the child, or if both parents die and the child is adopted by a sibling, grandparent, aunt or uncle, the child’s right of inheritance from or through the deceased parent is unaffected by the adoption. Such an adoption has no effect on the relationship between the child and the deceased parents’ families. Unless the court orders otherwise, the adoption does not terminate any rights of the grandparents to visit the child. F.S.A. §63.172(2). Adopted persons are included in class gift terminology and terms of relationship. F.S.A. §732.608. If a testator wishes to exclude adopted children of his devisee or legatee, he must make a specific provision in his will. In re Baker’s Estate, 172 So.2d 268 (Fla. App. 1965). The adoption statute and the probate law should be construed together; under this construction, a child adopted after the execution of a will would be deemed a pretermitted child, unless his omission was intentional, and would take a child’s part, even if the property had already been disposed of to living descendants of the adopting parent. In re Frizzell’s Estate, 156 So.2d 558 (Fla. App. 1963). The adoptive status does not cease upon the adoptee’s subsequent marriage or reaching majority. Church v. Lee, 102 Fla. 478, 136 So.2d 242 (1931).

5. Release of Information on Adoption


No person may disclose from the records the name and identity of a natural parent, an adoptive parent or an adopted child unless:

(1) The birth parent authorizes in writing the release of his or her name; (2) The adopted child, if 18 or more years of age, authorizes in writing the

release of his or her name; or, if the adoptee is less than 18, written consent is obtained from an adoptive parent;

(3) The adoptive parent authorizes in writing the release of his or her name; or

(4) The court orders the disclosure on good cause shown. F.S.A. §63.162(1)(d).

6. Custody and Termination of Parental Rights

a. Natural Rights of Parents

Parents have a natural and legal right to the custody of their children. Fields v. Fields, 143 Fla. 886, 197 So. 530 (1940). A child’s welfare is presumed to be best served by the care and custody of the natural parent, and even conditions which may justify temporary changes in custody will not necessarily support absolute and permanent transfer of the child. Torres v. Van Eepoel, 98 So.2d 735 (Fla. 1957). The natural father of a child born out of wedlock may be entitled to custody if the father is a fit parent and such custody would not be detrimental to the child’s welfare. In re Guardianship of D. A. McW., 460 So.2d 368 (Fla. 1984) (natural father prevailed over competing claim by child’s grandmother). However, a parent’s right to the custody and control of a minor child is subject to the power of the state and may be restricted by legislative or judicial action, based on the best interests of the child.

b. Rights of the Child In a highly publicized Florida case, an 11-year-old sought to terminate parental rights. While the petition for termination as filed by his adoptive parents was ultimately granted, it was held that an unemancipated minor does not have the capacity to bring such an action in his own right. Kingsley v. Kingsley, 623 So.2d 780 (Fl. App. 1993).

c. Burden of Proof The court may order either a temporary change in custody of a child or a final termination of parental rights. F.S.A. §39.41. While they may justify a


change in custody, mere blameworthy neglect, indifference and irresponsibility for a child’s welfare will not generally be sufficient to terminate parental rights over the parent’s objection. Roy v. Holmes, 111 So.2d 468 (Fla. 1959). In some cases, parents adjudged unfit may regain custody of their children upon improvement of their circumstances. In re G.M., 270 So.2d 473 (Fla. App. 1972). The United States Supreme Court held in Santosky v. Kramer, 455 U.S. 745 (1982), that permanent termination of parental rights must be based upon a finding of parental unfitness proved by clear and convincing evidence. However, temporary removal of the child from parental custody is allowed upon a finding of fact by a preponderance of the evidence. V. SEPARATE MAINTENANCE AND DISSOLUTION OF

MARRIAGE A. JURISDICTION AND VENUE

1. Separate Maintenance Actions

While both separate maintenance actions and dissolution of marriage actions are based on the marital relationship, an action for separate maintenance recognizes the continuation of the marriage and the possibility of reconciliation of the spouses, while a dissolution finally terminates the marriage. Both types of actions are brought in equity; thus, jurisdiction is in the circuit courts. F.S.A. §61.09, which governs separate maintenance actions, does not require that either spouse be a resident of the state to bring suit. Weinschel v. Weinschel, 368 So.2d 386 (Fla. App. 1979). The venue for separate maintenance actions lies in the county where the cause of action accrues when the petitioner or the parties’ minor child is physically present and is refused support by the supporting spouse. F.S.A. §47.011; Friedman v. Friedman, 383 So.2d 1100 (Fla. 1980).

2. Dissolution of Marriage Actions

a. Subject Matter Jurisdiction

Actions to dissolve a marriage are governed by the Florida Dissolution of Marriage Act, F.S.A. Ch. 61, which requires that one of the parties to the marriage be a Florida resident for at least six (6) months before filing the petition. F.S.A. §61.021. “Residence” must consist of both actual presence in the state and an intention to remain in the state permanently or indefinitely.


A court may have jurisdiction in a dissolution action even if the defendant has not been served personally within the state and has not appeared in the action. Orlowitz v. Orlowitz, 208 So.2d 849 (Fla. App. 1967). While due service of process is necessary for jurisdiction, service may be by publication in dissolution actions when personal service cannot be had. Florida Statutes §§49.011(4), 49.021. Service by publication is not authorized in separate maintenance actions. Greenberg v. Greenberg, 101 So.2d 608 (Fla. App. 1958).

b. Personal Jurisdiction A court has in rem jurisdiction in a marriage dissolution action over any property of the parties within the court’s jurisdiction; however, the court may not enforce an in rem provision in personam (for example, by contempt proceedings or by the entry of a money judgment against the respondent) unless the court acquires personal jurisdiction over the respondent. Gelkop v. Gelkop, 384 So.2d 195 (Fla. App. 1980). Personal jurisdiction over the defendant is required for determination of personal property rights and obligations of the parties.

c. Venue If both spouses are residents of Florida, a dissolution action may be brought only in the county where the defendant resides, where the cause of action accrued or where the property in litigation is located. F.S.A. §47.011. An action against a nonresident may be brought in any county of the state. Seward v. Seward, 145 Fla. 701, 200 So. 78 (1941).

B. PROCEDURE 1. Pleadings

Pleadings in marital actions must allege the existence of a valid marriage, and must contain a statutory ground for relief (see below). In addition, a petition may request interlocutory and ancillary relief, child support and custody, temporary and permanent alimony, costs, suit money and attorney fees.

2. Default Judgment When a party against whom affirmative relief is sought fails to file or serve any paper in the action or fails to plead or otherwise defend, the court may enter a default judgment against the party. Fla. R. Civ. P. 1.500(a), (b). However, even in the face of default by the defendant, the plaintiff in a marriage


dissolution case must prove the allegations of the complaint and entitlement to any property award. Manley v. Manley, 360 So.2d 489 (Fla. App. 1978).

3. Compulsory Financial Disclosure Applications for temporary alimony, child support, attorney fees, or suit money no longer must be accompanied by an affidavit specifying the party’s financial circumstances. Fla. R. Civ. P. 1.611(a) which required such disclosure was repealed by the Florida Legislature.

4. Summary Procedure The parties may file a petition for simplified dissolution if they certify under oath that there are no minor dependent children of the parties, that the wife is not pregnant, and that the parties have reached a satisfactory agreement as to division of property and payment of joint obligations. Fla. R. Civ. P. 1.611(c).

5. Costs and Right to Counsel Although Florida courts do not recognize an absolute right to court-appointed counsel for an indigent party in a marital action, it is within the court’s discretion to assign counsel if the facts and circumstances of the case warrant. See Richter v. Richter, 307 So.2d 849 (Fla. App. 1975). Under the Dissolution of Marriage Act, the court may grant suit costs, including attorney fees, to either party in a dissolution case. F.S.A. §61.16. This allows the spouses to be on financial parity for the prosecution or defense of the action. Silberman v. Katcher, 214 So.2d 726 (Fla. App. 1968). The court considers the financial resources of both parties in awarding counsel fees and costs. Counsel fees and costs may similarly be awarded, in the court’s discretion, in separate maintenance cases. F.S.A. §61.09; McFarlin v. McFarlin, 75 So.2d 580 (Fla. 1954).

C. SEPARATE MAINTENANCE 1. Grounds

The ground for recovering separate maintenance is that a spouse has the ability to maintain or contribute to the maintenance of his spouse and children, and that he fails to do so. See Brandt v. Brandt, 217 So.2d 573 (Fla. App. 1968).


The legal duty to support a spouse is a continuing obligation so long as the marriage exists. Naurison v. Naurison, 108 So.2d 510 (Fla. App. 1959). Florida law provides that “if a person having the ability to contribute to the maintenance of his spouse and support of his minor child fails to do so, the spouse who is not receiving support or who has custody of the child or with whom the child has his primary residence may apply to the court for alimony and for support for the child without seeking dissolution of marriage.” F.S.A. §61.09. The amount awarded in a separate maintenance action is based on the necessities of the plaintiffs and the parties’ children and on the ability of the defendant to pay. Campbell v. Campbell, 220 So.2d 920 (Fla. App. 1969). If the plaintiff spouse is adequately cared for by her own assets and income (measured by the spouses’ historical need, the defendant’s ability to pay and their standard of living), or if the respondent spouse is providing maintenance and support commensurate with the financial condition and circumstances of the parties, no award will be made. Belcher v. Belcher, 271 So.2d 7 (Fla. 1972) conformed to 272 So.2d 832.

However, the respondent spouse may not reduce his family’s standard of living so as to have this lowered standard to measure the support required of him. Kaufman v. Kaufman, 63 So.2d 196 (Fla. 1952).

There is no requirement that the spouses be living apart in order to recover separate maintenance. There are no fault prerequisites to an award of separate maintenance. Thus, if the parties are living apart, it is not essential that the parties be separated due to the fault of the party against whom the suit is brought. Weinschel v. Weinschel, 368 So.2d 386 (Fla. App. 1979).

2. Defenses Absence of grounds for the right to recover separate maintenance may be used as a defense to the action. In addition, a spouse may be estopped from seeking separate maintenance by her conduct.

See Furman v. Furman, 130 So.2d 316 (Fla. App. 1961), where a wife was estopped from counterclaiming for separate maintenance in her husband’s divorce action because of her conduct in obtaining a Mexican mail-order divorce.


Condonation, collusion, recrimination and laches have been abolished as defenses to legal separation and dissolution of the marriage by the Dissolution of Marriage Act. F.S.A. §61.044. When one spouse brings an action for separate maintenance, the other may counterclaim for dissolution of the marriage, and, conversely, a spouse may institute a separate maintenance action in Florida despite a pending divorce proceeding in another state. See Posner v. Posner, 233 So.2d 381, conformed to, 234 So.2d 378 (Fla. App. 1970); Wood v. Wood, 56 Fla. 882, 47 So. 560 (1908).

3. Nature and Scope of Separate Maintenance Decree In a proceeding for separate maintenance and support, the court may enter any order it deems just and proper. F.S.A. §61.09. There is no fixed rule or formula for determining the amount awarded, and the award will not be reversed absent a showing of abuse of discretion. Lamoureux v. Lamoureux, 157 Fla. 300, 25 So.2d 859 (1946). The primary consideration in determining the amount of a separate maintenance award is the economic circumstances of the spouses. Specific consideration is given to various types of living and other expenses and one’s station in life, customary standard of living or social rank. Kaufman v. Kaufman, 63 So.2d 196 (Fla. 1952). Courts also consider each party’s assets, income and earning capacity. Platt v. Platt, 103 So.2d 253 (Fla. App. 1958). Lump-sum alimony, which is used to distribute assets acquired during the marriage, is not used in separate maintenance awards, since the receiving spouse would have the payment and at the same time retain the statutory right to share in the other spouse’s estate. Daniel v. Daniel, 171 So.2d 180 (Fla. App. 1965). The court may allow one spouse to occupy a house acquired in the names of both parties as an estate by the entireties and may require one or both of the parties to pay for repairs, and to make mortgage, insurance and tax payments on the premises. Guilden v. Guilden, 104 So.2d 737 (Fla. App. 1958). However, the court may not vest title to the property in one spouse or resolve the parties’ interest in jointly held property or in property held by one spouse in which the other spouse claims an interest. Goodstein v. Goodstein, 212 So.2d 321 (Fla. App. 1968). In addition to determining an award of child support, a court in a separate maintenance action may determine child custody when the child is physically in


the state and therefore within the court’s jurisdiction. Castle v. Castle, 247 So.2d 455 (Fla. App. 1971).

4. Modification of the Decree The court retains jurisdiction in a separate maintenance case to make any further orders or modifications. A substantial change of circumstances affecting the receiving spouse’s needs or necessities is grounds for modification of the decree. Fleming v. Fleming, 177 So.2d 384 (Fla. App. 1965).

D. DISSOLUTION OF MARRIAGE 1. Grounds for Dissolution of Marriage

The Dissolution of Marriage Act is popularly known as the “no-fault” divorce law because it provides a means of dissolution of marriage without the necessity of either party alleging or proving fault on the part of the other. Lefler v. Lefler, 264 So.2d 112 (Fla. App. 1972). Under the Act, F.S.A. Ch. 61, only two grounds for dissolution exist: (1) the marriage is shown to be irretrievably broken, or (2) one of the parties to the marriage is mentally incapacitated. F.S.A. §61.052(1)(a), (b).

a. Marriage Irretrievably Broken Whether a marriage is “irretrievably broken” is a matter for the trial court’s determination, based on evidence of all surrounding facts and circumstances and not on mere stipulation or on the failure of the respondent to contest the allegation that the marriage is irretrievably broken. McClelland v. McClelland, 318 So.2d 160 (Fla. App. 1975). The test for determining if a marriage is broken is “whether for whatever reason or cause, no matter whose fault, the marriage relation is for all intents and purposes ended, no longer viable, a hollow sham beyond hope of reconciliation or repair.” Ryan v. Ryan, 277 So.2d 266 (Fla. 1973). The court must be satisfied that the parties can no longer live together because their difficulties are so deep and substantial that no reasonable effort could eradicate them and enable the parties to live together in a normal relationship. Nelms v. Nelms, 285 So.2d 50 (Fla. App. 1973). The possibility of reconciliation is an important consideration, and the court may order the proceedings continued for a reasonable length of time if the circumstances indicate that the parties may reconcile. However, reconciliation requires an intention of the parties to reconcile, which requires more than occasional postseparation sexual experiences. Busot v. Busot, 338 So.2d 1332 (Fla. App. 1976).


b. Mental Incompetence

To obtain a dissolution of marriage on this ground, the party alleged to be incompetent must have been adjudged incompetent according to the provisions of the Florida statute governing the adjudication of mental incompetence, F.S.A. §744.331, for a preceding period of at least three (3) years. F.S.A. §61.052(1)(b).

2. Defenses The Dissolution of Marriage Act abolished the defenses to dissolution of marriage of condonation, collusion, recrimination and laches. F.S.A. §61.044. In addition, the concept of fault has been abolished, the final judgment merely dissolving the marriage without indicating in whose favor it is granted, and the defense of provocation is no longer applicable. Fraud and deceit may be raised as defenses in a dissolution of marriage case. A contrived, false or fraudulent creation of the ground upon which dissolution is sought, for the purpose of terminating the marriage through what amounts to a misuse and, in effect, a fraud upon the court, will not be tolerated. Ryan, supra. The responding party may deny that the marriage is irretrievably broken. If there is such a denial, or if there is a minor child of the marriage, the court may order the parties to seek counseling, may continue the proceeding for up to three (3) months to permit reconciliation, or may take other action in the best interests of the parties and the minor child. If there is no minor child of the marriage and the responding party does not deny that the marriage is irretrievably broken, the court may enter a judgment of dissolution. F.S.A. §61.052.

3. Rights During Pendency of Dissolution Proceedings The Dissolution of Marriage Act provides that the court may allow a reasonable sum for alimony pendente lite to either spouse in a dissolution proceeding. F.S.A. §61.071. This award allows the spouse a means of living while the the parties’ rights are being adjudicated. Holly v. Holly, 81 Fla. 881, 89 So. 132 (1921). The court may also order suit money and attorney fees pendente lite. F.S.A. §61.071. The decision of whether to award temporary alimony and in what amount rests within the discretion of the trial court. The factors affecting the award are


(1) the needs of one spouse and (2) the ability of the other spouse to pay. Horton v. Horton, 573 So.2d 423 (1991). The parties may reach their own agreement or stipulation determining their rights regarding temporary alimony, and the court will uphold this agreement if it is in accordance with legal principles. Vickers v. Vickers, 413 So.2d 788 (Fla. App. 1982). The court may award temporary custody of the parties’ minor children and allow temporary child support to the spouse having custody.

4. Legal Effects of Final Judgment A final decree for the dissolution of marriage puts an end to the relation of marriage between the parties. As a result, the status of the parties is that of single and unmarried persons. However, a judgment of dissolution of marriage does not render the children of the marriage children born out of wedlock. F.S.A. §61.052(4). Property held as tenants by the entirety is converted to tenancy in common upon dissolution. F.S.A. §689.15. Final judgment of dissolution settles all property rights of the parties, specifies the parties’ responsibilities for debts incurred during the marriage, and makes provision, if necessary, for alimony, child custody and support, and expenses such as medical care and life insurance. Dissolution of the marriage does not automatically divest a beneficiary spouse of his or her expectancy in the proceeds of the other spouse’s life insurance policy. Davis v. Davis, 301 So.2d 154 (Fla. App. 1974). All wills made by a husband and wife whose marriage has been subsequently dissolved become void upon dissolution as they affect the surviving spouse. F.S.A. §732.507. Remarriage of the spouses to each other does not revalidate the wills. In re Guess’ Estate, 213 So.2d 638 (Fla. App. 1968). If either spouse executed a revocable trust prior to dissolution, then any provision affecting the other spouse is void upon entry of judgment. F.S.A. §737.106. VI. THE DISSOLUTION OF MARRIAGE DECREE

A. SEPARATION AND SUPPORT AGREEMENTS

1. Formalities and Permissible Provisions


Although contracts to facilitate or promote the procurement of a divorce are illegal in Florida, an agreement relating to alimony or to the adjustment of property rights, even though made in contemplation of divorce, is valid if it is not directly conducive to the procurement of the divorce. Allen v. Allen, 111 Fla. 733, 150 So. 237 (1933). The court will consider whether the provisions in the agreement are fair in light of facts surrounding the husband’s property and whether provisions made for the wife will enable her to live after the dissolution of the marriage in a manner reasonably consonant with her way of life before the dissolution and no less comfortably than before the marriage. Agreements made in good faith and free from fraud, deceit, coercion, or trickery should be upheld by the courts. Baker v. Baker, 394 So.2d 465 (Fla. App. 1981). In the agreement, the parties may define their mutual rights and obligations regarding property, spousal support, and support and custody of children. A provision that the agreement is to be in lieu of alimony, suit money and attorney fees bars a subsequent claim for such items; however, in the absence of an express provision, the agreement does not bar the right to alimony. Campbell v. Campbell, 220 So.2d 920 (Fla. App. 1969). Although a spouse may waive alimony, she may not waive support for a minor child without court approval. Kirkconnell v. Kirkconnell, 222 So.2d 441 (Fla. App. 1969). Any agreement which purports to relieve a father, entirely and permanently, of his duty to support a minor child is void as against public policy. Warrick v. Hender, 198 So.2d 348 (Fla. App. 1967). The parties may stipulate in the agreement that payments to the recipient spouse are to continue after the other spouse’s death. Hazlewood v. Hazlewood, 178 So.2d 752 (Fla. App. 1965).

2. Enforcement and Modification a. Agreements Merged Into the Dissolution of

Marriage Judgment Either party in an action for dissolution of marriage may present a separation and support agreement to the court for approval and merger or incorporation of the agreement into the final dissolution decree. If the effect of the court’s approval and ratification is to merge the agreement into the final decree, the agreement loses its independent effectiveness and is superseded by the decree. Solomon v. Gordon, 148 Fla. 572, 4 So.2d 710 (1941).


b. Agreements Surviving the Judgment (Incorporation)

Rather than merging an agreement into the dissolution decree, the court may incorporate an approved agreement into the decree, which leaves the agreement with independent significance. Any action to enforce the agreement may be in the form of either a contempt proceeding to enforce the dissolution decree or a suit for specific performance of the contract or agreement. Provisions in separation and support agreements relating to alimony and child support and custody are modifiable by a court, while provisions relating to property settlement may be modified only with the consent of the parties. Once validly incorporated into a dissolution judgment, an agreement settling alimony rights of a former spouse may be modified by showing a change in circumstances. Bailey v. Bailey, 300 So.2d 294 (Fla. App. 1974). Where the alimony is based on an agreement, a heavier burden rests on the party seeking modification than would otherwise be required. Andrews v. Andrews, 409 So.2d 1135 (Fla. App. 1982). To modify or set aside a property settlement agreement, a party must prove fraud, duress, coercion, or overreaching by the other party. Baker v. Baker, 394 So.2d 465 (Fla. App. 1981). Any agreement obtained by fraud may be set aside, and if the agreement has been incorporated into a dissolution decree, that portion of the decree may be annulled. Fisher v. Fisher, 199 So.2d 338 (Fla. App. 1967).

B. EQUITABLE DISTRIBUTION Florida has an equitable distribution statute that provides for the division of property upon divorce. F.S.A §61.075. Up until 2008, Florida recognized the doctrine of special equity which allowed the award for an extraordinary contribution to the marital property. This doctrine has been abolished and an extraordinary contribution by a spouse would now be handled as an unequal distribution of marital property under equitable distribution. F.S.A. §61.075(11).

1. Division of Marital Property The Florida equitable distribution statute provides that in dissolution proceedings the court “shall set apart to each spouse that spouse’s nonmarital assets and liabilities and shall distribute between the parties the marital assets and liabilities in such proportions as are equitable.” In other words, non-marital assets and liabilities are not subject to equitable distribution. Marital assets


and liabilities must be distributed equitably, but not necessarily equally. However, “the court must begin with the premise that the distribution should be equal, unless there is a justification for an unequal distribution.” F.S.A. §61.075(1). Marital and non-marital assets are defined below. Equitable distribution is a remedy “in addition to all other remedies available to a court to do equity between the parties.” F.S.A. §61.075(1). Distribution is made after the court considers all relevant factors enumerated by the statute. See B(2), infra. The equitable distribution statute applies to:

(1) Proceedings for dissolution of marriage; and (2) Proceedings for disposition of assets following a dissolution of marriage

by a court which lacked in personam jurisdiction over the absent spouse or lacked in rem jurisdiction over the assets.

Therefore, a distribution of assets may be made even if one spouse has obtained an ex parte divorce elsewhere in an attempt to avoid such an allocation. However, the distribution of martial assets and liabilities requires specific written findings of fact based on competent substantial evidence identifying nonmarital and martial assets and liabilities.

a. Marital Property Defined Marital property is defined to include both marital assets and marital liabilities. The statute defines marital property as:

(1) Assets acquired and liabilities incurred during the marriage, individually by either spouse or jointly by them;

(2) The enhancement in value and appreciation of nonmarital assets resulting either from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets, or both;

(3) Interspousal gifts during the marriage; (4) All vested and nonvested benefits, rights and funds accrued during the

marriage in retirement, pension, profit-sharing, annuity, deferred compensation, and insurance plans and programs; and

(5) All real property held by the parties as tenants by the entireties, whether acquired prior to or during the marriage, shall be presumed to be a marital asset. If, in any case, a party makes a claim to the contrary, the burden of proof shall be on the party asserting the claim that the property be treated as a nonmarital asset. F.S.A. §61.075(5)(a)(1)-(5). A professional degree is not itself “property” subject to distribution. Arce v. Arce, 566 So.2d 1308 (1990).


i. Assets Acquired and Liabilities Incurred During Marriage.The statute does not make a distinction between individually or jointly acquired assets; therefore, record title is not a consideration in determining an asset’s status as marital property. The Florida Supreme Court has held that goodwill accumulated during marriage is a marital asset.

In Thompson v. Thompson, 576 So.2d 267 (1991), the Court held that if a law practice has monetary value over and above its tangible assets and cases in progress which is separate and distinct from the presence and reputation of the individual attorney, then a court should consider the goodwill accumulated during marriage as a marital asset. Valuation must be made according to fair market value, which is what a willing buyer would pay and a willing seller would accept, neither acting under duress for a sale of the practice. The excess over assets would represent goodwill.

ii. Enhancement in Value and Appreciation of Non-Marital Assets.The statute permits the equitable distribution of the enhancement in value, or the appreciation, of non-marital property caused by the active efforts of either spouse or by contributions or expenditures of marital assets. Under this definition of marital property, it would be possible for a court to find that an asset is partially marital and subject to equitable distribution, and partially non-marital and immune from distribution. Passive appreciation does not transform nonmarital property into marital property.

For example, separately held real property which increases in value due to inflation remains separate property.

iii. Interspousal Gifts During Marriage.Under prior law, a gift from one spouse to the other was awarded to the recipient-spouse upon dissolution of the marriage. The equitable distribution statute treats such gifts as marital assets subject to distribution. iv. Vested and Nonvested Benefits Accrued During Marriage. A In General.The statute treats rights and benefits of retirement, pension, profit-sharing, insurance, and other plans and programs as economic resources


of the marriage subject to distribution. Both vested and nonvested benefits, rights and funds are included in the definition of marital property. Unless the dissolution judgment requires a spouse to name a particular beneficiary of his or her Individual Retirement Account (“IRA”) as a condition of a dissolution of marriage, the owner of the IRA after dissolution is free to name whomever desired as the beneficiary after the dissolution. This fact applies to the balance of an IRA remaining where a spouse is required to transfer part of that IRA as a condition of the dissolution, and to an IRA that was omitted from the property settlement and decree. Upon the IRA owner's death, the institution need look no further than the IRA contract to determine the beneficiary. Luszcz v. Lavoie, 787 So.2d 245 (Fla. App. 2001). B Uniformed Services Retired or Retainer Pay.Florida statutory law provides that in the case of a marriage of at least ten years during which one or both spouses have performed at least ten years of federal uniformed service, the division of marital property must include any accrued uniformed services retired or retainer pay. F.S.A. §61.076. The final judgment of dissolution must include evidence of the spouse or spouses’ uniformed service and specify the amount of pay to be distributed. v. Presumption of Real Property as a Marital Asset.Record title in the joint names of the spouses without any further designation indicating the manner in which the property is held creates a presumption that the property is held as tenants by the entirety and is a marital asset regardless of who pays for it. The spouse claiming a contrary intent, has the burden of proof that the subject property, or some portion thereof, is nonmarital property. F.S.A. §61.075(6)(d)(3). The presumption exists as to property acquired before marriage and property acquired after marriage. Therefore, the statute provides for the situation in which property owned jointly prior to marriage is converted to a tenancy by the entirety upon marriage.

b. Non-marital Property Defined Non-marital assets and liabilities are not subject to equitable distribution. The statute defines such separate property as:

(1) Assets acquired and liabilities incurred by either party prior to the marriage and assets acquired and liabilities incurred in exchange for such assets and liabilities;


(2) Assets acquired separately by either party by noninterspousal gift, bequest, devise, or descent and assets acquired in exchange for such assets;

(3) All income derived from nonmarital assets during the marriage unless the income was treated, used, or relied upon by the parties as a marital asset;

(4) Assets and liabilities excluded from marital assets and liabilities by valid written agreement of the parties and assets acquired and liabilities incurred in exchange for such assets and liabilities; and

(5) Any liability incurred by forgery or unauthorized signature of one spouse signing the

name of the other spouse, unless subsequently ratified by the other spouse. F.S.A. §61.075(5)(b)(1)-(5).

i. Assets Acquired and Liabilities Incurred Before Marriage, or Acquired or Incurred in Exchange.Assets and liabilities immune from distribution include not only those acquired or incurred prior to marriage, but also those which can be traced to such assets and liabilities owned prior to marriage. ii. Assets Acquired and Liabilities Incurred Separately by Non-interspousal Gift, Bequest or Descent, or Acquired or Incurred in Exchange.Assets or liabilities received by gift, devise or descent, and assets and liabilities which are acquired in exchange for such assets and liabilities, are immune from distribution. Therefore, a spouse who seeks to prove an asset or liability is separately owned may do so by tracing the proceeds of the gift or inheritance. iii. Income From Non-marital Assets During Marriage.All income derived from non-marital property is non-marital property unless the spouses “treated, used, or relied upon” the income as marital funds. Therefore, the statute provides that where non-marital funds are commingled with marital funds, (for example, a joint bank account), the funds may be deemed a marital asset. Any use of income derived from non-marital property for the benefit of the marriage may be construed by the court to have converted the separate funds to marital funds. iv. Assets and Liabilities Excluded From Marital Property by Written Agreement, or Acquired or Incurred in Exchange.The spouses may agree in a signed writing that certain assets and liabilities are excluded from the definition of marital property for purposes of equitable distribution. The spouses may also agree in writing that assets and liabilities which can be traced back to the excluded property are also non-marital property.


c. Presumption of Marital Property The equitable distribution statute provides that all assets acquired and liabilities incurred during marriage “and not specifically established as nonmarital assets or liabilities are presumed to be marital assets and liabilities.” F.S.A. §61.075(7). The presumption is overcome by a showing (for example, through tracing) that the property at issue is non-marital. The presumption does not vest title, which occurs only upon entry of the judgment of dissolution. The presumption is for evidentiary purposes only, and is not meant to establish community property in Florida. F.S.A. §61.075(7).

2. Considerations Affecting Distribution Under F.S.A. §61.075(1), the Florida courts must consider nine relevant factors in determining the equitable disposition of the marital property:

(1) The contribution to the marriage by each spouse, including contributions to the care and education of the children and services as homemaker;

(This factor recognizes contributions to the economic partnership of marriage through homemaking services as well through outside employment.)

(2) The economic circumstances of the parties;

(This factor requires the court to consider the availability of nonmarital assets and other benefits to each spouse.)

(3) The duration of the marriage; (4) Any interruption of personal careers or educational opportunities of

either party; (5) The contribution of one spouse to the personal career or educational

opportunity of the other spouse; (6) The desirability of retaining any asset, including an interest in a

business, corporation, or professional practice, intact and free from any claim or interference by the other party;

(7) The contribution of each spouse to the acquisition, enhancement, and production of income or the improvement of, or the incurring of liabilities to, both the marital assets and the nonmarital assets of the parties;


(Under this factor, the court must consider the waste of marital assets by a spouse.)

(8) The desirability and financial feasibility of retaining the marital home as

a residence for any dependent children, and if not, whether other equities would be served by giving any other party exclusive use and possession of the marital home;

(9) The intentional dissipation, waste, depletion or destruction of marital assets after the filing of the petition or within two (2) years prior thereto; and

(10) Any other factors necessary to do equity and justice between the parties.

(Factor (9) is a catchall factor which gives the court discretion to consider other relevant circumstances, such as marital misconduct. While the equitable distribution statute does not provide explicitly for consideration of moral misconduct, this factor could be interpreted to permit consideration of moral as well as economic fault. However, Florida’s failure to include moral fault explicitly within the equitable distribution statute while including such fault as a consideration in the state’s alimony statute suggests Florida intends that the focus of misconduct as a factor should be on economic misconduct.)

3. Date of Valuation of Marital Assets and Liabilities

The date for determining marital property and its value is the earliest of

(1) The date the parties enter into a valid separation agreement; or (2) Such other date as may be expressly established by such agreement; or (3) The date of the filing of a petition for dissolution of the marriage

unless the trial judge determines another date is just and equitable under the circumstances. F.S.A. §61.075(6). The statute permits alternate valuation dates to provide for situations in which the value of the marital property has increased or decreased substantially prior to trial due to passive appreciation, the active efforts of one spouse, or marital waste by a spouse. The trial judge has the discretion to consider relevant circumstances in determining the valuation date in order to prevent one spouse from suffering economic injustice upon distribution.


4. Effect of Equitable Distribution Judgment The judgment distributing the marital assets has the effect of “a duly executed instrument of conveyance, transfer, release, or acquisition.” F.S.A. §61.075(4). Therefore, a judgment which affects real property should be recorded in the appropriate county.

5. Relationship of Equitable Distribution to Alimony Equitable distribution is determined by the court “without regard to alimony for either party.” F.S.A. §61.075(8). The court considers whether alimony must be awarded only after the disposition of marital assets and liabilities. Florida’s alimony statute provides that the court must consider the marital assets and liabilities distributed to each spouse as a factor in determining a proper alimony award. F.S.A. §61.08(2)(d).

6. Monetary Awards The equitable distribution statute permits the court to order a monetary payment in a lump sum or in installments “in lieu of or to supplement, facilitate, or effectuate equitable division” of marital property. F.S.A. §61.075(9). This provision permits compensation to one spouse where the other spouse retains an indivisible asset such as a business, or where a nonmarital asset has became partially marital through the efforts of the nonowner spouse.

C. ALIMONY 1. Nature of Alimony

In a proceeding for dissolution of marriage, the court may grant alimony to either party, and it may consider any factor necessary to do equity and justice between the parties, including the adultery of either spouse and all relevant economic factors. F.S.A. §61.08. Alimony is the statutory equivalent of the common-law obligation to provide the necessaries of life—food, clothing, and habitation—to one’s spouse. Aldrich v. Aldrich, 163 So.2d 276 (Fla. 1964). Florida’s equitable distribution statute eliminates the need for the court to effectuate a division of property by means of an alimony award.

2. Types For determining the type of alimony, there is a rebuttable presumption that a short-term marriage is a marriage that lasts less than seven years. A moderate


term marriage is a marriage that lasts seven years, but less than 17 years. A long-term marriage is a marriage that lasts for longer than 17 years. The length of the marriage is measured from the date of the marriage until the date of filing the action for dissolution of the marriage. a. Bridge-the-Gap Bridge-the-gap alimony is awarded to assist a party by providing support to allow the party to make a transition from being married to being single. Bridge-the-gap alimony is designed to assist a party with legitimate identifiable short-term needs, and the length of an award may not exceed two years. An award of bridge-the-gap alimony terminates upon the death of either party or upon the remarriage of the party receiving alimony. An award of bridge-the-gap alimony is not modifiable in amount or duration.

b. Rehabilitative Rehabilitative alimony is awarded to assist a party in establishing the capacity for self-support through the redevelopment of previous skills or credentials or the acquisition of education, training, or work experience necessary to develop appropriate employment skills or credentials. In order to award rehabilitative alimony, there must be a specific and defined rehabilitative plan which will be included as a part of any order awarding rehabilitative alimony. An award of rehabilitative alimony may be modified or terminated according to the grounds identified in F.S.A. §61.14, which includes a substantial change in circumstances. Other grounds for modification or termination include non-compliance with the rehabilitative plan or upon completion of the rehabilitative plan. Rehabilitative alimony will not be proper where the receiving party is too ill or incapacitated to work, is untrainable, or where a wife expresses a desire to attend full-time to the domestic responsibilities of caring for young children. c. Durational Durational alimony is awarded when permanent alimony is inappropriate. The purpose of durational alimony is to provide a party with economic assistance for a set period of time following a marriage of short or moderate duration. An award of durational alimony terminates upon the death of either party or upon the remarriage of the party receiving alimony. The amount of an award of durational alimony may be modified or terminated based upon a substantial change in circumstances in accordance with F.S.A. §61.14. However,


the length of an award of durational alimony may not be modified except under exceptional circumstances and may not exceed the length of the marriage.

d. Permanent Periodic Permanent periodic alimony is awarded to provide for the needs and necessities of life as they were established during the marriage of the parties for a party who lacks the financial ability to meet his or her needs and necessities of life following a dissolution of a long duration marriage, or a moderate duration marriage, if such an award is appropriate upon consideration of the factors for setting alimony. Also, permanent alimony may be awarded following a marriage of short duration if there are exceptional circumstances. An award of permanent alimony terminates upon the death of either party or upon the remarriage of the party receiving alimony. An award may be modified or terminated based upon a substantial change in circumstances or upon the existence of a supportive relationship in accordance with F.S.A. §61.14. Complete lack of capacity for self-support need not be shown if the spouse can earn only a minimal level of support. Walter v. Walter, 464 So.2d 538 (Fla. 1985). It is payable at intermittent times.

e. Lump-Sum Lump-sum alimony is in a definite amount and must have some reasonable relationship to the estate of the person on whom it is imposed. Cann v. Cann, 334 So.2d 325 (Fla. App. 1976). Lump-sum alimony in Florida as a form of property distribution is no longer necessary because the equitable distribution statute accomplishes the same end. Lump-sum alimony will not be awarded unless the spouse being required to pay is in a financial position to make a gross payment without impairing or endangering his economic status. Bradley v. Bradley, 327 So.2d 253 (Fla. App. 1976). An award of lump-sum alimony vests in the recipient at the time of the final decree of dissolution of marriage and is not modifiable or terminable. Storer v. Storer, 353 So.2d 152 (Fla. App. 1977).

f. Use of Family Residence One of the parties under the terms of a final dissolution of marriage judgment may be awarded exclusive possession of the family residence if: (1) the award is a form of lump-sum alimony; (2) the possession is awarded to the party who has custody of the minor children so as to enforce the other party’s obligation to support and maintain them; (3) there is a valid agreement with respect to exclusive possession between the parties; (4) there is a finding


ofunequal distribution of marital property; or (5) it is a form of rehabilitative alimony. Segal v. Segal, 353 So.2d 894 (Fla. App. 1977). The award of use of a residence owned as an estate by the entireties is not a transfer of title to the property. Sistrunk v. Sistrunk, 235 So.2d 53 (Fla. App. 1970). The right to a former spouse’s use of the family residence ceases on his or her remarriage.

3. Considerations Affecting Allowance The court may grant alimony, either bridge-the-gap, rehabilitative, durational, or permanent, to either party in a proceeding for dissolution of marriage. In any award, the court may order any specific form of alimony or any combination of these forms. F.S.A. §61.08(1). Statutorily, the court must consider all relevant economic factors in determining whether to award alimony. The court must first make a specific factual determination whether either party has an actual need for alimony and whether either party has the ability to pay alimony. If the court finds that a party has a need for alimony, and the other party has the ability to pay alimony, then the court must consider all relevant factors in determining the type and amount of alimony. The factors considered include:

(1) The standard of living established during the marriage; (2) The duration of the marriage; (3) The age and the physical and emotional condition of both parties; (4) The financial resources of each party including the nonmarital and

marital assets and liabilities distributed to each; (5) Where applicable, the time necessary for either party to acquire

sufficient education or training to enable him or her to find appropriate employment;

(6) The contribution of each party to the marriage, including, but not limited to, services rendered in homemaking, child care, education and career building of the other party;

(7) The responsibilities each party will have with regard to any minor children that they have;

(8) The tax treatment and consequences to both parties of any alimony award, including the designation of all or a portion of the payment as a non-taxable, non-deductible payment;

(9) All sources of income available to either party, including income available to either party through investments of any asset held by that party; and

(10) Any other factor necessary to do equity and justice between the parties. F.S.A. §61.08(2)(a)-(j).


In addition, the court may take into consideration the adultery of either spouse and the circumstances involved, in determining whether, and what amount of, alimony should be awarded. F.S.A. §61.08(1). The adultery of the paying spouse, as well as of the receiving spouse, may be a factor in determining whether alimony should be awarded. Prior law looked only to the fault of the spouse seeking alimony. Despite the statutory allowance of adultery as a consideration, however, the Florida Supreme Court has disapproved the use of adultery as a factor to override the financial needs of the parties. Noah v. Noah, 491 So.2d 1124 (Fla. 1986). If a party has a separate income or estate that is adequate to comfortably support him, he has no need for alimony and none should be awarded. White v. White, 314 So.2d 187 (Fla. App. 1975). Alimony should similarly be denied where the parties’ estates and incomes are nearly equal. Colman v. Colman, 314 So.2d 156 (Fla. App. 1975). The court may deny alimony where a party is able and free to work, and the fact of one party’s misconduct does not entitle the other party to be supported for the rest of his life when he is able to work. Gordon, supra. A former spouse is entitled to alimony which will permit him or her to live in a manner commensurate with that provided by the other spouse during the marriage, if the other spouse is able to pay that amount. Firestone v. Firestone, 263 So.2d 223 (Fla. 1972). Income alone is not the sole test for determining ability to pay. The court may consider earning capacity, and the nature and extent of capital assets. Platt v. Platt, 103 So.2d 253 (Fla. App. 1958). Where the need of one spouse and the ability of the other to pay indicates that both parties will suffer economic hardship as a result of any division of their financial resources, the court may consider the conduct of either spouse that may have caused their difficult economic situation. Williamson v. Williamson, 367 So.2d 1016 (Fla. 1979). In other words, marital fault may be considered, but only in a financial context.

4. Modification and Termination a. Grounds

F.S.A. §61.14 empowers the courts to increase or decrease the amount of support, maintenance or alimony provided by agreement or by court order. Modification is authorized where a substantial change of circumstances has occurred since the date of the agreement, the entry of the final decree, or the most recent modification of the decree. The change may be in the earnings of the party paying or in the needs of the party receiving, or both.


See, e.g., Bedell v. Bedell, 583 So.2d 1005 (Fla. 1991), where the Florida Supreme Court held that a substantial increase in the financial ability of the payor spouse, standing alone, may justify but does not require an order of increased alimony. See also Moore v. Moore, 542 So.2d 1026 (Fla. App. 1989), wherein both parties, as well as their minor child, received substantial damages awards in a medical malpractice action.

However, the obligated party cannot seek a reduction in alimony on the grounds of a changed financial situation where the change was a result of his own voluntary action. Gamse v. Gamse, 291 So.2d 620 (Fla. App. 1974). Subsequent misconduct of the recipient spouse (for example, using alimony for alcohol and drugs or for gambling) has been held insufficient grounds for modification of the award of alimony, absent changed financial circumstances. Horner v. Horner, 222 So.2d 791 (Fla. App. 1969).

However, the court held that a wife who shot her husband subsequent to the award of alimony had forfeited her right to the alimony. See Kerrigan v. Kerrigan, 21 Fla. Supp. 15 (1963).

b. Property Settlements

The court has no power to modify property settlement agreements or provisions for lump-sum alimony. Rubio v. Rubio, 347 So.2d 1093 (Fla. App. 1977). However, the parties are free to make a new or supplemental agreement without judicial intervention, Ash v. Ash, 193 So.2d 677 (Fla. App. 1967), and a postnuptial agreement may be set aside on a showing of fraud, overreaching or unfairness due to inadequate disclosure. Casto v. Casto, 508 So.3d 330 (Fla. 1987). Final judgments incorporating marital settlement agreements reached after commencement of litigation and completion of discovery in marital dissolution actions can be challenged under Rule 1.540 (regarding relief from judgment, decrees or orders in family law proceedings) for up to one year, but there is no time limit on motions based on fraudulent financial affidavits. Macar v. Macar, 803 So.2d 707 (Fla. 2001).

c. Arrears If a party applies for a reduction of alimony and the circumstances justify the reduction, the court may adjust the alimony regardless of whether the party is in arrears under the former order. F.S.A. §61.14(4). Where the obligated party defaults in the payment of alimony installments under a final decree, the unpaid installments constitute vested property rights, and the court cannot cancel or


reduce the decree with respect to the past-due installments. Benson v. Benson, 369 So.2d 99 (Fla. App. 1979). However, the court may cancel arrears of alimony accruing after the application for modification was filed, and may make the modification order retroactive. Boyle v. Boyle, 194 So.2d 64 (Fla. App. 1967); Ramona v. Ramona, 244 So.2d 547 (Fla. App. 1971).

5. Termination Remarriage of the recipient spouse (even if subsequently annulled) is grounds for termination of the alimony award, but the remarriage of the obligated spouse and the attendant increased living expenses are not cause for reducing alimony. Bradley v. Bradley, 347 So.2d 789 (Fla. App. 1977). A former spouse’s cohabitation with a person of the opposite sex is not in itself grounds for termination of alimony where the spouse’s economic status has not been changed substantially thereby. Ochs v. Ochs, 540 So.2d 190 (Fla. App. 1989). In the absence of an agreement between the parties, a former spouse’s liability for periodic payments of alimony terminates upon the death of either party. However, the court has allowed alimony to continue beyond the life of the obligated spouse under special circumstances.

See Krasner v. Krasner, 339 So.2d 674 (Fla. App. 1976), where the court made alimony payable from the husband’s estate where the husband had extensive assets and the wife was partially disabled.

6. Security and Enforcement

a. Security

The Dissolution of Marriage Act provides that when either party is about to move himself or his property from the state, the court may order security for payment of alimony to the receiving party. F.S.A. §61.11.

b. Execution An alimony judgment may be enforced by execution if the receiving spouse secures a judgment for the amount of arrearage with an order for execution of the specific amount. Sutton v. Sutton, 382 So.2d 776 (Fla. App. 1980). Wages of a delinquent obligated spouse may be attached or garnished to enforce a court order for alimony. F.S.A. §61.12. Additionally, the party to whom alimony is owed may file a complaint for enforcement with the court. F.S.A. §61.17.


c. Contempt The remedy of contempt is most commonly invoked to enforce an alimony order. Williams v. Williams, 277 So.2d 542 (Fla. App. 1973). Florida regards an alimony obligation not as a debt in the constitutional sense, thus the prohibition against imprisonment for debt does not apply. DeFrances v. Knowles, 244 So.2d 168 (Fla. App. 1970). In a contempt hearing, the obligor spouse is presumed to have the ability to pay the alimony or support, and has the burden of proof to show otherwise. F.S.A. §61.14(5).

d. Income Deduction Order With respect to any order requiring the payment of alimony entered on or after January 1, 1985, the court must direct in the order that the payments be made through a central governmental depository. F.S.A. §61.08. This requirement is waived if there is no minor child or if the parties jointly request that payments not be made through the depository. F.S.A. §61.08(4)(c), (d).

D. CHILD SUPPORT AND CUSTODY 1. Child Support

a. Factors Considered

In a proceeding for dissolution of marriage, the court may order either or both parents to pay support, and it will determine the time-sharing arrangements of the parents with minor children as part of the proceedings. F.S.A. §61.13(1), (2). The court will consider an agreement between the parties in determining child support, and if the agreement provides for proper care and maintenance of the child, the court will ordinarily adopt the agreement. Forte v. Forte, 320 So.2d 446 (Fla. App. 1975). However, the parties cannot contractually abrogate one parent’s obligation to support his children nor waive their right to support. Strickland v. Strickland, 344 So.2d 931 (Fla. App. 1977). In determining the amount of child support, the court must consider the needs of the children, their ages, and the station in life and prior lifestyle of the parents, measured against the financial status and ability of the payor spouse to supply such needs. Luedke v. Behringer, 143 So.2d 218 (Fla. App. 1962). The court may consider the payor’s income and the size and net worth of his estate to determine his ability to pay. Garrett v. Garrett, 239 So.2d 108 (Fla. App. 1970).


In some cases, the court has approved the expenses of education, summer camp, recreation, religious education, or hospital, medical and dental expenses as part of the support. The court may order the parents to pay for private school tuition if they have the ability to pay and it is within their customary standard of living, or the child has special needs that are not met in the public school system. Forrest v. Ron, 821 So.2d 1163 (Fla. App. 2002). Each order for child support shall contain a provision for health insurance for a minor child when reasonably available. Insurance is reasonably available if the obligor has access at a reasonable rate to group coverage. The court will apportion to both parties the cost of insurance coverage and any non-covered medical expenses. F.S.A. §61.13(1)(b). A parent may be required to support an adult child who is unable to support himself because of a legal or physical deficiency. Dwyer v. Dwyer, 327 So.2d 74 (Fla. App. 1976). However, a trial court may not order post-majority support simply because the child is in college and the payor parent can afford to pay. Grapin v. Grapin, 450 So.2d 853 (Fla. 1984). The parties may execute an agreement which obligates support payments to continue beyond the child’s majority. See Vineberg v. Vineberg, 177 So.2d 367 (Fla. App. 1965). A court will ordinarily not cut off the child support obligation prior to high school graduation for a child who turns 18 before graduation. Hill v. Horton, 776 So.2d 1004 (Fla. App. 2001). When a parent ordered to pay child support or alimony does not do so, the parent who should have received support or alimony may not refuse to allow the child or children time-sharing. When a parent refuses to honor the other parent’s rights under a time-sharing schedule, the parent whose time-sharing was denied must continue to pay child support or alimony. The court may remedy such breach by:

(1) Awarding the parent denied time-sharing an amount of extra time-sharing to compensate for the time-sharing missed;

(2) Ordering the parent denying the time-sharing to pay reasonable court costs and attorney’s fees incurred by the non-offending parent;

(3) Ordering the parent denying time-sharing to attend a parenting course approved by the court;

(4) Ordering the parent denying time-sharing to do community service if it will not interfere with the welfare of the child;

(5) Ordering the parent denying time-sharing to have the financial burden of frequent and continuing contact when the parents reside more than 60 miles apart;

(6) Modifying, upon request, the parenting plan if in the best interests of the child; and


(7) Imposing any other reasonable sanction as a result of non-compliance. Child support guidelines which have been promulgated by the legislature give specific amounts for child support depending on income of both parents and the number of minor children. These guidelines presumptively establish the amount the trier of fact shall order in either initial or modification proceedings. They apply to parents with a combined net income of $100,000 or less. F.S.A. §61.30(6).

For example, where the combined monthly available (net) income is $2800 and there is one child, the guideline amount is $607 per month. Where there are two children, the guideline amount is $941 and where six children are involved, the guideline amount is $1549.

To determine which parent shall pay child support, divide each parent’s net income (after allowable expenses such as taxes and health insurance payments) by the combined net income to get the percentage share of each parent. Then multiply the appropriate guideline amount by each parent’s percentage share to get the actual dollar value. For orders of child support entered into on or after October 1, 2010, the court may impute income to a parent in certain circumstances including: unemployment, when information about a parent’s income is unavailable, when the parent fails to participate in child support proceedings, or when the partent fails to provide adequate financial information. The party seeking the court to impute income has the burden of proof and must present evidence that (1) the unemployment or under employment is voluntary, and (2) identifies the amount and source of the imputed income through evidence of income from available employment for which the party is suitably qualified by education, experience, current licensure, or geographic location, with due consideration being given to the parties’ time-sharing schedule. F.S.A. §61.30. The trier of fact may order payment of child support in an amount different from the guideline amount upon a written finding, or specific finding on the record, explaining why ordering payment of the guideline amount would be unjust or improper. F.S.A. §61.30.

b. Modification and Termination An order for child support may be modified by showing a sufficient change in circumstances. The change may be in one or both parents’ ability to provide, in the child’s needs, or both. Banks v. Graham, 252 So.2d 864 (Fla. App. 1971).


As in determining the original award, the court considers the best interests of the child in allowing a modification of child support. F.S.A. §61.13(1). Remarriage of either parent does not, of itself, warrant modification of a child support award. However, circumstances related to the parentreceiving support’s remarriage may justify modification.

For example, see Birge v. Simpson, 280 So.2d 482 (Fla. App. 1973), where the income and financial circumstances of a divorced wife’s present husband were held necessarily material and relevant to the wife’s ability to contribute to the support of her children.

A final judgment of dissolution of marriage which establishes a child support obligation for the former husband is a final determination of paternity, and any challenge to this determination must be brought under Rule 1.540 for relief from judgment for fraud, mistake, or newly discovered evidence. There is no time limitation on actions involving paternity issues. D.F. v. Department of Revenue, 823 So.2d 97 (Fla. 2002). The duty for child support generally terminates when the child reaches the age of majority, unless modified by agreement of the parties or by a court finding of dependency. Rollings v. Rollings, 362 So.2d 700 (Fla. App. 1978). For orders of child support entered into on or after October 1, 2010, child support for a child terminates on that child’s 18th birthday. However, F.S.A. §743.07 now allows a court to require child support beyond the age of 18 years if the child is dependent in fact, is between the ages of 18 and 19, and is still in high school, performing in good faith with a reasonable expectation of graduation before the age of 19. McCauley v. McCauley, 599 So.2d 1002 (1992). Also, absent an agreement extending liability, an obligation for child support terminates on the death of the obligated parent. Aldrich v. Aldrich, 163 So.2d 276 (Fla. 1964).

c. Enforcement Florida statutes provide that the wages and salaries of a parent obligated to pay child support may be attached and garnished to enforce the court’s order. F.S.A. §61.12. The court may also issue an income deduction order, just as for alimony. F.S.A. §61.1301. The court may also order the obligor to purchase or maintain a life insurance policy or a bond, or to otherwise secure the award with any other assets which may be suitable for that purpose. F.S.A. §61.13(1)(c).

2. Child Custody


It is the public policy of the State of Florida to assure that each minor child has frequent and continuing contact with both parents after the parents separate or the marriage of the parties is dissolved and to encourage parents to share the rights and responsibilities of childbearing. The father shall be given the same consideration as the mother in determining the child’s primary residence, regardless of the child’s age or sex. F.S.A. §61.13(2)(b)(1).

a. Determination The controlling consideration in determining which parent will receive child support is the welfare of the child. Edbaugh v. Edbaugh, 282 So.2d 14 (Fla. App. 1973). The court must consider the character and moral conduct of the persons seeking child support, their mental health, the type of home the child will live in and the characters of the other occupants, and may consider promotion of the child’s religious or spiritual welfare, church attendance or religious training. Boyd v. Boyd, 1 Fla. Supp. 40 (1950); Bonsack v. Campbell, 134 Fla. 809, 184 So. 332 (1938).

While prior Florida cases held that the effect of a subsequent interracial marriage on a particular child might be considered by the court in determining the parent in whose custody the child’s best interest would be served, the United States Supreme Court in Palmore v. Sidoti, 104 S. Ct. 1879 (1984) held that “the reality of private biases and the possible injury they might inflict are not permissible considerations for removal of an infant child from the custody of its natural mother.” See Niles v. Niles, 299 So.2d 162 (Fla. App. 1974).

The court will order that parental responsibility for the child will be shared by both parents unless the court finds that shared parental responsibility would be detrimental to the child. Evidence of detriment to the child includes evidence of spouse abuse; if the court finds that spouse abuse has occurred between the parties, the court may award parental responsibility to the abused spouse. Florida Statutes §61.13(2)(b)(2). Even if the parents are awarded shared parental responsibility, the child should reside in the home of only one parent rather than rotate between both parents’ homes because such instability is presumptively not in the child’s best interests. In the Interest of S.M.H., 531 So.2d 228 (Fla. App. 1988). Siblings should not be separated unless there is a compelling reason for the children to reside with different parents. Henderson v. Henderson, 537 So.2d 125 (Fla. App. 1988).


In ordering shared parental responsibility, one party may be granted the ultimate responsibility over specific aspects of the child’s welfare or the court may divide those responsibilities between the parties based on the best interests of the child. For purposes of shared parental responsibility and primary residence, the best interests of the child shall include an evaluation of all factors affecting the welfare and interests of the child, including, but not limited to:

(1) The willingness and ability of the parent receiving child support to facilitate and encourage frequent and continuing contact with the other parent;

(2) The love, affection, and other emotional ties existing between the parents and the child;

(3) The capacity and disposition of the parents to provide the child with food, clothing, medical, or other material needs;

(4) The length of time the child has lived in a stable, satisfactory environment and the desirability of maintaining continuity;

(5) The permanence, as a family unit, of the existing or proposed custodial home;

(6) The moral fitness of the parents; (7) The mental and physical health of the parents; (8) The home, school, and community record of the child; (9) The reasonable preference of the child if the court determines the child

to be of sufficient age, intelligence and experience to express a sound preference;

(10) The willingness of each parent to facilitate and encourage a close and continuing parent-child relationship between the child and the other parent;

(11) Evidence of domestic abuse or false testimony in a domestic abuse proceeding; and

(12) Any other fact considered by the court to be relevant. F.S.A. §61.13(3). If it is in the best interest of the child, the court may award custody to a third person, usually a grandparent or an aunt or uncle, instead of one of the natural parents. Drake v. Drake, 386 So.2d 1307 (Fla. App. 1980). This occurs when the parents are proven to be unfit, or have never shown any interest in the child, nor contributed to its support. DeGroot v. Fuller, 210 So.2d 244 (Fla. App. 1968).

b. Time-Sharing


The parent who is deprived of custody is entitled totime-sharing with the child or children, as long as he conducts himself in a manner not adversely affecting the child’s welfare. Chaffin v. Grigsby, 293 So.2d 404 (Fla. App. 1974). Both parents should be granted visitation rights when custody is awarded to a third person. Pittman v. Pittman, 153 Fla. 434, 14 So.2d 671 (1943). The parent receiving support cannot refuse to honor the other parent’s time-sharing rights even if the obligor parent does not pay child support or alimony. Similarly, even where the parent receiving support denies the other parent court-ordered time-sharing rights, the other parent cannot refuse to pay any ordered child support or alimony. In either case, the aggrieved parent must seek the court’s help. By statute in Florida, grandparents may be awarded visitation rights of a minor child when it is in the best interest of the child and the parents’ marriage has been dissolved, a parent has deserted the child, or the child was born out of wedlock. Factors considered in determining the child’s best interest include the grandparent’s willingness to encourage a close relationship between the child and the parents, the length and quality of the prior relationship between the child and the grandparent(s), the mental and physical health of the child and of the grandparents, and the preference of the child if the child is of sufficient maturity. F.S.A. §752.01. Grandparents have legal standing to seek judicial enforcement of visitation awards, but are not “contestants” to the dissolution proceeding. F.S.A. §61.13(2)(b), (2)(c). The statutes provide for mediation of visitation disputes involving grandparents. F.S.A. §752.015. If grandparents are awarded visitation, the subsequent remarriage by the natural parent and adoption by the stepparent will not necessarily terminate any grandparental rights, but the court may determine what is in the best interest of the child, after affording the grandparent an opportunity to be heard. F.S.A. §752.07. However, many of the provisions of these statutes have been successfully challenged by parents on the grounds of violation of their fundamental right to privacy under the state constitution. See Richardson v. Richardson, 766 So.2d 1036 (2000); Belair v. Drew, 776 So.2d 1105 (Fla. App. 2000). Shared parental responsibility, and/or visitation rights to a grandparent may not be denied solely because that person has or is believed to have AIDS. F.S.A. §61.13(6).

c. Modification By statute in Florida, no presumption arises either in favor or against a request to relocate by the primary residential parent. In making a determination


as to whether relocation with the child should be permitted, the court must consider the following factors:

(1) Whether the move would be likely to improve the general quality of life for both the parent receiving support and the child;

(2) The extent to which time-sharing rights have been allowed and exercised;

(3) Whether the parent receiving support, once out of the jurisdiction, will be likely to comply with any substitute time-sharing arrangements;

(4) Whether the substitute time-sharing will be adequate to foster a continuing meaningful relationship between the child and the parent not receiving child support;

(5) Whether the cost of transportation is financially affordable by one or both parties; and

(6) Whether the move is in the best interests of the child. F.S.A. §61.13(2)(d).

VII. EXTRATERRITORIAL RECOGNITION OF FOREIGN

DIVORCE DECREES AND ORDERS A. FULL FAITH AND CREDIT FOR FOREIGN DIVORCES

1. Divorce Decree from Sister State

a. When Only One Spouse Participates

The domicile of one of the parties to a marriage is a sufficient basis for a state to render a divorce even if there was no personal service on the nondomiciled spouse. Williams v. North Carolina, 317 U.S. 287 (1942).

Thus, if one spouse leaves home, establishes a genuine new domicile in another state, and then secures a divorce, the stay-at-home spouse’s state must give full faith and credit to the divorce.

However, where only one spouse participates in a divorce proceeding, the stay-at-home spouse has the right to attack the finding of the domicile of the procuring spouse because there has been no contested hearing on the issue of domicile in the rendering state. When the procuring spouse returns to his original domicile soon after the divorce or, more conclusively, buys a round-trip ticket originally, the stay-at-home spouse will probably be able to attack the out-of-state decree successfully in the state of original domicile. Williams v. North Carolina, 325 U.S. 226 (1945). The decree is presumptively valid, however, until attacked. Cook v. Cook, 342 U.S. 126 (1951).


b. When Both Spouses Participate

The underlying principles concerning the validity of an out-of-state divorce do not change when both spouses participate in the proceeding. Jurisdiction must still be based upon the domicile of one of the parties. However, by participating in the out-of-state divorce, through the entry of an appearance, the stay-at-home spouse is barred by the doctrine of collateral estoppel from attacking the validity of the divorce, because the question of domicile has actually been, or could have been, litigated in the rendering state. Sherrer v. Sherrer, 334 U.S. 343 (1948).

The Court extended this doctrine in Coe v. Coe, 334 U.S. 378 (1948), barring a later attack where the defendant merely entered an appearance in the rendering state and admitted jurisdiction. Consent jurisdiction not only binds the parties, but also protects the decree from collateral attack to the extent that it is protected in the rendering state. If a nonparty would not be permitted to attack collaterally a divorce in the rendering state, the Full Faith and Credit Clause prevents its attack in any other state by a nonparty. Johnson v. Muelberger, 340 U.S. 581 (1951). Despite the fact that the parties and their privies cannot attack a consensual, out-of-state divorce, it does not necessarily bind the state in a bigamy prosecution. Furthermore, if the defendant’s consent were obtained by fraud, the rule of the Sherrer case would be inapplicable.

A valid judgment or decree rendered by a court of one state, properly authenticated, must be recognized, and is entitled to full faith and credit in Florida’s courts. Bowers v. Bowers, 326 So.2d 172 (Fla. 1976). Florida courts will not permit a third person to attack a sister-state divorce decree unless the decree affects the rights or interests acquired by the third person prior to the decree. Grace v. Grace, 162 So.2d 314 (Fla. App. 1964). Where the defendant in a foreign divorce proceeding does some act which in itself recognizes the validity of the divorce decree entered in the proceeding, he is estopped from impeaching the decree. Reichert v. Appel, 74 So.2d 674 (Fla. 1954). The doctrine of laches may also preclude an attack on a void or voidable foreign divorce decree, as where the defendant was served constructively and received notice of it or soon learned of the decree but did nothing to attack it for several years. Lanigan v. Lanigan, 78 So.2d 92 (Fla. 1955).


2. Divorce Decree From Foreign Nation The states are not required to give full faith and credit to judgments of divorce rendered in foreign nations. Schwartz v. Schwartz, 143 So.2d 901 (Fla. App. 1962). In order to be recognized under the doctrine of judicial comity and reciprocity, the foreign divorce judgment must “partake of the elements that would support it if procured in this country.” Ogden v. Ogden, 159 Fla. 604, 33 So.2d 870 (1947). Florida courts will not recognize a foreign judgment of divorce unless at a least one of the spouses was a good-faith domiciliary in the foreign nation at the time the decree was rendered. Kittel v. Kittel, 194 So.2d 640 (Fla. App. 1967). A mail-order divorce rendered without either party having ever personally appeared in the foreign jurisdiction is not entitled to recognition in Florida. Klose v. Klose, 6 Fla. Supp. 28 (1953).

3. Divisible Divorce Florida recognizes the doctrine of divisible divorce, whereby an ex parte divorce decree in a sister state does not affect a prior Florida support award. Sorrells v. Sorrells, 82 So.2d 684 (Fla. 1955). The United States Supreme Court has upheld the states’ right to continue their support awards in such cases because an ex parte action has no in personam jurisdiction over the other spouse. Estin v. Estin, 334 U.S. 541 (1948). The Court has also upheld the right of a state to grant alimony to a resident of the state after an out-of-state, ex parte divorce containing no provision for alimony. Vanderbilt v. Vanderbilt, 354 U.S. 416 (1957).

B. ENFORCEMENT/MODIFICATION OF FOREIGN SUPPORT DECREES

To be enforceable, a foreign judgment must be valid, and some form of notice must be given a former spouse before a judgment for arrears is entered against him. Reichert v. Appel, 74 So.2d 674 (Fla. 1954). Under the revised Uniform Reciprocal Enforcement of Support Act (URESA), F.S.A. §88.011 et seq., a support decree of one state may be enforced in the state where the obligor presently resides. The Act is applicable to enforcement of spousal support as well as child support. State ex rel. Quigley v. Quigley, 463 So.2d 224 (Fla. 1985). A motion is filed in the state and county of the petitioner’s residence, and upon certification that the petition is sufficient to state a cause of action, the initiating court transmits all papers to the proper court in the responding state where the obligor resides. F.S.A. §§88.111; 88.141. The court in the responding state holds a hearing on the duty of


support, orders the obligor to pay any amounts deemed owed, and transmits payments received to the Florida court. F.S.A. §88.181 et seq. A responding court in proceedings under URESA may enter support orders which exceed the original amount provided in a prior foreign judgment. Courts have the authority under URESA to order child support commensurate with the current needs of the obligees and the current ability of the obligor to pay, without being bound by previous support orders. Koon v. Boulder City, 494 So.2d 1126 (Fla. 1986). A divorce decree granted by a foreign nation does not foreclose a spouse’s right to an adjudication of alimony in Florida, where the foreign court did not secure personal jurisdiction over the defendant spouse by personal service or by appearance. Pawley v. Pawley, 46 So.2d 464 (Fla. 1950).

C. ENFORCEMENT AND MODIFICATION OF FOREIGN CHILD CUSTODY ORDERS

In the absence of personal jurisdiction over the defendant spouse, a foreign decree awarding custody of children to the other spouse is not entitled to full faith and credit, even though the children were domiciled in the state in which the decree was entered at the time it was entered. May v. Anderson, 345 U.S. 528 (1953). However, Florida has adopted the Uniform Child Custody Jurisdiction Act (UCCJA), the purposes of which include the avoidance of jurisdictional competition and conflict with courts of other states in child custody matters, assurance that litigation concerning the custody of a child takes place ordinarily in the state with which the child and his family have the closest connection, and deterrence of abductions and other unilateral removals of children undertaken to obtain custody awards. F.S.A. §61.1304. Under the UCCJA, a Florida court is statutorily prohibited from modifying a foreign custody decree unless it has jurisdiction and the court which rendered the decree does not have jurisdiction or has declined to assume jurisdiction to modify the decree. F.S.A. §61.133(1). Lamon v. Rewis, 592 So.2d 1223 (1992). Furthermore, unless it is required in the child’s interest, a Florida court may not exercise its jurisdiction to modify a custody decree of another state if the petitioner, without the consent of the person entitled to custody, improperly took or retained the child from the physical custody of the person entitled to custody or if the petitioner violated any other custodial provision. F.S.A. §61.1318(2).


On the other hand, the UCCJA does not operate to divest a Florida court of continuing jurisdiction unless virtually all contacts have been lost with the forum state. Once validly acquired under F.S.A. §61.1308, jurisdiction is presumed to continue until a Florida court expressly determines on some other basis that jurisdiction is no longer appropriate, until virtually all contacts with Florida have ceased, until some other Florida statute terminates jurisdiction, or until jurisdiction is terminated by operation of the Federal Parental Kidnapping Act. Yurgel v. Yurgel, 572 So.2d 1327 (Fla. 1990). The grounds necessary for Florida to assert jurisdiction under the UCCJA include any one of the following:

(1) The child is physically present in Florida and has been abandoned or neglected, or it is necessary to protect him from an emergency situation involving or threatening abuse;

(note that physical presence alone is not a sufficient ground for jurisdiction without these exacerbating circumstances);

(2) Florida is the home state of the child at the time of commencement of

the proceedings or within the preceding six months and a parent continues to live in Florida;

(3) It is in the best interests of the child for Florida to assume jurisdiction because the child and at least one parent or other custody contestant have significant connections with Florida and there is substantial evidence available in Florida regarding the child’s care, protection, training, and personal relationships; or

(4) Florida is the most appropriate forum according to the determination of another state in declining to exercise jurisdiction over the child or no other state meets the jurisdictional prerequisites. F.S.A. §61.1308.

A Florida court may grant extraterritorial effect to a custody award by a court of a foreign nation if the foreign court had personal jurisdiction over the parties. Willson v. Willson, 55 So.2d 905 (Fla. 1951).


BUSINESS ENTITIES I. PARTNERSHIP The Florida Revised Uniform Partnership Act (“RUPA”) is contained in Florida Statutes Annotated (F.S.A.) §§620.81001 - 620.9902. The Revised Act became effective on January 1, 1996.

A. DEFINITION OF A PARTNERSHIP The statutory definition of a partnership is “an association of two or more persons to carry on as co-owners a business for profit formed under F.S.A. §620.8202, predecessor law, or the comparable law of another jurisdiction.” F.S.A. §620.8101(7). "Person" means an individual, corporation, business trust, estate, trust, partnership, limited partnership, association, joint venture, limited liability company, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity. F.S.A. §620.8101(11). "Business" means any trade, occupation, profession, or investment activity. F.S.A. §620.8101(2). Under prior law, a partnership was not considered a legal entity apart from the members composing it; it was an aggregate of individuals. One of the most significant changes in RUPS is that the partnership is treated as an entity distinct from its partners. F.S.A. §620.8201.

B. FORMATION A partnership agreement among the partners forming the partnership may be oral, written, or implied. F.S.A. §620.8101(8). Whether express or implied, a contract is generally essential to the formation of a partnership. A written agreement is unnecessary; a contract to create a partnership is valid if oral. Valid consideration must support the contract between the parties. Botsikas v. Yarmack, 172 So.2d 277 (Fla. App. 1965).

1. Partnership vs. Joint Venture A “joint adventure” is similar to a partnership, but is usually limited to a single enterprise, while a partnership carries on a continuing business. Albert Pack Corp. v. Fickling Properties, 146 Fla. 362, 200 So. 907 (1941). However, if a joint venture satisfies the RUPA definition of partnership, it is a partnership for the purpose of acquiring, holding, and conveying title to real property in the name of the joint venture as an entity separate from its members. Century Bank of Lee County v. Gillespy, 399 So.2d 1109 (Fla. App. 1981). The co-venturers


are mutual agents having the power to bind each other in matters within the scope of the joint enterprise, and the rules of joinder applicable to partners are also applicable to joint venturers. Deal Farms, Inc. v. Farm & Ranch Supply, 382 So.2d 888 (Fla. App. 1980). It has been universally held that “joint venture” and partnership are separate legal relationships. In contracts creating joint ventures, there must be (1) a community of interest in the performance of the common purpose, (2) joint control or right of control, (3) a joint proprietary interest in the subject matter, (4) a right to share in the profits, and (5) a duty to share in any losses which may be sustained. Kislak v. Kreedian, 95 So.2d 510, 515 (Fla. 1957).

2. Capacity Any person who has the capacity to contract can enter into a partnership agreement. The word “person” means an individual, corporation, business trust, estate, trust, partnership, limited partnership, association, joint venture, limited liability company, government, governmental subdivision, agency or instrumentality, or any other legal or commercial entity. F.S.A. §620.8101(11). A Florida corporation is empowered by statute to be a general or limited partner. F.S.A. §607.0302. The common-law prohibition against a husband and wife contracting with each other was eliminated by statute in 1943; thus a married woman may form a valid partnership with her husband, if all elements of a partnership exist. F.S.A. §708.08. A person who suffers from a mental abnormality may enter into a valid partnership unless his mind is so affected that he is incapable of understanding the nature and consequences of his acts. Steinberg v. Shader, 156 Fla. 195, 23 So.2d 94 (1945). A minor can enter into a partnership, but he may void the partnership agreement on the basis of his infancy. However, his investment in the business is subject to the claims of creditors.

3. Tests of Partnership a. Intent

Traditionally, the key test of whether a partnership is formed has been whether it was the intention of the parties to become partners. Uhrig v. Redding, 8 So.2d 4, 150 Fla. 480 (1942). However, F.S.A. §620.8202(1) now


provides that the association of two or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not they intend to form a partnership. The parties need not use the term “partnership” so long as their acts and conduct indicate intent to carry on, as co-owners, a business for profit. Everett v. Ribicoff, 200 F. Supp. 103 (N.D. Fla. 1961).

An agreement whereby taxicab owners bound together as independent operators and used a group name, but did not share income, liability, or expenses (other than the cost of their dispatcher) was not a partnership agreement. Myers v. Brown, 296 So.2d 121 (Fla. App. 1974). Likewise, no partnership was created by an agreement between two doctors which specified that the first doctor was an independent contractor with separate liability, and that the second doctor was to receive a percentage of gross income in exchange for equipment and material. Schweitzer v. Seaman, 383 So.2d 1175 (Fla. App. 1980).

b. Sharing of Profits

The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in that business. However, no such inference may be drawn if the profits were received in payment:

(1) Of a debt by installments or otherwise; (2) Of rent; (3) For services as an independent contractor, or as wages or other

compensation of an employee; (4) As an annuity to a beneficiary, representative, or designee of a

deceased or retired partner; (5) As interest or other charges on a loan, even if the amount of payment

varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or

(6) As the consideration for the sale of goodwill of a business or other property by installments or otherwise. F.S.A. §620.8202(3)(c).

It is not statutorily required that there be a sharing of losses to create a partnership. In the absence of an agreement to the contrary, partners share losses in proportion to their share in the profits.

c. Sharing Gross Returns


The sharing of gross returns does not, in itself, establish a partnership, even if the persons sharing them have a joint or common right or interest in any property from which the returns are derived. F.S.A. §620.8202(3)(b).

For example, leases wherein the lessor shares a percentage of the lessee’s gross receipts in lieu of rent do not establish a partnership.

Filing or failing to file federal partnership tax returns has little bearing on the existence of a partnership under state law. Schlipp v. Schlipp, 380 So.2d 573 (Fla. App. 1980).

d. Common Property Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not in itself establish a partnership, even if the co-owners share profits made by the use of the property. F.S.A. §620.8202(3)(a). Thus, if two persons, in undertaking a real estate development, take title to the property as tenants in common they would not thereby form a partnership.

e. Control Partners, as co-owners of the business, must have the power of ultimate control. Therefore, unless the agreement indicates a contrary intent, if a person shares in the profits, but lacks any power of control, he is probably an agent, receiving a share of profit as incentive or bonus.

4. Partnership by Estoppel Even if a voluntary partnership does not exist, liability may be imposed on one who has let it appear that he is in a partnership if a creditor is thereby misled.

a. Liability for Holding Out as Partner When a person, by words or conduct, represents himself to be a partner in an existing partnership or with one or more persons not actually partners, he is liable to anyone who has extended credit or entered into a transaction in reliance on the representation of partnership. See Greenfield v. Cohen, 432 So.2d 574 (Fla. App. 1983). A person is likewise liable if he has consented to such a representation by another. If the representation is privately made, it may be relied on only by those to whom it was made.


If a representation was publicly made (e.g., by newspaper), the “purported partner” is liable to anyone who relies on the purported partnership even if the purported partner is unaware of being held out as a partner to this person. If partnership liability results, the purported partner is liable as though he were a partner; if no partnership liability results, he is liable jointly with any others who consented to the representation. F.S.A. §620.8308(1).

b. Agency Created by Holding Out When a person has been represented to be a partner in an existing partnership or with others in a nonexistent partnership, he is an agent of those consenting to the representation, and he can bind them as if he were in fact a partner as to persons who enter into transactions in reliance on the representation. If all the members of the partnership consent to the representation, any liability is a partnership obligation; otherwise, it is a joint obligation of those consenting. F.S.A. §620.8308(2). Subsection (3) of F.S.A. §620.8308 provides that a person is not liable as a partner merely because the person is named by another in a statement of partnership authority, and subsection (4) provides that a person does not continue to be liable as a partner merely because of a failure to file a statement of dissolution or amend a statement of partnership authority to indicate such dissociation.

5. Duration of Partnership A partnership to conduct a business which may last indefinitely is a partnership at will. Presumptively, every partnership is at will, unless a definite term is specified or the partnership is only for a particular undertaking. If the partners have an unrestricted right (not merely the power) to withdraw from the partnership, the partnership is at will, rather than for a definite term or particular undertaking. If a partnership for a definite term or particular undertaking is continued, without an express agreement, after the expiration of the term or completion of the undertaking, the rights and duties of the partners remain the same as they were at the expiration or completion, so far as is consistent with a partnership at will. If the partners, or those of them who habitually acted in the business during the term or undertaking, continue the business without any settlement or liquidation of the partnership, they are presumed to have agreed that the partnership will continue. F.S.A. §620.8406.


C. LIABILITIES OF PARTNERS TO THIRD PARTIES

1. Contractual Liability

All partners are liable jointly and severally for contractual debts and obligations of the partnership unless otherwise agreed by a claimant or provided by law. F.S.A. §620.8306. Under the prior law, contractual liability was only joint, so all of the partners had to be joined in the action. However, the RUPA rule of joint and several liability requires the judgment creditor first to exhaust the partnership assets before enforcing a judgment against any separate assets of a partner. F.S.A. §620.8307(4).

a. Authority Generally Every partner is an agent of the partnership for the purpose of its business. The act of every partner for apparently carrying on in the ordinary course the business of the partnership (or business of the kind carried on by the partnership) in the geographical area where the partnership operates binds the partnership, unless the partner has no authority to act in the matter and the person with whom he is dealing received notification that he has no such authority. F.S.A. §620.8301(1). An act of a partner that is not apparently for carrying on in the ordinary course the partnership business or business of that kind binds the partnership only if authorized by all the other partners or by a written partnership agreement. F.S.A. §620.8301(2).

b. Statements of Authority F.S.A. §620.8303 allows a partnership to file a statement of partnership authority. This statement can enhance or set forth limitations on the authority of some or all of the partners to enter into transactions on behalf of the partnership. F.S.A. §620.8303(1)(b). Filing is centralized, as for corporations, in the Florida Department of State. Except when dealing with the transfer of real property (which will be discussed infra), a person who gives value—without notice to the contrary—can use a grant of authority in a filed statement of partnership authority as conclusive evidence of that partner’s authority to enter into a certain transaction on behalf of the partnership unless there is a limitation on that authority in another filed statement. F.S.A. §620.8303(3). A person who is not a partner is deemed to know of a limitation on the authority of a partner to transfer real property held in the name of the partnership if a certified copy of the filed statement containing the limitation on


authority is of record in the office for recording transfers of such real property. F.S.A. §620.8303(4).

c. Knowledge that Authority Is Lacking Partnership agreements may include specific restrictions on authority; if a partner acts in contravention of such a restriction, and the third party has knowledge of the restriction, the partnership will not be bound. However, such a restriction is ineffective against anyone without knowledge of it. A person has “knowledge” of a fact when he has actual knowledge thereof. F.S.A. §620.8102(1).

d. Notice to Partner as Notice to Partnership F.S.A. §620.8102(6) provides that a partner’s knowledge, notice, or receipt of notification of a fact relating to the partnership is effective immediately as knowledge by, notice to, or receipt of notification by the partnership, except in the case of fraud on the partnership committed by or with the consent of that partner. The definition of “notice” is set forth in F.S.A. §620.8102(2). A person is deemed to have notice of a fact if the person:

1) Knows the fact; 2) Has received notification of the fact; or 3) Has reason to know that the fact exists from all other facts known to

the person at the time in question.

e. Admission by a Partner An admission or representation made by any partner concerning partnership affairs within the scope of his authority is evidence against the partnership. Therefore, when a suit is brought against partners to recover a partnership debt, an acknowledgment of the debt by one partner will be evidence binding both and justifying a verdict and judgment against both. Smith v. Haley, 34 Fla. 430, 16 So. 332 (1894).

f. Dormant Partners A dormant partner—i.e., one who is not active in managing partnership business and who is not known to the world as a partner—is nonetheless liable on partnership obligations. This is based on the rule that an undisclosed principal is still liable for the acts of his agent. Bessemer Properties, Inc. v. Barber, 105 So.2d 895 (Fla. App. 1959).


g. Incoming Partners An incoming partner—i.e., one admitted as a partner into an existing partnership—is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred. However, his liability can be satisfied only out of partnership property, and thus is limited to his investment in the business. The incoming partner is not personally liable for partnership obligations incurred before his admission as a partner. F.S.A. §620.8306(2).

h. Outgoing Partners A partner no longer affiliated with the partnership is not liable on partnership obligations made after his departure, so long as he gave proper notice to potential creditors. Houstoun v. Albury, 436 So.2d 224 (Fla. App. 1983).

2. Tort Liability Of Partners

a. Nature of Liability

All partners are liable jointly and severally for any tort or breach of trust committed by a partner acting in the ordinary course of business. Thus, an action may be brought against any one or more of the partners, but a partner will not be bound by a judgment unless he has been served with notice. Where at least two partners were actively involved in perpetrating a fraud, a punitive damage award against all the partners was found justified. Mulle v. Scheiler, 484 So.2d 47 (Fla. App. 1986). However, tort liability may not be imposed on a partner for an intentional tort committed by another partner outside the scope of the partnership business and without prior approval or subsequent ratification. Soden v. Starkman, 218 So.2d 763 (Fla. App. 1969).

b. Liability for Wrongful Acts Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his copartners, loss or injury is caused to any person who is not a partner, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. F.S.A. §620.8305(1). “Wrongful act” has been held to include both negligent and intentional torts.


c. Liability for Breach of Trust If, in the course of the partnership’s business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a person who is not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss. F.S.A. §620.8305(2).

d. Liability for Criminal Acts In the absence of a partner’s personal participation in the criminal acts of his partners, he cannot be criminally punished merely by reason of the partnership relationship. Munoz v. State, 87 Fla. 220, 99 So. 555 (1924).

3. The Partnership As A Party To An Action

Under RUPA, unlike prior law, a partnership may sue or be sued in its own name, due to the entity theory of partnership. F.S.A. §620.8307(1). (Please note that your corresponding lecture may still state the prior law that a partnership cannot be sued or sue in its own name.) The partnership may maintain an action against a partner for breach of the partnership agreement or for the violation of a duty to the partnership causing harm to the partnership. Process against a partnership may be served on any partner and is valid against all other partners. F.S.A. §48.061. The judgment obtained in the action may be a lien on the partnership property and the assets of the partner served with process, but not on the individual assets of partners not served in the action. Florida Brewing Co. v. Sendoya, 73 Fla. 660, 74 So. 799 (1917). In the event of bankruptcy of the partnership, the individual partners remain jointly and severally liable for all partnership obligations exceeding the value of the partnership assets. In re Toomey, 34 B.R. 35 (Bankr. Fla. 1983).

D. RELATIONS OF PARTNERS TO ONE ANOTHER

1. Fiduciary Relationship

As to partnership matters, partners stand in a fiduciary relation to one another. The fiduciary duties that a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care. F.S.A. §620.8404(1). There are other specific duties as detailed below. A partner must discharge the duties to the partnership and the other partners under RUPA or under the partnership agreement and exercise any rights consistently with the obligation


of good faith and fair dealing. F.S.A. §620.8404(4). Lieberbaum v. Levine, 54 So.2d 159 (Fla. 1951).

a. Duty of Loyalty A partner's duty of loyalty to the partnership and the other partners includes, without limitation, the following:

(a) To account to the partnership and hold as trustee for the partnership any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity. F.S.A. §620.8404(2)(a).

(b) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership. F.S.A. §620.8404(2)(b).

(c) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership. F.S.A. §620.8404(2)(c).

All of the partners (or a number or percentage specified in the partnership agreement) may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty. F.S.A. §620.8103(d)(2). Unless the partnership agreement specifies otherwise, a partner may engage in a separate business in his own behalf during the period that he is a member of the firm, but he may not carry on a business of the same nature or in competition with the firm. Singletary v. Mann, 157 Fla. 37, 24 So.2d 718 (1946). If he does so, he must account to the partnership for his profits. Similarly, a partner may not exploit a business opportunity of the partnership unless he has made full disclosure and received the approval of his partners. A partner does not violate a duty or obligation under this act or under a partnership agreement merely because the partner's conduct furthers the partner's own interest. F.S.A. §620.8404(5). A partner may lend money to and transact other business with the partnership, and as to each loan or transaction, the rights and obligations of the partner are the same as those of a person who is not a partner, subject to other applicable law. F.S.A. §620.8404(6).


b. Duty of Care A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. F.S.A. §620.8404(3).

c. Duty to Keep Books and Records Partnership books, if any, must be kept at the partnership’s chief executive office. Every partner must have access to inspect and copy the books during ordinary business hours. F.S.A. §620.8403. However, no books or records are enumerated in RUPA as mandatory to be kept, and there is no liability to other partners or third parties for a failure to keep partnership books.

d. Duty to Disclose RUPA requires, however, that partners must disclose true and full information of all things affecting the partnership to any partner, or to the legal representative of a deceased or disabled partner, without demand if reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement or the statute, and any other information upon demand, except to the extent unreasonable or improper under the circumstances. F.S.A. §620.8403(3). Furthermore, a partner’s fiduciary duty requires him to make full disclosure of all matters within his knowledge which are material to the affairs of the partnership or to the cost, value, location, or condition of partnership property. Fuller v. Pierce, 92 Fla. 129, 109 So. 238 (1926).

Where a partnership’s real property contract did not disclose that $35,000 of joint partnership funds was to be used to pay a debt owed by the managing partner to a vendor, which debt was incurred by the managing partner prior to his entry into an agreement with the partners, the managing partner was obligated to pay that amount to the partnership. Slingerland v. Hurley, 388 So.2d 587 (Fla. App. 1980).

If the managing partner of a partnership paid too little when he sold a portion of partnership holdings to a corporation in which he and his wife were majority stockholders, then the managing partner owed the partnership the difference between the purchase


price and the market value on the date of sale. Slingerland v. Hurley, supra.

2. Rights And Duties Of Partners

The rights and duties of the partners in relation to the partnership are determined by statute, subject to any agreement between them.

a. Contributions, Distributions, Profits, and Shares Each partner is entitled to be repaid his contributions to the partnership property, whether made by way of capital or advances, and to share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied. F.S.A. §620.8401(1). Profits are paid through distributions. "Distribution" means a transfer of money or other property from a partnership to a partner in the partner's capacity as a partner or to the partner's transferee. F.S.A. §620.8101(4). It does not include a transfer to a partner in another capacity, such as a creditor, of the partnership. A partner has no right to receive, and may not be required to accept, a distribution in kind. F.S.A. §620.8402. Each partner must contribute toward partnership losses according to his share in the profits. F.S.A. §620.8401(2). Absent a partners’ agreement specifying their proportionate interests in partnership property, there is a rebuttable presumption that the interests of the partners are equal. Yarborough v. Kilbee, 307 So.2d 223 (Fla. App. 1975). If partners agree to share profits other than equally, losses are shared in the same ratio.

b. Right to Manage All partners have equal rights in the management and conduct of the partnership business. F.S.A. §620.8401(6). These rights may be changed by agreement—for example, by weighting votes to correspond to capital contributions or shares in profits. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no act outside the ordinary course of business of the partnership and an amendment may be done rightfully without the consent of all partners. F.S.A. §620.8401(10).

c. Right to Contribution or Indemnification


The partnership must reimburse every partner for payments made and indemnify her for personal liabilities reasonably incurred by her in the ordinary course of partnership business or in the preservation of partnership business or property. F.S.A. §620.8401(3). The partnership must reimburse a partner for an advance to the partnership beyond the amount of capital the partner agreed to contribute. F.S.A. §620.8401(4). Even though a partnership obligation is joint, each partner is individually liable for the entire amount of the partnership’s obligation. If a partner is forced to pay the entire debt or more than his pro rata share and the partnership is unable to indemnify him, he is entitled to contribution from his copartners and may seek it through an accounting action.

d. Right to Interest A partner who makes any payment or advance that becomes a partnership obligation is paid interest from the date of the payment or advance. F.S.A. §620.8401(5). However, a partner receives interest on his capital contribution only from the date when repayment should be made. Therefore, it is important that partners agree to characterize money paid to the partnership as a loan (interest from time of loan) or a capital contribution (interest from time repayment due), or an accounting action will later be necessary.

e. Right to Remuneration As a general rule, no partner is entitled to demand remuneration for acting in the partnership business, except for reasonable compensation for services rendered in winding up the partnership business. F.S.A. §620.8401(8). However, if the partners agree, for example, that one person will be the managing partner and that he should receive reasonable compensation, the courts will uphold his right to payment for services rendered. Gonzales v. Smith, 66 Fla. 85, 62 So. 913 (1913).

f. Admission of New Members No person can become a member of a partnership without the consent of all partners. F.S.A. §620.8401(9). The admission of a new partner does not change the partnership entity.

g. Suits Between Partners


F.S.A. §620.8405(2) gives a partner the right to maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting, in order to:

(1) Enforce his or her rights under the partnership agreement; (2) Enforce his or her rights under Florida’s Revised Uniform Partnership Act;

or (3) Enforce his or her rights to otherwise protect his or her interest arising

apart from the partnership. A court of equity may act to enjoin a partner from violating the rights of his co-partner. Sweat v. Boyd, 126 Fla. 180, 170 So. 740 (1936).

h. Worker’s Compensation A partner who devotes full time to the partnership may elect to be included in the definition of “employee” by filing notice of his election; he will then be eligible for Worker’s Compensation benefits. F.S.A. §440.02(2)(c). F.S.A. §440.02(13)(c) provides that “employee” includes a sole proprietor or a partner who devotes full-time to the proprietorship or partnership and elects to be included in the definition of employee by filing notice thereof.

E. PARTNERSHIP PROPERTY AND PROPERTY RIGHTS

1. Partnership Property

Property acquired by a partnership belongs to the partnership and not to the partners as individuals. F.S.A. §620.8203; B. A. Lott, Inc. v. Padgett, 153 Fla. 308, 14 So.2d 669 (1943). A partner may use or possess partnership property only on behalf of the partnership. F.S.A. §620.8401(7). Partnership property may be that originally brought into the partnership on account of the partnership. Thus, any property—cash or contributions of goods, labor, or skill—brought into the business at its formation is the “capital” of the partnership. All property subsequently acquired on account of the partnership, by purchase or otherwise, is partnership property. Courts will look at how the title to the property is held, but title is not solely determinative.

a. Where Title Documents Acknowledge Partnership


Property is partnership property if acquired in or transferred to:

(1) The property is acquired in the partnership’s name; or (2) The property is acquired in one or more of the partner’s individual

names, but the instrument of transfer refers to the partner’s capacity as a partner and/or to the existence of the partnership, or states the partnership’s name. F.S.A. §§620.8204(1), (2).

b. Where Title Documents Do Not Acknowledge

Partnership Property acquired in the name of one or more of the partners, without an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership and without use of partnership assets, is presumed to be separate property, even if used for partnership purposes. F.S.A. §620.8204(4).

c. Property Acquired with Partnership Funds Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership or of one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership. F.S.A. §620.8204(3). Unless a contrary intention appears, in other words, property acquired with partnership funds is partnership property. Factors considered in establishing a contrary intent would be the terms of the partnership agreement or any other relevant express or implied agreement, the firm’s records, the payment of taxes, repair bills, insurance premiums, the partners’ conduct, the use or improvement of the property by the business, and how title is held. The use of partnership funds in the purchase of real estate may be a sufficient indication of its character as partnership property, even if legal title is in the names of individual partners, Claffin v. Ambrose, 37 Fla. 78, 19 So. 628 (1896), or a nonpartner third party.

2. Property Rights of A Partner

The property rights of a partner are (1) his interest in the partnership, and (2) his right to participate in the management of the partnership. Under RUPA, unlike its predecessor UPA, a partner has no interest that can be transferred, either voluntarily or involuntarily, in specific partnership property. The partnership owns specific assets; the partners are not treated as co-owners.


a. Partner’s Interest in Partnership A partner’s interest in the partnership is personal property. F.S.A. §620.8502. i.. Transferability. F.S.A. §620.8502 also provides that a partner’s only transferable interest is his or her share of profits and losses and the right to receive distributions. F.S.A. §620.8503 provides that a partner may transfer his or her “transferable” interest in the partnership, and that such a transfer does not, by itself, cause the partner’s dissociation from the partnership or the dissolution of the partnership. In addition, such a transfer does not give the transferee the right to “participate in the management or conduct of partnership business, to require access to information concerning partnership transactions, or to inspect or copy the partnership books or records.” The transferee basically only has a right to her transferor’s distributions. ii. Creditors’ Rights. Partnership property cannot be attached unless the claim is against the partnership. Although a partner’s right in specific partnership property is not subject to execution by a non-partnership creditor, any judgment creditor can subject the partner’s interest to a charging order. The statutory charging order is the only means by which a partner’s individual judgment creditor can reach the partner’s partnership interest. Atlantic Mobile Homes, Inc. v. LeFever, 481 So.2d 1002 (Fla. App. 1986). A charging order allows the court to charge the debtor-partner’s interest with payment of the unsatisfied amount of the judgment debt, and to appoint a receiver of his share of the distributions and any other money due him from the partnership. Before foreclosure or sale of the debtor’s interest, the other partners may redeem his interest with their separate property, or, with the consent of all the other partners, with partnership property. F.S.A. §620.8504. A judgment creditor of a partner or a partner’s transferee, upon application, may have the court charge the transferable interest of the judgment debtor to satisfy the judgment. This charging order constitutes a lien on the judgment debtor’s transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time and the purchaser at the foreclosure sale has the rights of a transferee. F.S.A. §620.8504 iii. Rights of Deceased Partner’s Estate. Unlike his rights in specific partnership property, a partner’s interest in the partnership vests at death in his


executor, who may require an accounting. Frye v. Manacre, Ltd., 431 So.2d 181 (Fla. App. 1983).

3. Conveyance Of Real Property

a. Title in Name of Partnership When title to real property is in the partnership name, any partner may convey title to it by a conveyance executed in the partnership name. F.S.A. §620.8302(1)(a). However, if the partner did not have the authority (actual or apparent—see Section II(A), supra) to convey the partnership property, the partnership may recover the property, unless the purchaser or his assignee is a holder for value without knowledge that the partner exceeded his authority in making the original conveyance. F.S.A. §620.8302(2). A partner’s authority to transfer real property is subject to the provisions of any statement of partnership authority filed in the public records, F.S.A. §§620.8302 and 620.8303.

b. Title in Name of One or More Partners When title to real property is in the names of one or more of the partners, and the instrument transferring the property to them indicates their capacity as partners or the existence of the partnership, but not the name of the partnership, the partners in whose name the title stands may convey title to the property. F.S.A. §620.8302(1)(b). However, the partnership may recover the property if the partners’ act was unauthorized, unless the purchaser or his assignee is a holder for value without knowledge that the partners have exceeded their authority in making the conveyance. F.S.A. §620.8302.

F. DISSOCIATION OF A PARTNER

The following events will result in the dissociation of a partner:

(1) The partnership having notice of the partner’s express will to immediately withdraw as a partner or withdraw on a later specified date;

(2) An event agreed to in the partnership agreement causing the partner’s dissociation;

(3) The partner’s expulsion pursuant to the partnership agreement; (4) The partner’s expulsion by a unanimous vote of the other partners (if it

is unlawful to do business with such partner, the partner has transferred substantially all of his partnership assets, except for security purposes, the partner is a now dissolved corporation that


received 90 days’ notice of intent to expel it and did not cure the defect within that time, or the partner is now a dissolved partnership);

(5) On application by the partnership or another partner, the partner’s expulsion by judicial determination for wrongful conduct, a material breach of the partnership agreement, or conduct inconsistent with the partnership’s business;

(6) The partner’s filing bankruptcy (or, as expanded under RUPA, executing an assignment for the benefit of creditors, the appointment of a trustee or receiver, and the partner either sought or consented to such action or failed to have the appointment of a trustee or receiver vacated within 90 days);

(7) The partner’s death, or incapacity; (8) If the partner is a trust, or the trustee of a trust, the distribution of the

trust’s entire transferable interest; (9) If the partner is an estate, the distribution of the estate’s transferable

interest; (10) Termination of a partner who is not an individual, partnership,

corporation, trust, or estate. F.S.A. §620.8601.

1. Wrongful Dissociation

A partner has the power, but not necessarily the right to dissociate from the partnership at any time. A partner’s dissociation is wrongful if the dissociation violates an express provision of the partnership agreement, or in the case of a partnership for a definite term or particular undertaking, if the dissociation occurs prior to the end of that term or undertaking. A partner who wrongfully dissociates will be liable to the partnership and to the other partners for any damage caused by the wrongful dissociation. F.S.A. §620.8602.

2. Effect Of Partner’s Dissociation

Under RUPA, unlike prior law, the dissociation of a partner from the partnership does not necessarily result in the dissolution of the partnership. When a partner dissociates, his or her right to participate in the management of the partnership terminates. Most of the partner’s duties of loyalty and care also terminate upon dissociation. F.S.A. §620.8603. Under F.S.A. §620.8702, a dissociated partner continues to have authority to bind the partnership for a period of one (1) year after the dissociation in transactions that meet the following requirements: (i) the transaction would have bound the partnership prior to the dissociation; (ii) the third party dealing with the partnership reasonably believed that the dissociated partner was then a


partner; and (iii) the third party did not have actual notice, or constructive notice, of the partner’s dissociation. The dissociated partner is liable to the partnership for any damage caused to the partnership arising from an obligation incurred by the dissociated partner after dissociation regarding any of the foregoing. F.S.A. §620.8702. The dissociation of a partner does not, in itself, discharge the partner’s liability to third parties for any partnership obligation incurred before dissociation. F.S.A. §620.8703. The dissociating partner is not, however, liable for any partnership obligations incurred after dissociation, except for transactions entered into by the partnership within one (1) year after his or her departure, if the other party does not have notice of the dissociation, and reasonably believes that the dissociated partner is still a partner. F.S.A. §620.8703(2). A dissociated partner may be released from liability for a partnership obligation by agreement with the partnership creditor and the partners continuing the business, F.S.A. §620.8703(3), or if the partnership creditor agrees to a material alteration in the payment obligation with notice of the dissociation and without the partner’s consent, F.S.A. §620.8703(4).

3. Statement Of Dissociation

F.S.A. §620.8704 provides that a dissociated partner or the partnership may file a statement of dissociation. In general, the statement of dissociation provides constructive notice to all third parties of the partner’s dissociation. A statement of dissociation filed with the Secretary of State will act as a limitation on the grant of authority set forth in any statement of partnership authority. A person who is not a partner is deemed to have notice of the dissociation 90 days after the statement is filed.

G. DISSOLUTION AND WINDING UP

F.S.A. §620.8801 lists the events, including certain types of partner dissociation, that can result in a dissolution and winding up of the partnership business. RUPA makes three major changes in the dissolution rules from its predecessor, UPA:

(1) If the partnership continues in business after the dissociation of one of its partners, it is organically the same partnership, not a new partnership entity (under UPA, the dissociation of any one partner caused dissolution and the formation of a new entity);

(2) In a partnership for a definite term or specific undertaking, where a partner has wrongfully dissociated, or a partner dies (including “death”


of a partner that is an entity) or becomes bankrupt or incompetent or makes an assignment for the benefit of creditors or has a receiver or liquidator appointed over all or substantially all of that partner’s property, the partnership is not dissolved unless within ninety (90) days of the dissociation, at least half of the remaining partners agree to wind up the partnership business, whereas under UPA, any partner who had not wrongfully dissociated could force a liquidation; and

(3) Even if the partnership is dissolved and starts liquidating, the dissolution can be retroactively revoked by agreement of all the partners, other than a wrongfully withdrawing partner, at any time before the liquidation process is completed (under UPA, it was possible to revoke the decision to liquidate, but legally, the business was considered a new partnership). F.S.A. §620.8802(2).

The only events that will trigger the dissolution of a partnership are spelled out in F.S.A. §620.8801. All other events or partner dissociations will result in the buyout of the partner’s interest and the continuation of the partnership entity and business by the remaining partners.

For example, if a partner withdraws in violation of the partnership agreement, his only right is to be bought out. In a partnership at will, on the other hand, the departing partner had the right to have the partnership dissolved and its business wound up.

A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the following events:

(1) In a partnership at will, the partnership’s having notice from a partner, other than a partner who is dissociated under F.S.A. §§ 620.8601(2) - (10), of such partner’s express will to withdraw as a partner, or to withdraw on a later date specified by the partner;

(2) In a partnership for a definite term or particular undertaking: (a) If within 90 days after a partner’s dissociation by death or

otherwise under s. 620.6801(6) - (10) or by wrongful dissociation under F.S.A. §620.8602(2), at least half of the remaining partners expressly agree to wind up the partnership business (partners who have rightfully dissociated pursuant to F.S.A. §620.8602(2)(b)(1) are deemed to have agreed to winding up);

(b) The express will of all of the partners to wind up the partnership business; or

(c) The expiration of the term or the completion of the undertaking; (3) An event agreed to in the partnership agreement resulting in the

winding up of the partnership business;


(4) An event which makes it unlawful for all or substantially all of the business of the partnership to be continued, provided a cure of the illegality, within 90 days after notice to the partnership of the event, is effective retroactively to the date of the event for purposes of this section;

(5) On application by a partner, a judicial determination that: (a) The economic purpose of the partnership is likely to be

unreasonably frustrated; (b) Another partner has engaged in conduct relating to the

partnership business which makes it not reasonably practicable to carry on the business in partnership with such partner; or

(c) It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement; or

(6) On application by a transferee of a partner’s transferable interest, a judicial

determination that it is equitable to wind up the partnership business: (a) After the expiration of the term or completion of the undertaking,

if the partnership was for a definite term or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer: or

(b) At any time, if the partnership was a partnership at will at the time of the transfer or entry of the charging order that gave rise to the transfer. F.S.A. §620.8801.

1. Effect Of Dissolution On Authority Of Partner

After dissolution, the partnership is bound by any acts by the partners that are appropriate for winding up the partnership business and also for any obligations not appropriate for winding up entered into with a non-partner who does not have actual or constructive notice of the dissolution. F.S.A. §620.8804. This section attempts to balance the interests of the partners to terminate their mutual agency authority against the interests of outside creditors who have no notice of the partnership’s dissolution.

2. Effect Of Dissolution On Existing Liabilities

F.S.A. §620.8802 provides that a partnership is not terminated by reason of its dissolution, but rather continues until the winding up is completed. However, all the partners, including a dissociated partner who has not wrongfully dissociated, can agree to waive the right to have the business wound up, and if they do so, the partnership business continues as if dissolution had never occurred.


The rights of third parties who act in reliance on the dissolution before receiving notification of the revocation, are not adversely affected. This will protect third parties who, for example, enter into a transaction with the partnership that is proper if the partnership is liquidating, but that would not be enforceable against the partnership if it had not been dissolved. All of these rights may be modified by the partnership agreement. Thus, the partnership agreement may provide that in an at will partnership, the dissociated partner does not have the right to force a liquidation of the partnership, but instead the majority of the remaining partners shall decide whether the partnership will continue or be liquidated.

3. Winding Up

a. Right to Wind Up Generally, all partners who have not wrongfully dissolved the partnership have an equal right to wind up the firm’s affairs. If the partnership is dissolved by death, the surviving partners are entitled to wind up; the legal representative of the last surviving partner ultimately has the right to wind up. If dissolution results from a partner’s bankruptcy, the remaining partners are entitled to wind up. The partners may agree that one or some of them shall have exclusive power to wind up. Any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court. F.S.A. §620.8803.

b. Powers and Duties in Winding Up A partner winding up a partnership must pay its debts and complete its unfinished transactions and contracts. He has power to dispose of any or all of its real or personal property, and to close up the business. He can collect, pay, or compromise firm debts. However, he cannot make new contracts or create new liabilities (except incident to settling affairs, e.g., hiring lawyers or accountants). RUPA expressly gives the liquidating partners the authority to engage in activities not ordinarily incident to liquidating the partnership in order to preserve the partnership’s business or property “as a going concern for a reasonable time.” F.S.A. §620.8803.

4. Continuance After Dissolution

a. Right to Continue Business


Generally, a partnership continues after dissolution only for the purpose of winding up its business. F.S.A. §620.8802(1). Partners also have the right to continue if a partner is expelled, if the partnership agreement so provides, or if a partner retires or dies and the retiring partner or the representative of the deceased partner consents to a continuation. If the business is continued without a settlement, a retiring partner or the estate of a deceased partner has the option of receiving either the value of his share at the date of dissolution, plus interest, or in lieu of interest, the share of profits attributable to the use of his right in the property in the firm during the period from dissolution to settlement. F.S.A. §620.765. The remaining partners are required to account to the withdrawing partner. Hilgendorf v. Denson, 341 So.2d 549 (Fla. App. 1977).

b. Liability in Continuance Where a business is continued after dissolution by a former partner or partners, with or without new partners and without liquidating the partnership’s affairs, the creditors of the original partnership become creditors of the continuing partnership. An incoming partner is only liable to the old creditors to the extent of his interest in the partnership property. If all the partners assign their rights to third persons, who promise to pay the partnership debts and who continue the business, the creditors of the dissolved partnership remain creditors of the continued business. If the business is continued, the creditors of the dissolved partnership take precedence over the individual creditors of a retired or deceased partner as to that partner’s interest in the dissolved partnership or any consideration due him for his right to partnership property. A partner who, with knowledge of the dissolution, incurs a partnership liability by an act that is not appropriate for winding up the partnership business is liable to the partnership for any damage caused to the partnership arising from the liability. F.S.A. §620.8806(2).

5. Distribution Of Assets

If the business is not continued, the partners must wind it up by liquidating the partnership assets and settling its obligations, and then must distribute the remaining assets to the partners. The assets of the partnership are (1) the


partnership property, and (2) any contributions from the partners necessary to pay partnership obligations to creditors and to partners. F.S.A. §620.8807 sets out the rules for the liquidating distribution to the partners and the rules for contributions by partners necessary to wipe out a negative capital account and to pay partnership obligations in excess of its assets. Pursuant to the statute, partners who are creditors of the partnership are treated the same as other creditors “to the extent permitted by law,” rather than being automatically subordinated to outside creditors.

a. Distribution In winding up the partnership’s business, the assets of the partnership as well as the contributions of the partners are applied to satisfy debt obligations to creditors including partners who are creditors. As to order of payment, note that the statute does not distinguish between third-party creditors and partner creditors. Any surplus remaining gets distributed to the partners as follows: Any profits and losses resulting from liquidation of the partnership assets are credited and charged to the partners’ accounts. The partnership must make a distribution to a partner in an amount equal to any excess of the credits over the charges in the partner’s account. Excluded from the calculation are charges attributable to an obligation for which the partner is not personally liable under F.S.A. §620.8306. A partner must contribute to the partnership an amount equal to any excess of the charges over the credits in the partner’s account. A transferee of a partner's transferable interest in the partnership has a right to receive upon the dissolution and winding up of the partnership business, in accordance with the terms of the transfer, the net amount otherwise distributable to the transferor. F.S.A. §620.8503(2).

Note that the RUPA eliminated the “dual priority” rule (a/k/a the “jingle” rule.) This rule provided that personal creditors of a partner have priority with respect to the partner’s personal assets and creditors of the partnership have priority with respect to partnership assets. This rule has been superseded for all practical purposes by section 723 of the federal Bankruptcy Code. This section provides that the partnership’s creditors will be paid out of the partnership assets and then have equal rights to participate with personal creditors in dividing up personal assets. The reason for this change is that prospective creditors of the partnership rely on the creditworthiness of the individual partners in making lending and contracting decisions.


b. Contribution A partner must contribute to the partnership an amount equal to any excess of the charges over the credits in the partner’s account. F.S.A. §620.8807(2). If a partner fails to contribute, all other partners must contribute the additional amount necessary to satisfy the partnership obligations. F.S.A. §620.8807(3). After the settlement of accounts, each partner must contribute (in the proportion in which he shares losses) the amount necessary to satisfy partnership obligations that were not known at the time of the settlement and for which the partner is personally liable under F.S.A. §620.8306. F.S.A. §620.8807(4). A deceased partner’s estate is liable for such partner’s obligations to contribute. F.S.A. §620.8807(5).

6. Statement Of Dissolution

F.S.A. §620.8805 allows for a partner who has not wrongfully dissociated to file a statement of dissolution with the Secretary of State. The statement of dissolution will act as constructive notice to all third parties (except those involved in a real property transaction relying upon a recorded statement of partnership authority) of the dissolution of the partnership ninety (90) days after it is filed with the Secretary of State. The statement of dissolution must state the name of the partnership, and that the partnership has dissolved and is winding up its business. F.S.A. §620.8805(1). The statement of dissolution cancels an existing statement of partnership authority filed under F.S.A. §620.8303. II. LIMITED PARTNERSHIPS

In 2005, the Florida Legislature passed the Florida Uniform Limited Partnership Act (FRULPA 2005), and it took effect in January 2006. FRULPA governs all limited partnerships formed after January 1, 2006. The corresponding lecture (the section on limited partnerships) is largely based on the 1986 act. We have referenced the 2005 statute. Obviously, you do not need to concern yourself with particular statute notations. They are mainly for editorial reference.

A limited partnership consists of general partners, who manage the business and are personally liable without limitation for partnership obligations, and limited partners, who contribute capital and share in profits, but generally take little or no part in the control or management of the business. Under FRULPA 2005, limited partners can now take more control and management


responsibilites without losing their liability shield. Generally, the limited partners’ liability is limited to their contribution. A limited partnership’s principal advantage is that it provides limited liability (as in a corporation). The direct deduction for tax purposes of expenses or losses against partners’ other income has been curtailed by the Tax Reform Act of 1986. The provisions of RUPA apply also to limited partnerships except where the Revised Uniform Limited Partnership Act (“RULPA”) specifically applies. Effective January 1, 1987, Florida has adopted a version of RULPA similar to that recommended in 1985 by the National Conference of Commissioners on Uniform Laws. As stated above FRULPA 2005 applies to limited partnerships formed after January 1, 2006.

A. FORMATION A limited partnership is formed by complying with the statutory requirements. There must be at least one general partner and at least one limited partner, but there is no statutory maximum number. A limited partnership can carry on any lawful business which a general partnership can.

1. Certificate of Limited Partnership and Required Records In order to form a limited partnership, a certificate of limited partnership must be executed and filed with the Department of State. The certificate must set forth:

(1) The name of the limited partnership. Under FRULPA 2005, the name of the limited partner may contain the name of any partner, even the name of a limited partner, which was not allowed under the 1986 Act. FRULPA 2005 F.S.A. §620.1108.

(2) The address of the office and the name and address of the agent for service of process;

(3) The name and the business address of each general partner. (Each general partner that is a legal or commercial entity and not an individual must be organized or otherwise registered with the Department of State as required by law, must maintain an active status, and must not be dissolved, revoked, or withdrawn.);

(4) A mailing address for the limited partnership; (5) Any other matters the general partners determine to include therein;

and (6) Whether the limited partnership is a limited liability partnership.

FRULPA 2005 F.S.A. §620.1201.


Under FRULPA 2005, an affidavit of capital contribution is no longer required. Under the 1986 Act, the filing fees depends on the amount of capital contribution, which is no longer required under FRULPA 2005. There is simply a flat filing fee. FRULPA 2005 F.S.A. §620.1109. Each limited partnership shall keep at the office for service of process the following records:

(1) A current list of the full names and last-known business addresses of all partners, separately identifying in alphabetical order the general partners and the limited partners;

(2) A copy of the certificate of limited partnership and all certificates of amendment thereto, together with executed copies of any powers of attorney pursuant to which any certificate was executed;

(3) Copies of the limited partnership's federal, state, and local income tax returns and reports, if any, for the three most recent years;

(4) Copies of any then-effective written partnership agreements and of any financial statements of the limited partnership for the three most recent years;

(5) A copy of any financial statement of the limited partnership for the most recent 3 years;

(6) A copy of the 3 most recent annual reports delivered by the limited partnership to the Department of State pursuant to FRULPA 2005 §620.1210; and

(7) Unless contained in a written partnership agreement, a writing setting out:

(a) The amount of cash and a description and statement of the agreed value of the other property or services contributed by each partner and which each partner has agreed to contribute;

(b) The times at which or events on the happening of which any additional contributions agreed to be made by each partner are to be made;

(c) For anyone that is both a general partner and limited partner, specification of transferable interest the person owns in each capacity; and

(d) Any events upon the happening of which the limited partnership is to be dissolved and its affairs wound up. FRULPA 2005 F.S.A. §620.1111.

Records are subject to inspection and copying during ordinary business hours at the reasonable request, and at the expense, of any partner. FRULPA 2005 F.S.A. §620.8403.


The name of each domestic limited partnership as set forth in its certificate of limited partnership and the name of each foreign limited partnership as set forth in its application for registration as a foreign limited partnership: (1) must contain the word “limited partnership” or "limited" or its abbreviation, "Ltd."; and (2) the name of a limited liability partnership must contain the phrase “limited liability partnership” or “L.L.L.P.” Note, again that under FRULPA 2005 F.S.A. §620.1108, the name of the limited partnership may contain the name of any partner. FRULPA 2005 F.S.A. §620.1108 also requires that the name of the limited partnership be distinguishable from the names of all other entities or filings, except fictitious name registrations organized, registered, or reserved under the laws of this state, the names of which are on file with the Division of Corporations of the Florida Department of State.

2. Partners and the Partnership Agreement A copy of a written partnership agreement must be kept, along with other required records, at the designated office of the limited partnership. The agreement must specify the amount of cash and agreed value of all contributions by partners, when any additional contributions are to be made, any partner’s right to receive distributions, and any events causing the partnership to be dissolved and its affairs wound up. FRULPA 2005 F.S.A. §620.1111. The Act gives flexibility to limited partnerships by allowing the agreement to specify partners’ rights and duties. The statute no longer conclusively presumes that limited partners must be statutorily protected since they do not participate in management. However, the Act provides certain protections for the limited partners in the absence of a written agreement to the contrary. The partnership agreement may vary the statutory order of distribution of assets upon the winding up of the partnership or may vary the statutory requirement of unanimous written consent to the admission of general partners. The agreement may create classes of partners with differing rights, liabilities, and powers and may even allow the future creation of additional classes with superior rights and powers. The agreement may specify voting rights and any requirements relating to notice, quorum, and proxies. The agreement may provide for issuance and transferability of certificates of partnership to evidence a partner’s interest; these securities may be transferred as easily as those of a privately held corporation.


FRULPA 2005 F.S.A. §620.8105(3) provides that each general partner that is a legal or commercial entity and not an individual must be organized or otherwise registered with the Department of State as required by law, must maintain active status and must not be dissolved, revoked or withdrawn.

3. Capital Contributions Capital contributions may include cash, property, or services rendered, as well as promissory notes and future promises to perform services or contribute property. FRULPA 2005 F.S.A. §620.1501. The Florida Bar v. Johnson, 511 So. 2d 295, n.1 (Fla. 1987). A limited partner need not execute any document to be admitted to the partnership if her entire capital contribution is paid in full. However, if a partner is to make any of her contribution after admission, the contribution promise is not enforceable against the partner unless evidenced by a written agreement. The partnership agreement may determine under what circumstances a partner may be excused from making a capital contribution as promised or be required to make a cash contribution equal to the agreed value of the promised property or services. However, creditors may enforce a contribution promise which the partnership agreement would excuse. FRULPA 2005 F.S.A. §620.1502.

B. RIGHTS, POWERS AND LIABILITIES OF A LIMITED PARTNER 1. Liabilities

a. To Third Parties

i. Holding Out to Creditors.In general, a limited partner is not liable for the obligation of a limited partnership even if she participates in the management and control of the limited partnership unless the limited partner is also a general partner. FRULPA 2005 F.S.A. §620.1303. ii. False Statement in Certificate.A limited partner will be liable if he caused the certificate to be executed knowing it contained a false statement and a third party suffered loss by reasonable reliance on that statement. However, the execution of the certificate is not generally the responsibility of the limited partners. It is more likely that liability will fall on a general partner who knew or should have known of the false statement. FRULPA 2005 F.S.A. §620.1306(2). iii. Lack of Filing Proper Certificate.A person who erroneously believes himself to be a limited partner is not liable as a general partner provided that, within a reasonable time after ascertaining the mistake, he causes a certificate


of limited partnership to be executed or amended and filed, or he executes a certificate withdrawing from his interest in the profits or other compensation from the business. FRULPA 2005 F.S.A. §620.1306. iv. Participation in Control.Under prior law, a limited partner would be liable as a general partner if she took part in the control of the business. This is no longer true under FRULPA 2005. Under FRULPA 2005, any obligation of the limited partnership (i.e. in contract or tort) is not the obligation of a limited partner. That is, a limited partner is not personally liable even if he participates in the management and control of the business. FRULPA 2005 F.S.A. §620.1303. Under prior law, even a limited partner who actually participates in control will be liable for partnership debts only to persons who relied on the limited partner’s conduct in transacting with the partnership, reasonably believing the limited partner was a general partner. FRULPA 1986 F.S.A. §620.129(1). Basically, under the 1986 Act, limited partners are shielded from liability beyond their capital contribution. Also, if a limited partner participates in the management or control of the business, his limited liability is revoked. Under FRULPA 2005, however, a limited partner is shielded from liability even if he participates in the management and control of the business. Under the 2005 Act, the rights of limited partners are obviously expanded, but the general partners still have more authority regarding partnership activities. Partnership activities may be may be exclusively decided by a general partner (or majority), but not a limited partner. Under FRULPA, the following actions require approval of ALL the general partners:

(1) Amending the partnership agreement or the certificate of limited partnership;

(2) Admitting a general or limited partner; (3) Compromising a partner’s obligation to make a contribution or return of

an (4) improper distribution;Expelling a limited partner; (5) Redeeming a transferable interest; (6) Dissolving the limited partnership; or (7) Approving a conversion or merger plan. FRULPA 2005 F.S.A. §620.1406.

b. To the Partnership


A limited partner is liable to the partnership to the extent of any contribution that he agreed in writing to make to the partnership, but has not made. See Section VI(A)(3), supra, on enforceability of contribution promises. The partnership agreement may penalize partners who fail to make promised contributions. FRULPA 2005 F.S.A. §620.1502. If a partner receives the return of any part of his contribution rightfully, he is liable to the limited partnership for one year for the amount of the returned contribution to the extent necessary to discharge the limited partnership’s liabilities to creditors who extended credit to the limited partnership while the contribution was held by the partnership. If a partner receives the return of any part of his contribution in violation of the partnership agreement or the FRULPA, he is liable to the limited partnership for a period of two years for the amount of the contribution wrongfully returned. A “return of contribution” includes any distribution that reduces his share of the net assets below the value of his contribution not previously distributed to him. FRULPA 2005 F.S.A. §620.1509 Generally, under FRULPA 2005 §620.1509, a general partner would be personally liable to the partnership if he consents to an improper distribution. A general or limited partner would be personally liable for receipt of an improper distribution only if he/she knew it was improper. Any action for improper distributions must be commenced within 2 years after the distribution.

2. Rights and Powers a. Transaction of Business with Partnership

Any partner may transact business with the limited partnership, or lend money to it, subject to the same rights and obligations as a non-partner would have, unless otherwise provided in the partnership agreement. FRULPA 2005 F.S.A. §620.1112.

b. Right to Inspect Records and Demand Information The FRULPA gives limited partners broad rights to inspect and copy records required to be kept by the partnership. Limited partners also have a right to make periodic reasonable demands for information regarding the partnership’s financial condition and such other information as is “just and reasonable” regarding partnership affairs. FRULPA 2005 F.S.A. §620.1304.

c. Profits and Distributions


A limited partner has the right to receive the share of profits or other compensation by way of income stipulated in the written partnership agreement. If the partnership agreement does not so provide, profits and losses must be allocated on the basis of the value of the contributions made by each partner to the extent received and not returned. The same is true of distributions of cash and other assets. FRULPA 2005 F.S.A. §620.1503. At the time a partner becomes entitled to receive a distribution, he becomes a creditor of the limited partnership with respect to the distribution. FRULPA 2005 F.S.A. §620.1507. Absent written agreement, a partner has no right to demand partition or in-kind distribution. The partnership is not dissolved upon an unsuccessful demand by a limited partner for return of his capital contribution. FRULPA 2005 F.S.A. §620.1506.

d. Assignment of Interest The only interest of a partner which is transferable is the partner’s transferable interest. A transferable interest is personal property. The partnership agreement may require that a partner’s interest in the limited partnership be evidenced by a certificate issued by the limited partnership and may also provide for the assignment or transfer of any interest in the limited partnership represented by a certificate and make other provisions with respect to such certificates. FRULPA 2005 F.S.A. §620.1701. A transfer, of all or part, of a partner’s transferable interest is allowable and does not cause the partner’s dissociation or dissolution of the partnership. In addition, the transfer or assignment does not entitle the transferee or assignee to participate in the management or conduct of the limited partnership’s activities, to require access to any information to which a limited partner would otherwise have access, or to inspect or copy the required information or the limited partnship’s other records. The transferor retains the rights of a partner other than the interest in distributions transferred and retains all duties and obligations of a partner. A transfer of a partner’s transferable interest in the limited partnership in violation of a restriction on transfer contained in the partnership agreement is ineffective to a person without notice. FRULPA 2005 F.S.A. §620.1702.

e. Withdrawal A limited partner may withdraw only at the time or upon the occurrence of an event specified in the partnership agreement or certificate of limited partnership. Withdrawal of a limited partner does not dissolve the partnership. FRULPA 2005 F.S.A. §§620.1601, 1602.


Under FRULPA 2005, the withdrawing partner does not get distributions at the time of dissociation. He gets future distributions as a “transferee” of his interest. Under the 1986 Act, a general partner can withdraw from the partnership even if the agreement restricts this. But a general partner who wrongfully withdraws is liable for damages caused by the withdrawal. Whether a general partner’s withdrawal was wrongful or not, upon such withdrawal, he is entitled to a distribution equal to the amount of his interest, and damages are offset. Under FRULPA 2005, a general partner still has the right to withdraw despite the agreement, but he has NO right to receive distributions unless provided otherwise in the agreement. Instead, the withdrawing/dissociated partner is treated as a “transferee” of his interest. This means that he has no right to management or control of the business and simply has the right to future distributions of profits or losses.

C. RIGHTS, POWERS AND LIABILITIES OF A GENERAL PARTNER The general partners usually have sole control of the partnership business and are generally the only ones entitled to act on its behalf. They owe a fiduciary duty to the limited partners. After the filing of the original certificate, additional general partners may be admitted as provided in the written partnership agreement, or if there is no such provision, with the written consent of all partners. FRULPA 2005 F.S.A. §620.14011. Under FRULPA 2005, a person also becomes a limited partner following the dissociation of a limited partnership’s last general partner. That is, unlike the 1986 Act, the limited partnership does not automatically dissolve when a general partner dissociates. A general partner in a limited partnership has the same rights and powers and is subject to the same restrictions and liabilities as a partner in a general partnership. The liability of a general partner exists independently of partnership liability. O’Neill v. Boden-West R.E., 599 So.2d 1045 (Fl. App. 1992). A person may be both a general partner and a limited partner in the same partnership at the same time. Such a person has all the rights and powers and is subject to all the restrictions of a general partner, and has the rights and powers and is subject to the restrictions of a limited partner to the extent of his participation and contribution as a limited partner. FRULPA 2005 F.S.A. §620.1113.


D. CANCELLATION/AMENDMENT/RESTATEMENT OF CERTIFICATE 1. Cancellation

A certificate of limited partnership must be cancelled upon the dissolution and the completion of winding up of the partnership or when there are no limited partners. The certificate of disolution, which must be filed with the Department of State, is to set forth:

(1) The name of the limited partnership; (2) The date of filing of the initial certificate of limited partnership; (3) The reason for filing of the certificate of dissolution; (4) The effective date of the dissolution if dissolution if not to be effective

upon the filing of the certificate of dissolution; and (5) Any other information the general partners filing the certificate of

dissolution determine to include therein. FRULPA 2005 F.S.A. §620.1203.

2. Amendment

The certificate must be amended promptly after any of the following events:

(1) The admission of a new general partner; (2) Thedissociation of a person as a general partner; or (3) The appointment of a person to wind up the partnership’s activities.

FRULPA 2005 F.S.A. §620.1202(2).

A general partner who becomes aware that any statement in the certificate was false when made or that facts as described in the certificate have changed, making the certificate inaccurate in any respect, must promptly amend the certificate. FRULPA 2005 F.S.A. §620.1202(3). The certificate may be amended at any time for any other proper purpose as determined by the limited partnership. FRULPA 2005 F.S.A. §620.1202(4).

3. Restatement A limited partnership may at any time integrate into a single instrument all of the provisions of its certificate of limited partnership which are then in effect and adopt the new instrument as a “restated certificate of limited partnership.” This would be done, for example, if various amendments to the certificate have been filed. The restated certificate may also adopt further amendments if executed by a general partner and any new general partners being added. An


amendment or restated certificate is effective when filed by the Department of State. FRULPA 2005 F.S.A. §620.1202(5), (6).

E. DISSOLUTION AND DISTRIBUTION OF ASSETS A limited partnership is dissolved, and its activities must be wound up, only upon the occurrence of any of the following: the happening of an event specified in the partnership agreement; the consent of all general partners and all limited partners; after the dissociation of a person as a general partner with the consent of the remaining partners, if there are no remaining general partners, after the passage of 90 days; after the dissociation of the limited partnership’s last limited partner, unless the limited partnership admits at least one limited partner; or signing and filing a declaration of dissolution. FRULPA 2005 F.S.A. §620.1801. The courts may order a judicially supervised dissolution “whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.” FRULPA 2005 F.S.A. §620.1802. If the dissolution is not judicially supervised, winding up may be done by the remaining general partners or, if none, by a person to wind up the dissolved limited partnership’s activities may be appointed by the consent of the majority of the rights to receive distributions. FRULPA 2005 F.S.A. §620.1803. General and limited partners share equally in the distribution of assets upon dissolution; neither group has priority unless provided in the partnership agreement. However, any partner who has become a creditor of the partnership by means of a loan or an unsatisfied distribution has first priority like other creditors over rights of partners to their share of profits, return of capital, and payment of partnership interests. In settling accounts after dissolution, liabilities must be paid in the following order:

(1) To creditors, including partners who are creditors; (2) To partners and former partners for required distributions; and (3) To partners for return of their contributions and payment of partnership

interests in the same proportion partners share in distributions. FRULPA 2005 F.S.A. §620.1813.

Under the statute, partners may vary by agreement the priority of distribution of limited partnership assets among partners upon distribution. Furthermore, similar to regular partnerships discussed in section I above, under FRULPA 2005, if a general partner dissociates, and there is at least one


general partner remaining, no dissolution occurs unless within 90 days of the dissociation, all partners agree to dissolve the limited partnership. If there is no general partner remaining, then dissolution occurs after 90 days unless the remaining partners all agree to continue the business and admit at least one new general partner. Under the previous FRULPA 1986, the limited partnership is automatically dissolved upon the dissociation of a general partner unless all the partners agree to continue the business.

F. DISSOCIATED PARTNER’S ABILITY TO BIND LIMITED PARTNERSHIP

A limited partnership is bound by a general partner’s act after dissolution which is appropriate for winding up the limited partnership prior to the dissolution if the other party does not have notice of the dissolution. A person dissociated as a general partner binds the limited partnership through an act occurring after dissolution if less than 2 years have passed and the other party does not have notice of the dissociation and reasonably believes that the person is a general partner. FRULPA 2005 F.S.A. §620.1804. If a general partner having knowledge of the dissolution causes the limited partnership to incur an obligation by an act that is not appropriate for winding up the partnership’s activities, the general partner is liable to the limited partnership for any damage caused to the limited partnership arising from the obligation. FRULPA 2005 F.S.A. §620.1805.

G. FOREIGN LIMITED PARTNERSHIPS A foreign limited partnership is one organized under the laws of a jurisdiction other than Florida. FRULPA 2005 F.S.A. §620.1102(8). To do business in Florida, it must file a certificate with the Department of State, listing its name or the name adopted for transacting business in the state, the state and date of its formation, name and address of a resident agent for service of process and an alternate appointment of the Secretary of State as agent for service of process if the resident agent cannot be found or his authority has been revoked, the address of an office maintained in the state or the foreign limited partnership’s principal office, name and address of each general partner and a mailing address for the foreign limited partnership. An office must be designated for keeping records of the names and addresses of limited partners. FRULPA 2005 F.S.A. §620.1902.

H. ADDITIONAL PROVISIONS REGARDING PARTNERSHIPS AND LIMITED PARTNERSHIPS/CONVERSIONS AND MERGERS


1. Partnership Conversion and Merger F.S.A. §620.8912 authorizes an organization to convert to a partnership, and a partnership to convert to another organization. An organization that has been converted is for all purposes the same entity that existed prior to the conversion. Once the conversion takes effect: title to all real estate and other property owned by the converting organization at the time of its conversion remains vested in the converted organization; all debts, liabilities, and other obligations of the converting organization continue as obligations of the converted organization; an action or proceeding pending by or against the converting organization can be continued as if the conversion had not occurred; and all of the rights, privileges, immunities, powers, and purposes of the converting organization remain vested in the converted organization. F.S.A. §620.8915. F.S.A. §620.8916 authorizes merger between a partnership and another organization. The statutory format is similar to that for corporate mergers. A plan of merger must be set forth and approved by all constituent organizations and the individual partners of the partnership. F.S.A. §§620.8917, 8918. When a merger becomes effective: the surviving organization continues; each constituent organization that merges into the surviving organization ceases to exist as a separate entity; title to all real estate and other property vests in the surviving organization; all debts, liabilities, and other obligations continue as obligations of the surviving organization; an action or proceeding pending by or against any constituent organization may be continued as if the merger had not occurred; and all the rights, privileges, immunities, powers, and purposes of each constituent organization vest in the surviving organization. F.S.A. §620.8919. 2. Limited Partnership Conversion and Merger FRULPA 2005 F.S.A. §620.2102 allows an organization to convert to a limited partnership, and a limited partnership to convert to another organization. A plan of conversion must be consented to by all of the general partners of a converting limited partnership and it also must be consented to by those limited partners who own a majority of the rights to receive distributions as limited partners. FULPA 2005 F.S.A. §620.2103. An organization that has been converted is for all purposes the same entity that existed prior to the conversion. Once the conversion takes effect: title to all real estate and other property owned by the converting organization at the time of its conversion remains vested in the converted organization; all debts, liabilities, and other obligations of the converting organization continue as obligations of the converted organization; an action or proceeding pending by or against the


converting organization can be continued as if the conversion had not occurred; and all of the rights, privileges, immunities, powers, and purposes of the converting organization remain vested in the converted organization. FRULPA 2005 F.S.A. §620.2105. FRULPA 2005 F.S.A. §620.2106 authorizes merger between a limited partnership and another organization. The statutory format is similar to that for corporate mergers. A plan of merger must be set forth and approved by all general partners of a constituent limited partnership and must also be approved by those limited partners who own a majority of the rights to receive distributions as limited partners. FRULPA 2005 F.S.A. §620.2107. Both constituent organizations must have approved the merger. FRULPA 2005 F.S.A. §620.2108. When a merger becomes effective: the surviving organization continues; each constituent organization that merges into the surviving organization ceases to exist as a separate entity; title to all real estate and other property vests in the surviving organization; all debts, liabilities, and other obligations continue as obligations of the surviving organization; an action or proceeding pending by or against any constituent organization may be continued as if the merger had not occurred; and all the rights, privileges, immunities, powers, and purposes of each constituent organization vest in the surviving organization. FULPA 2005 F.S.A. §620.2109.

I. LIMITED LIABILITY PARTNERSHIPS Florida limited Liability Partnerships (LLP’s) are simply partnerships that engage in the practice of law, public accounting, or architecture. They can be formed by 2 or more partners who are both licensed to practice in the designated field of the partnership. LLPs must register with the state. Basically, they afford limited liability as to the acts of your partners, but not as to your own. Like other types of partnerships, the partners of an LLP can enter into a partnership agreement regarding management of the firm. These organizations are governed under F.S.A. §§621.01 through 621.14. III. BUSINESS TRUSTS A business trust is an unincorporated business association created by a trust instrument, which transfers the business property to trustees who hold and manage it for the benefit of the holders of the trust certificates (the beneficiaries). The business or “common-law” trust offers advantages similar to the corporation: its existence does not terminate upon the death, bankruptcy, or withdrawal of a certificate holder; management is centralized in the trustees;


and the trust certificates are freely transferable. The trust also provides limited liability for the beneficiaries, unless they have retained too much control. However, unlike corporate shareholders, the beneficiaries can neither elect nor remove the trustees. The Rule Against Perpetuities does not apply to business trusts, since the Rule is directed against remote vesting, and the interest in a business trust vests immediately and may be transferred by the owner. Two or more persons may organize and associate themselves together for the purpose of transacting business in Florida under a “declaration of trust,” but they are not permitted to transact a banking or security business of any kind. F.S.A. §609.01. It is unlawful to transact business under a declaration of trust without first complying with the provisions of the statute. F.S.A. §609.04. Every business trust organized in Florida to transact business within the state or elsewhere, which intends to sell or offer for sale units, shares, contracts, notes, bonds, mortgages, oil or mineral leases, or other securities, must first file a sworn copy of its declaration of trust with the Department of State. Filing of the declaration constitutes public notice of the purposes and manner of the business. F.S.A. §609.02. After the filing of the declaration, the Department of State issues a certificate to the association, and if all applicable laws have been complied with, the trust is authorized to do business. F.S.A. §609.03. Before any securities may be sold, the trust must obtain a permit from the Department of Banking and Finance to offer and sell securities. F.S.A. §609.05. Unless otherwise provided in the trust instrument, shares in the trust are personal property for purposes of taxation, even if the business property is realty. F.S.A. §609.051. The declaration of trust may provide that the units, shares, certificates of beneficial ownership, or other securities issued, or to be issued, shall be fully paid and non-assessable. A holder of any such security who has not fully paid the agreed sum is personally liable to the trust, or its creditors, for the amount remaining unpaid, but he is not otherwise liable for any trust debt or obligation. F.S.A. §609.07. Any business trust organized in accordance with Florida law may merge into a wholly owned subsidiary corporation if the merger is permitted under the laws of the jurisdiction where the subsidiary is organized. Unless otherwise provided in the declaration of trust, no shareholder in the trust has any dissenter’s rights of appraisal upon the merger of the business trust with its wholly owned subsidiary. F.S.A. §609.08.


If the trust instrument vests such control in the beneficiaries that the trustees are merely acting as agents for them, the association will be held to be a partnership. The beneficiaries will be individually liable and will be necessary parties to any litigation growing out of the agreement. Willey v. W.J. Hoggson Corp., 90 Fla. 343, 106 So. 408 (1925). Important factors in determining if control is sufficient to impose liability are: (1) the power to remove trustees and fill vacancies; (2) the power to elect trustees; (3) the power to alter, amend, or terminate the trust; or (4) the power to instruct the trustees.

An attempted trust was held to be a partnership where, although each party to the agreement had an interest in the fund according to his contribution, some of the parties were designated as trustees for the others, and at the same time acted as principals for themselves. The court reasoned that one person cannot act as both a trustee and a beneficiary, since when an equitable estate and a legal estate are vested in the same individual, they merge and the trust is extinguished. Willey v. W. J. Hoggson Corp., supra.

The trend is to treat a business trust qualified in Florida under Chapter 609 as an entity for the purpose of suing and being sued. Corcoran v. Brody, 347 So.2d 689 (Fla. App. 1977); Tampa Properties, Inc. v. Great American Mortgage Investors, 333 So.2d 480 (Fla. App. 1976). Under federal tax and bankruptcy laws, the business trust is treated as a corporation. IV. BUSINESS CORPORATIONS

The basic law relating to the organization, operation, and dissolution of corporations is the Florida Business Corporation Act, Chapter 607, Title XXXVI, Business Organizations, Florida Statutes Annotated (“F.S.A.”). Because there is no common-law right to organize a corporation, all corporate rights, duties, and liabilities derive from statute. Unless otherwise noted, all statutory citations herein are to Chapter 607. The major characteristics of a corporation are (1) the power to acquire, own, and dispose of assets in the corporate name; (2) the power to sue and be sued; (3) a continuous existence, despite the death of individual shareholders; (4) limited liability of the shareholders; and (5) centralized management of assets by directors and officers.


These notes are organized primarily around the rights, duties, and liabilities of the persons who play various roles in the life of the corporation: (1) promoters; (2) incorporators; (3) shareholders; (4) directors; and (5) officers.

A. PROMOTERS

A promoter is one who causes a corporation to be formed, organized, and financed. In small corporations, the promoters usually, although not necessarily, become the incorporators, the shareholders, and the officers and directors of the new corporation. The promoter’s function is to set up the corporation and establish it on a firm footing. Generally, he will manage the initial financing of the corporation, arrange for a meeting of the investors, negotiate and prepare the preincorporation agreements, lease office and factory space, and contract for the initial needs of the business.

1. Promoters’ Relationship to the Corporation

Promoters stand in a fiduciary relationship to the corporation. Thus, promoters are bound to exercise the utmost good faith and are under a duty to make full disclosure of all material facts concerning any assets they sell to the corporation. Ft. Myers Development Corp. v. J.W. McWilliams Co., 97 Fla. 788, 122 So. 264 (1929).

a. Duty of Disclosure i. If an Independent Board of Directors. If full disclosure of the cost and manner of acquisition of the assets by the promoter was made to an independent board of directors and the board approved the transaction, there is no breach of fiduciary duty and the promoter can keep any profit from the sale. ii. If Promoters Are the Only Shareholders. If the only shareholders of the corporation are promoters and no further issuance of stock is contemplated, failure to disclose their financial interest is not a violation of their fiduciary duty to the corporation.

Thus, the corporation has no cause of action even if shares are later sold to the public without disclosure, since the corporation is not a party to the resale. Lake Mabel Development Corp. v. Bird, 99 Fla. 253, 126 So. 356 (1930).

However, the purchaser may have a cause of action against the promoters for deceit or pursuant to SEC Rule 10b-5. If the corporation becomes insolvent, a creditor might be able to assert the corporation’s rights against the promoters.


iii If Additional Shareholders Are Contemplated. If the original promotional scheme contemplates sale of stock to other investors, the corporation has an action for breach of fiduciary duty against a promoter who fails to fully disclose material facts about property transferred. However, if the new shareholders purchase their shares from the promoters and not the corporation, the corporation has no cause of action.

b. Promoters’ Liability for Breach of Fiduciary Duty In an action for breach of the promoters’ fiduciary duty, the corporation may either avoid the transaction or may hold the promoters liable for the secret profits. The measure of the profit where the promoter owned the property before he organized the corporation is the difference between the market value and the inflated price at which it was sold to the corporation. However, if the promoter obtained the property after undertaking the promotion (and thus in his fiduciary capacity), the measure is the difference between his actual cost for the property and the inflated sale price. If the promoter received stock in the corporation in return for the property, the measure is the difference between the market value of the property and the market value of the shares received. The value of the property must be at least equal to the par value of the stock received or to the stated value of no-par stock; if it is not, the stock is watered stock and will give rise to the remedies discussed below in Section II(B)(1)(c).

2. Promoter’s Relationship with Other Promoters

If there is more than one promoter of a corporation, the promoters are in effect joint venturers, and owe each other a fiduciary duty. As fiduciaries, they cannot make a secret profit on assets that they transfer to the promoters as a group, and must fully disclose to each other information concerning the formation of the corporation. There is a mutual agency among the promoters, so that each can bind the others on contracts within the scope of the promotion.

3. Preincorporation Agreements

Before incorporation, promoters frequently enter into consensual agreements with third parties relative to the proposed corporation. Since the corporation is not yet in existence, it cannot contract in its own name, nor can the promoters contract in its behalf as its agents. This may lead to difficulties in determining who is liable on such contracts.

a. Liability of the Promoter


i. In General. As a general rule, if the agreement is silent on the issue of liability, the promoter is personally liable on any contract he entered into in behalf of the yet nonexistent corporation, whether the contract is made in his name or in the corporation’s name. This is especially true if the other contracting party was expected to perform before incorporation. Personal liability will continue even after the corporation is formed, unless there is a novation or an agreement to release liability. By statute in Florida, persons purporting to act on behalf of a corporation, having actual knowledge that it is unincorporated, are jointly and severally liable for any liabilities created while so acting, except as to any person who also had actual knowledge that there was no incorporation. F.S.A. §607.0204. ii. Specific Agreement. If the agreement expressly specifies that the promoter has no personal liability, it will be given effect. Even though a contract is executed by a promoter on behalf of a proposed corporation, if the person with whom the contract is made agrees to look to some other fund for payment, the promoter incurs no personal liability with respect to the contract. Vodopich v. Collier County Developers, Inc., 319 So.2d 43 (Fla. App. 1975). Intent to relieve the promoter from personal liability may also be implied from the promoter’s refusal to sign an agreement providing for his liability and his subsequent signing of an agreement from which that provision was deleted. iii Promoter Signs as Agent. If the promoter signs as agent, he is personally liable, because he cannot be an agent for a nonexistent principal. iv. Novation. Even if the promoter is personally liable on the contract, a novation will release him from that liability. A novation occurs if all parties agree to substitution of the corporation as a party to the contract in place of the promoter. The consideration for the promoter’s release is the assumption of liability by the corporation. A novation is usually express, but might be implied from actions of the parties. v. Indemnification. Even if the promoter is held liable on the contract, he may be entitled to reimbursement by the corporation, if he undertook the contract in good faith, at least to the extent that the corporation benefited from the contract.

b. Liability of the Corporation

i. In General. As a general rule, a corporation is not liable on any preincorporation agreements its promoters entered into on its behalf, unless it


assumes liability by its own act after it comes into existence. If the contract was made for the corporation’s benefit, concerned a matter on which the corporation could legally contract, and full disclosure was made to an independent board, the new corporation may assume liability under one of several theories. ii. Adoption. A corporation may adopt the contract expressly by assuming liability, or impliedly, by accepting its benefits. Adoption makes the corporation liable from the time of adoption only, and does not release the promoter. iii. Novation. If all the parties agree to substitute the liability of the corporation for that of the promoter, there is a novation and the promoter is discharged. iv. Continuing Offer. If the promoter is not bound on the preincorporation agreement, the third party’s promise may be treated as a continuing offer. If not revoked before incorporation or if irrevocable, because supported by consideration, the offer may be accepted by the new corporation, and the contract is made between the corporation and the third party.

c. Liability of the Third Party A third party who entered into a contract with a promoter is liable from the contract’s inception. If there is no contract with the promoter so that the promise is treated as a continuing offer, the third party may revoke his offer before the corporation accepts it. However, if the third party’s promise is irrevocable (under contract or Uniform Commercial Code principles), it can be accepted by the corporation when formed and can be enforced. If the corporation assumes liability for the promoter’s contract, it can enforce the contract.

4. Preincorporation Expenses

The corporation has no obligation to compensate or reimburse promoters for their services and expenses in forming the corporation; however, it may expressly assume liability after incorporation. Courts will not infer assumption of incorporation expenses from acceptance of benefits, since the corporation, owing its existence to the incorporation services, cannot reject them. Acceptance of post-incorporation services will bind the corporation to pay for related preincorporation services on the theory of an indivisible contract (e.g., attorney’s services). If the corporation assumes liability, it may seek to pay for the promoters’ services by issuing them stock, and consideration for stock may be in the


form of money, property, promissory notes, or labor actually performed or to be performed for the corporation. In the case of promissory notes or labor to be performed, the corporation may place shares issued for such notes or future services in escrow until the note is paid or the services performed. F.S.A. §607.0621(5). Generally, preincorporation services are not considered to have been rendered to the corporation, and hence are not adequate consideration. However, F.S.A. §607.0628 provides that a corporation may pay the expenses of “organizing or reorganizing the corporation from the consideration received for shares.”

B. INCORPORATORS AND THE INCORPORATION PROCESS

One or more persons may act as incorporator or incorporators of a corporation by delivering articles of incorporation to the Department of State for filing. F.S.A. §607.0201.

1. Articles of Incorporation

The articles of incorporation must be executed by the incorporator or incorporators. F.S.A. §607.0202. The contents of the articles of incorporation required or permitted by F.S.A. §607.0202 are enumerated below.

a. Name The name of the corporation and the street address of its initial principal office and its initial registered office, and the name of its initial registered agent at such address, must be listed. F.S.A. §607.0202(1)(b), (e). The corporate name must contain the word “corporation,” “incorporated,” “company,” or such other word, abbreviation, affix, prefix, or suffix as will clearly indicate that it is a corporation instead of a natural person or partnership. The name must be distinguishable from the names of all other entities organized under the laws of Florida on file with the Division of Corporations. F.S.A. §607.0401. A foreign corporation not authorized to transact business in Florida may register its corporate name, provided that the name is not the same, or deceptively similar to, the name of any domestic corporation existing under the laws of Florida, or the name of any foreign corporation authorized to transact business in Florida, or any corporate name reserved under the Act. F.S.A. §607.0403. Operation of a business under an unregistered, fictitious name is unlawful; the penalty is that the business will not be permitted to maintain any court


action or proceeding in Florida until the statutory requirements are met. F.S.A. §865.09.

b. Duration The articles may state the duration of the corporation if other than perpetual.

c. Capital Stock Relevant information regarding stock must be set forth, including the different series of shares, the number of shares authorized to be issued, the respective rights, preferences and limitations of each class or series, and any provisions granting preemptive rights. F.S.A. §607.0202(1)(c), (d); F.S.A. §607.0601. Information regarding the par value of shares may be set forth in the articles. F.S.A. §607.0202(2)(b)(4).

d. Incorporators The articles must include the name and address of each incorporator. F.S.A. §607.0202(1)(f).

e. Directors The articles may state the names of directors constituting the initial board. F.S.A. §607.0202(2)(a).

f. Purposes The articles may, but need not, state the purposes for which the corporation is incorporated. F.S.A. §607.0202(2)(b)(1).

g. Miscellaneous Optional Provisions The articles of incorporation may also set forth any provision, not inconsistent with law, which the incorporator(s) may elect to set forth in the articles for the regulation of the business and for the conduct of the corporation’s affairs. They may also include any provision creating, defining, limiting, and regulating the powers of the corporation, the directors, and the stockholders, or any class of stockholders, including but not limited to, share transfer restrictions, cumulative voting provisions for election of directors, and any provision which is required or permitted to be set forth in the bylaws. Any such provision set forth in the articles of incorporation need not be set forth in the bylaws.


Certain rights exist only if included in the articles. The shareholders of a Florida corporation have no preemptive rights except to the extent that they are granted in the articles of incorporation. F.S.A. §607.0202(1)(d). Likewise, cumulative voting must be authorized by the articles. F.S.A. §607.0728(3). The authority of a corporation to redeem or to reacquire its stock when the stockholder is not willing to sell must also be set forth in the articles of incorporation. Werber v. Imperial Golf Club, Inc., 413 So.2d 41 (Fla. App. 1982). However, it is not necessary that the articles set forth any of the corporate powers enumerated in the Act. F.S.A. §607.0202(3).

h. Filing of Articles The articles must be delivered to the Department of State. If the Department of State finds that the articles conform to the law, it must, when all fees are paid, file the articles of incorporation. F.S.A. §607.0203. Any document filed with the Department of State must be in English. F.S.A. §607.0120(5). Corporate existence commences upon the filing of the articles by the Department of State, except that the date of commencement of corporate existence may be specified in the articles if such date is within five business days prior to the filing date. F.S.A. §607.0203(1).

2. Corporate Financial Structure

When individuals invest in a corporation, they receive “securities” as tangible evidence of their investment. There are two distinct types of securities: debt securities and equity securities.

a. Types of Securities

i. Debt Securities. A person holding debt securities is a creditor of the corporation; normally, he is entitled to repayment of his principal at a specified time with a fixed return on the principal in the form of interest. Depending upon the terms of the instrument creating the debt, he may have the right to convert his debt security into an equity security, and the corporation may have the right to prepay the debt before the expiration of the term. Holders of debt securities have priority over equity security holders upon liquidation of the corporation, but do not ordinarily have the right to vote. The three major types of debt securities are debentures, bonds, and notes. Debentures are unsecured obligations of the corporation. Holders of these debt instruments are general creditors.


Bonds usually are secured by a mortgage or a security interest in specific assets of the corporation. Bonds can either be registered in the name of the owner on the books of the corporation, in which case the corporation’s obligations run to the registered owner, or they may be bearer bonds, in which case the corporation pays the interest to the holder of the coupons and, upon maturity, pays the principal to the person possessing the bond. Notes are long-term securities which may be secured or unsecured. They are generally used when dealing with institutional lenders, and are generally not traded or transferred as bonds and debentures may be. ii. Equity Securities. Equity securities represent the capital of the corporation which is at risk in the business. There is neither a right to repayment nor a right to any return on the amount invested. However, upon liquidation, once the creditors are satisfied, all the remaining corporate assets belong to the shareholders. Shareholders usually have dividend rights—the right to a current return on their investment; liquidation rights—the right to a share of the corporate assets at the end of the corporation’s existence; and voting rights—the right to a voice in the management of the corporation. The articles may create several classes of shares and delineate the different rights of each. Each corporation has the power to create and issue the number of shares stated in its articles of incorporation. The shares may be divided into one or more classes. Any or all of the classes may consist of shares with or without par value, and with such designations, preferences, limitations, and relative rights as are stated in the articles of incorporation. The articles may limit or deny the voting rights or provide special voting rights for any class if consistent with the provisions of chapter 607. Classes of Shares. The articles of incorporation must prescribe the classes of shares and the number of shares of each class that the corporation is authorized to issue. If more than one class of shares is authorized, the articles of incorporation must prescribe a distinguishing designation for each class, and prior to the issuance of shares of a class the preferences, limitations, and relative rights of that class must be described in the articles of incorporation. All shares of a class must have preferences, limitations, and relative rights identical with those of other shares of the same class except to the extent otherwise permitted by statute. F.S.A. §607.0601(1). When so provided in the articles of incorporation, a corporation may issue preferred or special classes:


(1) Subject to the right of the shareholders or the corporation to require redemption or conversion of any of such shares for an amount determined by a designated formula as specified in the articles or by reference to extrinsic date or events;

(2) Entitling the holders thereof to cumulative, noncumulative, or partially cumulative dividends; and

(3) Having preference over any other class for payment of dividends and distributions on dissolution. F.S.A. §607.0601(3).

If a corporation is authorized to issue more than one class or series of stock, the shares of each class or series must be designated to distinguish each from the other. Shares entitled to preference in the distribution of dividends or assets must not be designated as common shares. Likewise, shares not entitled to preference in the distribution of dividends or assets must be designated as common shares and not preferred. F.S.A. §607.0601(5). A. Common Stock.Common stock represents the residual ownership interest in the corporation; upon liquidation, the holders of the common stock divide all the assets remaining after satisfaction of creditors and payment to the preferred stockholders of their liquidation preference. Common stockholders have a potentially unlimited return on their investment, but also take the greatest risk of losing their investment. Holders of common stock have no right to a dividend unless declared by the directors after payment of preferred stock dividends. Usually, common stockholders have the right to vote, but common stock may be divided into classes, some of which may be nonvoting or may be limited in the election of directors. B. Preferred Stock.Preferred stockholders are generally entitled to receive fixed dividends before any dividends are paid to the common stockholders. While the directors ordinarily are not obligated to declare a dividend, if one is declared, the preferred stockholders are entitled to receive their stipulated amount before the common stockholders receive their dividends. Furthermore, the articles may make a preferred stock dividend mandatory whenever there are sufficient earnings to pay it. (1) Participating Preferred Stock.Usually, preferred shares are nonparticipating: they receive no more than their stipulated dividend. However, preferred stock may have the right to participate with the common stock in any further distributions after the stipulated preferred dividend is paid. The terms of such participation are fixed by the articles. (2) Cumulative Dividends.The right of preferred stockholders to receive dividends may be cumulative or noncumulative, depending upon the provisions


in the articles. If the dividend preference is cumulative, the shareholders have the right to receive the stated amount each year, Way to whether or not earnings are sufficient to pay it. If not paid in a particular year, the amount must be added to the stated preference of the succeeding year, and the dividend preferences cumulate until paid. Usually, the preferred stock cannot force the directors to declare a dividend, but no dividends may be paid on the common stock until all cumulated preferred dividends are paid. If the preferred dividend right is noncumulative, the shareholder is entitled to a dividend only if and when declared by the board. Failure to pay a dividend, even if sufficient earnings are available, does not increase the preference amount to be paid in a subsequent year. However, the preferred stockholder still has the right to receive his dividend before a dividend is paid on common stock in any year. (3) Summary of Preferred Stock Characteristics.

In summary, although preferred stock may have a variety of privileges and limitations, certain characteristics are usual: (a) it is nonvoting stock, but voting rights might accrue if the dividend is not paid; (b) it is preferred concerning a stated amount of dividends, and the stated dividends will usually be both limited and cumulative; (c) it is preferred and limited concerning liquidation rights; and (d) it is redeemable at a stated price at the option of the corporation.

C. Shares in Series.The articles of incorporation may provide that the shares of a preferred or special class of stock may be divided into and issued in series. Any or all of the series of a class, and the variations between their relative rights and preferences may be fixed in the articles of incorporation. Each series in a class must be given a distinguishing designation. §607.0602. If the articles of incorporation expressly vest authority in the board of directors, then, to the extent that the articles have not established series and fixed their relative rights and preferences, the board will have the authority to divide classes into series and fix the relative rights and preferences for such series. F.S.A. §607.0602. A statement setting forth the board resolution must be filed with the Department of State, and operates as an amendment to the articles. F.S.A. §607.0602(4). D. Fractional Shares and Scrip.When necessary or desirable to effect share transfers, share distributions or reclassifications, mergers, consolidations, or reorganizations, a corporation may issue fractions of a share. A certificate for a


fractional share will entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. In lieu of fractional shares, the corporation may issue scrip in registered or bearer form. Scrip is a certificate which will entitle the holder to receive a certificate for a full share upon the surrender of sufficient scrip. The board of directors may cause scrip to be issued subject to the condition that it will become void if not exchanged for full share certificates by a certain date. This and any other condition allowed by statute regarding exchange of scrip must be stated or fairly summarized on the face of the certificate. Unless otherwise provided therein, scrip does not entitle the holder to voting, dividend, or liquidation rights. F.S.A. §607.0604. E. Hybrid Securities.Occasionally, hybrid securities, combining features of debt and equity securities, are issued. However, they raise difficulties as to how they should be treated. If a security has a fixed maturity at a reasonable future time and a fixed rate of return, it will probably be found a debt security; if it has neither, it is probably an equity security. Another test is whether the holder ranks with the general creditors on liquidation. iii. Balancing Debt and Equity. Extensive debt financing is attractive to corporations for several reasons. For tax purposes, the interest paid on debt is deductible by the corporation. Interest payments avoid double taxation of dividends (once as corporate profits, and once as income to the dividend recipient). The repayment of the principal of debt is not a taxable event, whereas the redemption of stock is frequently taxed as a dividend. If the corporation becomes insolvent, a holder of debt securities participates with the other creditors in the assets, whereas an equity holder receives a distribution only after all the creditors are satisfied. Debt financing also is a means to obtain additional money without relinquishing control, and without risking more of the investors’ own money. However, excessive debt financing is dangerous. If the rate of debt to equity is too high, interest payments and even the repayment of the debt may be treated as dividends for tax purposes. In the event of insolvency, the shareholder-creditor’s claim may be partially or totally subordinated to the claims of other creditors, or it may be reduced to participation with the shareholders in the assets. If the corporation is undercapitalized and has too high a ratio of shareholder debt to equity, a court may also deny the shareholders limited liability.


b. Issuance of Shares

i. Authorization. A corporation is empowered to create and issue the number of shares authorized by its articles of incorporation. Once issued, shares are outstanding shares until they are reacquired, redeemed, converted, or canceled. F.S.A. §607.0603(1). Redeemed shares may be canceled and restored to the status of authorized but unissued shares. F.S.A. §607.0631(1). ii. Stock Subscriptions. A stock subscription is an agreement to purchase stock. Usually, the prospective subscriber offers to buy unissued stock of a corporation, which may be either existing or yet to be formed. Upon acceptance of the offer by the corporation or other subscribers, an enforceable contract is formed. A subscription for shares of a corporation to be organized is irrevocable for a period of six (6) months, unless otherwise provided by the terms of the subscription agreement or unless all the subscribers consent to the revocation of the subscription. F.S.A. §607.0620(1). Whether made before or after the corporation’s formation, a subscription for shares will not be enforceable unless in writing and signed by the subscriber. F.S.A. §607.0620(2). Unless the subscription agreement provides otherwise, the subscription, whether made before or after organization of the corporation, must be paid in full, or in installments, whenever the board of directors calls for payment. A call for payment of subscriptions must be uniform as to all shares of a class or series. F.S.A. §607.0620(3). If a subscriber defaults on the payment of any installment or call, the corporation may proceed to collect the amount due in the same manner as for any contractual debt due the corporation. The subscription agreement may prescribe other penalties for failure to pay installments or calls that may become due, but no penalty effecting a forfeiture of the subscription, or the amounts paid thereon, may be declared against a subscriber unless the amount due thereon remains unpaid for a period of twenty (20) days after written demand therefor. The defaulting subscriber is entitled to the excess of the proceeds from the sale of his subscribed shares over the sum of the amount due and unpaid on the subscription plus the reasonable expenses incurred in selling the shares. F.S.A. §607.0620(5).

c. Expenses The reasonable charges and expenses of formation or reorganization of a corporation and reasonable expenses of and compensation for the sale or


underwriting of shares may be paid or allowed by the corporation out of the consideration received for shares. F.S.A. §607.0628.

d. Share Certificates Shares owned by a shareholder may, but need not be represented by share certificates. F.S.A. §607.0625. A share certificate is merely evidence of ownership of a share or interest in the corporate enterprise.

Therefore, it is possible under some circumstances for a person to own stock in a corporation even though no certificate was issued to him. Smallwood v. Moretti, 128 So.2d 628 (Fla. App. 1961).

i. Requirements. Each share certificate must be signed manually or in facsimile by an officer or officers designated in the bylaws or by the board and may be sealed with the corporate seal or a facsimile thereof. If any officer who signed, or whose facsimile signature has been placed upon, the certificate, ceased to be an officer before the certificate was issued, it may still be properly issued by the corporation. F.S.A. §607.0625(4).

Each certificate representing shares must state upon its face: (1) The name of the corporation; (2) That the corporation is organized under the laws of Florida; (3) The name of the person(s) to whom issued; and (4) The number and class of shares and the designation of

series, if any, which the certificate represents. F.S.A. §607.0625(2).

Every certificate representing shares issued by a corporation which is authorized to issue shares of more than one class or more than one series of any class must set forth or fairly summarize upon the face or back of the certificate, or must state that the corporation will furnish to any shareholder upon request and without charge a full statement of:

(1) The designations, preferences, limitations, and relative rights of the shares of each class or series authorized to be issued;

(2) Any variations in the relative rights and preferences between the shares of each series;

(3) The authority of the board of directors to fix and determine the relative rights and preferences of subsequent series. F.S.A. §607.0625(3).

ii. Transfer Restrictions. Every certificate representing shares which are restricted as to the sale, disposition, or other transfer of such shares must state that the shares are restricted as to transfer. The certificate must also set forth or


fairly summarize the restriction, or must state that the corporation will furnish a full statement of the restrictions to any shareholder upon request. F.S.A. §607.0627. Unless so noted, the restrictions will be ineffective except against a person with actual knowledge of them. F.S.A. §678.0627(2). If the transfer is noted, and the share is presented to the issuer for registration of a transfer, the issuer is on notice of an adverse claim and must inquire about it prior to registering the transfer. Share restrictions may be imposed by the articles, by the bylaws, or by an agreement among shareholders or between the shareholders and the corporation.

3. The Organizational Meeting

After the filing of the articles, an organizational meeting of the board of directors named in the articles, or of the incorporators if no directors were named, is held within or without the state. The meeting must be called by a majority of the directors or incorporators, who must give at least three days’ written notice to each director or incorporator named in the articles. The purpose of the meeting is to adopt bylaws, elect directors (if necessary), elect officers, and to transact other relevant business. F.S.A. §607.0205.

4. Corporate Purposes aAnd Powers

a. General Authority (F.S.A. §607.0302) The “purposes” of a corporation are the business objectives for which it is formed; the “powers” of a corporation are the means by which it can fulfill its purposes. Powers may be either implied or expressly granted. Unless otherwise provided by its articles of incorporation, each corporation has the power:

(1) To have perpetual succession by its corporate name unless a limited period of duration is stated in its articles of incorporation;

(2) To sue and be sued in the corporate name; (3) To have a corporate seal, which may be altered at will, and to use it, or

a facsimile thereof, by impressing, affixing, or otherwise reproducing it; (3) To purchase, receive, lease, or otherwise acquire, own, and otherwise

deal in and with real or personal property or any interest therein, wherever located;


(4) To sell, convey, mortgage, pledge, create a security interest in, lease, exchange, transfer, and otherwise dispose of all or any part of its property;

(5) To lend money to or use its credit to assist its officers and employees in accordance with F.S.A. §607.0833 (which permits loans on a secured or unsecured basis, with interest or without, whenever the loan, guarantee or assistance may reasonably be expected to benefit the corporation);

(6) To purchase, receive, subscribe for, or otherwise use and deal in and with, shares and other interests in, or obligations of, any other entity;

(7) To make contracts and guarantees and incur liabilities, borrow money, issue notes, bonds, and other obligations, and secure any of its obligations by mortgage or pledge of all or any of its property franchises and income, and make contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion, or attainment of the business of a corporation that is a majority-owned subsidiary or parent of the contracting corporation, which contracts of guaranty and suretyship shall be deemed to be necessary or convenient to the conduct, promotion, or attainment of the business of the contracting corporation, and make other contracts of guaranty and suretyship which are necessary or convenient to the business of the contracting corporation;

(8) To lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment;

(9) To conduct its business, locate offices, and exercise the powers granted by the Act within or outside Florida;

(10) To elect directors and appoint officers, employees, and agents of the corporation, define their duties, fix their compensation, and lend them money and credit;

(11) To make and alter bylaws, not inconsistent with its articles of incorporation or with the laws of Florida, for the administration and regulation of the affairs of the corporation;

(12) Tto make payments or donations for the public welfare or for charitable, scientific, or educational purposes;

(13) To transact any lawful business that will aid governmental policy; (14) To make payments or donations or to do any other act not inconsistent

with the law that furthers the business and affairs of the corporation; (15) To pay pensions and establish pension plans, profit sharing plans,

share bonus plans, share option plans, and benefit or other incentive plans for its current or former directors, officers, employees, and agents of the corporation or of its subsidiaries;

(16) To provide insurance for its benefit on the life of any of its directors, officers, or employees, or on the life of any shareholder for the purpose


of acquiring at his death shares of its stock owned by the shareholder or by the shareholder’s spouse or children;

(17) To be a promoter, incorporator, partner, member, associate, or manager of any corporation, partnership, joint venture, trust, or other enterprise;

(18) To have and exercise all powers necessary or convenient to effect its purposes. F.S.A. §607.0302.

b. Ultra Vires

An ultra vires act is one not within the express or implied powers of the corporation. The use of the ultra vires defense is governed by F.S.A. §607.0304, which provides that “the validity of corporate action, including, but not limited to, any conveyance, transfer, or encumbrance of real or personal property to or by a corporation, may not be challenged on the ground that the corporation lacks or lacked power to act.” In three situations, however, ultra vires, or lack of corporate capacity or power, may be asserted lawfully: (1) in a proceeding by a shareholder against the corporation to enjoin the act; (2) in a proceeding by a corporation, whether acting directly, derivatively, or through a receiver, trustee, or other legal representative, or through shareholders in a representative suit, against the incumbent or former officers or directors of the corporation; or (3) in a proceeding by the Attorney General, as provided in the Act, to dissolve the corporation, or in a proceeding by the Attorney General to enjoin the corporation from the transaction of unauthorized business. F.S.A. §607.0304(2).

5. Bylaws

Bylaws are the internal rules and regulations which govern the corporation, the shareholders, the officers, and the directors. Bylaws may contain any provision for the regulation and management of the affairs of the corporation consistent with the law and the articles of incorporation. The power to adopt, alter, amend, or repeal bylaws is vested in the board of directors, unless reserved to the shareholders by the articles of incorporation. Bylaws adopted by the board or by the shareholders may be repealed or changed, new bylaws may be adopted by the shareholders and the shareholders may prescribe in any bylaw made by them that such bylaw may not be altered, amended, or repealed by the board of directors. F.S.A. §607.1020. The board of directors may also adopt emergency bylaws when a catastrophic event occurs and the board lacks a quroum. Such bylaws are


effective only during the emergency and are subject to amendment or repeal by the shareholders. No such bylaw may impose liability on any director, officer, employee, or agent of the corporation. F.S.A. §607.0207. Action upon bylaws is usually by a majority vote, whether the voting group consists of directors, shareholders, or a special class of shareholders. The articles or the bylaws may provide for other than majority vote requirements.

C. SHAREHOLDERS

1. Liabilities

a. Limited Liability Generally A corporation is a legal entity created by complying with the statute governing incorporation; it is strictly a creature of statute, existing only because permitted by statute. The Florida General Corporations Act (Act) defines a “corporation” or “domestic corporation” as a corporation for profit, except a foreign corporation. F.S.A. §607.01401(5). The law regards the corporation as an entity distinct from its shareholders whether it is a large publicly held corporation with thousands of shareholders, or a small closely held corporation with two or three shareholders. A shareholder has rights to corporate property only when a dividend is declared or when the corporation is liquidated; if his stock has voting rights, he participates in managing the corporate assets through his power to elect directors.

b. Defective Incorporation A disappointed creditor of a corporation may seek to enforce a corporate liability against persons who purported to act as shareholders or agents of the corporation. The success of such an attack depends upon the organizers’ compliance with the incorporation statute and the corporation’s resulting legal status. i. A De Jure Corporation. A corporation organized in compliance with the Act is a de jure (lawful) corporation. The certificate of incorporation is conclusive evidence that all conditions precedent required to be performed by the incorporators have been complied with and that the corporation has been incorporated under Chapter 607, but proceedings may still be brought by the state to cancel or revoke the certificate or for involuntary dissolution of the corporation. F.S.A. §607.1430.


ii. A De Facto Corporation. Traditionally, if statutory compliance was insufficient for de jure status, a de facto corporation might still have been formed if four elements existed: (1) a law or chapter under which the alleged corporation might be created; (2) an attempt in good faith to organize under the law; (3) an unintentional omission of an essential requirement of the law of charter; and (4) an exercise in good faith of corporate powers in accordance with such attempted organization. Richmond v. Town of Largo, 155 Fla. 226, 19 So.2d 791 (1944). De facto status insulated directors and shareholders from liability except in a quo warranto action by the state. However, the statute makes clear that any step short of receiving a certificate of incorporation does not constitute a good faith effort, and hence no de facto corporation could exist.

Under an earlier version of the statute, the court found that it need not reach the issue of whether Chapter 607 abrogated the de facto corporation doctrine, as no de facto corporation could exist on the facts (filing of incorporation papers was not attempted until eight months after the entity held itself out as a corporation). Ratner v. Central National Bank of Miami, 414 So.2d 210 (Fla. App. 1982).

iii. Corporation by Estoppel. Absent de jure or de facto status, a corporation might still exist by estoppel. Formerly, one who dealt or contracted with an apparent corporation and recognized its corporate existence was estopped from denying such corporate existence. However, this theory of estoppel was abrogated by the Act. No body of persons acting as a corporation is permitted to set up the lack of legal organization as a defense to an action against them as a corporation, nor is any person sued on a contract made with the corporation or sued for an injury to its property or a wrong done to its interests permitted to set up the lack of such legal organization in his defense. F.S.A. §607.1904. iv. Consequences of Defective Incorporation. All persons who assume to act as a corporation with actual knowledge that there has been no incorporation under the Act shall be jointly and severally liable for all debts and liabilities incurred or arising as a result of so acting, except for any liability to any person who also had such actual knowledge. F.S.A. §607.0204. However, purely passive and innocent investors who did not take part in management probably would not be held liable. One who purports to act as an agent of a nonexistent corporation breaches an implied warranty of authority to third persons with whom he has dealt and will be personally liable for any debts incurred.

c. Piercing the Corporate Veil


The legal fiction of a corporation existing as an entity, separate and distinct from its shareholders, was designed to serve convenience and justice; it will be disregarded whenever justice or public policy demands that shareholders or affiliated corporations be held liable for corporate obligations. This equitable doctrine of “piercing the corporate veil” will be applied when the corporation is a mere device or sham to accomplish some ulterior purpose, or is a mere instrumentality or agent of another corporation or individual owning all or most of its stock, or where its purpose is to evade some statute or to accomplish some fraud or illegal purpose, or where the corporation is employed by the shareholders for fraudulent or misleading purposes, was organized or used to mislead creditors or to perpetrate a fraud upon them, or to evade existing personal liability. Tiernan v. Sheldon, 191 So.2d 87 (Fla. App. 1966). Beyond these general considerations, factors which the courts consider in deciding whether to pierce the veil include: i. Alter Ego. —This use of the corporate shield by an individual totally in control of the corporation so as to further personal interests. Factors which a court may consider in determining whether to pierce the corporate veil include whether corporate formalities were observed, the degree to which the corporation was a vehicle for shareholder’s personal business interests, the amount of equity capital and the extent of domination of the corporation’s affairs by a person or other entity by virtue of its ownership, control and congruency of established goals. Shearson Hayden Stone, Inc. v. Lumber Merchants, Inc., 500 F. Supp. 491 (S.D. Fla. 1980).

Individual liability was imposed on a corporate officer where it was shown that he was the sole beneficiary of the corporation’s activities, directed and managed its activities, and used the corporate name at his pleasure. Fenick v. Robertson, 406 So.2d 1263 (Fla. App. 1981).

If a parent foreign corporation is not personally “doing business” in a state, it may be deemed to be vicariously present if a subsidiary is presently “doing business” there as the parent’s “alter ego.” Hermetic Seal Corp. v. Savoy Electronics, Inc., 290 F. Supp. 240 (S.D. Fla. 1967). The plaintiff must show that the parent controls the subsidiary to such a degree that the subsidiary is a mere instrumentality, that the parent is perpetrating fraud or wrong through its subsidiary, and that an unjust loss or injury to the claimant exists. Factors considered in determining whether to disregard the corporate fiction include: (1) are formal legal requirements observed; (2) is the subsidiary adequately financed or does the parent furnish capitalization; (3) by whom are salaries and expenses paid; (4) do the subsidiaries’ directors act in independent


and primary interest of the parent; (5) are operations so integrated through commingling of funds, interactivities, common directors, and supervision that they should be considered as one enterprise; and (6) generally, is the one organization so organized and controlled and its business conducted in such a manner as to make it merely an agency, instrumentality, adjunct, or alter ego of the other. Markow v. Alcock, 356 F.2d 194 (5th Cir. 1966).

Ownership by one corporation of all the stock of another corporation does not in itself destroy the status of the latter as a distinct legal entity, nor does having common stockholders or officers of the two corporations destroy the legal independence of either corporation. St. Petersburg Sheraton Corp. v. Stuart, 242 So.2d 185 (Fla. App. 1970).

However, where a principal officer of a parent company maintained an office in Florida from which he directed and controlled the business operations of the Florida subsidiary, and the parent’s board meetings, corporate records and shareholders were in Florida, the subsidiary was found to be the parent’s alter ego or instrumentality under Florida law, and the parent was “doing business” in Florida. Hermetic Seal Corp. v. Savoy Electronics, Inc., supra.

ii Lack of Corporate Formality. Failure to hold shareholders’ and directors’ meetings (especially where there are few shareholders) and failure to maintain indicia of separateness between parent and subsidiary showing a lack of corporate formality. Books, accounts, and records must be separately maintained to show appropriate corporate formalities. Each corporation must be represented to the public as a separate entity, or all affiliates may be treated as a common enterprise. iii Inadequate Capitalization. This alone will not ordinarily lead to disregard the corporate entity, if the corporate formalities are carefully observed. An individual has the right to use the corporate form to shield himself from personal liability, and a corporation has the right to use a subsidiary for the same purpose. Nonetheless, adequacy of capitalization is a factor considered by the courts. Adequate capital is not precisely defined, but generally must be sufficient for the corporation’s prospective needs and for meeting corporate debts as they become due. A subsidiary’s capital must be sufficient to allow it financial independence from the parent corporation. In a tort suit seeking to impose personal liability on shareholders, the court will look to the amount of liability insurance available in addition to the corporate capital.


If the corporate veil is pierced, individual shareholders may be held personally liable for the corporation’s debts. Mysels v. Barry, 332 So.2d 38 (Fla. App. 1976). However, the Florida Supreme Court has held that the corporate veil may not be pierced absent a showing of improper conduct. Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d 1114 (Fla. 1984). Thus, it is not sufficient to show only that a parent corporation established a subsidiary as a mere instrumentality; it must also be shown that the parent did so to mislead creditors and avoid liability.

d. Watered Stock

i. Valid Consideration. The consideration for the issuance of shares may consist of any tangible or intangible property or benefit to the corporation, including (1) cash; (2) promissory notes; (3) services performed; (4) promises to perform services evidenced by a written contract; or (5) other securities of the corporation. F.S.A. §607.0621(2). When payment of the consideration for which such shares are issued is received by the corporation, the shares are deemed to be fully paid and non-assessable. Consideration in the form of a promise to pay money or a promise to perform future services is received by the corporation at the time of the making of the promise. F.S.A. §607.0621(4). ii. Valuation of Consideration. Consideration in the form of property or services presents problems as to its value. In the absence of fraud in the transaction, the judgment of the directors (or the shareholders, as the case may be) as to the value of the consideration received is conclusive. F.S.A. §607.0621(3). iii. Inadequate Consideration. Stock issued for inadequate consideration falls into three categories. If the stock is labeled “fully paid,” but the payment was in cash for less than the par or stated value, it is discount stock. If “fully paid” stock is issued for no consideration, it is bonus stock. If “fully paid” stock is issued for property or services the fair value of which is less than the value of the shares, it is watered stock. (The term “watered stock” is sometimes used to refer to all three types.) In general, a holder of, or subscriber to, shares of a corporation is under no obligation to the corporation or its creditors with respect to such shares. However, the holder or subscriber is obliged, to the corporation or its creditors, under Florida law, to pay to the corporation the full consideration for which the shares were issued or will be issued. This obligation may be enforced by the corporation, and its successors or assigns, by a shareholder suing derivatively on behalf of the corporation, by a receiver, liquidator, or trustee in bankruptcy


of the corporation, or by any other person having the legal right to marshal the assets of the corporation. F.S.A. §607.0622. Any person becoming an assignee or transferee of shares, or of a subscription for shares, in good faith and without knowledge or notice that the full consideration therefor has not been paid, will not be personally liable to the corporation or its creditors for any unpaid portion of such consideration, but the assignor or transferor will continue to be liable therefor. F.S.A. §607.0622(2). No pledgee or other holder of shares as collateral security will be personally liable as a shareholder, but the pledgor or other person transferring such shares as collateral will be considered the holder thereof for purposes of liability. F.S.A. §607.0622(3). An executor, administrator, receiver, or other fiduciary will not be personally liable to the corporation as a holder of, or subscriber to, shares of the corporation, but the estate and funds in his hands may be liable. F.S.A. §607.0622(4). Any obligation to pay must be enforced within five (5) years of the issuance of the stock or of the date of the subscription for shares, whichever is earlier. F.S.A. §607.0622(5).

e. Subordination of Shareholder Debt Ordinarily, in addition to buying stock, a shareholder can lend money to a corporation and will be treated as a creditor. However, if a corporation becomes insolvent, majority shareholder debt may be subordinated to other unsecured debts of outside creditors and also to the interests of preferred stockholders who have no voice in management. The majority shareholder loans are in effect treated as additional equity, but no personal liability is imposed on shareholders. An equitable remedy, subordination is usually ordered only if the shareholder-creditor acted in bad faith or if the corporation was undercapitalized, or mismanaged so as to jeopardize payment to outside creditors. This is called the “Deep Rock” doctrine, named after the corporation involved in Taylor v. Standard Gas & Electric Co., 306 U.S. 307 (1939).

2. Shareholders’ Rights

a. Right to Inspection

Every Florida corporation must keep as permanent records the minutes of all meetings of its shareholders and board of directors, as well as, a record of all shareholder or board actions taken without a meeting and all committee actions


taken in place of the board. F.S.A. §607.1601(1). The corporation must also maintain accurate accounting records. F.S.A. §607.1601(2). The corporation or its agent must also keep a record stating the names and addresses of all shareholders and the number, class, and series, if any, of the shares held by each. F.S.A. §607.1601(3). In addition, the following records must be kept: (1) the articles and bylaws and any amendments to them currently in effect; (2) board resolutions regarding the issuance of shares; (3) the minutes of all shareholder meetings and records of all action taken without a meeting, as well as all written communications to shareholders, for the past three years; (4) a list of the names and business addresses of all directors and officers; and (5) the corporation’s most recent annual report. F.S.A. §607.1601(5). Corporate records may be in written form or any other form capable of being converted into written form within a reasonable time. F.S.A. §607.1601(4). Any shareholder, including a beneficial owner whose shares are held in a voting trust or by a nominee on her behalf, has the right to inspect and copy, during regular business hours, any of the records described in F.S.A. §607.1601(5), supra, provided the shareholder gives written notice of her demand at least five business days before the date she wishes to inspect the records, except that written notice of demand to inspect the bylaws or the list of directors and officers must be made at least fifteen business days before the shareholder desires to inspect them. F.S.A. §607.1602(1), (4). Any shareholder is also entitled to inspect and copy (in person, by agent, or attorney), at any reasonable time, the corporation records of account and minutes and records of shareholders (to the extent not permitted under F.S.A. §607.1601(5)) and directors meetings, provided the shareholder makes written demand on the corporation at least five business days before she desires to inspect the records and she (1) makes the demand in good faith and for a proper purpose; (2) she describes with reasonable particularity her purpose and the records she seeks to inspect; and (3) the records are directly connected with that purpose. F.S.A. §607.1602. The burden is on the corporation or corporate officers to prove that the shareholder has an improper purpose or is guilty of other wrongdoing. The corporation may deny the demand for inspection if the shareholder has within two years sold or offered for sale any list of shareholders for any corporation, has aided or abetted any person in procuring any such list for any purpose, has improperly used any information secured through prior examination of the records of any corporation, or was not acting in good faith or for a proper purpose in making his demand. F.S.A. §607.1602(6).


The statute does not impair the power of any court of competent jurisdiction, upon proof by a shareholder of proper purpose, to compel the production for examination by such shareholder of the books and records of the corporation. F.S.A. §607.1602(5)(b); 1604. Unless modified by a resolution of the stockholders not later than 120 days after the close of the fiscal year, each corporation must prepare and furnish to its shareholders: an annual financial statements that include a balance sheet as of the end of the year, an income statement for that year, and a statement of cash flows for that year. If annual statements are reported by a public accountant that report must accompany the annual statements. If not, the annual statements must come with a statement of the president or person responsible for the corporation’s accounting records stating her reasonable belief that the statements were prepared on the basis of generally accepted accounting principles and describing where not prepared on that basis. Upon the written request of any shareholder who was not mailed the financial statements, the corporation must mail him a copy of the most recent annual statement. The court may compel the corporation to furnish the financial statements to the shareholder if the corporation fails to comply with the shareholder’s request within 30 days. F.S.A. §607.1620. A shareholder may not sell or distribute any of the information or records that he or she inspects pursuant to F.S.A.§607.1602, except to the extent that such use is for a proper purpose (as defined in F.S.A.§607.1602(3)). Any person who violates this new provision is subject to a $5,000.00 civil penalty. F.S.A. §607.1602(7).

b. Voting Rights Shareholders have the right to elect directors and approve fundamental changes in the corporation, such as amendment of the articles of incorporation, merger, sale of substantially all assets, or dissolution. (See Section VI, infra). Management may seek shareholder ratification of actions if the directors have a conflict of interest. Shareholder action on these matters is usually taken at a meeting.

i. Meetings A. The Annual Meeting.A meeting of stockholders must be held annually for the election of directors and the transaction of other business. The meeting may be held either within or outside Florida, at a place stated in the bylaws, or if not inconsistent with the bylaws, stated in the notice of the meeting. F.S.A. §607.0701.


The meeting is held on the date and at the time stated in, or fixed in accordance with, the bylaws. If the annual meeting is not held within any thirteen-month period, the circuit court of the circuit in which the principal office of the corporation is located, or if such office is not in Florida then of the circuit in which the registered office of the corporation is located, may, on the application of any shareholder, summarily order a meeting to be held. The order of the court may designate the time and place of the meeting, the record date for determination of shareholders entitled to vote, and the form of notice of such meeting. F.S.A. §607.0703. B. Special Meetings.Special meetings of the shareholders may be called by any one of the following persons or groups: the board of directors; the holders of not less than ten percent (10%) of all the shares entitled to vote at the meeting; or such other persons or groups as may be authorized in the articles of incorporation or the bylaws. F.S.A. §607.0702. C. Notice of Meetings.Except as otherwise provided in the Act, written notice stating the place, day, and hour of the meeting and, in the case of a special meeting, the purpose(s) for which the meeting is called, must be delivered to each shareholder of record entitled to vote at the meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. Notice must be given either personally or by first-class mail, by or at the direction of the president, the secretary, or the officer or persons calling the meeting. F.S.A. §607.0705(1). If a meeting is adjourned to another time or place, it is not necessary, unless the bylaws provide otherwise, to give any notice of the adjourned meetings if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and any business may be transacted at the adjourned meeting that might have been transacted at the original meeting. If, however, after the adjourned meeting, the board fixes a new record date for the adjourned meeting, a notice of the adjourned meeting must be given in compliance with F.S.A. §607.0705(1), to each shareholder of record on the new record date entitled to vote at the meeting. F.S.A. §607.0705(4). D. Waiver of Notice.Whenever any notice is required to be given to any shareholder pursuant to Chapter 607 or under the provisions of the articles of incorporation or the bylaws of the corporation, a written waiver of notice signed by the person(s) entitled to such notice, whether before or after the time stated therein, will be the equivalent of the giving of such notice. Attendance of a person at a meeting will constitute a waiver of notice of that meeting, except if the person attends a meeting for the express purpose of objecting at the


beginning of the meeting to the transaction of business, because the meeting was not lawfully called or convened. Neither the business to be transacted nor the purpose of any regular or special meeting of the shareholders need be specified in a written waiver of notice, unless so required by the articles of incorporation or the bylaws. F.S.A. §607.0706. E. Record Date and Voting List.For the purpose of determining shareholders entitled to notice of, or to vote at, any shareholders’ meeting or adjournment thereof (or to determine who is entitled to receive payment of dividends, or to determine shareholders for any other purpose), the board may provide that the stock transfer books will be closed for a stated period not to exceed seventy days. If the stock transfer books are closed for the purpose of determining shareholders entitled to notice of, or to vote at, a shareholders’ meeting, the books must be closed for at least ten (10) days immediately preceding the meeting, unless a shorter time exists between the record date and the meeting. F.S.A. §607.0707; 0720(2). In lieu of closing the stock transfer books, the bylaws or, in the absence of an applicable bylaw, the board may fix a date in advance as the record date for the determination of shareholders. In any case, that date may not be more than seventy (70) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. F.S.A. §607.0720(2). If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice or to vote at a meeting of shareholders, the record date for such determination of shareholders is the close of business on the day before notice is delivered to the shareholders. F.S.A. §607.0707(4). When a determination of shareholders entitled to vote at any shareholders’ meeting has been thus made, that determination will apply to any adjournment of the meeting, unless the board fixes a new record date for the adjourned meeting. The board must fix such a date if the meeting is adjourned to a date more than 120 days after the date set for the original meeting. F.S.A. §607.0707(6). At least ten (10) days before each shareholders’ meeting, the officer or agent having charge of the stock transfer books for the corporation’s shares must make a complete list of the shareholders entitled to vote at the meeting, or adjournment, with the address of each and the number and class and series, if any, of shares held by each. The shareholders’ list is prima facie evidence as to who are the shareholders entitled to examine the list or to vote at any shareholders’ meeting. F.S.A. §607.0720(4).


The list must be kept on file at the principal place of business of the corporation, at a place identified in the meeting notice in the city where the meeting will be held, or at the office of the transfer agent or registrar of the corporation for ten days prior to the meeting. The list must be subject to inspection by any shareholder at any time during usual business hours, and must also be subject to the inspection of any shareholder at any time during the meeting. F.S.A. §607.0720. As discussed supra, F.S.A.§607.0702(7) provides that a shareholder may not sell or otherwise distribute any information or records inspected regarding the stock transfer books, except to the extent that such use is for a proper purpose (as defined in F.S.A.§607.1602(3)). Any person who violates this new provision is subject to a $5,000.00 civil penalty. If these requirements are not substantially complied with, then upon the demand of any shareholder in person or by proxy, the meeting must be adjourned until there is compliance. If upon such demand the meeting is not adjourned by the corporation’s officers and the list is not produced, the circuit court may order inspection of the list and postponement of the meeting upon application of a shareholder. Refusal or failure to comply with these requirements will not affect the validity of any action taken at the meeting. F.S.A. §607.0720(5), (6). F. Quorum of Stockholders.The Florida Legislature has repealed F.S.A. §607.0727, which set forth statutory requirements for a Quorum of Stockholders. G. Shareholders’ Action Without a Meeting.Unless otherwise provided in the articles, any action that must or may be taken at any annual or special meeting of shareholders may be taken without a meeting, without prior notice, and without a vote if written consent, setting forth the action to be taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. If any class of shares is entitled to vote as a class, written consent shall be required of the holders of a majority of the shares of each class entitled to vote thereon as a class and of the total shares entitled to vote thereon. F.S.A. §607.0704(1). Within ten (10) days after obtaining such authorization by written consent, notice must be given to those shareholders who have not consented in writing or who are not entitled to vote. The notice must fairly summarize the material features of the authorized action. If the action is a merger, consolidation, or sale or exchange of assets for which dissenters’ rights are provided, the notice


must contain a clear statement of the rights of shareholders dissenting therefrom to be paid the fair value of their shares upon compliance with the statutory provisions regarding the rights of dissenting shareholders. F.S.A. §607.0704(3). If the action taken by shareholders’ written consent would have required the filing of a certificate under the Act if taken by shareholders’ vote at a meeting, the certificate filed must state that written consent was given in accordance with this section. F.S.A. §607.0704(5).

ii. Voting A. Required Vote.Unless the articles, or the bylaws, set forth a greater percentage, a majority of shares present at a meeting and entitled to vote on the subject matter other than the election of directors is sufficient to pass a resolution. If voting by class is required, because the matter affects the rights of that class, then a majority of that class present at the meeting is necessary to pass the resolution. Shareholders generally do not owe a fiduciary duty to the corporation or other shareholders in the way they vote. B. Greater Vote.The articles may require the vote of a greater proportion of the shares, or of any class or series, than a majority. A provision in the articles requiring a greater vote may not be altered, amended, or repealed except by such greater vote. The authorization or taking of any action by vote of the shareholders may be rescinded or revoked by the same vote as would be required at the time of rescission or revocation to authorize or take the action in the first instance, subject to the contract rights of other persons. C. Qualification of Voters.Unless the articles of incorporation provide otherwise, each outstanding share, regardless of class, is entitled to one vote on each matter submitted to a vote at a shareholders’ meeting. If the articles provide for more or less than one vote for any share on any matter, every reference in chapter 607 to a majority or other proportion of shares will refer to such a majority or other proportion of votes entitled to be cast. F.S.A. §607.0721(1). A shareholder may vote either in person or by proxy executed in writing by the shareholder or his duly authorized attorney-in-fact. F.S.A. §607.0722(1). Remember that only the shareholders of record on the record date are eligible to vote. F.S.A. §607.0707. If a share or shares are in the names of two or more persons then if only one person votes, in person or by proxy, his act binds all; if more than one person


votes, in person or by proxy, the vote of the majority binds all; or if more than one person votes, in person or by proxy, but the vote was evenly split, each faction is entitled to vote the share or shares proportionately. F.S.A. §607.0721(8). D. Special Rules for Voting Shares. (1) Authorized but Unissued Shares.Shares which have been authorized, but unissued (and shares of its own stock owned by another corporation the majority of the voting stock of which is owned or controlled by it) may not be voted, directly or indirectly at any meeting, and may not be counted in determining the total number of shares outstanding. However, shares of a corporation’s own stock held by the corporation in a fiduciary capacity may be voted. F.S.A. §607.0721. (2) Shares Owned by a Corporation.Shares that a corporation owns in another domestic or foreign company may be voted by the officer, agent, or proxy designated in the bylaws or, absent such a bylaw, by the person designated by the board. In the absence of any such designation or in case of a conflicting designation, the chairman of the board, the president, any vice-president, the secretary, and the treasurer of the corporate shareholder will be presumed to possess, in that order, authority to vote the shares. F.S.A. §607.0721(5). (3) Fiduciaries.Shares held by an administrator, executor, guardian, personal representative, or conservator may be voted by him, in person or by proxy, without a transfer of shares into his name. However, a trustee will not be entitled to vote shares held by him without a transfer of such shares into his name or the name of his nominee. F.S.A. §607.0721(6). (4) Receiver.A receiver, trustee in bankruptcy, or assignee for the benefit of creditors may vote shares held by her or under her control without a transfer of the shares into her name. F.S.A. §607.0721(7). (5) Pledged Shares.A shareholder whose shares are pledged is entitled to vote them until they are transferred on the corporate records. Thereafter, the pledgee or his nominee is entitled to vote the transferred shares. (6) Redeemed Shares.On and after the date on which written notice of redemption of redeemable shares has been mailed to the shareholders, and a sum sufficient to redeem them has been deposited with a bank or trust company along with irrevocable instructions and authority to pay the redemption price to the holders upon the surrender of certificates, such shares


will not be entitled to vote on any matter and will not be deemed to be outstanding shares. F.S.A. §607.0721(4). E. Non-voting Shares.The articles of incorporation may provide for the issuance of shares with no voting rights. F.S.A. §607.0601(3)(a). If limitations on the voting rights of shares issued in series are not set forth in the articles, but are provided in a board resolution pursuant to its authority under the articles, the corporation must file a statement with the Department of State. The resolution will then operate as an amendment of the articles. F.S.A. §607.0602(4). Even if stock is designated nonvoting stock, that stock is eligible to vote as a class on amendments that would change any rights or preferences of that class, or that would create a class of stock with superior rights. F.S.A. §607.1004. F. Proxy Voting. (1) In General.Every shareholder entitled to vote at a meeting of shareholders, every shareholder entitled to express consent or dissent without a meeting, other person entitled to vote on the shareholder’s behalf, or the shareholder’s duly authorized attorney-in-fact, may authorize another person or persons to vote the shares by proxy. F.S.A. §607.0722. The designation of a voting proxy is a designation of an agent for the purpose of voting the stock as the shareholder directs, or, if desired, in the discretion of the agent. Therefore, a proxyholder may not vote in favor of a resolution which benefits himself at the expense of, or against, the principal’s interest. A stockholder may repudiate acts of a proxyholder in excess of authority, or the stockholder may elect to ratify such acts. Abbey Properties Co. v. Presidential Insurance Co., 119 So.2d 74 (Fla. App. 1960). A shareholder appoints a proxy by signing an appointment form personally or by her attorney-in-fact. An executed telegram or cablegram or a photographic or photostatic reproduction of an appointment form is sufficient to constitute an appointment form. The form may be signed by any reasonable means, including a faxed signature. Electronic transmissions are sufficient if it can be determined that the transmission was authorized by the shareholder. F.S.A. §607.0722(2). If a proxy expressly provides, any proxyholder may appoint, in writing, a substitute to act in his place. F.S.A. §607.0722(9). No proxy is valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. F.S.A. §607.0722(3).


Unless the appointment form or electronic transmission conspicuously states the proxy is irrevocable and the appointment is coupled with an interest on the part of the proxyholder, a voting proxy is freely revocable by the shareholder executing it. The authority of a proxyholder to act is not revoked by the incapacity or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of incapacity or death is received by the corporate officer responsible for counting votes before the proxy exercises her authority to vote under the appointment. F.S.A. §607.0722(4), (5). (2) Irrevocable Proxies.

An appointment of a proxy which states that it is irrevocable is irrevocable when it is held by any of the following: (1) A pledgee; (2) A person who purchased or agreed to purchase the shares; (3) A creditor of the corporation who extended credit to the

corporation under terms requiring the appointment; (4) An employee of the corporation whose employment

contract requires the appointment; or (5) A person designated by or under a shareholder voting

agreement. F.S.A. §607.0722(5). Notwithstanding a provision in the proxy stating that it is irrevocable, the proxy becomes revocable after the interest with which it is coupled is extinguished, i.e., the pledge is redeemed, the debt of the corporation is paid, the period of employment provided for in the employment contract has terminated, or the shareholder voting agreement has terminated. F.S.A. §607.0722(6). Notwithstanding a provision making it irrevocable, a proxy may be revoked by a purchaser of shares without knowledge of the provision, unless the existence of the proxy and its irrevocability are noted conspicuously on the share certificates. F.S.A. §607.0722(7). (3) Regulation of Proxy Solicitation.The solicitation of proxies is an effective way for management to retain corporate control. Especially in widely-held corporations, if a proxyholder is a corporate insider he will know much more about the corporation’s affairs than does the average shareholder; this advantage may allow corporate insiders to pursue policies without the knowledge or control of shareholders. On the other hand, insurgents (who may not even be shareholders) may attempt to gain control of the corporation by soliciting proxies rather than by purchasing a majority of the shares. To prevent abuses, §14 of the Securities Exchange Act of 1934 provides for SEC regulation


of the solicitation of proxies in connection with any securities that are either traded on a national securities exchange, or that are issued by any company which has assets in excess of $10,000,000 and a class of equity securities with at least 500 shareholders of record. The federal rules aim to compel full disclosure of all relevant facts by requiring a proxy statement, use of a prescribed form of proxy, and filing of solicitation materials with the SEC. The rules also seek to open channels of communication between shareholders for an exchange of views by requiring management either to include in its proxy solicitation a shareholder’s proposal (at his expense), or to furnish such a shareholder with a shareholder’s mailing list. 17 C.F.R. §240.14a. Although proxy solicitation is largely regulated by federal law, state courts may use their equity power to prevent or remedy the effects of fraud or misrepresentation in proxy solicitation in connection with corporations within their jurisdiction. See, Belcher v. Schilling, 309 So.2d 32 (Fla. App. 1975). In other states, courts have enjoined the holding of a meeting or have set aside an election when proxy solicitations contained fraudulent misrepresentations or omissions. G. Shareholder Voting Agreements and Voting Trusts.To consolidate voting power in order to gain or strengthen control of corporate affairs, stockholders may arrange to vote their stock collectively. This can be done through either a voting agreement or a voting trust. (1) Shareholder Voting Agreements.A shareholder voting agreement does not involve a transfer of legal title to the shares; it merely binds the shareholders to vote according to its terms. An agreement between two or more shareholders, if in writing and signed by the parties thereto, may provide that the shares are to be voted in a particular way, or that the shares will be voted as the parties agree in the future, or that the shares will be voted according to an agreed procedure (e.g., by arbitration). F.S.A. §607.0731. Such agreements are often used to ensure election of certain directors, but may cover other matters as well. Such agreements will not impair the right of the corporation to treat the shareholders of record as entitled to vote the shares standing in their names. A transferee of shares in a corporation whose shareholders have entered into an agreement will be bound by the shareholders’ voting agreement if he takes shares subject to the agreement with notice thereof. The transferee is deemed to have notice of any such agreement, or its renewal, if its existence is noted on the face or back of the share certificates. F.S.A. §607.0731(3).


(2) Voting Trusts.A voting trust involves a transfer of legal title to shares to a trustee who votes them for a specified period according to the trust terms. Equitable ownership remains in the shareholders, who continue to be entitled to any dividends or distributions and all other rights except voting. Any number of shareholders of a corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote or otherwise represent their shares by signing an agreement setting out the provisions of the voting trust and transferring their shares to the trustee(s). Upon the transfer, the trustee must prepare a list of the names and addresses of all owners of beneficial interests in the trust and the number and class of shares each such owner transferred to the trust. A copy of the list must be deposited with the corporation at its principal office. F.S.A. §607.0730(1). The counterpart of the voting trust agreement and the copy of the list of owners of beneficial interests in the trust are subject to the same right of examination by a shareholder of the corporation (in person, by his agent or attorney) as are the corporation’s books and records. Likewise, the counterpart and the copy of the list are subject to examination by any beneficiary of the trust during business hours. F.S.A. §607.0730(1).

c. Litigation Rights

i. Distinctions Between Direct and Derivative Suits. There are two basic types of shareholder actions. In the direct suit, a shareholder sues on his own behalf to redress an injury to his interest as a shareholder. If the harm is to many shareholders, a direct suit may be brought as a class action wherein the plaintiff sues as the representative for the injured group. The second type of action is the derivative suit—the substantive claim belongs to the corporation. The purpose of a derivative suit is to vindicate a wrong or injury to the corporation, not to a particular shareholder or member. The shareholder sues on behalf of the corporation when the corporation fails to enforce its right. Derivative suits are equitable actions, often involving a breach of fiduciary duty. Because there are conditions precedent to initiating a derivative suit, it is essential to determine if a cause of action is direct or derivative. Generally, if a cause of action is based on acts which relate solely to the plaintiff, as a stockholder, and not to the corporation (e.g., a contract to which he is a party, or a fraud that affects him directly), it is a direct action. An action is derivative if the gravamen of the complaint is injury to the corporation, or to the whole body of stock or property without severance or distribution among individual holders,


or if it seeks to recover corporate assets or to prevent their dissipation. Fried v. Easton, 293 So.2d 87 (Fla. App. 1974). The body of the complaint determines whether the suit is direct or derivative. Allegations of negligence, breach of fiduciary duty, corporate mismanagement, misappropriation of corporate assets, and fraud which resulted in the corporation having been rendered insolvent and shareholders’ investments rendered worthless were the bases of a derivative, not individual, action. Alario v. Miller, 354 So.2d 925 (1978). On the other hand, a reduction in the value of stock as a result of a refinancing plan pursuant to which a corporation was alleged to have been fraudulently induced to issue common stock was held an injury to stockholders and not to the corporation, and the stockholders could not maintain a derivative claim under §10(b) of the Securities Exchange Act. Sargent v. Genesco, Inc., 492 F.2d 750 (5th Cir. 1974).

ii. Derivative Suits A. Conditions Precedent.

(1) Contemporaneous Ownership.In a derivative suit, the plaintiff must allege in her complaint that she was a shareholder (or holder of voting trust certificates) at the time of the transaction complained of, or that her interest devolved upon her by operation of law (e.g., inheritance) from a person who was a contemporaneous owner. F.S.A. §607.07401(1). However, under Florida law, a stockholder who sells his stock pending the appeal of a favorable judgment in a derivative suit against the corporation loses his standing to further prosecute or defend the case except to the extent that the judgment runs personally in his favor. Schilling v. Belcher, 582 F.2d 995 (5th Cir. 1978). The real party in interest in a derivative action is the corporation on whose behalf suit is brought and the court has no jurisdiction to adjudicate the rights of the corporation in its absence as a party—i.e., it is indispensable.

Therefore, the former stockholders of a corporation which had been dissolved for four years could not maintain a derivative action on behalf of the corporation. Nelson v. Miller, 212 So.2d 66 (Fla. App. 1968).

(2) Demand Upon Directors.The statute requires that the plaintiff allege with particularity in her complaint that she has made a demand upon the directors to


take the desired action and the demand was refused or ignored. F.S.A. §607.07401(2). B. Defenses.Since stockholders in a derivative suit stand in the shoes of the corporation, they are subject to the same defenses that could have been raised against the corporation. In addition, if a shareholder consented to, acquiesced in, or ratified the wrongful act with knowledge of all the material facts, she cannot later attack those acts. Likewise, a transferee would be estopped to sue if his transferor would have been estopped. Since a derivative suit is an equitable action, the equitable defenses, such as laches and unclean hands may be interposed. A defense on the merits that would defeat a corporate recovery is available only to the wrongdoers and not to the corporation which might be named as a nominal defendant. However, if the remedy is receivership, the corporation may raise a defense on the merits because its own interests might be endangered by a disposition favoring the plaintiff. C. Intervention.If the representation of shareholder interests is adequate, nonparty shareholders are usually bound by a derivative suit judgment on the theory that the named plaintiff represented their interests. Therefore, shareholders may wish to intervene in either direct or derivative actions involving their corporation. The trend is to require that intervening shareholders in a derivative action be contemporaneous shareholders. In Florida, anyone claiming an interest in pending litigation may at any time be permitted to assert his right by intervention. However, the intervention must be in subordination to, and in recognition of, the propriety of the main proceeding, unless otherwise ordered by the court in its discretion. Fla. R. C. P. 1.230. The intervenor’s interest in the litigation must be of such direct and immediate character that the intervenor will either gain or lose by the direct legal operation and effect of the judgment. D. Compromise and Settlement.Approval of the court having jurisdiction of the action is required for the compromise, settlement, or discontinuance of a shareholders’ derivative suit. If the court determines, in its discretion, that the interests of the corporation’s shareholders may be substantially affected, it may direct that notice, by publication or otherwise, of the proposed settlement, compromise, or discontinuance be given to the shareholders. Shareholders objecting to the settlement must, within a time allowed by the court, show cause why the settlement should not be accepted and approved by the court as fair and reasonable. The court may determine which parties will bear the expense of giving notice in such amount as the court determines to be reasonable in the circumstances. F.S.A. §607.07401(4).


E. Attorneys’ Fees and Expenses.If the court with jurisdiction finds upon final judgment that the action was brought without reasonable cause, it may require the plaintiff(s) to pay the defendants’ reasonable expenses, including reasonable attorneys’ fees, incurred in the defense of the action. F.S.A. §607.07401(5). If the action on behalf of the corporation is successful in whole or in part, or if anything is received by plaintiff(s) as the result of a judgment, compromise, or settlement, the court may award the plaintiff(s) the reasonable expenses of maintaining the action, including reasonable attorneys’ fees, and may direct the plaintiff(s) to account to the corporation for the remainder of the proceeds received. This provision will not apply to any judgment rendered for the benefit of injured shareholders only and limited to a recovery of the loss or damage sustained by them. F.S.A. §607.07401(6).

d. Preemptive Rights Preemptive rights are the rights of existing shareholders to acquire newly issued shares, options, or securities having conversion or option rights in proportion to their holdings or original shares. i. When Applicable. To the extent, if any, that such rights are provided in the articles of incorporation, the shareholders of a Florida corporation will have the preemptive right to acquire unissued shares of the corporation or securities of the corporation convertible into or carrying a right to subscribe to or acquire shares. F.S.A. §607.0630(1), (3). A corporation may amend its articles of incorporation so as to limit, deny, or grant to shareholders of any class the preemptive right to acquire additional or treasury shares of the corporation, whether then or thereafter authorized. The holders of the outstanding shares of a class, whether or not usually entitled to vote, will be entitled to vote on a proposed amendment that limits or denies any existing preemptive rights of that class. F.S.A. §607.1004.

ii. Shareholders’ Remedies. A shareholder whose preemptive rights are violated by a sale of securities may enjoin the sale, or may sue for specific performance and compel the corporation to issue sufficient shares to maintain his proportionate interest. Alternatively, he may sue the corporation for damages, measured as the difference between the market price and the price at which he was entitled to purchase the shares at the time of the wrongful sale.

iii. Equitable Rights. Even if a shareholder does not have preemptive rights, he can protect his proportionate interest if shares are issued or reacquired by management in violation of their fiduciary duties. The directors must act in the best interests of the corporation, and if stock is issued to


perpetuate their control, their fiduciary duties are breached. A shareholder may sue for an injunction of the issuance, or for damages, or for cancellation of the wrongfully issued stock. An issuance or repurchase of stock to prevent a takeover by a looter might be justified by the business judgment rule.

e. Redemption and Repurchase of Shares i. Redemption. Once a corporation becomes established and profitable, it

may wish to rid itself of the burden of a high preferential dividend; such a guaranteed return is offered to attract investors to a new venture, but once the venture becomes prosperous, common stockholders want a greater share of the profits. Hence, the articles of incorporation, or the board, if authorized, often provide that preferred or special classes or series of stock will be redeemable. Absent a redemption provision or a board resolution, the corporation cannot redeem any stock. The effect of a redemption call depends upon the articles. Absent such a provision, the majority view is that once the board passes the resolution, it is irrevocable and the share owner may enforce his claim to compensation as a creditor; concomitantly, the owner may no longer exercise the rights of a shareholder. Basic equitable principles may also restrict redemptions: if creditors would be prejudiced, an equity court could enjoin or set aside an unfair redemption. Likewise, a violation may be found (particularly in a close corporation) if directors use a redemption arbitrarily to eliminate a troublesome minority shareholder or to deny him participation in a corporate distribution.

ii. Repurchase. Absent a statutory or charter prohibition, a corporation is at liberty to purchase its own shares. Naples Awning & Glass, Inc. v. Cirou, 358 So.2d 211 (Fla. App. 1978). Corporations may buy back their stock on the open market—for example, to acquire stock to fund an employee stock option plan—or may enter into stock repurchase agreements with its shareholders—for example, to preserve the “closeness” of a close corporation if a shareholder should die. Generally, equity will not prohibit a corporate repurchase of stock absent a showing of fraud, bad faith, misrepresentation, or breach of fiduciary duty. Repurchases in order to bail out insiders or to discriminate in some way against one class are improper. A director who votes for or assents to the purchase of a corporation’s own shares contrary to the provisions of the Act will be liable to the corporation, jointly and severally, with all other directors so voting or assenting, for the amount of the consideration paid for such shares in excess of


the maximum amount which could have been paid lawfully, to the extent that any creditor or shareholder of the corporation has suffered damage as a result thereof. Equity can enjoin the purchase, or rescind it and restore the shares to the shareholder, or order the corporation to extend the favorable offer to the disadvantaged stockholder. Damages or an accounting are other possible remedies. However, a repurchase to keep management in power may be proper if undertaken in good faith to prevent a corporate takeover by looters or to buy out a dissenting shareholder. An unfair repurchase may be attacked by a shareholder who sold his stock, shareholders who did not sell their stock, but were injured or prejudiced by the repurchase, or by existing creditors who were injured or prejudiced.

iii. Treasury Shares. A corporation whose shares are registered on a national securities exchange or are traded on the NASDAQ may designate in the bylaws or board resolutions that shares reacquired by the corporation are treasury shares. Reaquired shares of all other corporations are considered authorized, but unissued. If the articles prohibit their reissuance, the number of authorized shares is reduced upon amendment of the articles by the board without shareholder action. F.S.A. §607.0631.

f. Dividends i. Definition. A dividend is a distribution by a corporation to its

shareholders of cash, property, or stock of the corporation. A dividend differs from a distribution in redemption of stock in that a dividend is distributed with respect to the shareholder’s stock, rather than in exchange for his stock. The term “distribution” as used in the Act includes a declaration or payment of a dividend; a purchase, redemption, or other acquisition of shares; and a distribution of indebtedness.

ii. Shareholders’ Rights to Dividends. A. In General.A shareholder has no inherent right to a dividend. The directors may declare dividends in cash, property, or in the corporation’s own shares. It is illegal for the corporation to declare and pay dividends when the corporation is insolvent, when the payment of dividends would render the corporation insolvent, or when the declaration or payment would be contrary to any restrictions contained in the articles of incorporation. B. Contractual Rights to Dividends.One means of assuring dividend payment is a provision in the articles, the bylaws, or in a shareholders’ agreement making


dividends mandatory when earnings are available. Such provisions offer protection to preferred or minority shareholders, and will be enforced by the courts. C. Directors’ Refusal to Declare Dividends.Whether or not a dividend should be declared, and, if declared, its amount, rests in the discretion of the directors. Generally, courts will not declare a dividend and courts will set aside the directors’ refusal to declare a dividend only if the directors acted fraudulently or unreasonably with obvious abuse of their discretionary power. D. Remedies.If the plaintiff shareholder has proven his contractual right to dividends or the abuse of discretion by the directors, the court may issue a decree for specific performance of the contract or a mandatory injunction ordering a dividend.

iii. Declaration and Payment of Dividends. A. Procedure.Once the directors have voted to declare a dividend, the bylaws or the directors may fix a record date for determination of the shareholders entitled to receive dividends. The date may not be more than seventy days prior to payment, and only the shareholders of record on the fixed date are entitled to receive the dividend, notwithstanding any subsequent transfer on the books of the corporation. Alternatively, the directors may close the transfer books for a stated period of not more than seventy days. If the stock transfer books are not closed and no record date is fixed, the date on which the board declared the dividend is the record date for the determination of shareholders. F.S.A. §607.0707. B. Shareholders’ Rights After Declaration.A corporation’s declaration of a dividend to its stockholders immediately creates a debtor-creditor relationship that continues until the stockholder has been paid, although the stockholder’s claim is unenforceable until the date fixed for payment occurs. Once a dividend is declared and the corporation has set aside funds for its payment, that money is held in trust for the stockholders, to the exclusion of other creditors. Once properly declared, a dividend generally may not be revoked without the shareholders’ consent. A dividend may be revocable prior to payment if there has been an unforeseen, drastic, and adverse change in the corporation’s assets. Likewise, if funds are not legally available to pay the dividend, the declaration may be revoked. It has been held, as well, that the declaration of a dividend in stock may be rescinded at any time prior to the actual issuance of the stock.


Dividends declared before a sale of stock belong to the seller, even if not paid until after transfer of the stock. Usually, the pledgee of stock is entitled to the dividend, and must apply it to reducing the pledgor’s indebtedness. Dividends on shares held in trust are disposed according to statute. Corporate distributions of shares of the distributing corporation, including those in the form of a stock split are principal. A right given to subscribe to shares or securities which accrues to stockholders on account of their ownership and the proceeds of any sale of that right are principal. F.S.A. §738.06(1). Except to the extent that the corporation indicates that a part of a corporate distribution is a settlement of preferred or guaranteed dividends accrued since the trustee became a stockholder or is, instead a settlement of an ordinary cash dividend, a corporate distribution is principal if the distribution is pursuant to:

(1) A call of shares; (2) A merger, consolidation, reorganization, or other plan whereby the

corporation’s assets are acquired by another corporation; (3) A total or partial liquidation of the corporation; or (4) A distribution of assets pursuant to a judgment or final administrative

order by a government agency. F.S.A. §738.06(2). Distributions made from ordinary income by a regulated investment company or a qualified real estate investment trust are income. All other distributions made by the company or trust are principal. F.S.A. §738.06(3). Except as provided in F.S.A. §738.06(1), (2), or (3), all corporate distributions to a trust are income, including: cash dividends; and distributions of, or rights to subscribe to shares, securities or obligations of corporations other than the distributing corporation and the proceeds of the rights or property distributions. Except as provided in F.S.A. §738.06(2) and (3), if the distributing corporation gives a stockholder an option to receive a distribution either in cash or its own shares, the distribution chosen is income. F.S.A. §738.06(4). C. Unclaimed Dividends.Any dividend, profit, distribution, interest, payment on principal, or other sum held or owing by a business association for or to a shareholder, certificate holder, member, bondholder, or other security holder, or a participating patron of a cooperative, who has not claimed it or corresponded in writing with the business association concerning it within seven years after the date prescribed for payment or delivery is presumed abandoned if specific domicile requirements are met. F.S.A. §717.1101.


When any dividend or other property is presumed abandoned under F.S.A. §717.1101, the intangible interest in the business association, as evidenced by the stock records or membership records of the association, pursuant to which the abandoned sum became owing to the owner, will be presumed abandoned at the same time that the sum is presumed abandoned and the business association will be deemed the holder. F.S.A. §717.1101. Any dividend or stock split or exchange, or any distribution held and owing to a person at the time the stock or other security to which it attaches is presumed abandoned, will also be presumed abandoned at the same time. F.S.A. §717.1101. Every person holding property presumed abandoned must annually report to the Department of Banking and Finance with respect to the property. F.S.A. §717.117. After the Department has published and mailed notice of the abandoned property, all funds and proceeds are eventually deposited in the State School Fund, except for an account retained for the payment of claims. The corporation which paid or delivered the property to the Department is relieved of all liability to the extent of the value of the property so paid or delivered. F.S.A. §717.1201 et seq.

D. DIRECTORS

1. Election, Removal, and Vacancies

a. Number

There must be at least one director on the board. The number of directors is fixed by, or in the manner provided in, the articles of incorporation or the bylaws, except that the number constituting the initial board of directors must be fixed by the articles of incorporation. In the absence of a bylaw providing for the number of directors, the number is the same as that provided in the articles of incorporation. The number of directors may be increased or decreased from time to time by amendment to, or in the manner provided in, the articles of incorporation or the bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. F.S.A. §§607.0803; 0805(3).

b. Qualifications Directors need not be residents of Florida or shareholders of the corporation unless the articles of incorporation or bylaws so require. A director must be a natural person and at least 18 years old. The articles of incorporation or bylaws


may provide other qualifications for directors. F.S.A. §607.0802. If eligibility to serve as a director of a condominium or other homeowners’ association is restricted to membership in the association and membership is appurtenant to ownership of a unit or parcel, a beneficiary of a trust that owns the unit or parcel is eligible, provided the beneficiary occupies the unit or parcel. F.S.A. §607.0802(2).

c. Election and Term Each person named in the articles of incorporation as a member of the initial board of directors must hold office until the first annual meeting of shareholders and until there is a decrease in the number of directors. F.S.A. §607.0805(1), (5). At the first annual meeting of shareholders and at each annual meeting thereafter, the shareholders must elect directors to hold office until the next succeeding annual meeting, except in the case of classification of directors as permitted by the Act. Each director must hold office for the term for which he is elected and until his successor is elected and qualified or until his earlier resignation, removal from office, or death. F.S.A. §607.0805(4), (5).

d. Vacancies Vacancies in the board of directors, including vacancies resulting from an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, even if less than a quorum remain. F.S.A. §607.0809(1). A director elected to fill a vacancy shall hold office only until the next election of directors by the shareholders. F.S.A. §607.0805(4).

e. Classification of Directors i. To Ensure Representation. In straight voting, each share has one vote

for each director; thus, a majority stockholder can elect the entire board of directors. To ensure representation of certain shareholders on the board, some states permit stock to be classified for the purpose of electing directors.

For example, if X owns 25% and Y owns 75% of the common stock, X’s stock can be designated Class A Common with the right to elect one-quarter of the directors, and Y’s can be designated Class B Common with the right to elect three-quarters of the directors. Thus, X, although a minority shareholder, is assured representation. The Florida Act makes no provision for this specific type of classification.


ii. By Term of Office. Classification may be used in a different way to

strengthen management. Classification of directors by term of office or by staggering expiration of directors’ terms will prevent replacement of a majority of the board at any annual meeting, thus frustrating dissident shareholders’ attempts to change corporate management and policy. The articles of incorporation or the specific provisions of a shareholder-adopted bylaw may provide that the directors be divided into not more than three classes, as nearly equal in number as possible, whose terms of office respectively expire at different times. No such term may continue for longer than three years. F.S.A. §607.0806(1). In any corporation in existence before July 1, 1990 in which directors of the corporation are divided into four classes, the directors may continue to serve such staggered terms unless and until the articles or bylaws are amended to alter or terminate the classes. F.S.A. §607.0806(2). If the directors are classified and the number of directors is changed thereafter, any increase or decrease in directorships must be apportioned among the classes so as to make all classes as nearly equal in number as possible. F.S.A. §607.0806(1).

Assume that there are three classes of directors. In the first year (1997), A, B and C could be elected for one year, D, E and F for two years, and G, H and I for three years. Then, in 1998, A, B and C could be reelected for a three-year term; in 1999, D, E and F for a three-year term, and so on. The benefit of classification of this type is continuity. Conversely, continuity has the drawback of insulating the board from shareholder pressure to change.

f. Cumulative Voting

Cumulative voting is designed to provide minority representation on the board by permitting a shareholder to cumulate the total number of votes to which he is entitled and to cast that total number, or any portion of it, for any one or more of the directors to be elected. In Florida, each shareholder entitled to vote at an election for directors has the right to vote, in person or by proxy, the number of shares owned by him, for as many persons as there are directors to be elected at that time and for whose election he has a right to vote. There is no right to cumulative voting unless the articles of incorporations so provide. F.S.A. §607.0728(2). If cumulative voting is authorized by the articles of incorporation, each shareholder has the right to cumulate his votes by giving one candidate as many votes as the number of directors to be elected at that time multiplied by the number of his votes or by distributing such votes on the same principle among any number of candidates. F.S.A. §607.0728(3).


i. Application of Cumulative Voting. If cumulative voting is in effect, each shareholder entitled to vote has the right to as many votes as the number of directors to be elected multiplied by the number of shares he owns. A shareholder may either give all of his votes to one candidate or he may distribute his votes among any number of candidates.

Example: Major owns 51 shares, Minor owns 49 shares, and three directors are to be elected. Straight Voting. Major votes 51 shares for each director, Minor votes 49 shares for each director, and Major elects all three directors. Cumulative Voting. Major multiplies his 51 shares by the 3 directors to be elected, and thus has 153 votes; Minor multiplies his 49 shares by the 3 directors to be elected and thus has 147 votes. Minor could ensure his own election to the board by casting all 147 votes for himself. Actually, all that is required is 52 votes for Minor, because Major does not have enough votes to cast 52 for all three directors he wishes to elect (viz. 3 x 52 = 156 vs. 153 he has). However, Major could elect the majority of the board by casting 77 votes for one director, and 76 votes for a second. Minor could not divide his votes between two candidates and cast more than 74 votes for each. Thus, Major, if he divides his votes properly, can gain control of the board. However, if Major tried to elect three directors by casting 51 votes for each, Minor, despite his minority ownership, could elect two directors by casting 74 votes for one and 73 for the second.

ii. Formula for Cumulative Voting. The following formula has been

devised to indicate to shareholders how to cumulate votes so that a maximum number of directors may be elected:

Shares Required = (Voting Shares Present) x (Directors Desired to Elect) (Directors to be Elected) + 1 Thus, if there are 100 shares at the meeting, and shareholder Graham wishes to be elected to a three-person board, he must assemble 26 shares: Shares Required = (100) x (1) 3 + 1


If Graham desires to place himself and his nominee on the board, he must assemble 51 shares: Shares Required = (100) x (2) 3 + 1

iii. Devices to Reduce the Impact of Cumulative Voting. The power of cumulative voting increases as the number of directors to be elected increases. For example, it takes one vote more than 25% of the stock voting at a meeting to cumulatively elect a director if three directors are being elected, but only one vote more than 10% of the stock voting at a meeting if nine directors are being elected. Thus, efforts to reduce the impact of cumulative voting focus on reducing the number of directors elected by one group of shares at one time. Classification by term reduces the number of directors to be elected at one time and is therefore limited or prohibited in some states that allow cumulative voting. There are no such limitations on classification in Florida. If the majority of shareholders can remove a director without cause, cumulative voting may be rendered meaningless. Therefore, if shareholders are entitled to vote cumulatively, and less than the entire board is to be removed, no one of the directors may be removed if the votes cast against his removal would be sufficient to elect him if cumulatively voted at an election of the entire board of directors or at an election of the class of directors of which he is a part. F.S.A. §607.0808(3).

g. Removal of Directors Unless the articles of incorporation provide otherwise, at a meeting of shareholders called expressly for that purpose, any director or the entire board of directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. F.S.A. §607.0808. Whenever the articles entitle the holders of any class of shares to elect one or more directors, such director(s) may be removed only by a vote of the majority of the shares entitled to vote in that class. F.S.A. §607.0808(2). A director elected by cumulative voting cannot be removed if there are votes against his removal that would be sufficient to elect him in an election of the entire board. F.S.A. §607.0808(3).


2. Management Powers

a. Allocation of Powers Between Directors and

Shareholders

A hierarchy of authority allocates power between the shareholders, who own the corporation, and the directors, who manage the corporation. The highest authority is the state incorporation statute which, in the event of conflict, prevails over the articles of incorporation, which in turn prevail over conflicting bylaws, which prevail over shareholder agreements. The statutory scheme is designed to effectuate the concept of centralized management by granting to a majority of the board of directors the power to manage the corporation’s assets and affairs. Unless otherwise provided in the Act or in the articles of incorporation, all corporate powers are exercised by or under the authority of, and the business and affairs of the corporation are managed under the direction of, the board of directors. If provision is made in the articles, the powers and duties imposed upon the board may be exercised or performed to such extent and by such person(s) as are provided in the articles of incorporation. F.S.A. §607.0202(2)(b). Unless the bylaws provide otherwise, the directors elect the officers of the corporation, who make the day-to-day management decisions. The directors are not mere agents of the shareholders, and need not follow the shareholders’ wishes; rather, the directors owe a duty to the corporation to manage its affairs prudently. The shareholders do, however, have an indirect power to manage the corporation through their right to elect the board of directors. In addition, shareholders must approve fundamental changes such as merger, amendment of the articles of incorporation, sale of all or most assets, and dissolution. Shareholders may validly agree to directly manage the corporation. The shareholders of a corporation with 100 or fewer shareholders may enter into an agreement that eliminates the board of directors or restricts the discretion of the board of directors. F.S.A. §607.0732(1)(a).

b. Meetings of the Board The management powers of the directors generally must be exercised at meetings.

i. Place. Meetings of the board, whether regular or special, may be held anywhere, within or outside Florida. F.S.A. §607.0820(1).


ii. Notice. Meetings of the board may be called by the chairman of the

board, by the president of the corporation, or by any other person(s) authorized by the articles of incorporation or the bylaws. F.S.A. §607.0820(3). Regular meetings of the board may be held with or without notice, as prescribed by the articles or the bylaws. Unless otherwise prescribed in the articles or the bylaws, notice of the date, time, and place of special meetings of the board must be given to each director at least two days before the meeting. F.S.A. §607.0822. Notice of a board meeting need not be given to any director who signs a waiver of notice either before or after the meeting. Attendance of a director at a meeting constitutes a waiver of notice of such meeting and a waiver of any and all objections to the time or place of the meeting, or the manner in which it was called or convened, unless a director states, at the beginning of the meeting, any objection to the transaction of business, because the meeting was not lawfully called or convened. F.S.A. §607.0823. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board need be specified in the notice or waiver of notice of such meeting, unless required by the bylaws. F.S.A. §607.0822. A majority of the directors present, whether or not a quorum, may adjourn any board meeting to another time and place. Unless the bylaws provide otherwise, notice of any such adjourned meeting must be given to the directors who were not present at the time of the adjournment and, unless the time and place of the adjourned meeting are announced at the time of adjournment, to the other directors. F.S.A. §607.0820(2). Defects in directors’ meetings irregularly convened or conducted may be cured by acquiescence or subsequent ratification. Zinger v. Gattis, 382 So.2d 379 (Fla. App. 1980).

iii. Quorum. A quorum is the number of directors which must be present for the board to be legally competent to transact business. A quorum for the transaction of business consists of a majority of the number of directors prescribed by the bylaws or the articles. However, the articles or the bylaws may require a greater number to constitute a quorum. F.S.A. §607.0824(1). Vacancies in the board may be filled by the affirmative vote of a majority of the remaining members, even if there are fewer than constitute a quorum. F.S.A. §607.0809(1).


iv. Vote of Directors. Once a quorum is present, the act of a majority of the directors present at a meeting constitutes an act of the board, unless the bylaws or articles of incorporation require a greater margin. Thus, a minority of the board can act for the corporation if not all directors attend the meeting. For example, if there are five directors on the board, and only three attend a validly called meeting, the votes of two directors—a majority of those present—will constitute a valid act of the board. F.S.A. §607.0824(3).

v. Director Participation. A directors’ meeting should be a collective, deliberative proceeding at which directors listen to the ideas and arguments of other directors, and then vote in the best interests of the corporation; therefore, a director cannot vote by proxy, even if the proxyholder is another director. If he is to vote, he must be present at the meeting. However, except as may be otherwise restricted by the articles of incorporation or bylaws, a director may participate in a meeting by conference telephone or similar device, provided all those participating in the meeting can hear each other at the same time. Participation by such means constitutes presence at a meeting. F.S.A. §607.0820(4). A director must be free to vote according to his best judgment. Hence, any agreement by a director to vote in a certain way—even if that agreement has all the formalities of a binding contract—is void as against public policy. vi. Action of Directors Without a Meeting. Unless otherwise provided by the articles of incorporation or bylaws, any action required by the Act to be taken at a meeting of the directors of a corporation, or any action which may be taken at a meeting of the directors or a committee thereof, may be taken without a meeting if a consent in writing setting forth the action to be so taken is signed by all of the directors or committee members, as the case may be, and filed in the minutes of the proceedings of the board or of the committee. Such consent will have the same effect as a unanimous vote. F.S.A. §607.0821(1).

vii. Executive and Other Committees. The board does not ordinarily run the corporation on a day-to-day basis; it may delegate its powers to officers and to executive committees. Unless the articles or the bylaws provide otherwise, the board of directors, by resolution adopted by a majority of the full board of directors, may designate from among its members an executive committee and one or more other committees each of which, to the extent provided in such resolution or in the articles or bylaws of the corporation, will have and may exercise all of the authority of the board of directors, except that no committee has the authority to:


(1) Approve or recommend to shareholders actions or proposals required by chapter 607 to be approved by shareholders;

(2) Fill vacancies on the board of directors or any committee thereof; (3) Adopt, amend, or repeal the bylaws; (4) Authorize or approve the reacquisition of shares unless pursuant to a

general formula or method specified by the board; or (5) Authorize or approve the issuance or sale of, or any contract to issue or

sell, shares or determine the designation and relative rights, preferences, and limitations of any voting group, except within specific limits prescribed by the board. F.S.A. §607.0825(1).

By resolution adopted in accordance with F.S.A. §607.0825(1), the board may designate one or more directors as alternate members of any such committee. The alternate(s) may act in the place of any absent member(s) at any such committee meeting. F.S.A. §607.0825(3). Neither the designation of a committee, the delegation thereto of authority, nor action by a committee pursuant to such authority will alone constitute compliance by any board member, who is not a member of the committee in question, with his responsibility to act in good faith, in a manner he reasonably believes to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. F.S.A. §607.0825(4).

c. Compensation of Directors and Officers Unless the articles or bylaws provide otherwise, the board of directors has the authority to fix the compensation for their own services. F.S.A. §607.08101. However, directors may not fix their own compensation for services as officers, unless expressly authorized to do so by the corporate charter or by the shareholders. Coleman v. Plantation Golf Club, Inc., 212 So.2d 806 (Fla. App. 1968). Directors are also entitled to compensation for services rendered where the particular service is extraordinary or outside the scope of official duties. Flight Equipment & Engineering Corp. v. Shelton, 103 So.2d 615 (Fla. 1958). The salaries of directors and officers must be fair and reasonable. Directors may not vote to pay officers compensation which is excessive, unreasonable, or out of proportion to the value of services rendered; if any such payments are made, the court may examine their propriety and order a return of any compensation in excess of amounts determined to be reasonable. Coleman v. Plantation Golf Club, Inc., 212 So.2d 806 (Fla. App. 1968).


3. Liabilities

A director will be liable in the following circumstances, unless he complies with the statutory standard for the performance of the duties of directors.

a. For Wrongful Dividend or Distribution i. Generally. A director of a corporation who votes for or assents to the

declaration of a dividend or other distribution of corporate assets to the shareholders contrary to chapter 607 or the articles of incorporation will be personally liable to the corporation for the amount of the dividend paid or the value of the assets distributed in excess of the amount of dividend or distribution which could have been paid lawfully and without violation of the articles of incorporation. F.S.A. §607.0834(1). The director is liable only if it is established he did not act in good faith, with the care of an ordinarily prudent person, and in a manner he reasonably believed to be in the best interests of the corporation when he voted for or assented to the distribution. F.S.A. §607.0830(1). Any director against whom a claim is asserted pursuant to F.S.A. §607.0834 will be entitled to contribution from the other directors who voted for or assented to the action upon which the claim is asserted. F.S.A. §607.0834(2). Improperly paid dividends must be restored to the paying corporation when a derivative suit is brought by aggrieved stockholders. Alliegro v. Pan American Bank of Miami, 136 So.2d 656 (Fla. App. 1962). Any director against whom a claim is asserted under F.S.A. §607.0834 for the payment of a dividend or other distribution of the assets of a corporation, and who is held liable thereon, will be entitled to contribution from the shareholders who accepted or received any such dividends or assets knowing that the dividend or distribution was made in violation of chapter 607 or the articles of incorporation. Contribution will be in proportion to the amounts received by them respectively. F.S.A. §607.0834(2)(b).

Although dividends are not normally recoverable from stockholders, when a majority shareholder receives dividends which he knows are not paid pro rata to all stockholders, he must restore them to the paying corporation. Alliegro v. Pan American Bank of Miami, 136 So.2d 656 (Fla. App. 1963).

ii. Sources of Dividends. Payment of dividends is restricted by statute for

the protection of creditors, shareholders, and the corporation itself. Basically,


dividends may not be paid if the corporation is insolvent, or would be rendered insolvent by payment, or when the declaration or payment would be contrary to any restrictions contained in the articles of incorporation. F.S.A. §607.0640(3). A. Insolvency Restriction.The directors may not declare or pay a dividend if the corporation is insolvent or would be rendered insolvent thereby. Insolvency is defined as either the inability of a corporation to pay its debts as they become due in the usual course of business, or a situation where liabilities exceed assets. F.S.A. §607.06401(3). The board may base its determination of the corporation’s solvency on financial statements prepared under reasonable accounting practices or on a fair valuation or other reasonable method. F.S.A. §607.06401(4). B. Nonstatutory Limitations.Other limitations on the payment of dividends are found in debt instruments, credit arrangements with lending institutions, and sometimes in shareholder agreements. Such contractual restrictions usually place a limit on the amount of dividends payable, and may further restrict the sources from which dividends can be paid. Violation of these agreements imposes personal liability on the assenting directors; in addition, the agreements may provide for acceleration of repayment on the loan or bond. C. Wasting Assets Corporations.If the articles of incorporation so provide, a corporation engaged in exploiting natural resources or other wasting assets (e.g., timber, quarries, mines, or oil fields) can declare distributions to be paid in cash out of depletion or similar reserves, and the amount paid per share from such reserves must be concurrently disclosed to the shareholders receiving the distributions. F.S.A. §607.06401(5).

b. For Wrongful Redemption or Repurchase of Shares A director of a corporation who votes for or assents to the purchase of a corporation’s own shares contrary to the provisions of chapter 607 will be personally liable to the corporation for the amount of consideration paid for such shares in excess of the maximum amount which could lawfully have been paid.

i. Financial Limitations. A corporation’s redemption or repurchase of redeemable shares may not be undertaken if (1) the corporation is insolvent or would be rendered insolvent by the purchase or redemption; or (2) if the purchase or redemption would reduce the corporation’s remaining net assets below the aggregate preferential amount payable in the event of involuntary dissolution to those with rights prior to the rights of the holders of the shares redeemed or purchased.


ii. Disposition of Reacquired Shares. Any shares reacquired by the

corporation are restored to the status of authorized, but unissued shares. However, if the articles of incorporation prohibit the reissue of any acquired shares, the number of authorized shares is reduced by the number of shares acquired upon amendment of the articles.

c. For Wrongful Distribution During Liquidation A director who votes for or assents to any distribution of corporate assets to the shareholders during corporate liquidation without the payment and discharge or making adequate provision for all known debts, obligations, and liabilities of the corporation will be liable to the corporation, jointly and severally, with the other directors so voting or assenting, for the value of such assets which are distributed, to the extent that such debts, obligations, and liabilities of the corporation are not thereafter paid or discharged.

d. Duty of Care i. Generally. The officers and directors of a corporation occupy a

fiduciary relation to the corporation and the existing stockholders. They are bound to act with fidelity and the utmost good faith since in accepting the position each impliedly agrees and undertakes to give the corporate enterprise the benefit of his best care and judgment and to exercise his powers in the interest of the corporation and stockholders. B & J Holding Corp. v. Weiss, 353 So.2d 141 (Fla. App. 1977). Officers and directors are liable to the corporation for damages which result from breach of their trust, based on the common-law rule of responsibility of an agent for injury to his principal. Generally, directors and officers may be held liable for mismanagement, willful neglect or misconduct of corporate affairs.

ii. Director Liabilities. A director must perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. F.S.A. §607.0830(1). A. Duty to Dissent.Directors of a corporation are chargeable with full knowledge of the conduct of corporate affairs and they cannot be heard to say that they had nothing to do with the management of its business. Manatee County Growers Assoc. v. Florida Power & Light Co., 113 Fla. 449, 152 So. 181 (1934). A director of a corporation who is present at a meeting of its board at which action on any corporate matter is taken will be presumed to have assented to the action taken unless he votes against the action or abstains from


voting in respect thereto, because of an asserted conflict of interest. F.S.A. §607.0824(4); 0832. B. Good Faith Reliance.Because a director does not generally participate in the daily management of the corporation, the director must necessarily rely on information provided by others. In performing his duties, a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, prepared or presented by:

(1a) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented;

(2) Counsel, public accountants, or other persons as to matters which the director reasonably believes to be within such persons’ professional or expert competence; or

(3) A committee of the board upon which he does not serve, duly designated in accordance with a provision of the articles of incorporation or the bylaws, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. F.S.A. §607.0830(2). However, a director will not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. F.S.A. §607.0830(4).

A person who performs his duties in compliance with F.S.A. §607.0830 will have no liability by reason of being or having been a director of the corporation. F.S.A. §607.0830(5). C. Standard of Care.A director is not personally liable for monetary damages for any “statement, vote, decision, or failure to act” regarding corporate management or policy unless the director breached or failed to perform his duties and the breach or failure constitutes: a violation of the criminal law; a transaction from which the director derived an improper personal benefit; the wrongful declaration of a dividend or distribution of assets; conscious disregard for the best interest of the corporation or willful misconduct (in a proceeding by or in behalf of the corporation or a shareholder); or recklessness, bad faith, malice, or wanton and willful disregard of human rights, safety, or property (in a proceeding by or on behalf of a third party). F.S.A. §607.0831(1). The director will not bear personal liability for a criminal violation if he had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful. A criminal conviction estops the director


from contesting the fact that he violated a criminal law, but does not estop him from establishing the reasonableness of his belief. F.S.A. §607.0831(1).

iii. Business Judgment Qualification. If a director or officer makes a good faith error in business judgment, he does not breach his duty of care. However, if a director or officer knowingly undertakes an illegal action and the corporation suffers thereby, he will be liable although he honestly thought he acted with sound business judgment.

e. Duty of Supervision A director or officer can be held liable for negligently selecting or supervising subordinates. However, he would not be liable for the negligence of a person on the same level of responsibility unless he participated in the negligence, or was negligent in not discovering and correcting the problem.

f. Duty of Loyalty A director’s fiduciary duty requires that he be loyal to the corporation and not promote his own interests in a manner injurious to it. A conflict of interest constituting a breach of the duty of loyalty may arise where the individual has business dealings with the corporation, derives an improper personal benefit, takes advantage of a corporate opportunity, or enters into a business which competes with the corporation.

i. Improper Personal Benefit. A director is deemed not to have derived an improper personal benefit from any transaction not prohibited by state or federal law if the transaction was fair and reasonable to the corporation or the transaction and the nature of the personal benefits were disclosed or known to the shareholders, who approved the transaction by a majority vote not controlled by interested directors, or disclosed to all directors voting on the matter and at least two directors, comprising a majority of the disinterested directors, approved the transaction (except in a derivative suit regarding the director’s decision on an offer to acquire the stock of or effect a merger of the corporation). F.S.A. §607.0831(3). ii. Contract Dealings Between an Interested Individual and the Corporation. A conflict of interest is inherent whenever a director or officer contracts with the corporation to buy or sell goods or services. The fiduciary relationship demands that a director manage the business to promote, not his own interest, but the common interest of all shareholders. If a director or officer makes a personal profit as a result of his corporate position, he can be compelled to account to the corporation.


However, such “interested” transactions are not presumptively void or voidable solely because of the relationship or financial interest of a director or officer, or because of his presence at the meeting of the board or committee which authorizes, approves or ratifies the contract or transaction, or because his votes are counted for this purpose if: (1) the fact of his relationship or interest is disclosed or is known to the board or committee which authorizes, approves, or ratifies the contract or transaction by a sufficient margin without counting the votes or consents of the interested director; (2) the fact of his relationship or interest is disclosed or known to the shareholders entitled to vote and they authorize, approve, or ratify the contract or transaction by vote or written consent; or (3) the contract or transaction is fair and reasonable as to the corporation at the time it is authorized by the board, a committee, or the shareholders. F.S.A. §607.0832(1). Transactions between a business corporation and any other business enterprise in which one or more of its directors are officers or directors or have a financial interest will also be subject to scrutiny under F.S.A. §607.0832(1). In the case of an “interested” transaction, as long as a majority of directors who have no relationship or interest in the transaction vote to authorize, approve, or ratify the transaction regarding the interested director, then a quorum is present for the purpose of taking action in connection with that transaction. F.S.A. §607.0832(2).

iii. Corporate Opportunity. The fiduciary duty of loyalty prohibits a director from taking for his own benefit any business opportunity which properly belongs to the corporation, unless he first gives the corporation a chance to pursue the opportunity. It is often difficult to determine what is in fact a “corporate opportunity,” but generally if the corporation has a present interest or reasonably foreseeable expectancy of needing or acquiring the business or property, it will be held a corporate opportunity. Factors considered are whether the business is closely related to that of the corporation, whether the board had expressed an interest in acquiring that type of business, whether the individual became aware of the opportunity while acting in his capacity as a director or officer, and whether he used any corporate funds or facilities in discovering or developing the opportunity. Generally, an officer or director may seize a business opportunity if it has been made known to the shareholders, if the shareholders consent to acquisition of the business by the individual, and if such action is not detrimental to the creditors of the corporation.


However, where the president of the corporation was the only active director and the other stockholders customarily relied upon him to exercise the executive powers of the corporation, he could not translate his own inaction into corporate rejection of a corporate opportunity, allowing himself to buy the land in question. Farber v. Servan Land Co., Inc., 662 F.2d 371 (5th Cir. 1981). Directors cannot ratify their own inappropriate acts on behalf of the corporation. If a director illegally usurps a corporate opportunity, he may be enjoined and required to account to the corporation for any profits realized, and he may be subject to liability for damages sustained as a result of his breach of his fiduciary duties. The property acquired may be subjected to a constructive trust for the benefit of the corporation.

iv. Competition with Corporation. Competition by a director or officer will not necessarily be a breach of fiduciary duty if he acts in good faith. Independent Optical Co. of Winter Haven v. Elmore, 289 So.2d 24 (Fla. App. 1974). However, use of corporate personnel, facilities, information, or funds to develop or acquire a competing business would constitute a breach. The remedy for such a breach would be the profits earned in competition, a constructive trust on the competitor’s property, or damages for injury to the corporation.

g. Insider Trading in Securities i. Common Law. At common law, the majority rule was that a director,

officer, or other corporate “insider” owed no fiduciary duty to shareholders, and therefore was under no duty to disclose inside information when trading in corporate stock. Various “special facts” exceptions to this rule arose, and some states, including Florida, enacted statutes to prevent fraud in insider trading. (See infra.) Several courts have held that insider trading constitutes a breach of the fiduciary duties owed to the corporation, on the theory that inside information is a corporate asset and cannot be exploited for personal gain. Therefore, a constructive trust can be imposed on any profits received by officers and directors in such trading. Diamond v. Oreamuno, 24 N.Y.2d 494, 248 N.E.2d 910 (1969); Brophy v. Cities Service, 31 Del. Ch. 241, 70 A.2d 5 (Ch. 1949). This common-law theory has the advantage of not requiring that the suit be brought by a purchaser or seller (cf. Rule 10b-5); in addition, it applies to all corporations, not only to those registered under the Securities Exchange Act of 1934 (cf. Section 16(b)). However, Florida has explicitly refused to recognize a Diamond-type cause of action for insider trading. Schein v. Chasen, 313 So.2d 739 (Fla. 1975).


ii. Rule 10b-5. State law governing insider trading in corporate securities

has largely been eclipsed by federal law—the Securities Exchange Act of 1934. SEC Rule 10b-5 (promulgated under Section 10(b) of the 1934 Act) makes it unlawful for any person, by the use of any means of interstate commerce or the mails, in connection with the purchase or sale of any security, (1) to employ any device, scheme, or artifice to defraud, (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. Rule 10b-5 has been construed as impliedly creating a civil right of action in the injured party, i.e., the defrauded purchaser or seller or a corporation defrauded in its issuance of shares. Rule 10b-5 applies to any person who utilizes inside information—thus, not only directors, officers, and key personnel may be held liable, but tippees who have profited from inside information which they know is generally unavailable are also liable. The elements of a 10b-5 action are similar to those of a fraud action. The plaintiff must show that a material fact was omitted, and that the defendant knew or had reason to know of such misrepresentation or omission. Although courts have often said the plaintiff must show reliance or causation, these elements are usually presumed once the plaintiff has shown the omitted or misrepresented fact to be “material.” Privity is not required between plaintiff and defendant—the defendant can be liable for a misrepresentation or omission which affected a transaction in which the plaintiff was a buyer or seller. Liability under 10b-5 extends beyond the corporation, its officers and directors to persons in a confidential relationship to the corporation—lawyers, accountants, investment advisors, etc. A person who is privy to inside information must disclose it or refrain from trading. The holder of inside information may also be liable as a “tipper.” Although he may not have traded in the stock on the basis of confidential information, if he disclosed information to a “tippee” whom he knew or had reason to know would use the information to trade in the stock, then the “tipper” may be liable under 10b-5. The “tippee” may be held liable as well, because the essence of Rule 10b-5 is that anyone trading for his own account may not take advantage of inside information knowing it is unavailable to those with whom he is dealing. “Tippee” liability requires that a person receive material, nonpublic information, which he knows or has reason to know is not public information and which he knows was either improperly obtained or disclosed on a selective


basis by the tipper. A third or fourth hand tip will probably eliminate “tippee” liability. If the plaintiff purchased from or sold to the defendant, he is entitled to rescission. If this is impracticable or if the defendant was not the purchaser or the seller, the plaintiff may be awarded damages. Most courts award damages based upon restitution—the difference between the value of what he gave and the value of what he received. The time at which value is measured may be a reasonable time after the fraud was discovered, or may be at the time of trial. Increasingly, courts are instead awarding the defendant’s profits on the transaction as damages.

iii. Section 16(b). Insider trading is further discouraged by the drastic deterrent of short-swing profit recapture under Section 16(b). Unlike 10b-5, 16(b) applies only to securities either listed on a national securities exchange or issued by a corporation having total assets of at least $10,000,000 and a class of equity securities held by at least 500 shareholders of record. To prevent unfair use of inside information, this provision calls for recapture of any profits realized by a director, issuer, or 10% beneficial owner from any purchase and sale (or sale and purchase) of any security of the corporation within a period of less than six months. The insider’s intent is irrelevant. An involuntary exchange of shares, e.g., in a merger, might not be deemed a purchase or sale if there was no potential for speculative abuse. A director or officer may be liable if he was such at the time either of purchase or of sale, but a 10% beneficial owner must have been such at the time both of purchase and sale. If the corporation fails to sue within sixty days after a shareholder’s request to do so, the shareholder may sue in its name. The statute of limitations is two years, and runs from the date the profit is realized.

iv. The Williams Act. To insure disclosure in connection with cash takeover bids, certain provisions were added to the federal securities laws by the Williams Act. Section 13(d) of the Securities Act of 1933 requires a person acquiring more than five percent ownership in a corporation to file with the SEC and the corporation information about himself and his reasons for purchasing the stock. Section 13(g) requires continuing informational reports by all owners of more than five percent of a company’s equity securities. Section 14(f) of the Securities Exchange Act of 1934 requires the corporation to file with the SEC and send to all stockholders information similar to that required under the proxy rules if as a result of an arrangement with a person acquiring 10% of the outstanding shares, a majority of the board of directors will be elected or designated without a shareholder vote.


v. Florida Securities Act. The Florida Securities Act governs and regulates

the sale of securities within the state. F.S.A. §§517.011 - 517.315. A. Scope of the Act.The Act requires the registration of securities sold or offered for sale within the state unless they are of an exempted class or unless sold in an exempt transaction. F.S.A. §517.07. The “small offering” exemption dispenses with registration of offerings in which there are 35 or fewer purchasers in Florida during any consecutive twelve-month period; persons who invest $100,000 or more are not counted. (Thus, even with an unlimited number of investors of $100,000, an offering still need not be registered.) Brokers and dealers are exempt from registration under the Act when either the transaction or the securities are exempt. F.S.A. §517.12. F.S.A. §517.301(1) makes it unlawful for any person, in connection with rendering of any investment advice or in connection with the offer, sale, or purchase of any security, including a security or transaction listed as exempt from registration, directly or indirectly: (a) to employ any device, scheme, or artifice to defraud; (b) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary to make the statements made, in the light of the circumstances under which they are made, not misleading; or (c) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon any person. Note that this is basically the language of Rule 10b-5, except that this section does not require use of the mails or interstate commerce. The Act also makes it unlawful to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, communication, or broadcast which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received directly or indirectly from an issuer, underwriter, or dealer, or from an agent or employee of an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective of such consideration and the amount thereof. F.S.A. §517.301(2). Further, it is unlawful, in any matter within the jurisdiction of the Department of Banking and Finance, to knowingly and willfully falsify, conceal, or cover up a material fact by any trick, scheme, or device, or to make any false, fictitious, or fraudulent statement or representation, or to make or use any false writing or document, knowing the same to contain any false, fictitious, or fraudulent statement or entry. B. Enforcement of the Act.The Department may revoke or suspend the registration of any security, or deny its registration initially, if the terms of the offer or sale would not be fair, just, or equitable. F.S.A. §517.111(1). The Act


also provides for the establishment of a Security Guaranty Fund for disbursement to any person adjudged to have suffered monetary damages caused by dealers, salesmen, or investment advisors who violate the Act. F.S.A. §517.131. Whenever the Department has reason to believe that a person is violating, has violated, or is about to violate the Act, any rule or order promulgated by the Department, or any written agreement entered into with the Department, the Department may issue and serve a cease and desist order and, if the order is violated, may impose an administrative fine not to exceed $5,000. F.S.A. §517.221. The Department is also empowered to bring an action on behalf of the state to enjoin any person from engaging in any act or practice constituting a violation of the Act, and may apply to the court hearing the matter for an order whereby defendants must make restitution of sums obtained by them in violation of the Act. F.S.A. §517.191. C. Remedies Available to the Purchaser or Seller.In the case of unlawful sale, by an unregistered dealer (F.S.A. §517.12) or of an unregistered security (F.S.A. §517.07), the purchaser may elect rescission. The person making the sale and every director, officer, partner, or agent of or for the seller who personally participated or aided in making the sale will be jointly and severally liable to the purchaser in an action for rescission if he still owns the security, or for damages, if the purchaser sold the security. This remedy is not available to a purchaser who has not sold the security and who refused or failed, within thirty days of receipt, to accept a written offer by the seller to take back the security and refund the full amount. Likewise, the remedy is unavailable if the purchaser sold the security and refused or failed to accept the seller’s offer to pay the purchaser an amount equal to the difference between the original purchase price and the amount received on the sale by the purchaser. F.S.A. §517.211(1). Any person purchasing or selling a security in violation of F.S.A. §517.301—fraudulent transactions - and every director, officer, partner, or agent of or for the purchaser or seller who personally participated or aided in making the sale or purchase, will be jointly and severally liable to the person selling the security to or purchasing from such person in an action for rescission, if the person still owns the security, or damages, if sold. F.S.A. §517.211(2). In an action for rescission, a purchaser may recover the consideration paid plus interest, less income received by the purchaser upon tender of the security. The seller may recover the security upon tender of the consideration plus interest, less the amount of any income received by the defendant on the security. F.S.A. §517.211(3). In an action for damages brought by a purchaser,


the plaintiff may recover an amount equal to the difference between (a) the consideration paid plus interest from the date of purchase, and (b) the value of the security at the time disposed of by plaintiff plus the amount of income received on the security by the plaintiff. If the seller brings an action for damages, the amount of recovery equals the difference between (a) the value of the security at the time of the complaint plus income received, and (b) the consideration received for the security plus interest from date of sale. The court may award reasonable attorneys’ fees, unless unjust, to the prevailing party in any action brought under this section, including an appeal. F.S.A. §517.211. Whoever violates any provision of chapter 517 is also guilty of a felony of the third degree. Furthermore, nothing in chapter 517 limits any statutory or common-law right of any person to bring any action in any court for any act involved in the sale of securities or the right of the state to punish any person for violation of the law. The same civil remedies provided by laws of the United States for the purchaser or seller of securities under such laws, in interstate commerce, also extend to purchasers and sellers of securities under chapter 517. F.S.A. §517.241.

4. Duties Of Controlling Shareholders

Controlling shareholders are subject to many of the same duties as directors.

a. In General Under Florida law, majority shareholders are fiduciaries, and they may not use their voting power to benefit themselves personally at the expense of the minority. They must not act fraudulently or misuse their power to promote their personal interests at the expense of corporate interests. United States v. Byrum, 408 U.S. 125 (1971). Thus, issuance of additional shares to dilute the minority’s interest, manipulation of dividend policy to oppress the minority, unreasonable terms on a loan to or from the corporation, or unfair contracts between a controlling shareholder and the corporation would constitute a breach.

Where a controlling shareholder, knowing that corporate assets had greatly appreciated, caused the corporation to redeem the preferred stock and then to liquidate, rather than allowing the preferred to participate in liquidation, the majority shareholder’s fiduciary duty was violated, and the preferred shareholders were


entitled to receive their proportional share of the liquidation value. Zahn v. Transamerica Corp., 162 F.2d 36 (3rd Cir. 1947).

b. Sale of Control

In selling their control, controlling shareholders owe the corporation fiduciary duties and duties of due care, because control is a corporate asset in which all shareholders have an interest. Thus, if a controlling shareholder sells his stock to a person who he knows or has reason to know intends to loot the corporation, he is liable.

In Perlman v. Feldman, 219 F.2d 173 (2d Cir. 1955), a controlling shareholder sold his stock in a steel company to a syndicate of steel users who thereby gained a steady supply at fixed prices in wartime. The court held that the shareholder’s receipt of a price substantially in excess of market price and book value was a premium received for sale of a corporate asset, for which he was accountable to the minority shareholders.

For negligence in selling control, a shareholder will be liable for the damages suffered by the corporation. For breach of fiduciary duty, he may be liable for damages, his profit, or premium.

E. OFFICERS

1. Appointment, Election, and Removal

a. Election and Qualifications

Officers handle the daily operations of the corporation. A corporation must have the officers described in the bylaws or appointed by the board of directors in accordance with the bylaws. An officer may be authorized by the board or the bylaws to appoint additional officers or assistant officers. F.S.A. §607.08401(1), (2). Any two or more offices may be held by the same person. F.S.A. §607.08401(4).

b. Removal Any officer appointed by the board of directors, or any officer or assistant officer appointed by another officer, may be removed by the board or


appointing officer at any time with or without cause. Any vacancy may be filled by the board of directors. Removal of any officer will not prejudice any contract rights of the person removed. The appointment of an officer does not of itself create contract rights. F.S.A. §607.0843.

2. Powers and Authority

a. Authority of Corporate Officers

i. Express Authority

A. In General.The express authority of officers is spelled out in the incorporation statute and the articles of incorporation. Furthermore, all officers, as between themselves and the corporation, have such authority and perform such duties in the management of the corporation as may be provided in the bylaws or as may be prescribed by the board of directors not inconsistent with the bylaws. F.S.A. §607.0841. Persons dealing with a corporation are required to take notice of the authority of those attempting to act for the corporation, Gables Racing Assoc. v. Persky, 148 Fla. 627, 6 So.2d 257 (1942), and of the limitations imposed upon their authority by the act of incorporation. Randall v. Mickle, 103 Fla. 1229, 138 So. 14 (1932). However, special or secret limitations upon the apparent authority of an agent will not affect one dealing with the agent in the general line of his authority unless he knew of such limitations or was put on notice. See, McGehee Lumber Co. v. Tomlinson, 66 Fla. 536, 63 So. 919 (1913). B. Conveyances by Corporations.The express authority of a corporation to convey real estate and make related transactions is governed by chapter 692 of Title 39, Real and Personal Property, Florida Statutes Annotated. Any corporation may execute instruments conveying, mortgaging, or affecting any interest in its lands by instruments sealed with the common or corporate seal and signed in its name by its president or any vice president or any chief executive officer. Assignments, satisfactions, or partial releases of mortgages and debts may be similarly executed by any corporate officer. No corporate resolution need be recorded to evidence the authority of the person executing the deed, mortgage, or other instrument for the corporation, and an instrument so executed will be valid whether or not the officer signing for the corporation was authorized to do so by the board of directors, in the absence of fraud in the transaction by the person receiving it. In cases of fraud, subsequent transactions with good faith


purchasers for value and without notice of the fraud will be valid and binding on the corporation. F.S.A. §692.01. This provision allows third parties without knowledge of intracorporate disputes, fraud or misrepresentations to enter into business transactions of the type specified with confidence as to the validity of the transaction and without need to verify the actual authority of the officer executing the agreement. The section was not intended to permit a “raid” on corporate assets in breach of fiduciary duties where there is no “arm’s length” transaction and no bona fide third-party purchaser involved. Snead v. U.S. Trucking Corp., 380 So.2d 1075 (Fla. App. 1980).

An assistant vice-president of a bank has been held not to be a vice-president or chief executive officer with authority pursuant to this section to execute a lease on behalf of a bank. Florida First National Bank of Jacksonville v. Dent, 350 So.2d 481 (Fla. App. 1977). The statute has been satisfied, however, when the words “corporate seal” were printed on a deed so as to fulfill the requirement that, in addition to the signature of a president, vice-president or chief executive officer, the deed be sealed with the common or corporate seal. Epstein v. Deerfield Beach Bank & Trust Co., 280 So.2d 690 (Fla. App. 1973).

ii. Implied Authority. Implied authority exists by virtue of the office, or

because of the general custom or practice of a corporation, or because it is reasonably necessary to accomplish the matters specifically delegated.

iii. Apparent Authority. Apparent or ostensible authority is based upon a representation by the corporation, by words or actions, that an officer is authorized to act for it; if a third party in good faith reasonably relies upon this apparent authority and changes his position, the corporation will be estopped to deny such authority. Lack of authority is no defense. An unauthorized act may be subsequently ratified by the board.

b. Powers of Specific Officers i. President. Generally, a president has the authority to perform acts for

the corporation in the usual course of business. Under ordinary circumstances, in the absence of internal conflict, the corporate president has the power to hire attorneys and institute or defend suits on its behalf. Conlee Construction Co. v. Cay Construction Co., 221 So.2d 792 (Fla. App. 1969). However, under Florida law, a valid resolution of the board of directors is necessary to initiate a voluntary bankruptcy proceeding for a corporate debtor; the corporate president


cannot institute such proceedings on his own. In re American International Industries, Inc., 10 B.R. 695 (S.D. Fla. 1981). Unless the articles of incorporation provide otherwise, the mortgage, pledge, or creation of a security interest in corporate assets must be made as authorized by the board of directors. Therefore, where the board’s resolution did not authorize the president to pledge his corporation’s assets as security for a personal loan from a bank and the bank had a duty to inquire into the president’s authority to pledge such assets and failed to do so, the corporation was entitled to the return of the pledged assets. American Business Credit Corp., Inc. v. First State Bank of Lantana, 385 So.2d 1080 (Fla. App. 1980).

ii. Vice President. Generally, the only power a vice president possesses is to act in place of the president should he resign, die, or become disabled. Thus, he has no implied authority by reason of his office. However, many corporations have more than one vice president (e.g., executive vice president, senior vice president). These officers are usually given certain express authority.

For example, although a contract for remodeling a house provided that it was not binding upon the corporate contractor until accepted and approved by an authorized executive and signed on the line designated for “salesman,” the appellate court held that since the person signing was a vice-president who had the authority to and did approve the contract, the contract was binding on both parties. Bruna Aluminum Products, Inc. v. Polakoff, 303 So.2d 674 (Fla. App. 1974).

iii. Treasurer. The treasurer is the fiscal agent and usually has the authority

to receive funds and to disburse corporate moneys when authorized. The treasurer of a corporation has no authority to bind the corporation in dealings with third persons unless expressly or impliedly authorized to do so. Ideal Foods, Inc. v. Action Leasing Corp., 413 So.2d 416 (Fla. App. 1982).

iv. Secretary. The secretary is authorized to keep the corporate books and records and the corporate seal, to certify resolutions, and to keep the minutes of all corporate meetings. However, the secretary is merely a ministerial officer without authority to transact corporate business on his own volition and judgment. Id.

v. General Manager. The term “manager” when applied to a corporation conveys the idea that management of the company’s affairs has been committed to that person with respect to the property and business under his charge, and that his acts in the line of duty and in the scope of employment are those of the


corporation. Dade County Dairies, Inc. v. Projected Planning Co., 158 So.2d 565 (Fla. App. 1963).

3. Fiduciary Duties and Liabilities

The officers are subject to many of the same fiduciary duties as are directors. Officers stand in a quasi-fiduciary relationship to the corporation. Each must act with fidelity and the utmost good faith, since in accepting the office he impliedly agrees and undertakes to give the corporate enterprise the benefit of his best care and judgment and to exercise his powers in the interest of the corporation and the stockholders. Flight Equipment & Engineering Corp. v. Shelton, 103 So.2d 615 (Fla. 1958). An officer cannot make a personal profit, directly or indirectly, from his position with the corporation. Where a benefit or profit has been acquired, the officer can be compelled to account to the corporation.

4. Compensation

a. Generally

Unless otherwise provided by its articles of incorporation, every corporation has the power to fix the compensation of its officers and agents. This is done by the directors, except that a director who is also an officer may not vote to fix her own compensation as an officer. The courts have the power, at the instance of stockholders and other persons interested in the corporation, to inquire into the reasonableness of officers’ salaries and to order a return of any compensation in excess of amounts determined to be reasonable. Coleman v. Plantation Golf Club, Inc., 212 So.2d 806 (Fla. App. 1968). An officer may be liable for breach of the employment contract if she leaves before the end of the contract term. The officers are entitled to reimbursement, under the theory of implied contract, for reasonable expenses necessarily incurred in the performance of corporate duties which are of benefit to the corporation. If, however, under the facts and federal government regulations, it is unlawful to pay an officer a bonus, the corporation is entitled to have any sum so paid returned.

b. Stock Rights and Options Stock options, or warrants, give the holder the right to purchase a specified amount of stock in the corporation at a specified price within a stipulated time. Stock rights, or stock subscription warrants, are similar, but are issued to


existing shareholders for the purchase of shares at a future date. The judgment of the board of directors will be conclusive as to the adequacy of the consideration received or to be received for such rights and options. F.S.A. §607.0624(1). Unless F.S.A. §607.0624 or the articles of incorporation provide otherwise, a corporation may create and issue, whether or not in connection with the issue and sale of any of its shares or other securities, rights and options entitling the holders thereof to purchase shares of the corporation. The instrument(s) evidencing such rights or options must be approved by the board of directors. The instrument(s) must set forth or incorporate by reference the terms and conditions upon which, the time(s) at or within which, and the conditions upon which such shares may be purchased from the corporation upon exercise of any such rights and options. The terms and conditions may include restrictions that preclude or limit the transfer of these rights to any person engaged in a takeover attempt. F.S.A. §607.0624(2). Such rights or options may be issued to directors, officers, and employees of the corporation, or a subsidiary, or affiliate thereof, as an incentive to service or continued service. Rights or options may also be issued to a trustee on behalf of such directors, officers, and employees.

5. Indemnification and Liability Insurance

At common law, a director, officer, or employee of a corporation was not entitled to indemnification by the corporation for litigation expenses incurred in defending suits arising out of the performance of his duties. Some jurisdictions allowed indemnification if the defense was both successful on the merits and of benefit to the corporation. To relieve such persons of these financial risks, many corporations would agree in advance to indemnify them for such expenses, and state statutes have also created a right to indemnification regardless of whether the defense was successful on the merits. Some statutes allow indemnification only as to claims brought by third parties and not in derivative actions brought by the shareholders. Under Florida law, a corporation has the power to indemnify any party to an action if the person is or was a director, officer, employee, or agent of the corporation. The action may be derivative, nonderivative, or even criminal, but there are differing powers and duties of indemnification depending on the nature of the action and the success of the defense. If allowed, indemnification may be against liability incurred by that person in connection with the proceeding, or appeal thereof.


a. Grounds

i. Permissive.

A. Non-derivative.A corporation may indemnify such a party from liability incurred in a direct suit by a shareholder or third party if the person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation. With respect to any criminal action or proceeding, he additionally must have had no reasonable cause to believe his conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or on a plea of nolo contendere will not, of itself, create a presumption that the person did not act in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation. With respect to any criminal action or proceeding, he additionally must have had no reasonable cause to believe his conduct was unlawful. F.S.A. §607.0850(1). B. Derivative.A corporation may also indemnify any such person who was or is a party to any proceeding by or in the right of the corporation to procure a judgment in its favor if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation. No indemnification may be made in derivative actions where such person is found liable unless, and only to the extent that, the court determines that despite the adjudication of liability, but in view of all circumstances of the case, the person is fairly and reasonably entitled to indemnity. F.S.A. §607.0850(2).

ii. Mandatory. To the extent that a director, officer, employee, or agent of a corporation is successful on the merits or otherwise in defense of any proceeding referred to above or in the defense of any claim arising therein, he must be indemnified against expenses, actually and reasonably incurred by him in connection therewith. F.S.A. §607.0850(3).

b. Authorization Procedure Unless mandatory or pursuant to a court determination, any indemnification may be made by the corporation only as authorized in each specific case upon a determination that indemnification is proper in the circumstances, because the person has met the applicable standard of conduct. The determination must be made:

(1) By the board of directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding or by a majority vote


of a committee, duly designated by the board of directors, consisting of two or more directors who are not parties to the proceeding;

(2) By independent legal counsel; or (3) By the shareholders by a majority vote of a quorum consisting of

shareholders who were not parties to the proceeding, or, if such a quorum is not obtainable, by a majority vote of non-party shareholders. F.S.A. §607.0850(4).

Expenses incurred by an officer or director in defending a civil or criminal proceeding may be paid by the corporation in advance of final disposition upon receipt of an undertaking, by or on behalf of the director or officer, to repay such amount if it is ultimately determined that he is not entitled to indemnification. Expenses incurred by other employees and agents may be paid in advance upon terms or conditions determined by the board. F.S.A. §607.0850(6). Unless the articles of incorporation provide otherwise, a director, officer, employee, or agent of the corporation may apply to a court for indemnification and/or advancement of expenses upon the failure of a corporation to provide indemnification to which the party is entitled by statute or prior corporate action, despite any contrary determination of the board or of the shareholders. F.S.A. §607.0850(9).

c. Nonexclusivity of Statute The statutory provisions for indemnification and advancement of expenses are not exclusive. A corporation may make other or further indemnification of any such persons under any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in that person’s official capacity and as to action in another capacity while holding office. However, no indemnification or advancement of expenses may be provided if a judgment or other final adjudication establishes that the defendant’s actions or omissions were material and constituted (a) a criminal violation (unless the defendant had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful); (b) a transaction from which the defendant derived an improper personal benefit; (c) improper distribution of corporate assets approved by a director; or (d) willful misconduct or a conscious disregard for the best interests of the corporation in a derivative action or in a direct action by a shareholder. F.S.A. §607.0850(7).

d. Insurance Permitted


Whether or not a corporation would have the power to indemnify a person against such liability under §607.0850, the corporation does have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation or who is or was serving at the request of the corporation as a director, officer, employee, or agent of another business enterprise. The corporation may insure against any liability asserted against such person or arising out of his status. F.S.A. §607.0850(12).

F. FUNDAMENTAL CORPORATE CHANGES

1. Amendment of Articles of Incorporation

a. Permissible Amendments by Board Without Shareholder Approval

The articles may be amended to change certain corporate purposes and structures; however, the amended articles must still be lawful under the Corporation Act. F.S.A. §607.1002.

Specifically, the articles may be amended by the board, without shareholder action: (1) To modify the term of corporate existence; (2) To delete the names and addresses of the initial directors; (3) To the delete the name and address of the initial registered

agent or office, if a statement of change is on file with the Department of State;

(4) To delete any information in the articles that is of historical interest only;

(5) To delete the authorization for a class or series of shares authorized pursuant to §607.0602, if no shares of such class are issued;

(6) To change the corporate name by substituting the word “corporation,” “incorporated,” or “company,” or the abbreviation “corp.,” “Inc.,” or “Co.,” for a similar word or abbreviation in the name, or by adding, deleting, or changing a geographical attribution for the name;

(7) To change the par value for a class or series of shares; (8) To provide that if the corporation acquires its own shares,

such shares belong to the corporation and constitute treasury shares until disposed of or canceled by the corporation; or


(9) To make any other change permitted by the Act to be made without shareholder action. F.S.A. §607.1002(1).

The board of directors may adopt any of the amendments permitted by F.S.A. §607.1002(1) without shareholder action.

b. Amendments Requiring Shareholder Approval The shareholders of any class are entitled to vote as a class on any amendment that would:

(1) Exchange or reclassify all or part of the shares of that class into shares

of another class; (2) Exchange or create a right of exchange of all or part of the shares of

another class into that class; (3) Change the designations, preferences, limitations, or relative rights of

that class; (4) Change the shares of the class into a different number of shares of the

same class; (5) Create a new class of shares with prior and superior rights or increase

the rights and preferences or the number of authorized shares of any class having rights and preferences prior or superior to the shares of that class;

(6) Increase the rights, preferences, or number of authorized shares of any class that would, after the amendment, receive prior, superior or equal rights, or preferences to the shares of that class;

(7) Limit or deny the existing preemptive rights of that class; or (8) Cancel or otherwise affect dividends on the shares of such class which

have accrued, but have not been declared. If any amendment operates in any manner above specified upon a series of a class of shares, then the shares of that series will be entitled to vote as a separate class on the amendment. F.S.A. §607.1004(2). A class or series of shares is entitled to voting rights even though the shares are nonvoting shares. F.S.A. §607.1004(4).

c. Procedure The board of directors must submit a proposed amendment to the shareholders where shareholder approval is required. If shares have been issued, the board must submit the proposed amendment to the vote of the shareholders at either the annual or a special meeting. F.S.A. §607.1003(4). If


no shares have been issued, the amendment must be adopted by the vote of a majority of the incorporators or directors of the corporation. F.S.A. §607.1005. Written notice setting forth the purposes of the meeting and a copy or summary of the proposed amendment must be given to each shareholder of record entitled to vote thereon within the time and in the manner provided for the giving of notice of meetings to shareholders. (See Section III(B)(2), supra.)

d. Adoption of Amendments At the shareholders’ meeting, the proposed amendment will be adopted upon receiving the affirmative vote of the holders of a majority of the shares entitled to vote thereon. If any class of shares is entitled to vote as a class, the proposed amendment will be adopted upon receiving the affirmative vote of the holders of a majority of the shares of each class entitled to vote thereon as a class and of the total shares entitled to vote thereon. Any number of amendments may be submitted to the shareholders and voted upon at one meeting. Any provision in the articles of incorporation requiring the vote or concurrence of the holders of a greater proportion of shares, or of any class or series, than required by the Act, may not be amended except by such greater vote. F.S.A. §607.1003(5). The shareholders of a corporation having 35 or fewer shareholders may amend the articles of incorporation without an action of the directors at a meeting for which notice of the change to be made is given. F.S.A. §607.1003(6).

e. Filing of Amendments After adoption, the articles of amendment must be delivered to the Department of State for filing. (If the amendment is made prior to the issuance of shares the incorporator or director must execute the document.) The articles must set forth information regarding the name of the corporation, the date of adoption of the amendment, the text of the amendment, and the manner in which the amendment was adopted by the incorporators or board of directors or approved by the shareholders. F.S.A. §607.1006. Upon delivery to the Department of State, the articles of amendment are filed. The amendments become effective and the articles of incorporation are deemed amended upon the date of such filing or upon the date specified in the articles of amendment. At any time, a corporation may integrate all the provisions of its articles of incorporation and amendments into a single instrument. Such restated articles of incorporation may be adopted by the


board without a shareholder vote. Upon filing of the restated articles with the Department of State, the corporation’s original articles are superseded. Amendments may be made simultaneously with restating the articles if all provisions of the Act are complied with and the provisions being amended are identified. F.S.A. §607.1007. No amendment which is adopted will affect any existing cause of action in favor of or against the corporation, any pending suit to which the corporation is a party, or the existing rights of any persons other than shareholders. If the corporate name is changed by amendment, no suit brought against the corporation in its former name will abate for that reason. F.S.A. §607.1009.

2. Mergers and Consolidations

In a merger, one corporation is absorbed into another corporation, which survives (A Corp. and B Corp. merge; A Corp. survives); in a consolidation (or share exchange), two corporations combine to form a new corporation and both old corporations cease to exist (A Corp. and B Corp. consolidate into C Corp.). Florida law permits mergers between its domestic corporations and other types of business entities, including limited liability companies and partnerships. F.S.A. §607.1108.

a. Procedure To effect a merger or consolidation (share exchange), the board of each corporation must adopt a plan setting forth the terms and conditions, including the manner of converting shares of the participating corporations into shares of the surviving or new corporation, and the articles or amendments to the articles of the new or surviving corporation. F.S.A. §§607.1101, 607.1102. The plan must then be submitted to the shareholders for a vote at an annual or special meeting and written notice of the shareholders’ meeting must be given to each shareholder of record (whether or not entitled to vote). The notice must state the purpose of the meeting, set forth the plan or a summary of it, and state clearly and conspicuously that dissenting shareholders who file a written objection to the plan before the shareholders’ vote are entitled to be paid the fair value of their shares. F.S.A. §607.1103(4). The plan must be approved by a majority of the shares entitled to vote thereon in each corporation; if any class is entitled to vote thereon as a class, the plan must be approved by a majority of the shares in that class and a majority of the shares entitled to vote. Any class of shares will be entitled to


vote as a class if the plan of merger or share exchange contains any provision which, if contained in a proposed amendment to the articles of incorporation, would entitle that class to vote as a class. F.S.A. §607.1103(6). Any plan may provide that at any time before the filing of the articles of merger or share exchange, the plan may be abandoned pursuant to the provisions therefor, if any, set forth in the plan. F.S.A. §607.1103(9). Unless required by the articles of incorporation, no vote of the shareholders of the corporation which is to survive a merger is necessary if: (1) the plan does not amend its articles of incorporation; and (2) each share of its stock which is outstanding immediately prior to the merger becoming effective will remain outstanding after the merger as an identical share of the surviving corporation. F.S.A. §607.1103(7). If a plan of merger or share exchange is adopted by the surviving corporation by action of its board of directors and without a shareholder vote, the articles of merger must be executed in compliance with the filing requirements of F.S.A. §607.0120, and must include a statement that shareholder approval was not required. F.S.A. §607.1105(1). The articles of merger or share exchange must be filed with the Department of State by each corporation, and must include the plan, the date and manner of its adoption, and the effective date of the merger or share exchange. F.S.A. §607.1105.

b. Short-Form Merger A simpler procedure is provided for merger of a subsidiary corporation into its parent. A parent owning at least eighty percent of the outstanding shares of each class of its subsidiary may merge the subsidiary into itself without the approval of the shareholders of either the parent or subsidiary. Note that the shareholders of the subsidiary who dissent from the merger are entitled to be paid the fair value of their shares if they comply with the law regarding the rights of dissenting shareholders. F.S.A. §607.1104.

c. Effect of Merger or Consolidation The merger or share exchange will be effected on the date of the filing of the articles by the Department of State or on the effective date specified in the articles. However, in no event can the effective date be prior to the filing of the articles by the department. When the merger or share exchange is effected, the participating corporations or entities become a single corporation or entity, and the surviving or new entity has all the rights, privileges, immunities, and powers


of the former corporations. Title to all real estate and other property owned by each party to a merger vests in the surviving entity. The surviving or new entity also succeeds to the liabilities and duties of the former entities, and is responsible for any debts, liens, or suits against its predecessor. F.S.A. §§607.1106(1); 11101(3). If, however, there is no merger, and the purchaser of the assets of a manufacturer continues to sell the general product of the seller under the same trade name, a different rule applies. Florida follows the traditional corporate law rule which does not impose the liabilities of the selling predecessor upon the buying successor company unless: (1) the successor expressly or impliedly assumes the predecessor’s obligations; (2) the transaction is a de facto merger; (3) the successor is a mere continuation of the predecessor; or (4) the transaction is a fraudulent attempt to avoid the predecessor’s liabilities. This general rule applies to products liability cases. Bernard v. Kee Manufacturing Co., 409 So.2d 1047 (Fla. 1982). By operation of law, title to any property is transferred to the surviving or new corporation. When two corporations merge, they may provide that the successor corporation will be liable even for punitive damages stemming from reckless conduct of the predecessor corporation. Celotex Corp. v. Pickett, 490 So.2d 35 (Fla. 1986). While punitive damages will not be imputed as a matter of law to a faultless party, such liabilities can be expressly or impliedly assumed. In the case of a merger, the articles of incorporation of the surviving corporation are deemed to be amended to include the changes stated in the articles of merger. In the case of a share exchange, the statements set forth in the articles of share exchange, which are legally required or permitted to be in the articles of incorporation, are deemed to be the new corporation’s original articles of incorporation. F.S.A. §607.1106(1), (2).

d. Dissenting Shareholders’ Appraisal Rights i. In General. Many shareholders who dissent from a merger or share

exchange have the right to require the corporation to appraise their shares and buy them at fair market value. This effects a workable compromise between the desire of the majority to make a fundamental change in the corporation, and the desire of the dissenter not to be forced into a corporate situation radically different from that which he anticipated when he bought his stock. However, certain groups of shareholders are excepted, and even those with appraisal rights must follow an elaborate procedure to exercise them.


ii. Right of Shareholders to Dissent. Any shareholder of a Florida corporation has the right to dissent from any plan of merger or share exchange to which the corporation is a party. A shareholder may dissent as to less than all the shares registered in his name. In that event, his rights are determined as if his dissenting shares and his other shares were registered in the names of different shareholders. F.S.A. §§607.1302(1); 1303(1).

iii. Exceptions. Unless the articles of incorporation provide otherwise, the right of shareholders to dissent does not apply: (1) in a merger, to the holders of shares of any class or series, of the surviving corporation, whose vote was not necessary to authorize the merger; or (2) to the holders of any class or series which, on the date fixed to determine the shareholders entitled to vote on the plan of merger or consolidation were either registered on a national securities exchange, were designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or were held of record by not less than 2,000 shareholders. F.S.A. §607.1302(1), (2).

iv. Procedure. A shareholder, electing to dissent, must file a written objection with the corporation before the vote on the proposed corporate action. If the proposed action is approved, and the shareholder did not vote in its favor, the corporation must give written notice of approval of the action within ten days to each shareholder who filed a notice of intent to demand payment for her shares. The shareholder may, within twenty days after the date of the giving of notice to her, file a notice of election and make demand for the fair value of her shares. F.S.A. §§607.1320; 1321. If the corporate action was approved by the written consent of the shareholders without a meeting, the corporation must give written notice of the action within ten days of such action to each shareholder and inform the shareholder of his right to dissent. A shareholder who elects to dissent must file his notice of election and demand for payment within twenty (20) days after receiving notice from the corporation. F.S.A. §§607.1320; 1321. Any shareholder failing to make demand within the 20-day period will be bound by the terms of the proposed corporate action. A shareholder making demand is thereafter entitled only to payment as provided by the act and is not entitled to vote or to exercise any other shareholder’s right. F.S.A. §§607.1320(3), (4). The dissenter must present his share certificates simultaneously with his election to dissent. F.S.A. §607.1323(1). A shareholder’s demand for payment may not be withdrawn unless the corporation consents. F.S.A. §607.1323(1).


Within ten days after the expiration of the period in which shareholders may file notice of their election to dissent, or within ten (10) days after the corporation action is effected, whichever is later (but in no case later than ninety (90) days after authorization of the act), the corporation must send the dissenter a written offer to buy his shares at a specified price which it deems to be fair value. The notice and offer must be accompanied by a current balance sheet and profit-and-loss statement. F.S.A. §607.1322. If the dissenter and the corporation agree on a valuation within thirty (30) days after the corporation makes the offer, the dissenter must be paid within ninety (90) days after the offer or the effective date of the corporate act. Upon payment, the dissenter must surrender his share certificates, and he ceases to have any interest in the shares. F.S.A. §607.1324.

v. Appraisal Proceedings. If within thirty days (30) after the written offer to the shareholder, the shareholder and the corporation have failed to agree on the fair value of the shares, then the corporation which has received a shareholder demand given within sixty (60) days after the corporate action was effected must, or at its election at any time within such 60-day period may, file an action requesting that the fair value of the shares be determined. If the corporation fails to institute the action, any dissenting shareholder may do so in the name of the corporation. F.S.A. §607.1330(1). Petitions must be filed in any court of competent jurisdiction in the county where the corporation’s registered office is located—thus, all claims are heard in one forum. If the surviving or new corporation is foreign, without a registered office in Florida, filing should be in the county where the registered office of the domestic corporation was last located. F.S.A. §607.1330(2). All dissenting shareholders who have not agreed upon a price must be made parties to the proceeding as an action against their shares quasi in rem. A copy of the petition must be served on each dissenter. F.S.A. §607.1330(3). The court usually appoints one or more appraisers to receive evidence and recommend a fair value. F.S.A. §607.1330(4). The judgment should include fair and equitable interest, and the costs and expenses of the proceeding (except counsel and expert fees) are assessed against the corporation. However, if any dissenter’s refusal of the corporation’s offer of payment was arbitrary, vexatious, or in bad faith, he may be assessed for a portion of the costs. F.S.A. §607.1331(1). The corporation must pay the dissenting shareholder within ten (10) days after final determination of fair value by the court. Upon payment, the dissenter


must surrender his shares, which may be held and disposed of as authorized but unissued shares of stock. F.S.A. §607.1330(6).

e. Affiliated Transactions The merger or consolidation of the corporation or any subsidiary of the corporation with an interested shareholder or with any corporation that is, or after the merger or consolidation would be, an affiliate or associate of the interested shareholder is called an “affiliated transaction.” It must be approved by the affirmative vote of the holders of two-thirds of the voting shares other than the interested shareholder, unless (a) it has been approved by a majority of the disinterested directors; (b) the corporation has not had more than 300 shareholders at any time during the three preceding years; (c) the interested shareholder has owned at least 80% of the corporation’s outstanding voting shares for at least five years; (d) the interested shareholder currently owns at least 90% of the outstanding voting shares, exclusive of any shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; (e) the corporation is a registered investment company; or (f) the holders of each class or series of voting shares are paid consideration for shares according to a prescribed formula. F.S.A. §§607.0901(1), (2), (4).

3. Sale of All Assets

Instead of merging with another corporation, a corporation may choose to acquire its business by buying all its assets. This course has fewer procedural requirements, but still provides appraisal rights in certain cases.

a. Authorization A sale, lease, exchange, or other disposition of all, or substantially all, of the property and assets of a corporation, with or without good will, may be made upon such terms and conditions and for such consideration as may be authorized by the board of directors following recommendation of the proposed transaction and directing submittal thereof to a vote at an annual or special meeting of shareholders. F.S.A. §607.1202(1). When a corporation sells all its assets, there is a presumption that the directors acted honestly, in the shareholders’ best interests. De La Rosa v. Tropical Sandwiches, Inc., 298 So.2d 471 (Fla. App. 1974). If the board of directors has not authorized a sale, the fact that the majority of stockholders, including directors who voted as stockholders, approved the sale is immaterial since the corporation’s affairs are managed by the board. Liebling v. Florida Realty Investment Co., 24 F.2d 688 (5th Cir. 1928).


b. Procedure for Shareholder Approval The board resolution recommending the sale or other disposition must be submitted to shareholder vote. Written notice must be sent, in the manner provided in the Act for the giving of notice of shareholders’ meetings, to all shareholders, whether or not entitled to vote, and must include the purpose of the meeting, and a statement of the dissenters’ appraisal rights. A majority of the shares entitled to vote is required for authorization; if any class is entitled to vote as a class, authorization must be by a majority of that class and a majority of all the shares entitled to vote. Despite shareholder approval, the board may, in its discretion, abandon the sale. F.S.A. §607.1202(4), (5), (7).

c. Dissenting Shareholders’ Appraisal Rights Shareholders dissenting from a sale of all or substantially all assets other than in the usual and regular course of business or for relocation are entitled to the same appraisal rights as dissenters from merger or consolidation, and must follow the same procedures. They must file a written objection to the transaction before the shareholder vote is taken. F.S.A. §§607.1302(1)(c); 1320; 1321. Unless the articles of incorporation provide otherwise, shareholders are not entitled to appraisal rights: (1) if the holders of shares of any class or series on the date fixed to determine the shareholders entitled to vote on the proposed sale or exchange were either registered on a national security exchange or held of record by not less than 2,000 shareholders; (2) the sale or exchange is pursuant to an order of a court with jurisdiction; or (3) the sale is for cash on terms requiring all or substantially all of the net proceeds of sale to be distributed to the shareholders in accordance with their respective interests within one year of the date of sale. F.S.A. §607.1302(2). In a bulk sale of a corporation’s assets, a stockholder is entitled to the fair value of its stock as of the date preceding the date on which the vote was effected approving the sale. If that date is prior to the dividend date, dissenting shareholders are not entitled to dividends on their dissenting shares. Tampa Wholesale Co. v. Greco, 418 So.2d 1141 (Fla. App. 1982).

4. Control Share Acquisitions

A corporation or an individual may attempt to acquire a controlling interest in a target corporation by acquisition of shares. Such acquisitions are governed by the disclosure requirements of the Williams Act (discussed supra), but state takeover statutes are not preempted by the Williams Act if consistent with its purpose of placing current shareholders on an “equal footing” with takeover


bidders. CTS Corp. v. Dynamics Corp., 95 L. Ed.2d 67 (1987). Like the Indiana statute upheld in CTS Corp., the Florida takeover statute applies to “issuing public corporations” with at least 100 shareholders, having a principal place of business, principal office, or substantial assets within the state, and either 1,000 shareholders resident in Florida or at least 10% of the corporation’s shareholders resident in Florida, or at least 10% of its shares owned by Florida residents. Under the statute, the acquisition of at least 20%, 33 1/3%, or 50% of issued and outstanding shares constitutes the acquisition of “control shares.” An entity that acquires control shares does not automatically acquire voting rights in those shares, but gains them “only to the extent granted by resolution approved by the shareholders of the issuing public corporation.” F.S.A. §607.0902(9)(a). The resolution requires a majority vote of preexisting disinterested shareholders holding each class of stock. F.S.A. §607.0902(6). The resolution is voted on at the next regularly scheduled shareholders meeting, unless the acquiror requests a special meeting to be held within 50 days. F.S.A. §607.0902(7). If the shareholders do not approve voting rights for the control shares, the corporation may redeem the shares from the acquiror at fair market value. If full voting rights are accorded a person who has acquired a majority of all voting power, all shareholders of the corporation have dissenters’ rights. F.S.A. §607.0902(10).

G. SHARE TRANSFER RESTRICTIONS

1. Validity In general, reasonable restrictions on the transfer of corporate shares are valid and enforceable in Florida and may be set forth or authorized in the articles of incorporation or in the bylaws. However, bylaws properly adopted or amended may become so unconscionable as to warrant equitable intervention, and may be waived, amended or repealed by custom or usage; this result is particularly evident where bylaw restrictions on the transfer of shares have been long ignored and an attempt to enforce them to bar transfer is patently discriminatory. Coleman v. Coleman, 191 So.2d 460 (Fla. App. 1966). Since corporate stock is property, unreasonable restraints on transfer or alienation are unenforceable. However, a stockholder’s agreement providing that when debt evidenced by pledge or encumbrance of stock was in default the other stockholders could pay the amount of the debt and release the stock from the encumbrance was held to be a reasonable restraint on alienation. Weissman v. Lincoln Corp., 76 So.2d 478 (Fla. 1955).


As a general rule, restrictions on the alienation of stock are strictly construed and testamentary dispositions are not defeated as restricted transfers in the absence of express language in the stockholders’ agreement specifically addressing the issue. Where, however, a “buy-sell” agreement clearly addresses disposition upon death, the restriction will be upheld and the stock in question will not pass under the stockholder’s will. Murray Van & Storage, Inc. v. Murray, 364 So.2d 68 (Fla. App. 1978).

2. Types Provisions for restrictions on transfer usually fall within one of three categories: the first option, the consent restriction, and the buy-sell agreement. The first option obliges the stockholder to offer shares first to the corporation or other shareholders before they may be sold to outsiders. The option may be triggered by a proposed sale or transfer, by death, by bankruptcy, or by termination of employment. Options may be successive (first to corporation, then to shareholders), and may allow some shareholders to buy more than their proportionate share if others do not exercise their options. Consent restrictions require a shareholder wishing to sell his stock to give notice to the other shareholders and to receive their approval. A buy-sell agreement is similar to a first option, but is mandatory, requiring the offeree shareholders or corporation to buy the stock upon the triggering event (e.g., death, disability, termination of employment, or proposed sale). Such agreements, usually funded by a life insurance policy on each stockholder, have the advantage of assuring a purchaser, which is especially important for an illiquid estate. An agreement may provide for the corporation to buy the shares, or may allow the other shareholders to buy proportionally. Provision should be made for fixing the value of the stock—this may be a set price or book value at the time of the buy-out or may be determined by a procedure such as capitalization of earnings, or appraisal by an outside party.

3. Notice Unless conspicuously noted on the share, an otherwise lawful restriction on transfer imposed by the issuer will be ineffective except against a person with actual knowledge of it. F.S.A. §678.0627(2). “Noted” means that the restriction need not be set forth in full text.


The issuer to whom a security with a proper notation of a restriction is presented thereby receives notice of an adverse claim and is under a duty to inquire as to the claim prior to registration of the transfer.

H. PREEMPTIVE RIGHTS Unless allowed by the articles of incorporation, the shareholders of a corporation have no preemptive rights to acquire unissued shares of the corporation or securities of the corporation which are convertible into or carry a right to subscribe to or acquire such shares. F.S.A. §607.0630(1). A corporation may amend its articles so as to limit, deny, or grant preemptive rights to shareholders of any class. F.S.A. §607.1004.

I. DEADLOCK AND LIQUIDATION In a close corporation, high quorum and voting requirements and shareholder management increase the likelihood of deadlock. The corporate structure may provide for a built-in mechanism, such as arbitration or buyout, to deal with this paralysis in decision-making. The General Corporation Act provides for the liquidation of the assets and business of a corporation when a shareholder brings an action in a Circuit Court and establishes that:

(1) The directors are deadlocked in the management of corporate affairs and the shareholders are unable to break the deadlock and that irreparable injury to the corporation is being suffered or is threatened by reason thereof;

(2) The shareholders are deadlocked in voting power and have failed to elect successors to directors whose terms have expired or would have expired upon the qualification of their successors; or

(3) The corporate assets are being misapplied or wasted. F.S.A. §607.1430(2.

Such proceedings must be brought in the county in which the last known principal office of the corporation, as shown by the records of the Department of State, is situated. It is not necessary to make shareholders parties to any such action or proceeding unless relief is sought against them personally. F.S.A. §§607.1431(1), (2).

J. DISSOLUTION

Dissolution is the extinguishing of corporate existence; it requires affirmative action by the corporation itself or by the courts, and does not occur, because of bankruptcy or inactivity. Although dissolved, a corporation may


continue to exist for a limited time for limited purposes (i.e., prosecuting or defending lawsuits).

1. Voluntary Dissolution

a. Prior to Commencing Business A corporation which has not commenced business and which has not issued shares may be dissolved by the incorporators, prior to the organizational meeting, or, thereafter, by the directors. The articles must include the name of the corporation; the date of the filing of the articles; and either a statement that no shares have been issued, or a statement that the corporation has not commenced business, no corporate debts remain unpaid, net assets following winding up have been distributed to shareholders if shares were issued; and dissolution was authorized by a majority of the incorporators or directors. Upon filing the articles, the corporation ceases to exist. F.S.A. §607.1401.

b. After Commencing Business A corporation which has commenced business and issued shares may elect voluntary dissolution and wind up its affairs. Voluntary dissolution requires adoption of the board’s resolution recommending dissolution by the affirmative vote of the majority of shareholders entitled to vote thereon. If any class is entitled to vote as a class, approval must be by a majority of that class and a majority of the outstanding shares entitled to vote. Written notice stating that the purpose of the meeting is to vote on dissolution must be given to all shareholders entitled to vote. F.S.A. §607.1402. Upon execution of the consent, or upon adoption of the board’s resolution, and after compliance with winding up procedures, the corporation must file articles of dissolution. F.S.A. §607.1403.

c. Winding Up After the vote authorizing dissolution, the board has the power to wind up and settle the affairs of the corporation. Notice of the winding up proceedings must be mailed to all known creditors and claimants. The corporation must cease to carry on its business, except insofar as may be necessary for the winding up thereof. The board must collect all sums due the corporation, convert its assets to cash, and satisfy all debts. Any surplus of cash or property remaining after payment of the debts and liabilities of the corporation is paid to the shareholders in accordance with their rights and interests. At any time during the liquidation, the corporation may apply to a circuit court to have the liquidation continued under supervision of the court. F.S.A. §§607.1405; 1406.


Finally, articles of dissolution, including the name of the corporation and date of dissolution, together with a statement that the number of shareholder votes cast for dissolution was sufficient for approval, must be filed with the Department of State. Upon filing, the corporate existence ceases, except for the purposes of suits brought by or against the corporation, other proceedings, and appropriate corporate action. F.S.A. §607.1403. However, at any time within 120 days after the articles of dissolution are filed, shareholders may revoke the dissolution proceedings by written consent or by a majority vote. Upon revocation, the dissolution proceedings are revoked, and the corporation may again carry on its business. F.S.A. §607.1404. F.S.A.§607.1405(4) does not permit the name of the dissolved corporation to be available to another corporation prior to the end of the 120-day period following the effective date of the dissolution, unless the dissolved corporation provides the Department of State with an affidavit permitting the immediate assumption or use of the name.

2. Involuntary Dissolution

a. By Decree of the Circuit Court A corporation may be dissolved involuntarily by a decree of the circuit court for the county in which the principal office of the corporation is situated. It must be established that the corporation procured its articles of incorporation through fraud or that the corporation has continued to exceed or abuse the authority conferred on it by law. F.S.A. §607.1430.

b. By the Department of State A corporation may also be involuntarily dissolved by the Department of State if it determines that the corporation failed to file its annual report or pay the report filing fee, or the corporation failed for thirty days to appoint and maintain a registered agent in Florida, or the corporation failed for thirty days after the change of its registered office or agent to file a statement of change. F.S.A. §607.1420. The Department of State must give written notice to the corporation of the proposed dissolution and the reasons therefor. The corporation has 60 days to correct each ground for dissolution or demonstrate that each ground does not exist. Upon the issuance of a certificate of involuntary dissolution, the


existence of the corporation will cease. However, if an application for reinstatement is approved and filed by the Department of State, the corporate existence will be deemed to have continued without interruption from the date of dissolution. F.S.A. §§607.1421; 1422. Upon reinstatement, the personal liability of directors, officers, or agents for acts taken on behalf of the corporation subsequent to administrative dissolution is terminated if such acts are ratified by the board of directors or shareholders. F.S.A. §607.1421(4). A reinstated corporation may bring, defend, or intervene in any lawsuit, even one based on facts that arose before the corporation’s reinstatement. Triple T, Inc. v. Jaghory, 612 So.2d 642 (Fl. App. 1993).

3. Liquidation

a. Shareholder Initiated The circuit courts have full power to liquidate the assets and business of a corporation in an action by a shareholder if it is established that:

(1) The directors are deadlocked in the management of corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is being suffered or threatened as a result;

(2) The shareholders are deadlocked in voting power and have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or

(3) The corporate assets are being misapplied or wasted. F.S.A. §607.1430(2).

b. Creditor Initiated

The circuit courts are also empowered to liquidate a corporation’s assets and business in an action by a creditor (1) if the creditor’s claim has been reduced to judgment, and an execution is unsatisfied, and the corporation is insolvent; or (2) the corporation has admitted in writing that the creditor’s claim is due and owing, and the corporation is insolvent. F.S.A. §607.1430(4).

c. Procedure In a liquidation proceeding, the court has the power to issue injunctions, to appoint a receiver pendente lite, to otherwise act to preserve corporate assets and to carry on the business of a corporation until a full hearing can be held. F.S.A. §607.1431(3).


A receiver must be a natural person or an authorized corporation. F.S.A. §607.1432(2). The receiver may sue and defend in all courts in his own name as receiver for the corporation. After a hearing upon notice the court may appoint a liquidation receiver to collect the corporation’s assets, including unpaid subscriptions. The liquidation receiver will be authorized to sell and otherwise dispose of assets so that liquidation expenses and corporate liabilities and obligations may be paid. Remaining assets and proceeds will be distributed to the shareholders. F.S.A. §607.1432(3). The court may also appoint an ancillary receiver in any other state. F.S.A. §607.1432(6). During the liquidation proceedings, the court may require all creditors to file proofs of claim with the clerk or with the receiver. F.S.A. §607.1433(3). Liquidation may be discontinued at any time during the proceeding if it is established that a cause for liquidation no longer exists. Subsequent to liquidation, after the payment of debts and the distribution of assets, the court will enter a judgment of involuntary dissolution and the corporation will cease to exist.

4. Other Provisions

a. Deposit of Amount Due Creditors Upon the voluntary or involuntary dissolution of a corporation, the portion of assets distributable to an unknown or unlocatable creditor or shareholder, or to one disabled without a person legally competent to receive the sum, must be deposited, within six months from the date of final distribution, with the Department of Banking and Finance. The funds will be held as abandoned property until the creditor or shareholder proves his rights thereto. F.S.A. §607.14401.

b. Survival of Remedies If a corporation is dissolved by issuance of a certificate of dissolution by the Department of State, by decree of court, or by expiration of its period of duration, remedies against the corporation, its directors, officers, or shareholders are not impaired with respect to any existing right, claim, or liability incurred prior to the dissolution if an action is commenced within three years after the date of dissolution. An action or proceeding against the corporation may be prosecuted or defended by the corporation in the corporate name. The shareholders, directors, and officers will have the power to take corporate or other actions to protect rights and remedies. F.S.A. §607.1406.


If the corporation was dissolved by the expiration of its period of duration, it may extend the period of duration by amending the articles of incorporation at any time during the three-year period after dissolution.

c. Transfer of Property After Dissolution The directors of the corporation at the time of dissolution constitute a board of trustees to handle any property or interest remaining in the corporation after dissolution. If the trustees learn that the corporation continues to own any property, they must apply the property to the payment of any corporate debts or liabilities, or, if there are none, they must distribute the property or the proceeds of its sale to those who were shareholders at the time of dissolution. The directors continue as trustees for as long as the corporation holds any interest in property or for three years after dissolution, whichever is longer. A vote of a majority of the trustees constitutes an act of the board of trustees.

V. FOREIGN CORPORATIONS A foreign corporation is defined as a corporation organized under laws other than the laws of Florida for a purpose or purposes for which a corporation may be organized under chapter 607. F.S.A. §607.01401(11). Before doing business in Florida, a foreign corporation must file an application for authority to do so with the Department of State. No foreign corporation is entitled to file an application to transact business in Florida which a domestic corporation is not permitted to transact. A foreign corporation will not be denied authority to transact business in Florida by reason of the fact that the laws of the state or country of its incorporation which govern its organization and internal affairs differ from Florida’s laws. F.S.A. §607.1503(3). A corporation is not transacting business in Florida (for the purposes of the Act) by:

(1) Maintaining, defending, or settling any proceeding; (2) Holding meetings of its directors or shareholders or carrying on other

activities concerning its internal affairs; (3) Maintaining bank accounts; (4) Maintaining officers or agencies for the transfer, exchange, and

registration of its securities or appointing and maintaining trustees or depositaries with relation to its securities;

(5) Effecting sales through independent contractors; (6) Soliciting or procuring orders, whether by mail or through employees,

agents, or otherwise, when such orders require acceptance outside the state before becoming binding contracts;


(7) Creating, as borrower or lender, or acquiring indebtedness, mortgages, or other security interests in real or personal property;

(8) Securing or collecting debts or enforcing any rights in property securing the same;

(9) Transacting any business in interstate commerce; (10) Conducting an isolated transaction completed within a period of thirty

days and not in the course of a number of repeated transactions of like nature;

(11) Owning and controlling a subsidiary incorporated in or transacting business within the state or voting the stock of any corporation it has lawfully acquired;

(12) Owning a limited partnership interest in a limited partnership that is doing business within Florida, unless such limited partner manages or controls the partnership or exercises the powers and duties of a general partner; or

(13) Owning, without more, real or personal property. F.S.A. §607.1501(2).

A foreign corporation for which an application for authority has been filed will, until a certificate of revocation or withdrawal is issued to it, enjoy the same, but no greater, rights and privileges as a domestic corporation organized for the purposes set forth in the application and, except as otherwise provided in the Act, will be authorized to transact business in Florida for those purposes set forth in its application, subject to the right of the state to suspend or revoke such authority. F.S.A. §607.1505. A foreign corporation which transacts business in Florida without authority to do so will not be permitted to maintain any action, suit, or proceeding in any court of the state until the corporation obtains authority to transact business in Florida. Likewise, no action, suit, or proceeding may be maintained in any court of Florida by any successor or assignee of such unauthorized corporation on any right, claim, or demand arising out of the transaction of business by the corporation in Florida until authority to transact business in Florida is obtained by the corporation or by a corporation which has acquired substantially all its assets. F.S.A. §607.1502(1), (2). The failure of a foreign corporation to obtain authority to transact business in Florida will not impair the validity of any contract, deed, mortgage, security interest, lien, or act of the corporation, and will not prevent the corporation from defending any action, suit, or proceeding in any court of the state. F.S.A. §607.1502(5).


A foreign corporation which transacts business in Florida without authority to do so will be liable to the state, for the years or parts thereof during which it transacted business in Florida without authority, in an amount equal to all fees and taxes which would have been imposed upon the corporation had it duly applied for and received authority to transact business in Florida and thereafter filed all required reports. F.S.A. §607.1502(4). VI. CLOSE CORPORATIONS

A. INTRODUCTION

A “close corporation” or closely held corporation is one having (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction, and operations of the corporation. Close corporations are often small businesses whose owners want to keep ownership and control in a few hands; the owners may in effect have a partnership relation, but desire incorporation to achieve limited liability and potential tax benefits. The shareholders are usually also active in management. Usually the only ready market for close corporation stock is for the controlling stock, and, usually there is some limitation on the transferability of stock, such as a shareholders’ repurchase agreement. Although Florida has no special close corporation statute, close corporations may wish to avail themselves of certain general provisions of the corporations statute to alleviate problems peculiar to them.

B. HIGH VOTE REQUIREMENTS Majority rule is the traditional principle of corporate decision-making; dissident shareholders can usually sell out. Of course, in a close corporation, an unhappy shareholder may be impeded by share transfer restrictions, lack of a market to purchase his shares, and the possibility of job loss if he is also an employee. However, the Florida Legislature has repealed the statutory high vote requirements that formerly protected such minority shareholders, presumably, because these types of requirements may create a danger of deadlock by minority veto.

C. SHAREHOLDER MANAGEMENT A corporation having 35 or fewer shareholders may dispense with or limit the powers of the board of directors provided the articles describe the person(s) who will perform the duties of the board in its stead. F.S.A. §607.0801.


All the shareholders of a close corporation may assent to a written agreement, whether embodied in the articles of incorporation, the bylaws, or in any other written agreement signed by all parties thereto, with regard to any phase of the affairs of the corporation, whether to the management of its business, division of profits, or otherwise. Such an agreement will not be invalid as between the parties thereto on the ground that it is an attempt by the parties to restrict the discretion of the board of directors in its management of the business of the corporation, to treat the corporation as if it were a partnership, or to arrange their relationship in a manner that would be appropriate only between partners. The effect of any such agreement will be to relieve the directors and impose upon the shareholders assenting thereto the liability for managerial acts and omissions that is imposed on the directors by law, to the extent that, and so long as, the discretion or power of the board of directors in its management of corporate affairs are controlled by any such agreement. VII. LIMITED LIABILITY COMPANIES

A. INTRODUCTION

The limited liability company (“LLC”) is a business entity authorized by the Limited Liability Company Act, effective October 2002. Florida Statutes Annotated §§608.401 through 608.705. The LLC is a cross between a corporation and a limited partnership—the members are subject to liability only to the extent of the capital invested. Under current tax law, a LLC may qualify for “check the box” tax treatment which allows the LLC to be taxed as a corporation or partnership.

B. TAX STATUS Under the new “check the box” rules, an entity must be separate from its owners as defined by federal tax law to be able to elect its tax treatment.

1. Classification for Taxation For federal tax purposes, LLCs are treated by default as a pass-through entity for taxation. If the LLC has a single member, it is considered a “disregarded entity” for tax purposes, meaning that the single member reports the LLC’s income on her own tax return. When an LLC has multiple members, the LLC is treated as a partnership for tax purposes. However, under “check-the-box” taxation, a LLC can elect to be taxed as a corporation. The term “disregarded entity” only applies for tax purposes, it has nothing to do with the


actual business designation of the entity or the owner’s liability for business debts or lawsuits. F.S.A. §608.471.

C. COMPARISON WITH SUBCHAPTER S CORPORATION An LLC is similar to an S Corporation, Internal Revenue Code, §§1371-1377. Under Subchapter S, certain closely held corporations can elect to avoid taxation as a corporation if they comply with particular limitations. However, an LLC is not subject to the same limitations. In an S corporation, there can be no more than 100 shareholders; an LLC has no such limitation. In an S corporation, only U.S. citizens or resident aliens can be shareholders; an LLC imposes no such limitation. In an S corporation, a shareholder may write off depreciation losses and other deductions only to the extent of his basis in the stock; an LLC may pass on all losses to members of the company.

D. FORMATION One or more persons may form a limited liability company by executing, acknowledging, and delivering to the Department of State articles of organization. F.S.A. §§608.405; 408. The articles must contain the basic information required in the articles of a business corporation (e.g., name, purpose, address, agent). If the LLC is to be managed by managers, the articles may so state. Any other provisions not inconsistent with law may be included, but the LLC’s powers need not be enumerated. F.S.A. §608.407. The words “limited company” or “limited liability company” or the abbreviations “LLC,” “LC,” “L.L.C.,” or “L.C.” must be the last words of the name. Omission of these words or abbreviations renders any person who participates in the omission, or knowingly acquiesces in it, liable for any indebtedness, damage, or liability occasioned by the omission. F.S.A. §608.406(1)(a). If the Department of State finds that the articles conform to law, and all fees have been paid, it issues a certificate of organization. The certificate is conclusive evidence of the company’s de jure organization, except against the state in a proceeding to cancel or revoke the certificate or to involuntarily dissolve the company. The company’s existence commences on the date of filing, unless a later date is specified (up to 90 days after filing), or on the date of subscription and acknowledgment provided the filing is within five (5) days after that date. F.S.A. §§608.408; 409.


E. POWERS A limited liability company has the power to:

(1) Sue or be sued, or defend, in its own name; (2) Purchase, lease, or otherwise acquire real or personal property, or an

interest in real or personal property, wherever situated; (3) Sell, lease, mortgage, or otherwise encumber or dispose of, all or any

part of its property or assets; (4) Purchase, subscribe for, or otherwise acquire, vote, or otherwise use or

deal in or with: shares or other interests in or obligations of any other entity;

(5) Make contracts or guarantees or incur liabilities; borrow money; issue notes, bonds, or other obligations; or secure any of its obligations by mortgage or pledge of all or any part of its property, franchises, and income;

(6) Lend money, invest or reinvest its funds, or take and hold real or personal property as security for the repayment;

(7) Conduct its business, carry on its operations and have offices, and exercise the powers granted by statute within or outside Florida;

(8) Elect or appoint managers and agents of the limited liability company, define their duties, fix their compensation, and lend them money and credit;

(9) Make donations to the public welfare or for charitable, scientific, or educational purposes;

(10) Pay pensions and establish pension plans, profit-sharing plans, and other incentive plans for any or all of its current or former managers and employees;

(11) Be a promoter, incorporator, shareholder, partner, member, associate, or manager of any corporation, partnership, joint venture, trust, or other enterprise; or

(12) Have and exercise all powers necessary or convenient to further its business. F.S.A. §608.404.

F. MANAGEMENT

The management of the LLC, unless otherwise provided in the articles or operating agreement, is vested in the members in proportion to their percentage of the company’s profits. However, if the articles or operating agreement so provide, the management may be vested in a manager or managers elected annually in the manner prescribed by the company’s operating agreement. The managers shall also hold the offices and have the


responsibilities accorded to them by the members and set out in the company’s operating agreement. F.S.A. §608.422. "Operating agreement" means written or oral provisions that are adopted for the management and regulation of the affairs of the limited liability company and that set forth the relationships of the members, managers, or managing members and the LLC. F.S.A. §608.402(24). Any inconsistency between written and oral operating agreements will be resolved in favor of the written agreement. The members of an LLC may enter into an operating agreement before, after, or at the time the articles of organization are filed, and the operating agreement takes effect on the date of the formation of the limited liability company or on any other date provided in the operating agreement. The operating agreement may not: unreasonably restrict a right to information or access to records; eliminate the duty of loyalty; unreasonably reduce the duty of care; eliminate the obligation of good faith and fair dealing; vary the requirement to wind up the LLC’s business in a case specified by law; or restrict rights of a person, other than a manager, member, or transferee of a member’s distributional interest. F.S.A. §608.426(2). The power to adopt, alter, amend, or repeal the operating agreement of a limited liability company is vested in the members of the LLC unless vested in the manager or managers by the articles of organization or operating agreement, provided that any amendment to a written operating agreement must be in writing. The operating agreement adopted by the members or by the manager or managers may be repealed or altered; a new operating agreement may be adopted by the members; and the members may prescribe in any operating agreement made by them that such operating agreement may not be altered, amended, or repealed by the manager or managers. F.S.A. §608.423. Unless the articles of organization provide otherwise, the manager or managers of the LLC may adopt an operating agreement to be effective only in an emergency situation. F.S.A. §608.423(4). All regular operating agreement provisions consistent with the emergency provisions remain effective during the emergency, but the emergency provisions are not effective after the emergency ends. F.S.A. §608.423(5). For purposes of this section, an “emergency” exists if the company’s managers cannot be assembled, because of some catastrophic event. F.S.A. §608.423(7).

1. Centralized Management The LLC can be managed by all the members, by some of the members acting as a management committee, or by an individual manager, who needs


not be a member. F.S.A. §608.422. Management by a committee or individual member may be sufficient to constitute centralized management.

2. Limited Liability The potential liability of members and managers is set forth in F.S.A. §608.4228. This statute provides that a manager or managing member of a limited liability company shall not be personally liable for monetary damages to the company or any other person regarding the management of the company unless:

(1) The manager or managing member breached or failed to perform her duties as a manager or managing member; and

(2) The manager or managing members’ breach of, or failure to perform, those duties constitutes: (a) A crime, unless the manager or managing member had reasonable

cause to believe the conduct was lawful, or no reasonable cause to believe it was unlawful;

(b) An invalid distribution; (c) A transaction from which the manager or managing member derived

improper personal benefit; (d) An action in conscious disregard of the best interest of the company

or willful misconduct; or (e) Acts of recklessness, bad faith, malicious purpose, or wanton and

willful disregard of human rights safety or property, in an action by one other than the LLC or a member.

3. Transferability of Interest

The interest of a member is not freely transferable, because the transferee does not become a member without the unanimous consent of the other LLC members. Unless otherwise provided in the articles of organization, a member cannot assign her interest unless a majority of the nonassigning members consent to the assignment. The transferee cannot participate in management; rather, she only can receive the share of profits and return of contributions to which the transferor would otherwise have been entitled. F.S.A. §608.432.

4. Voting by Members and Managers Unless otherwise provided in the articles of organization or operating agreement, all members of the company shall be entitled to vote in matters relating to the company. F.S.A. §608.4231(1). Each member’s vote is weighted in proportion to her interest in the profits. F.S.A. §608.4231(3)(a).


5. Sharing Profits and Losses The profits and losses of a limited liability company shall be allocated among the members as provided in the articles of organization or operating agreement. If the articles or operating agreememt make no such provision, then profits and losses will be allocated on the basis of each member’s capital account (contributions that have not been withdrawn). F.S.A. §608.4261.

6. Admission of Additional Members Unless the articles of organization or operating agreement otherwise provide, no person may be admitted as a member unless a majority of the members consent in writing to the admission of the additional member. F.S.A. §608.4232.

7. Delegation of Powers and Rights Unless the articles of organization or operating agreement otherwise provide, a member or manager of a LLC has the power and authority to delegate to one or more other persons, the member’s or manager’s rights and powers to manage and control the business and affairs of the LLC, including the power and authority to delegate to agents, officers, and employees of a member or manager of the LLC, and the power and authority to delegate by a management agreement or other agreement. Such delegation by a member or manager does not cause the member or manager to cease to be a member or manager. F.S.A. §608.4236.

8. Membership Termination A person ceases to be a member of a LLC if the member: makes an assignment for the benefit of creditors; files a voluntary petition in bankruptcy; is adjudged bankrupt or insolvent; or seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of all, or a substantial part, of the member’s properties. F.S.A. §608.4237.

G. COMPANY CAPITAL AND PROPERTY

1. Contributions to Capital A member’s contributions to the company’s capital may consist of cash, property, services rendered, a promissory note, or other obligation to contribute cash, property, or services. Unless otherwise provided in the articles of organization or operating agreement, a member is obligated to the LLC to


perform any enforceable promise to contribute cash or property or to perform services, even if the member is unable to perform, because of the member’s death or disability or any other reason. F.S.A. §608.4211.

2. Company Property Real or personal property owned or purchased by the LLC is held and owned, and conveyance must be made, in the name of the company. Instruments providing for the acquisition, mortgage, or disposition of company property are valid and binding if executed by one or more managers, or by one or more members if management has been retained by the members. F.S.A. §608.425.

3. Distribution of Property The LLC may, from time to time, distribute its property to the members upon the basis stipulated in the operating agreement. If the operating agreement does not provide for the payment of distributions to members, the distributions shall be made on the basis of the agreed value, as stated in the records of the limited liability company, of the contributions made by each member to the extent they have been received by the limited liability company and have not been returned. A distribution cannot be made unless afterwards, the LLC will remain solvent. The managers or managing members of a limited liability company may base a determination that a distribution is not prohibited for this reason either on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable in the circumstances. In the case of any distribution based upon such financial statement or such a valuation, each such distribution shall be identified as a distribution based upon such financial statements or a fair valuation of assets, and the amount distributed shall be disclosed to the receiving members concurrent with their receipt of the distribution. F.S.A. §608.426.

4. Withdrawal and Distribution Upon Withdrawal A member may withdraw from a limited liability company only at the time or upon the occurrence of an event specified in the articles of organization or operating agreement and in accordance with the articles of organization or operating agreement. Notwithstanding anything to the contrary under applicable law, unless the articles of organization or operating agreement provides otherwise, a member may not resign from a limited liability company prior to the dissolution and winding up of the limited liability company.


Notwithstanding anything to the contrary under applicable law, the articles of organization or operating agreement may provide that a limited liability company interest may not be assigned prior to the dissolution and winding up of the limited liability company. Upon withdrawal, a withdrawing member is entitled to receive any distribution to which the withdrawing member is entitled under the articles of organization or operating agreement, and, if not otherwise provided in the articles of organization and operating agreement, the withdrawing member is entitled to receive, within a reasonable time after withdrawal, the fair value of the withdrawing member's interest in the limited liability company as of the date of resignation based upon the withdrawing member's right to share in distributions from the limited liability company. In the absence of a statement in the articles of organization or the operating agreement to the contrary or the consent of all members of the limited liability company, a member, irrespective of the nature of the member's contribution, has only the right to demand and receive cash in return for the member's contribution to capital. F.S.A. §608.427.

5. Wrongful Distribution If a member receives a distribution in violation of the articles or organization, operating agreement, or law, the member is liable to the LLC for a period of 3 years for the amount of the distribution wrongfully made. F.S.A. §620.428.

H. RIGHTS AND LIABILITIES OF MEMBERS

1. Nature and Transferability of Member’s Interest A member’s interest in an LC is personal property. F.S.A. §608.431. A member’s interest may be transferred or assigned as provided in the operating agreement. However, if all other members (other than the member proposing to dispose of his interest) do not approve of the proposed transfer or assignment, the transferee has no right to participate in the management of the business and affairs of the company or to become a member. The transferee is entitled to receive only the share of profits or other compensation by way of income and the return of contributions to which that member otherwise would be entitled. F.S.A. §608.432.

2. Liability for Company’s Obligation


Neither the members nor the managers of the LLC are liable under a judgment, decree, or court order or in any other manner for a debt, obligation, or liability of the LLC. F.S.A. §608.436. All persons who assume to act as a limited liability company without authority to do so are jointly and severally liable for all debts and liabilities. F.S.A. §608.437.

3. Parties to Actions A member of an LLC is not a proper party to proceedings by or against the company, except when the object is to enforce a member’s right against, or liability to, the company. F.S.A. §608.462. Process against the company may be served as if the company were a partnership, or upon the registered agent at his business address. F.S.A. §608.463.

I. DISSOLUTION

1. Causes An LLC is dissolved upon the occurrence of any of the following events:

(1) When the period fixed for its duration expires; (2) By the unanimous written agreement of all members; (3) Upon the occurrence of events stated in the LLC’s articles of

organization or the operating agreement; (4) At any time there are no members; or (5) Entry of order of dissolution by a court. F.S.A. §608.441(1).

The company will be dissolved when it has no members; however, unless otherwise provided in the articles of organization or operating agreement, the limited liability company is not dissolved and is not required to be wound up if, within 90 days (or other period provided in the articles of organization or operating agreement) after the occurrence of the event that terminated the membership of the last remaining member, the personal or other legal representative of the last remaining member agrees in writing to continue the limited liability company with the personal representative or its nominee or designee as a member, effective as of the occurrence of the event that terminated the last remaining member. F.S.A. §608.441(1)(d). So long as the limited liability company continues to have at least one remaining member, and except as otherwise provided in the articles of organization or operating agreement, the death, retirement, resignation, expulsion, bankruptcy, or dissolution of any member or the occurrence of any other event that terminates the continued membership of any member shall not


cause the limited liability company to be dissolved, and upon the occurrence of any such event, the limited liability company shall be continued without dissolution. F.S.A. §608.441(2).

2. Procedure Following the occurrence of any event effecting a dissolution of the limited liability company, the company must deliver articles of dissolution to the Department of State. F.S.A. §608.441(4). When all debts, liabilities, and obligations have been paid or provided for, and all assets distributed, articles of dissolution are filed with the Department of State, and the Department cancels the certificate of organization. Upon dissolution of the company, it can continue to exist, but it may not carry on any business except appropriate wind up and liquidation. F.S.A. §608.4431. 3. Revocation of Dissolution A LLC may revoke its dissolution at any time prior to the expiration of 120 days following the effective date of the articles of dissolution. Revocation of dissolution must be authorized in the same manner as dissolution was authorized. F.S.A. §608.4411. 4. Distribution of Assets Subject to any contrary statement in the operating agreement, members share in the assets in respect to the claims for capital and in respect to their claims for profits or for compensation by way of income on their contributions, in proportion to the respective amounts of the claims. F.S.A. §§608.4431; 444. In settling accounts after dissolution of a LLC, the assets of the company must be distributed in the following order: to creditors, including members who are creditors; to members and former members in satisfaction of liabilities for distributions; and to members pro rata in proportion to their then current percentage, or other interests in the profits of the company. F.S.A. §608.444.

5. Involuntary Dissolution a. Actions by Members

Unless otherwise provided in the articles of organization or operating agreement, on application by or for a member, the circuit court may order


dissolution of a limited liability company if it is established by a preponderance of the evidence that it is not reasonably practicable to carry on the business of the limited liability company in conformity with the articles of organization or the operating agreement. F.S.A. §608.441(3). An LLC may also be dissolved in a proceeding brought by a manager or member if it is established that:

(1) The managers, managing members, or members are deadlocked in the management of the limited liability company affairs, the members are unable to break the deadlock, and irreparable injury to the limited liability company is threatened or being suffered; or

(2) The limited liability company's assets are being misappropriated or wasted. F.S.A. §608.449(2).

b. Actions by Creditors

In a proceeding brought by a creditor, the LLC may be dissolved if it is established that:

(1) The creditor's claim has been reduced to judgment, the execution on that judgment returned unsatisfied, and the limited liability company is insolvent; or

(2) The limited liability company has admitted in writing that the creditor's claim is due and owing and the limited liability company is insolvent. F.S.A. §608.449(3).

c. Actions by the Department of Legal Affairs

An LLC may be judicially dissolved in an action filed by the Department of Legal Affairs when it is shown that the company:

(1) Has procured its articles of organization through fraud; or (2) Has continued to exceed or abuse its authority. F.S.A. §608.449(1)(a).

d. Administrative Order of the Department of State

A limited liability company may be dissolved administratively by order of the Department of State when the Department has determined that the LLC:

(1) Has failed to timely file its annual report or pay the filing fee for the annual report;


(2) Has failed for thirty (30) days either to appoint and maintain a registered agent in this state, or to file in the office of the Department of State a statement of a change of the registered office or agent;

(3) The limited liability company has failed to answer truthfully and fully, within the time prescribed, any interrogatories propounded by the Department of State; or

(4) The limited liability company’s period of duration has expired. F.S.A. §608.448.

If the Department of State determines that grounds for dissolution exist, it must serve the company with written notice of its determination. F.S.A. §608.4481. The limited liability company then has sixty (60) days after issuance of the notice to correct each ground for dissolution, or the Department of State will dissolve the limited liability company. Any limited liability company which has been dissolved by the Department of State may be reinstated by the Department at any time (1) upon approval of an application for reinstatement, signed by an officer or director of the dissolved limited liability company and filed by the Department, and (2) when it is established to the satisfaction of the Department that in fact there was no cause for the dissolution or that the reasons for the dissolution have been corrected and all fees have been paid. When the application for reinstatement is approved and filed by the Department of State, the existence of the limited liability company shall be deemed to have continued without interruption from the date of dissolution. The reinstatement shall have no effect upon any personal liabilities of the members or managers of the limited liability company on account of actions taken during the period between dissolution and reinstatement, but the power of the limited liability company to indemnify such members or managers shall extend to actions taken during such period. F.S.A. §608.449.


UCC ARTICLE 3 Negotiable Instruments I. IMPORTANCE OF “NEGOTIABILITY”

A. IN GENERAL

Whether an instrument is negotiable is important because negotiability determines, to a large extent, the rights and obligations of the various parties who are involved with the paper. The types of problems that are likely to arise under Article 3 can be divided into three categories: good faith purchaser versus obligor, good faith purchaser versus true owner, and transferee versus transferor.

1. Good Faith Purchaser vs. Obligor Probably the most common problem arising under Article 3 involves a suit by someone who has purchased the instrument, has demanded payment from the person obligated on it, has been refused payment and then sues the obligor. A brief look at the law of assignment is helpful to illustrate the problem and to show how Article 3 affects the result in these cases. Assume that Penny Payee agrees to sell her car to Mickey Maker for $2,500, with delivery of the car to take place immediately and payment to be made in thirty days. Once the contract has been concluded and the car delivered, Penny has a right against Mickey to recover $2,500 in thirty days. If Penny demands payment from Mickey, Mickey can raise any defenses that might exist to the contract, e.g., fraud, failure of consideration, duress, statute of frauds, etc., and, if these defenses are established, Penny will not recover. If Penny assigns her right to Alex and Alex brings the lawsuit against Mike, the same rule applies, i.e., that all defenses that Mickey has against Penny can be raised against Alex. This is because of the basic rule that an assignee of a chose in action takes only those rights that the assignor has to transfer and takes them subject to any defenses that might exist. If, however, the obligation that Mickey owes to Penny is in the form of a negotiable instrument—is so written as to meet the requirements of UCC §3-104 — and if Alex is a holder in due course under §3-302, then a different result may be obtained. F.S.A. §§673.1041; 3021. In this situation, Article 3 cuts off most of the defenses available to Mike. The defenses that are not cut off are those listed in §§3-305 (F.S.A. §673.3051) and 3-601 (F.S.A. §673.6011).


Thus, in these kinds of problems, the effect of the rules in Article 3 is to provide a transferee with better rights than her transferor.

The analysis of this kind of problem involves these basic steps: (a) Is the instrument negotiable? (b) Is the plaintiff a holder in due course? (c) What is the liability of the defendant? (d) Is the defense raised one that is cut off?

2. Good Faith Purchaser vs. “True Owner”

A second kind of problem occurs when the owner of an instrument loses it (or has it stolen) and it is subsequently transferred to a good faith purchaser. Generally, in such situations, the law of property gives to the owner (often called the “true owner”) a right to recover the instrument from the good faith purchaser. Under Article 3, however, the good faith purchaser will prevail against the true owner if the good faith purchaser meets all of the requirements of a holder in due course. §3-302. F.S.A §673.3021. In effect, when a transferee takes an instrument as a holder in due course, she gets good title as against the whole world, even the true owner.

3. Transferee vs. Transferor The third common type of problem arises where an instrument is transferred after its initial issuance, and the person to whom it is transferred sues the transferor.

For example, in our original hypothetical example, Alex, not having been paid by Mickey, might sue Penny instead of Mickey. Article 3 may impose liability on Penny in either or both of two ways: (1) Penny may be liable to Alex under her “contract of indorsement”; or (2) under the “transfer warranties” of a transferor. §§3-414, 3-416(b). F.S.A. §§673.4141; 4161.

B. TYPES OF NEGOTIABLE INSTRUMENTS

Instruments are divided into two general categories – notes and drafts. A note is basically an instrument that is a promise to pay. A draft is an instrument that is an order to someone else to pay. If an instrument falls within the definition of both a “note” and a “draft”, a person entitled to enforce the instrument may treat it as either. §3-104(e). F.S.A. §673.1041(5).


1. Notes A Note is a two-party instrument in which one party (the Maker) promises to pay a second party (the Payee) a sum of money. It is a promissory instrument and generally used in connection with the extension of credit by the payee. The underlying obligation is suspended until the note is paid or dishonored. Payment of the note results in discharge to the extent of the payment. §3-310(b)(2). F.S.A. §673.3101(2)(b).

December 15, 20— I promise to pay Penny Payee, or order, $2,500 on demand. s/Mickey Maker

The illustrative note is basically a promise by Mickey Maker to pay Penny Payee $2,500. Generally, it represents a debt between the parties, but like any promise it may or may not be an enforceable contract. Certificate of Deposit. A certificate of deposit is an instrument containing a bank’s acknowledgement that a sum of money has been received by the bank and a promise by the bank to repay that sum. A certificate of deposit is treated as a note of the bank. §3-104(j). F.S.A. §673.1041(10). 2. Drafts A Draft (Bill of Exchange) is a three-party instrument in which one party (the Drawer) orders a second party (the Drawee or Payor) to pay a sum of money to a third party (the Payee). One of the most common types of a draft is a Check, which is a draft drawn upon a bank and payable on demand. §3-104(f). F.S.A. §673.1041(6). Checks and drafts are usually used to pay a debt, but they may also be utilized to provide short-term credit.

December 15, 20— To the Drawee Bank Pay Paul Payee or order $1,000 s/Dave Drawer

The illustrative example of a draft signifies that Dave Drawer has ordered the Drawee Bank to pay to Paul Payee $1,000. Although there is no express


promise by any party expressed on the draft, the law implies a promise on the drawer’s part to pay if the drawee does not follow the drawer’s order to pay. a. Checks A check is a draft drawn upon a bank and payable on demand. §3-104(f). F.S.A. §673.1041(6). A check may also be a cashier’s check (a draft on which the drawer and drawee are the same bank or branches of the same bank) or a teller’s check (a draft drawn by a bank on another bank or payable at or through a bank.) An instrument may be a check even though it is described on its face by another term, such as “money order.” §3-104(f). F.S.A. §673.1041(6). A certified check, cashier’s check, or teller’s check discharges the underlying obligation to the same extent discharge would result if an equal amount of money were taken in payment of the obligation. §3-310(a). F.S.A. §673.3101(1). In the case of an uncertified check, the underlying obligation is suspended until the check is dishonored or it is paid or certified. §3-310(b)(1). F.S.A. §673.3101(2)(a). b. Traveler’s Check A traveler’s check is an instrument that is payable on demand, drawn on or payable at or through a bank, and is designated by the term “traveler’s check” or substantially similar term. It must be countersigned by a person whose specimen signature appears on the instrument. §3-104(i). F.S.A. §673.1041(9).

C. REQUIREMENTS OF A NEGOTIABLE INSTRUMENT Whether an instrument is negotiable is purely a matter of form, and the determination must be made from the four corners of the instrument. A promise or order other than a check is not negotiable if it contains a conspicuous statement that it is not negotiable or not governed by Article 3. §3-104(d). F.S.A. §673.1041(4). Section 3-104(a), sets out the following requirements of a negotiable instrument:

(1) Contain an unconditional promise or order; (2) To pay a certain sum in money; (3) With no other promise, order, obligation, or power given by the maker

or drawer except as authorized by the Code; (4) Payable on demand or at a definite time; and (5) Payable to order or to bearer. F.S.A. §673.1041(1).


1. Written Both a promise and an order must be in writing. §§3-103(a)(6), (9). F.S.A. §§673.1031(1)(f), (i).

2. Signed

The order or promise must be signed by the person giving the instruction or undertaking to pay. §§3-103(a)(6), (9). F.S.A. §§673.1031(1)(f), (i). A signature is made by use of any name, including any trade or assumed name, upon an instrument, or by any word or mark used in lieu of a written signature. §3-401(b). F.S.A. §673.4011(2). A signature may be made manually or by means of a device or machine and may be made by the use of any name, word, mark, or symbol executed or adopted by a party with the present intent to authenticate a writing. §3-401(b). F.S.A. §673.4011(2). It may be a simple “X”; it may be typewritten or printed. Even writing the name of another person constitutes the signature of the writer if the writer lacks authority to use the other’s name. §3-402. F.S.A. §673.4021.

3. Unconditional Promise or Order (§3-106)

The basic idea behind the requirement that a negotiable instrument contain an unconditional promise or order is that it be payable in all events. A number of rules which distinguish the conditional from the unconditional promise have been codified in the UCC:

(1) Implied or constructive conditions do not render the instrument nonnegotiable, e.g., “I promise to pay . . . if this instrument is properly indorsed.”

(2) Stating that consideration for which the instrument is given does not affect negotiabil ity, e.g., “This instrument given for services to be rendered.”

(3) Stating that the instrument is secured does not destroy negotiability, e.g., “This note is secured by a mortgage given of equal date.”

(4) Reference to other Instruments or Agreements. If the note or draft states that it is given “as per” a transaction, “in accordance with” a transaction, or that “arises out of” a transaction, this does not destroy negotiability. But, if the instrument states that it is “subject to” or “governed by” any other agreement, then negotiability is destroyed.


(5) If an instrument refers to another instrument for payment rights (acceleration), this does not render it nonnegotiable.

(6) Particular Fund Doctrine. If an instrument is payable out of a particular fund it is nonnegotiable unless the instrument is issued by a government, governmental unit or agency, e.g., “This note is payable only out of my expense account fund.” However, an instrument that is payable out of the entire assets of a partnership, unincorporated association, trust or estate is negotiable. In addition, a mere notation on the instrument that a particular account is to be charged does not render the instrument nonnegotiable, e.g., “Charge my expense account fund.” F.S.A. §673.1061.

4. Sum Certain in Money

The instrument must be payable in money, and only money, and the amount due must be ascertainable from an inspection of the instrument.

a. Money (§3-107) “Money” means a medium of exchange authorized or adopted by a domestic or foreign government as part of its currency. §1-201(24). F.S.A. §671.201(24). If a negotiable instrument is payable in foreign money, it may be satisfied by paying the equivalent in United States money unless it specifies that it can be paid only in foreign currency. §3-107. F.S.A. §673.1071. An instrument is rendered nonnegotiable if the obligor agrees to pay in goods or services, even as an alternative option, e.g., “I promise to pay $100 or give you my car”; or “I promise to pay $100 or mow your lawn.”

b. Sum Certain (§3-112) A negotiable instrument may be payable with or without interest or other charges described in it. Interest may be stated as a fixed or variable amount of money or as a fixed or variable rate. Determination of the amount or rate stated in the instrument may require reference to information not contained in the instrument. If an instrument provides for interest, but the amount cannot be ascertained, interest is payable at the rate payable on judgments at the place of payment of the instrument at the time interest first accrues. F.S.A. §673.1121.


5. No Other Promise Unless Authorized (§3-117) The Code provides that “other promises” do not destroy negotiability. The obligation of a party to pay the instrument may be modified, supplemented, or nullified by a separate agreement of the obligor and person entitled to enforce the instrument if it was incurred in reliance on the other agreement. F.S.A. §673.1171.

6. Payable “On Demand” or at a “Definite Time” (§3-108) An instrument is payable on demand if it states that it is payable on demand, or at sight, or otherwise indicates that it is payable on the will of the holder, or does not state any time for payment. An instrument is payable at a definite time if it is payable: (1) At the end of a definite period of time, e.g., in 90 days; (2) At a fixed date, e.g., December 25, 2013; or (3) At a time readily ascertainable at the time of issue, even if subject to rights of

(a) Prepayment, (b) Acceleration, (c) Extension at the holder’s option, or (d) Extension to a further definite time at the maker’s option or automatically, upon

or after a specified act or event. An instrument that is payable only upon the happening of an event is nonnegotiable, even if that event is certain to happen, if the time the event is to happen is uncertain. The most common example of this is a note payable at, or at a fixed time after, death. §3-108. F.S.A. §673.1081.

7. Payable to Bearer or to Order (§3-109) To be negotiable, an instrument must contain the magic words, “to order” or “to bearer,” or an acceptable substitute. F.S.A. §673.1091.

a. Order Instruments An instrument is payable to order if it is payable to the order of the payee of an identified person. §3-109(b). F.S.A. §673.1091(2).


b. Bearer Instruments An instrument is bearer paper if it is payable to: (1) Bearer; (2) The order of bearer; (3) Person in possession of promise is entitled to payment; (4) Does not state a payee; or (5) “Cash” or the order of “cash” or to any other designee which does not purport to be a real person. §3-109(a). F.S.A. §673.1091(1). c. An Instrument may be Payable to Multiple Payees. If an instrument is made payable to two or more persons alternatively (i.e., “X or Y”), it is payable to any of them and may be negotiated, discharged or enforced by any or all of them in possession of the instrument. If an instrument is payable to two or more persons jointly (i.e., “X and Y”), it is payable to all of them and may be negotiated, discharged, or enforced only by all of them. When an instrument is payable to X and Y, neither, acting alone, can be the holder of the instrument. If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively (e.g., an instrument payable to “X and/or Y” is treated like an instrument payable to “X or Y”). Thus, either X or Y is the payee. §3-110(d). F.S.A. §673.1101(4).

8. Deficiencies It should be remembered that whether an instrument is negotiable or not is a matter of form. It must meet the above noted requirements at the time of issuance to be negotiable, and these must be present on the paper itself. However, an obligor could confer some or all of the attributes of negotiability on otherwise nonnegotiable paper by a provision allowing the Code to govern the rights or obligations of the parties. II. LIABILITY OF THE DEFENDANT

A. IN GENERAL—SIGNATURES

It is a basic rule that no one is liable on an instrument unless the person signed it or is represented by an agent who signed the instrument in such a manner to bind the person. A person may be liable on the underlying transaction, but unless he has signed the instrument, or his signature has been affixed by one who has authority to sign for the individual, he is not liable on the instrument. §3-401(a). F.S.A. §673.4011(1). 1. Signatures may be made by agents or other representatives.


When a representative or purported representative signs either his own name or the represented person’s name on an instrument, the represented person is bound to the extent she would be bound if the signature were on a simple contract. If the representative’s signature is authorized, the represented person is liable on the instrument whether or not identified in it. §3-402(a). F.S.A. §673.4021(1). The representative who signs the instrument may or may not also be liable on it. If a representative signs her name to an instrument, and it is an authorized signature of the represented person, then (1) if the form of the signature unambiguously shows it is made on behalf of the represented person and the represented person is identified in the instrument, the representative is not liable, and (2) if the form of the signature does not show unambiguously that it is made in a representative capacity or the represented person is not identified, the representative is liable to a holder in due course who took the instrument without notice that the representative was not intended to be liable, and the representative is liable to any other person unless the representative proves that the original parties did not intend her to be liable. §3-402(b). F.S.A. §673.4021(2). An exception is that if a representative signs her name to a check payable from an account of the represented person who is identified on the check, without indicating her representative status, the representative is not liable if her signature is an authorized signature of the represented person. §3-402(c). F.S.A. §673.4021(3).

Consider the following situations in which “Peter Pumpkin” is the principal and “Andy Ashe” is the agent. (In all cases that follow, it is assumed that Andy Ashe had the authority to sign for Pumpkin):

(1) Agent signs “Peter Pumpkin”—Pumpkin is liable, Ashe is not. (2) Agent signs “Andy Ashe”—Pumpkin is not liable, Ashe is. (3) Agent signs “Peter Pumpkin by Andy Ashe, Agent”—Pumpkin

is liable, Ashe is not. (4) Agent signs “Andy Ashe, Agent”—As to third parties, Ashe is

liable and Pumpkin is not. As between the immediate parties to the instrument, Ashe may show that the intent of the parties was that he was not to be bound but that Pumpkin was. If he does establish this, then Pumpkin is liable and Ashe is not. The words “Andy Ashe,” in such cases, operate as the signature of Pumpkin.

(5) Agent signs “Peter Pumpkin Corporation, Andy Ashe”—Same rule as (4).

(6) Agent signs “Peter Pumpkin-Andy Ashe,”—Same rule as (4).


(7) Agent signs “Peter Pumpkin Corporation, Andy Ashe—Secretary”—Here there is a presumption that Ashe was signing only for the corporation and, in the absence of contrary proof, Ashe is not liable to anyone and the corporation is liable .

(8) If the body of the note recited “I Peter Pumpkin, promise to pay” and it is signed by “Andy Ashe,” this is a sufficient indication that Ashe was signing for Pumpkin and Pumpkin is liable but Ashe is not.

2. Unauthorized Signatures. Where a person signs someone else’s name without authority, this does not operate as the signature of the person whose name was signed, but it does operate as the signature of the person signing. §3-403(a). F.S.A. §673.4031(1).

Thus, if Ashe, without authority, signed the name of Pumpkin, Pumpkin would not be liable but Ashe would. §3-403(a). F.S.A. §673.4031(1).

B. LIABILITY OF THE MAKER OF A NOTE

A note is a two-party instrument in which one party, the maker, promises to pay the other party, the payee. The liability of the maker is clear and simple: She must pay the amount promised when the instrument becomes due, unless she has a defense. There are no conditions to the maker’s liability. In fact, suit may be instituted even though there has been no demand for payment. The liability of the maker is generally called “primary liability” which simply means that there are no conditions to her liability. However, where the note is payable on a particular date, the payee’s cause of action does not accrue until the day after the due date. §§3-413(a), 3-501(a). F.S.A. §§673.4131(1); 5011(1). If the note is made "payable at" a bank, then the note is the equivalent of a draft drawn on that bank. In such cases, the “maker” becomes in effect a “drawer” of a draft and her liability is determined by the rules applying to drawers. In some states, where a note is payable at a bank, the bank has the authority to pay the instrument when it falls due out of any funds that the maker has on deposit at the bank. §3-501(a). F.S.A. §673.5011(1). If the instrument is "payable through" the bank, this simply means that the bank has been designated by the maker (or drawer) as a collecting bank. The bank will make the presentment to the maker or drawer. A demand on the bank


is not itself presentment and the bank is not authorized to pay. §3-501(a). F.S.A. §673.5011(1).

C. LIABILITY OF THE DRAWER OF A DRAFT A draft is a three-party instrument whereby one party, the drawer, orders a second party, the drawee or payor bank, to pay a third party, the payee. Although the drawer occupies somewhat the same position as the maker of a note (and is often incorrectly called a maker), the drawer does not make any express promise to do anything. He is merely ordering the drawee to pay. The drawer does not have primary liability. The law does impose liability on the drawer, however, where the drawee fails to pay the drawer is obliged to pay the draft according to its terms at the time it was issued, if not issued, at the time it first came into possession of a holder, or if the drawer signed an incomplete instrument, according to its terms when completed. The obligation is owed to a person entitled to enforce the draft or to an indorser who paid the draft under §3-415. §3-414(b). F.S.A. §673.4141(2). The liability of a drawer is generally called “secondary liability,” which means there are conditions to the drawer’s liability, namely (1) presentment to the drawee, (2) dishonor by the drawee, and (3) notice of the dishonor to the drawer. However, the drawer may disclaim this secondary liability by drawing without recourse, if the draft is not a check. §§3-414(d), (e). F.S.A. §§673.4141(4), (5).

D. LIABILITY OF THE DRAWEE OF A DRAFT Initially, the drawee on a draft has no liability to the payee or a subsequent holder. The instrument is simply an order to the drawee. The drawee’s liability, if any, for wrongfully dishonoring the instrument (refusing to pay when it should pay) runs only to the drawer and must be based upon some contract between the drawer and the drawee. §3-408. F.S.A. §673.4081. However, if the drawee “accepts” the draft, it becomes liable as an acceptor. Acceptance is a promise by the drawee to pay the instrument when it becomes due and payment is demanded. It must be made on the instrument and may be made simply by the drawee’s signature. It becomes effective when the instrument, with the acceptance, is delivered. The most familiar type of acceptance is the “certification” of a check. §3-409. F.S.A. §673.409.


E. ACCOMMODATION PARTIES One who signs commercial paper which is issued for value simply to lend his credit to some other party to the instrument, and who does not directly receive any of the value given for the instrument, is an accommodation party (i.e., a surety). §3-419(a). F.S.A. §673.4191(1).

For example, if A wants to borrow money from a bank and the bank is unwilling to lend money on the strength of A’s promise to repay, B may sign as a co-maker. In such a case, the purpose of B becoming a maker is to lend his name. Whether B is paid for doing so by A is generally immaterial. Another common instance of an accommodation party occurs where A wants to cash a check at a bank at which A has no account. The bank may be reluctant to cash it for A alone, but if B, a depositor at the bank, is willing to sign as an indorser, the bank may cash the check. Again, B is an accommodation party.

An accommodation party is liable on the instrument in the capacity in which he signs (maker, drawer, acceptor, or indorser), even though the one taking the instrument knows that he is an accommodation party. Thus, one who signs as an accommodation indorser is liable as an indorser. §3-419(b). F.S.A. §673.4191(2). This presents no difficulty with regard to the accommodation indorser’s liability on the contract of indorsement, but an accommodation indorser has no liability on the warranties of a transferor for two reasons: (1) the accommodation indorser does not transfer the instrument, and (2) the accommodation indorser does not usually receive consideration. In the first example given above, B would be liable as a maker; in the second example, B would be liable as an indorser. §3-419(b). F.S.A. §673.4191(2). However, if a party’s signature on an instrument unambiguously indicates that a party is guaranteeing collection rather than payment of the obligation of another party to the instrument, then the signer is obliged to pay the amount due only if a judgment against the other party cannot be satisfied or it is otherwise apparent that payment cannot be obtained from the other party. §3-419(d). F.S.A. §673.4191(4). Where an indorsement shows that it is not in the chain of title (an anomalous indorsement), this is notice to all subsequent takers that the indorsement is for accommodation. §3-419(c). F.S.A. §673.4191(3).

For example, if a check is made out to A or order as payee, and the first indorsement is by B, then it is obvious that B signed as an accommodation party since B’s signature was not necessary to transfer the instrument.


An accommodation party is never liable to the party that he has accommodated, but if he pays the instrument, he has a right of recourse against the accommodated party. §3-419(e). F.S.A. §673.4191(5). III. HOLDER IN DUE COURSE

A. GENERALLY

A holder in due course is a specific type of holder – a good-faith purchaser. Generally, the rules that are used to determine who is a good-faith purchaser of land or chattels apply also to a holder in due course. The basic concepts are the same, but the Code spells out detailed requirements for being a holder in due course. A holder in due course is a holder of a negotiable instrument that does not bear apparent evidence of forgery, alteration, or other irregularity which calls its authenticity into question, who takes the instrument. §3-302(a)(1). F.S.A. §673.3021(1)(a). The holder took the instrument:

(1) For value; (2) In good faith; (3) Without notice that it is overdue or has been dishonored or that there is

an uncured default of payment on another instrument in the same series;

(4) Without notice of an unauthorized signature or alteration; and (5) Without notice of any defense against or claim to it on the part of any

person. §3-302(a)(2). F.S.A. §673.3021(1)(b). Even though one meets these requirements, Section 3-302(c) prevents a person from being a holder in due course, if he became a holder under the following circumstances:

(1) By purchasing it at a judicial sale or under legal process; (2) By acquiring it as a part of a bulk transaction not in the regular course

of business of the one transferring it to him; or (3) By acquiring it in taking over an estate. F.S.A. §673.3021(3).

A “bulk transaction” does not refer to Article 6—Bulk Transfers. Article 6 applies only to sales of inventory and equipment of a business, not to negotiable instruments. The requirement here is simply that one cannot be a holder in due course if he takes a large number of instruments at one time and the seller of these instruments does not normally transfer them in bulk.


B. BURDEN OF ESTABLISHING STATUS AS HOLDER IN DUE COURSE

The Code provides that if a defense or claim in recoupment to the obligation sued upon is proved, the party claiming to be a holder in due course has the burden of establishing that she does in fact enjoy this status. §3-308(b). F.S.A. §673.3081(2). Thus, one claiming to be a holder in due course must affirmatively prove that she meets each and every element of the holder in due course status: i.e., that she is a holder for value who took in good faith without notice. Unless specifically denied in the pleadings, each signature on an instrument is admitted, but if the effectiveness of a signature is put into question, the burden of establishing its validity is upon the person claiming under it. There is, however, a presumption that a signature is valid unless the action is being brought to hold the signer liable. §3-308(a). F.S.A. §673.3081(1).

For example, assume that a note is payable to P or order and signed by M. If a holder is suing M, and the name of P is on the reverse side in the place where indorsement would normally be, then (1) if M does not specifically deny the authenticity of P’s signature, M admits it; (2) if M does deny its validity, then the burden of proving its genuineness is on the plaintiff, but there is a presumption that it is valid. This is also true if a photocopy of the note is admitted into evidence in lieu of the original. §3-308(a). F.S.A. §673.3081(1).

C. HOLDER

1. In General

The first requisite of a holder in due course is that he be a holder. Section 1-201(20) defines a holder as “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.” Thus, the first person who becomes a holder is the payee of the instrument. That a payee can be a holder in due course is specifically provided in §3-302. F.S.A. §671.201(21). Parties subsequent to the payee become holders if they are in possession of (1) bearer paper, or (2) order paper that has been properly indorsed. Suppose, for example, that an instrument is made out to a named payee or his order, the instrument is stolen from the payee, and that the payee’s signature is forged on the back. If the forger then transfers the paper to another, it would appear that


the transferee could qualify as a holder, because the transferee seems to be in possession of bearer paper. However, the forgery is wholly inoperative as the signature of the payee; the paper thus has never become bearer paper, and the transferee is not a holder. A somewhat more workable rule to determine whether a possessor is a holder is that all necessary indorsements must be valid; necessary indorsements being those of all parties who took the paper as order paper. The following problems may help to indicate when a forged indorsement operates to prevent a subsequent person from being a holder. Attempt to answer the questions yourself before looking at the answers and explanations. The following technique should prove helpful in doing the problems:

(1) Cover the forged signature with your finger to indicate that the forged signature is not effective as an indorsement.

(2) Look to see if the paper was order paper or bearer paper just before the forgery occurred.

(3) If it was order paper just before the forgery, then E is not a holder because the indorsement that was forged was a necessary indorsement; if the paper was bearer paper just before the forgery, then E will be a holder since the indorsement was not necessary.

Problems on Forged Indorsements

Front of Instrument Transfers Back of Instrument

I promise to pay Penny Payee, or bearer, $1,000 on demand. s/Mickey Maker

M.M. P.P.

Pay A /s/ Penny Payee

A B

/s/A-

C

Pay D, /s/ C

D

/s/ D


Is D a holder when: Answers and Analysis

1. Penny Payee is only forgery? 1. YES.Instrument is bearer on its face. Since Penny Payee’s signature is forged, it has no effect. A took as bearer paper.

A is only forgery? 2. NOPaper was converted to order paper by Penny Payee, and A’s signature is necessary for further negotiation.

Both Penny Payee and A are forgeries? 3. YESB took bearer paper.

C is only forgery? 4. YESA converted it back to bearer paper and since C’s signature is forged it has no effect. D took bearer paper.

D is only forgery? 5. NOIt was order paper to D and his signature is necessary for further negotiation.

Both C and D are forgeries? 6. YESSee #4.

Penny Payee, C, and D are all forgeries? 7. YESBearer on its face. See #1.

A and C are forgeries? 8. NOIt was order paper to A, and his signature is needed. See #2.

Penny Payee and D are forgeries? 9. NOIt was order paper to D. See #5.

All indorsements are forgeries? 10. YESBearer on its face and never changed

2. Negotiation

Another way of approaching the requirement that a holder in due course must be a holder is through the concept of negotiation. When an instrument is negotiated, the transferee becomes a holder. Negotiation is clearly the “normal” way to transfer negotiable instruments and the Code will generally dictate that a transfer either constitutes a negotiation or gives the transferee the right to compel a negotiation. In spite of


the Code’s position that transfers are generally to be regarded as negotiations, there is no question that a negotiable instrument may be assigned if the transferor clearly indicates that intent. If the instrument is assigned, the transferee cannot become a holder and hence cannot be a holder in due course. Section 3-201(b) establishes the correct way to negotiate:

Except for negotiation by a remitter, if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone. F.S.A. §673.2011(2).

When an order instrument is transferred by delivery without an indorsement, this does not operate as a negotiation, but §3-203(c) provides:

“Unless otherwise agreed, if an instrument is transferred for value and the transferee does not become the holder because of lack of indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified indorsement of the transferor, but negotiation of the instrument does not occur until the indorsement is made.” F.S.A. §673.2031. 3. Misspelled Names

Where the name of the payee is misspelled, he may indorse the instrument either as his name is spelled on the instrument or as his name should be spelled. However, both names may be required “by a person paying or taking the instrument for value.” §3-204(d). F.S.A. §673.2041(4).

4. Negotiation by a Minor or as a Result of Fraud

If a minor negotiates an instrument, the negotiation is effective to transfer the instrument even though the minor may not undertake the contractual obligations of an indorser or be responsible for breach of warranty. The same is true where the negotiation is: (a) by a corporation exceeding its powers; (b) by a person without the capacity to contract; (c) obtained by fraud, duress, or mistake; (d) part of an illegal transaction; or (e) made in breach of duty. §3-202(a). F.S.A. §673.2021(1). The person or corporation indorsing may rescind in an appropriate case, but an attempted rescission is not good as against a subsequent holder in due course or a person paying the instrument in


good faith and without knowledge of facts that are a basis for rescission. §3-202(b). F.S.A. §673.2021(2).

5. Indorsements

a. Special or Blank Indorsements.

By the form of indorsement, the transferor of an instrument controls the method by which her transferee can further negotiate the instrument. A blank indorsement is simply the name of the transferor written on the back of the instrument. If the indorsement is “blank,” the instrument becomes bearer paper and the transferee can further negotiate by delivery alone. §3-205(b). F.S.A. §673.2051(2). A special indorsement names the transferee and directs payment to him. If the endorsement is “special,” then the instrument becomes order paper and the transferee’s indorsement is necessary for further negotiation. §3-205(a). F.S.A. §673.2051(1).

Blank Indorsement

s/ Penny Payee

Special Indorsement

Pay Tom Transferee

s/ Penny Payee When an order instrument is transferred by delivery without an indorsement, this does not operate as a negotiation, but §3-203(c) provides:

Unless otherwise agreed, if an instrument is transferred for value and the transferee does not become a holder because of lack of indorsement by the transferor, the transferee has a specifically enforceable right to the unqualified indorsement of the transferor, but negotiation of the instrument does not occur until indorsement is made. F.S.A. §673.2031(3).

b. Anomalous Indorsement.


An anomalous indorsement is one made by a person who is not the holder; the indorsement is extraneous to the chain of title and has no effect on the manner in which the instrument may be negotiated. However, the indorsement may create liability on the instrument for the indorser. §3-205(d). F.S.A. §673.2051(4). c. Restrictive Indorsement. An indorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation of the instrument is not effective to prevent further transfer or negotiation of the instrument. §3-206(a). F.S.A. §673.2061(1). d. Different Names. When the name of a holder is not the same as stated in an instrument, he may indorse the instrument either as his name is stated on the instrument or as it really is. However, both names may be required by a person paying or taking the instrument for value or collection. §3-204(d). F.S.A. §673.2041(4).

6. Negotiation Distinguished from Presentment To obtain payment of a negotiable instrument, demand is generally made upon the person expected to pay—the maker of a note or the drawee of a draft. Often when the demand is made, the holder signs the back of the instrument. This appears to be an indorsement and the transaction looks like a negotiation. However, the distinction between a demand and a transfer should be clearly drawn, because different results are obtained. A person paying the instrument upon presentment, such as a bank, does not take by negotiation, cannot become a holder in due course, and its rights against the presenting party are different from the rights of the transferee against her transferor after a negotiation. Presentment, especially of checks, often involves a number of banks and what is called the “check collection process.” Instead of presenting a check directly to the drawee bank, a holder may “deposit” it to her account in a bank and have her bank make the presentment. Often other banks come into the picture if the drawee is in a different city. Although the final step in the check collection process will be a presentment, the original depositing of the instrument and intermediate transfers are negotiations.


7. Negotiation Distinguished from Issuance After an instrument is drafted and signed by the maker or drawer, it is issued, generally to the payee. Although this is a transfer of the paper upon which the instrument is drawn, it is not a transfer of the obligation, but the creation of it. The issuance does not amount to a negotiation. However, the payee of an instrument is a “holder’ and may be a holder in due course, even though he does not take by negotiation. The Code treats a failure to issue the instrument, e.g., where it is stolen from the maker or drawer before it has been given to the payee, as the defense of nondelivery.

8. Fictitious Payee and Impostor Rules a. Fictitious Payee Rules The “fictitious payee rule” may determine whether one is a “holder” of an instrument. The rule is most often applied when an employee attempts to defraud his employer by drawing checks supposedly for the purpose of paying bills, while actually cashing the checks himself and pocketing the proceeds. §3-404(b). F.S.A. §673.4041(2).

For example, assume that an employee regularly draws a check payable to “John Smith or order,” representing to his employer that a business debt is owed to Smith. The employee then “forges” the name of John Smith as an indorsement and transfers the check to X. If the regular rules of forged indorsements applied, X would not be a holder in due course because a necessary indorsement was forged. However, under §3-404(b), when a person is named as payee by the drawer and the drawer intends that the named payee have no interest in the instrument, then any person can indorse in the name of the payee. Hence, here the indorsement is effective even though it was forged. F.S.A. §673.4041(2).

The same result is also reached by the Code in a slightly different situation. Assume that the employee who wants to cheat his employer makes up the checks but does not have the authority to sign them; instead, she has to have the employer (or another employee) actually sign. In such a case, even if the one actually signing has the intent that the named payee take an interest in the instrument, the rule of §3-405 applies and anyone can indorse. §3-405(b). F.S.A. §673.4051(2). b. Imposter Rules


When a person represents that he is someone else and induces the drawer or maker to make an instrument payable to the name of the impersonated person, again, anyone can indorse the instrument in the name of the payee. §3-404(a). F.S.A. §673.4041(1).

For example, if Tom Thief tells Michelle Maker that he is Paul Payee, and Michelle draws a check payable to Paul Payee and gives it to Tom, anyone may indorse the check “Paul Payee” and effectuate a negotiation so that a subsequent taker is a holder.

With this explanation, it is perhaps useful to look at the actual wording of §3-404(a):

(a) If an imposter, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the imposter, or to a person acting in concert with the imposter, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection. F.S.A. §673.4041(1).

D. VALUE

The second requirement for being a holder in due course is that he take the instrument for value. Value is defined by §3-303(a) in the following manner: A holder takes the instrument for value:

(1) The instrument is issued or transferred for a promise of performance, to the extent the promise has been performed;

(2) The transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding;

(3) The instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due;

(4) The instrument is issued or transferred in exchange for a negotiable instrument; or

(5) The instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument. F.S.A. §673.3031(1).


A particular situation involving value is worth mentioning at this point. It involves a holder giving a check to the bank. This may be done in several ways and whether value is given depends upon the form of the transaction:

(1) The holder may “cash” his check or sell a note at a bank with the bank giving him the face amount or somewhat less than the face amount. When this is done, the bank is clearly a holder for value to the full amount of the check.

(2) The bank may take the instrument “for deposit” crediting the holder’s account in the bank with the amount of the instrument. Here the bank is not a holder for value until it has actually paid out to the holder some or all of the money it credited to the holder’s account. The crediting amounts only to a promise to pay. When the bank does pay out, then it has performed the agreed consideration.

(3) The bank may take the instrument as security for a loan being made to the holder.

For example, Harry holds Sam’s negotiable note payable to Harry for $1,000, and gives this to the X bank as security for a loan to Harry by the bank. Here, the X bank obtains a security interest in the note under Article 9 and has given value for the instrument. §3-303. F.S.A. §673.3031.

Under situation (1), the bank becomes a holder for value to the full extent of the instrument—its face amount. In situations (2) and (3), however, the bank becomes a holder for value only to the extent that it has paid out the money on deposit or loaned the money.

E. GOOD FAITH Under Article 1 of the UCC, good faith is defined by §1-201(19) simply as “honesty in fact in the conduct or transaction concerned.” This is a subjective test. It does not include observance of due care, reasonable commercial standards, or lack of negligence. However, under Article 3, good faith is defined as “honesty in fact and the observance of reasonable commercial standards of fair dealing. §3-103(a)(4). F.S.A. §673.1031(1)(e).

F. NOTICE OF DISHONOR, OVERDUENESS, DEFENSES, AND CLAIMS 1. Generally


Conceptually, the requirement that a transferee have no notice that the instrument is overdue, has been dishonored, or that there are defenses or claims to it is akin to the requirement of good faith. The Code, like prior law, treats the no-notice requirement separately and in some detail. Here the test is primarily an objective one, but there are overtones of subjectivity or at least of reasonableness. There are seven types of notice that can destroy a transferee’s potential for becoming a holder in due course:

(1) Notice that the instrument is overdue; (2) Notice that the instrunment has been dishonored; (3) Notice that there is an uncured default with respect to payment of

another instrument issued as part of the same series; (4) Notice that the instrument contains an unauthorized signature; (5) Notice that the instrunment has been altered; (6) Notice that there is a claim to the instrument; and (7) Notice that any party has a defense or claim in recoupment. A person has “notice” of a fact when:

(1) He has actual knowledge of it; or (2) He has received a notice or notification of it; or (3) From all the facts and circumstances known to him at the time in

question, he has reason to know that it exists. §1-201(25). F.S.A. §671.201(25).

a. Knowledge. “Knowledge” is defined as follows: “A person ‘knows’ or has ‘knowledge’ of a fact when he has actual knowledge of it.” §1-201(25)(c). F.S.A. §671.201(25)(c). b. Receipt of Notice. A person receives a notice or notification when it comes to his attention, or it is duly delivered at the place of business through which the contract was made or at any other place held out by him as the place for receipt of such communications. §1-201(26). F.S.A. §671.201(26). c. Reason to Know.


The best explanation of when a transferee has “reason to know” is a Comment to Section 9 of the Restatement of Agency:

A person has reason to know of a fact if he has information from which a person of ordinary intelligence, or of superior intelligence which such person may have, would infer that the fact in question exists or that there is a substantial chance of its existence that, if exercising reasonable care with reference to the matter in question, his action would be predicated upon the assumption of its possible existence.

This does not, however, require inquiry into further facts since notice under §1-205(25) depends upon “all the facts known to him at the time in question.” The last four words also indicate that the person is not held to know facts that she once knew, but has forgotten.

2. Notice That Instrument Is Overdue The purchaser has notice that an instrument is overdue if he has reason to know:

(1) That any part of the principal amount is overdue or that there is an uncured default in payment of another instrument of the same series; or

(2) That acceleration of the instrument has been made; or (3) That he is taking a demand instrument after demand has been made or

more than a reasonable length of time after its issue. A reasonable time for a check drawn and payable within the states and territories of the United States and the District of Columbia is presumed to be ninety days. §3-304. F.S.A. §673.3041.

3. Notice of Dishonor

Notice of dishonor means that the holder has notice that there has been a presentment of the instrument prior to the time that the holder purchased it and that the person to whom the presentment was made dishonored it by failing to pay it or accept it. Typically, it occurs when the holder has notice at the time of purchase that the drawee bank or the maker has refused to pay the instrument (e.g., a check marked “insufficient funds”). §3-503(b). F.S.A. §673.5031(2). Notice of dishonor may occur by actual knowledge, notification, or when the holder had reason to know of the dishonor from all the facts available at the time that she took the instrument.


4. Notice of Claim Resulting from Breach of Fiduciary Duty If an instrument is taken from a fiduciary for payment or collection or for value, the transferee has knowledge of the fiduciary status of the fiduciary, and the person represented by the fiduciary makes a claim to the instrument or its proceeds on the basis that the transaction is a breach of fiduciary duty, notice of the breach of fiduciary duty can prevent the transferee from becoming a holder in due course. §3-307(b). F.S.A. §673.3071(2). 5. Notice of Defense or Claim in Recoupment Defenses to enforcement of a party’s obligation to pay an instrument include infancy, duress, lack of legal capacity, illegality of a transaction, fraud that induced the obligor to sign the instrunment without knowledge or reasonable opportunity to learn of its character or essential terms, and discharge in insolvency proceedings. §3-305(a)(1). F.S.A. §673.3051(1)(a). 6. Evidence of Forgery or Alteration A person has notice of a claim or defense if the instrument bears such apparent evidence of forgery or alteration, or is otherwise so irregular or incomplete as to call into question its authenticity. §3-302(a)(1). F.S.A. §673.3021(1)(a). 7. Excluded Transactions Even though one meets these requirements, §3-302(c) provides that, except to the extent a transferor or predecessor has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken in any of the following ways: (1) By legal process or by purchase in an execution, bankruptcy, or creditor’s sale; (2) By purchase as part of a bulk transaction not in the transferor’s ordinary course of business; or (3) As the successor in interest to an estate or other organization. F.S.A. §673.3021(3). A “bulk transaction” does not refer to Article 6 – Bulk Transfers. Article 6 applies only to sales of inventory and equipment of a business, not to negotiable instruments. The requirement here is simply that one cannot be a


holder in due course if he takes a large number of instruments at one time and the seller of these instruments does not normally transfer them in bulk.

G. THE “UMBRELLA” OR “SHELTER” DOCTRINE Where a person fails to meet one of the requirements for being a holder in due course, e.g., he takes after maturity, with notice of a defense or as a donee, that a person may still have the rights of a holder in due course derivatively. Section 3-203(b) provides that a transferee of an instrument takes any right of the person transferring the instrument to enforce it, including any right as a holder in due course. However, a person cannot obtain the rights of a holder in due course from his transferor if the transferee engaged in fraud or illegality affecting the instrument; or if she, as a prior holder of the instrument, had notice of a defense or claim against it. F.S.A. §673.2031(2).

H. NON-HOLDERS IN POSSESSION

A non-holder who is in possession of an instrument and has the right to enforce the instrument includes a person that acquired rights of a holder by subrogation or under §3-203(a), i.e., it was delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. Remember the Shelter Doctrine: Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course. F.S.A. §673.2031(1).

I. PERSONS NOT IN POSSESSION

Annother type of non-holder who may enforce an instrument is a person enforcing a lost or stolen instrument. Under §3-309(a), a person who is not in possession of an instrument is entitled to enforce the instrument if:

(1) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred;

(2) the loss of possession was not the result of a voluntary transfer by the person or a lawful seizure; and

(3) the person cannot reasonably obtain possession of the instrument, because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. F.S.A. §673.3091(1).


If the person entitled to enforce the lost or stolen instrument is also the obligee on the underlying obligation, the obligation may not be separately enforced to the extent of the amount payable on the instrument; to that extent the obligee’s rights against the obligor are limited to enforcement of the instrument. §3-310(b)(4). F.S.A. §673.3101(2)(d). Also, a person from whom payment is recovered if an instrument or accepted by mistake, and the payor or acceptor recovers payment or revokes acceptance, has rights as a person entitled to enforce the dishonored instrument. §3-418(d). F.S.A. §673.4181(4). IV. RIGHTS OF A HOLDER IN DUE COURSE—REAL AND

PERSONAL DEFENSES A. BURDENS OF PROOF

1. Validity of Signatures Unless specifically denied in the pleadings, the authenticity to make each signature on an instrument is admitted, but if the validity of a signature is put into question, the burden of establishing its validity is upon the person claiming it is valid. A signature is presumed to be valid, however, unless the action is being brought to hold the signer liable and the signer is dead or incompetent at the time of trial. §3-308(a). F.S.A. §673.3081(1). The person attempting to enforce the instrument may also bear the burden of proof, under certain circumstances, if a photocopy of the note is admitted into evidence in lieu of the original. §3-309(b). F.S.A. §673.3091(2). 2. Plaintiff’s Status The plaintiff must not only show that all necessary signatures are valid, but also that he is a person entitled to enforce the instrument under §3-301, or is authorized to seek payment on behalf of a person who is entitled to enforce the instrument. §3-308(b). F.S.A. §673.3081(2). 3. Defenses or Claims in Recoupment If the validity of signatures is admitted or proved, and the plaintiff proves that he is entitled to seek enforcement of the instrument, the burden shifts to the defendant to prove a defense or claim in recoupment. §3-308(b). F.S.A. §673.3081(2).


4. Holder in Due Course Status If a defense or a claim in recoupment to the obligation sued upon is proved, the party claiming to be a holder in due course has the burden of establishing that she does in fact enjoy this status. Thus, one claiming to be a holder in due course must affirmatively prove that she meets each and every element of the holder in due course status: i.e., that she is a holder for value who took in good faith without notice in order to enforce the instrument despite certain defenses. §3-308(b). F.S.A. §673.3081(2).

B. ADVERSE CLAIMS A person taking an instrument is subject to claims of property or possessory rights in the instrument or its proceeds, including a claim to rescind the negotiation and to recover the instrument or its proceeds. A person who was wrongfully deprived of possession by a thief, for example, might have a claim against the instrument under this section. A holder in due course takes the instrument free from all claims to it by others. Thus, if the instrument is stolen while it is bearer paper, the “true” owner cannot recover it from a holder in due course. §3-306. F.S.A. §673.3061. Claims “in recoupment” are different. A claim in recoupment, notice of which can prevent a transferee from becoming a holder in due course, is a claim of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument. §3-305(a)(3). F.S.A. §673.3051(1)(c). An example of a claim in recoupment is a breach of warranty claim by a buyer against a seller. A holder in due course is not subject to claims in recoupment against a person other than the holder. §3-305(b). F.S.A. §673.3051(2).

C. DEFENSES The defenses that an obligor on an instrument may raise depend on the status of the plaintiff. A holder in due course takes free of certain defenses regardless of notice and free of other defenses of which he has no notice. However, the fact that a person does not qualify as a holder in due course does not necessarily defeat her right to recover. A non-holder in due course may recover on a negotiable instrument where the obligor has no valid defense. The obligor may raise a defense based on a specific section of Article 3, or any defense that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract. §3-305(a)(2). F.S.A. §673.3051(1)(b). The Code more specifically details the


following defenses: non-issuance or lack of delivery; failure of consideration; infancy, incapacity, or illegality; no title or lost or stolen title; or discharge. 1. Non-Issuance or Lack of Delivery Issuance involves delivery with intent to confer rights in the instrument on another party. If an instrument is conditionally issued or is issued for a special purpose, failure of a condition or special purpose to be fulfilled is a defense. §3-305(b). F.S.A. §673.3051(2). The defense of non-issuance or lack of delivery is unique to negotiable instruments. It arises when an instrument is stolen from the drawer or maker before the maker or drawer delivers it to the payee. It also arises when the maker or drawer loses the instrument before it is issued and someone else finds it. Lack of delivery is a personal defense. However, if the instrument was order paper, i.e., payable to the payee or order, no party will ever be a holder of it, unless it was stolen or found by the payee who then indorses it. 2. Failure of Consideration The maker or drawer of an instrument has a defense if the instrument is issued without consideration sufficient to support a simple contract. For example, if an instrument is issued for a promise of performance, the issuer has a defense to the extent performance of the promise is due and has not been performed. If an instrument is issued for “value”, the instrument is issued for consideration. §3-303(b). F.S.A. §673.3031(2). 3. Infancy, Incapacity, Illegality The obligor may raise a defense based on his infancy, to the extent it would be a defense to a simple contract; a duress, lack of legal capacity, or illegality that nullifies his obligation; or fraud that induced the obligor to sign (fraud in the inducement) with neither knowledge or reasonable opportunity to learn of its character or its essential terms §3-305(a)(1). F.S.A. §673.3051(1)(a). 4. No Title or Lost or Stolen Instrument The defense of “no title” arises where the plaintiff in the action cannot trace her title back to the obligor. For example, if an instrument is stolen from the payee and then transferred to the plaintiff, there is no “chain of title” from the plaintiff back to the true owner, i.e., the payee. If the obligor proves that the instrument is a lost or stolen instrument, the obligor is not obliged to pay the instrument unless the person seeking to enforce it has the rights of a holder in


due course. If the plaintiff is a holder in due course, he gets good title as against the whole world. §3-305(c). F.S.A. §673.3051(3). 5. Discharge A party’s obligation on a negotiable instrument may be discharged in insolvency proceedings. §3-305(a)(1)(iv). F.S.A. §673.3051(1)(a)(4). The obligation of a party to pay the instrument is also discharged as stated specifically in Article 3 or by any act or agreement that would effect a discharge of an obligation to pay money under a simple contract. §3-601(a). F.S.A. §673.6011(1). Among other things, alteration of the instrument may effect a discharge. Section 3-407(b) provides that an alteration that was fraudulently made discharges a party whose obligation is affected by the alteration unless that party assents or is precluded from asserting the alteration. F.S.A. §673.4071(2).

D. REAL DEFENSES

A holder in due course takes free of all defenses except real defenses enumerated in §3-305(a)(1), and §3-601(a). The real defenses that can be raised even against a holder in due course are:

(1) Infancy, to the extent that it is a defense to a simple contract; (2) Duress, lack of legal capacity, or illegality of the transaction, as renders

the obligation of the party a nullity; (3) Fraud that induced the party to sign the instrument with neither

knowledge nor reasonable opportunity to learn of its character or its essential terms;

(4) Discharge in insolvency proceedings; and (5) Any other discharge of which the holder has notice when he takes the

instrument. F.S.A. §§673.3051(1)(a); 6011(1). Thus, the minority of the defendant is always a real defense and available even as against a holder in due course. However, duress, mental incapacity, or illegality are only real defenses when they can be said to render the contract a nullity (void) under the law of the state. Normally, duress is not a real defense, but becomes one when the threat or physical force is such that the person loses her capacity to contract. Mental incapacity is usually only a real defense when the person signing the note or draft has been adjudicated an incompetent and his property placed under guardianship. There is no general rule as to when a statute making a


contract illegal operates to void the obligation (thereby making it a real defense) rather than simply making the obligation voidable. Misrepresentation or fraud may be a real defense, but only when the fraud is fraud in the inception (or as it is sometimes called “fraud in the essence”). Fraud in the inducement is not a real defense. The distinction is based upon whether the individual signing knew that she was signing a negotiable instrument. Thus, if one signed a piece of paper believing that it was a sales order based upon a representation of a salesperson, and it turned out to be a note, there may be fraud in the factum and the possibility of a real defense. If, however, the signer knew that it was a negotiable instrument, but was led to sign it based upon a representation that the goods for which it was given were “all steel,” this would only be fraud in the inducement and would not constitute a real defense. Note that a party may raise fraud as a defense only if he did not have a “reasonable opportunity to learn” of the character and terms of the instrument. Thus, if there was a way for the party to discover that the instrument was a negotiable instrument (e.g., by reading it), the defense cannot be raised against a holder in due course.

E. ALTERATIONS When an instrument is altered by a holder, or an incomplete instrument is completed without authority, the obligor may raise a defense against one demanding payment.

1. Nature of Alteration An alteration is an unauthorized change in an instrument that purports to modify a party’s obligation, or an unauthorized addition to an incomplete instrument relating to a party’s obligation. Thus, a change in amount payable, date of payment, or addition or deletion of the name of a party is an alteration. Any unauthorized completion of an incomplete instrument is also deemed to be an alteration. §3-407(a). F.S.A. §73.4071(1).

2. Extent to Which Alteration Is a Defense The following rules apply when there has been an alteration:

(1) When the alteration is fraudulent, a party whose obligation is affected by the alteration is discharged, except as to holders in due course, unless the party raising the defense is estopped from raising it.


(2) When the alteration is not fraudulent, no person is discharged and it may be enforced as to its original tenor even by a nonholder in due course.

(3) Where the alteration consists of an unauthorized completion, then a holder in due course may enforce it as completed. §3-407(b). F.S.A. §673.4071(2).

Thus, a holder in due course can always enforce the instrument to its original tenor, and if there has been an unauthorized completion, his rights are even greater since he can enforce it as completed. A nonholder in due course has lesser rights; the obligor is completely discharged if the obligor’s contract has been changed and the alteration is fraudulent 3. Effect of Negligence or Ratification Section 3-406 provides that a person whose negligence substantially contributed to an alteration is precluded—estopped—from raising the alteration against a person who, in good faith, paid the instrument or took it for value or for collection. However, if such a person also was negligent in paying or taking the instrument, the loss is allocated between the person precluded and the person who paid or took the instrument. It is also clear that a person may ratify an alteration and thus be bound by it. F.S.A. §673.4061.

F. FORGERY

Although forgery is not listed as a real defense, it is available even as against a person who in good faith pays the instrument or takes it for value. §3-4041(a). F.S.A. §673.4041(1). The reason that forgery can be so raised is that the person whose name is forged did not sign the instrument and thus is not liable on the instrument. The same rule is applicable where the signature is made by an agent without authority. §3-403(a). F.S.A. §673.4031(1). However, where there is a forgery, or where an agent signs without authority, the forger or agent becomes liable just as though she had signed her own name. Thus, an action can be brought against the person who signed, in effect treating the forged name as the signature of the forger. If the party’s negligence substantially contributed to the unauthorized signature, she is estopped from raising it as against a holder in due course. §3-406. F.S.A. §673.4061.


G. DEFENSE OF ACCOMMODATION PARTIES 1. Derivative Defenses In an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the person entitled to enforce the instrument any defense or claim in recoupment that the accommodated party could assert against such person, except the defenses of discharge in insolvency, infancy, and lack of legal capacity. §3-305(d). F.S.A. §673.3051(4). 2. Suretyship Defenses If the due date of an instrument is extended, or the instrument is modified, or the value of collateral is impaired by a person entitled to enforce the instrument and, as a result, an accommodation party suffers a loss with respect to its right of recourse against an accommodated party, the accommodation party’s obligation is discharged to the extent of the loss. However, an accommodation party is not so discharged if: (1) the person entitled to enforce the instrument did not know of or have notice of the accommodation; or (2) if the accommodation party consents to the event or conduct that is the basis of the discharge; or (3) has waived any defenses which could be the basis for discharge. §3-605. F.S.A. §673.6051.

H. LACK OF DELIVERY The defense of lack of delivery is unique to negotiable instruments. It arises when an instrument is stolen from the drawer or maker prior to the time that it is issued, i.e., before the maker or drawer delivers it to the payee. It also arises when the maker or drawer loses the instrument before it is issued and someone else finds it. Lack of delivery is a personal defense. However, if the instrument was order paper, i.e., payable to the payee or order, no party will ever be a holder of it, unless it was stolen or found by the payee who then indorses it. V. PERSONS TRANSFERRING A NEGOTIABLE INSTRUMENT

A. CONTRACT OF INDORSEMENT—QUALIFIED

INDORSEMENTS If the transferor of an instrument indorses, whether or not the indorsement is necessary to negotiate the instrument, he becomes liable to pay the instrument if, upon demand, the maker or drawer does not and the indorser is given notice of the refusal to pay. §3-414. F.S.A. §673.4141. This rule is

+ 1 = 26

+ 1


usually abbreviated by stating that the indorser becomes “secondarily liable” on the instrument. All that secondary liability means is that there are conditions to the indorser’s liability, namely presentment (demand), dishonor (refusal to pay), and notice of dishonor. Presentment, dishonor, and notice of dishonor are technical terms and the Code provisions defining and explaining them must be met. Otherwise, the indorser is discharged from liability under his contract of indorsement. An indorser may disclaim liability on her indorsement by a “qualified” indorsement. If the indorsement is qualified, there is no secondary liability imposed upon the transferor. This is normally done by indorsing the instrument “without recourse.” §3-415. F.S.A. §673.4151.

B. PRESENTMENT, DISHONOR, AND NOTICE OF DISHONOR

Presentment, dishonor, and notice of dishonor are conditions to the liability of an indorser. If the holder fails to meet these conditions, then the indorser is completely discharged from liability on his contract of indorsement. §§3-501; 3-502; and 3-503. F.S.A. §§673.5011; 673.5021; and 673.5031. The indorser, however, may remain liable on transfer warranties.

1. Presentment for Payment

Presentment for payment is a particular type of demand on the party who ought to pay the instrument—the maker of a note or the drawee of a draft. Two factors are important—when must presentment be made, and how must it be made?

a. When Presentment Must Be Made Unless the demand for payment is made on time, it does not constitute a presentment. The time varies in accordance with when the instrument is due. i. Fixed Date. Presentment must be made on or after the date stated in the instrument, if a date is stated. §3-108(c). F.S.A. §673.1081(3). ii. Demand Instruments. Presentment must be made within a reasonable time after the person to be charged becomes liable on the instrument. §3-108(b). F.S.A. §673.1081(2).

For example: If a note is given to a payee and he negotiates it to A on December 15, and A then negotiates it to B on January 15, and

+ 1 = 51


B to C on February 15, the times for presentment to charge Payee, A, B, and C as indorsers are all different. As to Payee, it is a reasonable time after December 15, because that is the date upon which Payee becomes liable. As to A, it is a reasonable time after January 15 and as to B it is a reasonable time after February 15.

A reasonable time is determined by: (1) the nature of the instrument; (2) the usage of the trade; and (3) the facts of a particular case. The Code specifies time limits for liabilities on checks that are not drawn by banks. An indorser of a check is discharged 30 days after indorsement if the check is not presented for payment or given to a depository bank for collection within that time.

b. How Presentment Is Made (§3-501) Presentment is a demand upon the obligor, but it must be made in a particular way. Presentment may be made at the place of payment of the instrument and must be at such a place if payable at a bank. It can be made by any commercially reasonable means including electronic communication. It is effective if made to any one of two or more makers or drawers. §3-501(b)(1). F.S.A. §673.5011(2)(a). When the instrument is presented, the party to whom the presentment is made has the right to require: (a) that the instrument be exhibited; (b) identification of the party presenting and, if presentment is made on behalf of another person, authorization to do so; and, (c) a signed receipt on the instrument. If these demands are not met, there is no presentment. §3-501(b)(2). F.S.A. §673.5011(2)(b). A demand for payment is effective when received, but the party to whom presentment is made may treat it as occurring the next business day if that party has established a cutoff not earlier than 2 p.m. for the receipt and processing of instruments presented for payment and acceptance and that presentment is after the cutoff. §3-501(b)(4). F.S.A. §673.5011(2)(d). The party to whom presentment is made may delay his decision as to whether he will pay the instrument for a reasonable time to allow him to determine whether the instrument should be paid. In no event, however, may he delay beyond the close of business on the day of presentment.

2. Presentment for Acceptance In some cases, an instrument must go through two presentments. The first is presentment for acceptance and the second is presentment for payment. A


simple example of this is an instrument that is payable a certain number of days after sight, i.e., “Pay Paul Payee or order $1,000, thirty days after sight.” Until the drawee has sight of the instrument, the time for payment is not certain. Thus, the holder must first “present for acceptance.” The two other cases in which presentment for acceptance is necessary are: (1) where the instrument requires it; and (2) where it is payable at a place other than at the business address or residence of the drawee. 3. Excuse of Requirements of Presentment and Notice of Dishonor Presentment for payment or acceptance is excused if: (1) The person entitled to present the instrument cannot with reasonable diligence make

presentment; (2) The maker or acceptor has repudiated an obligation to pay the instrument or is dead or in insolvency proceedings; (3) By the terms of the instrument, presentment is not required to enforce the obligation

of indorsers or of the drawer; (4) The drawer or indorser whose obligation is being enforced has waived presentment or

otherwise has no reason to expect, or right to require, that the instrument be paid or accepted; or

(5) The drawer instructed the drawee not to pay or accept the draft, or the drawee was not

obligated to the drawer to pay the draft. §3-504(a). F.S.A. §673.5041(1).

A waiver of presentment is also a waiver of notice of dishonor. Notice of dishonor may also be separately waived by the party whose obligation is being enforced, or waived by the terms of the instrument. §3-504(b). F.S.A. §673.5041(2). Delay in giving notice of dishonor is excused if the delay was caused by circumstances beyond the control of the person giving notice, and the person giving the notice exercised reasonable diligence after the cause of the delay ended. §3-504(c). F.S.A. §673.5041(3). 4. Presentment Warranties If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, the person who presented and


obtained payment, as well as any previous transferor of the draft, warrants to the drawee that: (1) The warrantor is, or was at the time of transfer, a person entitled to enforce the draft

or authorized to obtain payment or acceptance on behalf of one who was entitled to enforce the draft;

(2) The draft has not been altered; and (3) The warrantor has no knowledge that the signature of the drawer of the draft is

unauthorized. §3-417(a). F.S.A. §673.4171(1). 5. Payment by Mistake or Revocation of Acceptance If the drawee mistakenly pays a check that had been forged or on which payment had been ordered stopped, the drawee may recover the funds paid or revoke acceptance regardless of its own negligence in paying. However, the drawee loses this remedy if the person receiving payment or acceptance was a person who took the check in good faith and for value, or who in good faith changed position in reliance on the payment or acceptance. §3-418(a). F.S.A. §673.4181(1).

6. Dishonor Dishonor occurs when a presentment for payment is made and payment is refused. It also occurs when a required or optional presentment for acceptance is made and acceptance is refused. Where presentment is excused, a dishonor occurs when the instrument is not duly accepted or paid. When payment is refused because the instrument lacks a necessary indorsement, such refusal does not constitute a dishonor. §3-502. F.S.A. §673.5021.

7. Notice of Dishonor Notice of dishonor may be given by any commercially reasonable manner, e.g., phone call, letter, telegram, electronic communication, etc. Except when giving notice is delayed due to circumstances beyond the control of the person giving notice and that person exercised reasonable diligence after the cause of delay ceased, notice of dishonor must be given by a collecting bank before midnight of the next banking day following the banking day on which the bank receives notice of dishonor, and by any other person within 30 days following the day on which the person receives notice of dishonor. §§3-503, 3-504(c). F.S.A. §§673.5031; 5041(3).


C. WARRANTIES OF TRANSFEROR The transferor of a negotiable instrument who receives consideration, whether or not he indorses, makes certain warranties to his immediate transferee. If the transfer is not accompanied by an indorsement, then the warranties run only to the immediate transferee. If the transferor does indorse, then the warranties run to all subsequent holders who take the instrument in good faith. The warranties are:

(1) The transferor is entitled to enforce the instrument; (2) All signatures are genuine or authorized; (3) The instrument has not been altered; (4) The instrument is not subject to a defense or claim in recoupment of

any party against the transferor; and (5) The transferor has no knowledge of any insolvency proceeding

commenced with respect to the maker, acceptor, or the drawer of an unaccepted draft. §3-416(a). F.S.A. §673.4161(1).

If the indorsement is “without recourse,” then the warranty that there is no defense of any party good against the transferor, (4) above, is limited to a warranty that the transferor has no knowledge of such a defense. §3-415. F.S.A. §673.4151.

D. INDORSERS

If the transferor of an instrument indorses, whether or not the indorsement is necessary to negotiate the instrument, the indorser becomes liable to pay the instrument if, upon demand, the maker or drawer does not and the indorser is given notice of the refusal to pay. §3-415(a). F.S.A. §673.4151(1). This rule is usually abbreviated by stating that the indorser becomes “secondarily liable” on the instrument. Secondary liability means that there are conditions to the indorser’s liability, namely presentment (demand), dishonor (refusal to pay), and notice of dishonor. If these conditions are not met, the indorser is discharged from liability under his contract of indorsement. An indorser may disclaim liability on her indorsement by a “qualified” indorsement. If the indorsement is qualified, there is no secondary liability imposed upon the transferor. This is normally done by indorsing the instrument “without recourse.” §3-415(b). F.S.A. §673.4151(2). Presentment, dishonor, and notice of dishonor generally are conditions to the liability of an indorser. If the holder fails to meet these conditions, then the


indorser is completely discharged from liability on his contract of indorsement unless the failure to meet one or more conditions is excused. The indorser, however, may remain liable on transfer warranties.

E. GUARANTORS The contract of an indorser is that he will pay if the maker or drawer does not, provided there is presentment, dishonor, and notice of dishonor. This contract may be varied in any way desirable by the indorser. Two of the most common ways of changing his obligation are to use the words “payment guaranteed” or “collection guaranteed” in connection with an indorsement. In effect, one who indorses “payment guaranteed” becomes liable as a maker. There is no requirement that the holder take any steps whatsoever against the drawer or maker before suing the person guaranteeing payment. Not only are presentment, dishonor, and notice of dishonor unnecessary, but even a demand on the maker or drawer is unnecessary. §3-419. F.S.A. §673.4191. If the indorser adds the words “collection guaranteed” to his indorsement, his liability is somewhat less than that of an ordinary indorser. Before resort may be had against him, the holder must proceed against the maker or acceptor by suit and execution or he must show that this would be useless. §3-419(d). F.S.A. §673.4191(4). Use of the words “presentment, dishonor, and notice of dishonor waived” is operative to make the indorser a guarantor of payment.

F. ACCOMMODATION INDORSERS One who signs as an accommodation party is liable in the capacity in which he signs. Thus, one who signs as an accommodation indorser is liable as an indorser. This presents no difficulty with regard to the accommodation indorser’s liability on the contract of indorsement, but an accommodation indorser has no liability on the warranties of a transferor for two reasons: (1) the accommodation indorser does not transfer the instrument, and (2) the accommodation indorser does not receive consideration. §3-419. F.S.A. §673.4191.


NEGOTIABLE INSTRUMENTS

1. Types of Negotiable Instruments

a. Notes §3-310(b)(2) F.S.A. §673.3101(2)(b)

Two party instrument in which maker promises to pay payee a sum of money.

b. Drafts §3-104(f) F.S.A. §673.1041(6)

Three party instrument where drawer orders the payor to pay a sum of money to payee.

2. Requirements of Negotiable Instrument

a. Written §§3-103(a)(6), (9) F.S.A. §§673.1031(1)(f), (i)

Instrument must be in writing.

b. Signed §3-401 F.S.A. §673.4011

Signed means: a. Any mark or sign sufficient. b. Intent to sign important. c. Forgery acts as signature of forger.

c. Unconditional Promise to Pay §3-106 F.S.A. §673.1061

Language contained in the instrumnent: a. Negotiability Unaffected: (1) Implied conditions. (2) Constructive conditions. (3) Consideration stated. (4) Security noted. (5) “As per” contract. (6) “In accordance with.” (7) “Arises out of.” (8) Reference to other instrument for

repayment rights. (9) To be charged against particular

account. b. Negotiability Destroyed: (1) “Subject to” contract. (2) “Governed by” contract. (3) Payment only out of a particular fund.


d. Sum Certain §3-112 F.S.A. §673.1121

Language contained in the instrunment: a. Negotiability Unaffected: (1) Stated interest. (2) “With interest” but no rate stated (here

judgment rate applies (§3-112)). (3) Different rates of interest before and

after default. (4) “With exchange.” (5) Costs of collection. (6) Attorney’s fees. (7) Discount for early payment. (8) Additional charges for late payment. (9) “Highest lawful rate of interest after

default.” b. Negotiability Destroyed: (1) External source needed to determine

interest rate, (2) Sum payable depends on some event

or external source.

e. Money §3-107 F.S.A. §673.1071

Money: a. Must be medium of exchange.

b. May be payable in foreign money.

c. Cannot give option to either party to demand or give something other than money in payment, e.g., “$500 or my car” renders it nonnegotiable.


f. Payable “on Demand” or at a “Definite Time” §3-108 F.S.A. §673.1081

a. Demand: (1) No time of payment stated. (2) At sight. (3) On presentment. (4) On demand. b. Definite Time: (1) On certain date. (2) Certain time after or before

stated date. (3) Fixed period after sight. (4) Definite time subject to any

acceleration, but good faith required.

(5) Definite time subject to any extension.

c. Instruments Not Negotiable: Payable on event certain to happen but the time of happening is not ascertainable, e.g., “on death.”


g. “Or Order, “Or Bearer” §3-109 F.S.A. §673.1091

a. “Order” (1) Payee “or order.” (2) “Order of” payee. (3) Payee “or assigns.” (4) “Estate. Trust fund, or order.” (5) An office, e.g., “order of

Secretary of State.” (6) Partnership, corporation, etc.,

or order. b. “Bearer” (1) “Bearer.” (2) Payee “or bearer.” (3) The order “of bearer.” (4) “Cash.” (5) Order of “cash.” (6) Any named payee that does not

purport to be a person. c. If payable both “to order” and “to bearer” then order instrument unless bearer words handwritten or typewritten. d. If no words of order or bearer then Article 3 applies; but no transferee can be a holder in due course.

3. Signatures

a. Signatures by Agents or Other Representatives §3-402 F.S.A. §673.4021

Representative signs represented person’s name, the represented person is bound as if a simple contract.

b. Unauthorized Signature §3-403 F.S.A. §673.4031

Person signs someone else’s name without authority, it operates as signature of person signing.

4. Requirements of Holder in Due Course


a. Must Be a “Holder” §1-201(20) F.S.A. §671.201(20)

A holder is: a. Payee is a holder. b. Possessor of bearer paper. c. Indorsee of order paper. d. Indorsement controls how next negotiation is to be made — Special: by indorsement; Blank: no indorsement needed. e. Fictitious payee and impostor rules.

b. ”Value” §3-303 F.S.A. §673.3031

Value is: a. Different from consideration b. Agreed consideration performed or

security interest in instrument. c. Antecedent claim good value. d. Exchange of negotiable instruments

means both parties give value e. Irrevocable commitment constitutes

value. f. Bank can purchase instrument, give

provisional credit or take a security interest. Whether value given depends on what bank has done.

c. “Good Faith” §1-103(a)(4) F.S.A. §673.1031(1)(e)

Good Faith is: a. “Honesty in fact in the conduct or

transaction.” b. Observance of reasonable commercial

standards of fair dealing; c. Generally jury question. d. Evidence of dishonesty:

1. Payment of much less than face amount of instrument

2. Knowledge of seller’s bad reputation


d. Notice of Dishonor, Overdueness, and Defenses

a. Dishonor Notice means holder has notice that presentment was made and it was dishonored by not paying or accepting it. §3-503. F.S.A. §673.5031. b. Overdueness Notice that instrument is overdue if:

1. uncured default, 2. acceleration has been made, or 3. taking demand instrument after demand has been made or more than a reasonable time after issue. §3-304. F.S.A. §673.3041.

c. Breach of Fiduciary Duty Transferee has knowledge of fiduciary, and represented person claims proceeds as a breach of fiduciary duty, this prevents transferee from becoming a holder in due course. §3-307. F.S.A. §673.3071. d. Defenses Defenses include:

1. infancy, 2. duress, 3. lack of capacity, 4. illegality of transaction, 5. fraud, or 6. discharge in insolvency. §3-305. F.S.A. §673.3051.

e. Forgery or Alteration Instrument has apparent evidence of forgery or alteration calling into question authenticity. §3-302. F.S.A. §673.3021.

5. How Holder in Due Course Proven

a. Validity of Signatures §3-308 F.S.A. §673.3081

Signature is valid, unless put into question. Burden of establishing validity upon person claiming validity.


b. Status of Plaintiff §3-308 F.S.A. §673.3081

Plaintiff must show that he is entitled to enforce the instrument.

c. Defenses §3-308 F.S.A. §673.3081

Defendant has to prove defenses.

d. Holder in Due Course §3-308 F.S.A. §673.3081

A holder in due course must prove every element in statute in order to enforce the instrument.

6. Presentment, Dishonor, and Notice of Dishonor

a. When Presentment Must be Made §3-108 F.S.A. §673.1081

It must be made: 1. on or after date on instrument, or 2. within reasonable time.

b. How Presentment Made §3-501 F.S.A. §673.5011

It must be made: 1. at the place of payment of the instrument; 2. by any commercially reasonable means; 3. requiring instrument to be shown, identification of presenter, and authorization; 4. may be treated as occurring on next day if after 2:00 p.m. when there is established cut-off; and 5. decision to pay may be delayed for reasonable time to determine if it should be paid.


c. Waiver of Presentment §3-504 F.S.A. §673-5041

It is waived if: 1. cannot with reasonable diligence make presentment; 2. has repudiated obligation to pay, is dead, or in insolvency; 3. not required for obligation; or 4. instructed not to pay or accept the draft.

Waiver of presentment is also waiver of notice of dishonor.

d. Presentment Warranties §3-417 F.S.A. §673.4171

It is warranted that: 1. warrantor is person entitled to enforce draft, 2. draft not altered, and 3. warrantor has no knowledge of unauthorized signature.

e. Payment by Mistake §3-418 F.S.A. §673.4181

If mistakenly paid due to forgery or after stop payment ordered, the funds may be recovered. However, if the person took the instrument in good faith for value, then this remedy is lost.

f. Dishonor §§3-503, 3-504(c) F.S.A. §§673.5031, 673.5041(3)

Notice of dishonor may be given in any commercially reasonable manner. Notice must be given the day after bank receives notice of dishonor, or 30 days if not a bank.


U.C.C. ARTICLE 9 (SECURED TRANSACTIONS) I. SECURED TRANSACTIONS GENERALLY

Article 9 applies to any transaction, that creates a security interest in

personal property or fixtures by contract. §9-109(a)(1). F.S.A. §679.1091(1)(a). It is irrelevant what the parties label the transaction, and Article 9 applies whether title to the collateral is in the secured party or the debtor. §9-202. F.S.A. §679.2021.

Leases are not covered by Article 9 unless reservation of title is intended as security. Whether a lease is intended as security is determined on the facts of each case. The inclusion of an option to purchase, even for no additional consideration or for a nominal consideration, does not of itself make the lease one intended for security. §1-201(37). F.S.A. §671.201(35).

A secured transaction under Article 9 involves a debtor-creditor relationship between the debtor and the secured party (creditor) wherein the debtor has given to the secured party a security interest in certain personal property (collateral) for the purpose of securing the debt. The purpose of the security interest is twofold:

(1) To make the debt more easily collectible if the debtor refuses to, or cannot, pay when it is due; and

(2) To give the secured party (creditor) a position superior to other creditors of the debtor who might attempt to reach the collateral to satisfy their debts, and to retain the secured party's rights to reach the collateral if it is sold to a third party by the debtor.

A. NATURE OF SECURED TRANSACTIONS

1. Debt Collection

The first purpose, i.e., to make the debt more collectible, involves rights and duties between the debtor and the secured party that are largely left to the agreement between the parties. However, the Code does provide certain limitations on freedom of contract, and determines the rights of the parties where the agreement is silent on a matter in dispute. 2. Priority Problems


The second purpose of the secured transaction is to protect the rights of the secured party against general creditors, lien creditors, trustees in bankruptcy, other secured parties, and purchasers of the goods. These rights are established by the Code and involve the concept of perfection of the security interest. Problems in this area are generally referred to as priority problems. There are three basic steps in answering a priority question:

(1) Determine the status of the secured party or parties if more than one. (a) Is the security interest of the secured party (and those of other

claimants) valid? Is there a proper writing, a description of the collateral that will meet the Code requirements, and is it authenticated by the debtor?

(b) How would the collateral be classified under the Code? Is it consumer goods, equipment, accounts, etc.?

(c) Is the security interest a purchase money security interest? Did the secured party advance credit to permit the debtor to obtain the collateral?

(d) Have the various security interests attached? Was there an agreement that they attach, has value been given, and does the debtor have an interest in the collateral? When did attachment occur?

(e) Has the security interest been perfected? If so, how was it perfected – by filing, possession, control, or automatically? When was it perfected?

(2) What is the status of the other parties who claim an interest in the property? Are there other secured parties, lien creditors, good faith purchasers, a trustee in bankruptcy, etc.? Are they perfected? What rights do they derive from their status?

(3) Application of the priority rules. Once the status of the secured parties and other claimants is determined, the next and final step is to take any two of the parties and apply the correct priority rule to determine who has superior or prior rights. If more than two parties are involved, then the winner of the first priority battle is pitted against the third party; the winner of that contest is pitted against the fourth; etc.

3. Scope of Article 9 Article 9 governs not only security interests in personal property and fixtures, but also agricultural liens, consignments, and the sale of accounts, chattel paper, payment intangibles or promissory notes. §9-109(a). F.S.A. §679.1091(1).


Certain transactions are excluded from Article 9. Article 9 does not apply to the extent preempted by a federal statute, regulation or treaty, or where another statute of the same state or another state expressly governs. The following types of commercial transactions are also excluded:

(1) Landlord's liens, other than agricultural liens; (2) Statutory or common law liens for services or materials; (3) Assignments of an employee’s claims for wages, salary, or other

compensation; (4) Interests in or claims in or under insurance policies, except health care

insurance receivables; (5) Rights represented by a judgment and rights of recoupment or set-off,

except for a judgment taken on a right to payment that was collateral; (6) Creations or transfers of liens on or interests in real property; (7) Assignments of claims arising out of tort, except commercial torts; (8) Assignments of deposit accounts in a consumer transaction. §9-109(d).

F.S.A. §679.1091(4). Also excluded are sales of accounts, chattel paper, payment intangibles, or promissory notes as part of the sale of a business, or their assignment for collection only, or a transfer to an assignee who assumes performance under the contract, or a transfer of a single account to an assignee in whole or partial satisfaction of a preexisting indebtedness. §9-109(d). F.S.A. §679.1091(4). II. CREATING A SECURITY INTEREST A security interest is created by a written security agreement or by the secured party’s taking possession, delivery, or control of the collateral with the intent to secure a debt, plus attachment of the security interest to the collateral.

A. THE SECURITY AGREEMENT A security agreement is an agreement that creates or provides for a security interest. §9-102(a)(73). F.S.A. §679.1021(1)(ttt). It must be in writing and:

(1) Contain a granting clause, i.e., state that it is creating a security interest; (2) Contain a description of the collateral; and (3) Be authenticated by the debtor.

1. Granting Clause

The granting clause need not be formal and can be in a different document.


For example, in In re Numeric Corp., 485 F.2d 1328 (1st Cir. 1973), the court held that there was a sufficient security agreement where a financing statement was filed and where the debtor corporation's board of directors had passed a resolution, reduced to writing, stating that it was granting a security interest to the secured party.

A financing statement is the document that is filed to give notice of the security interest - to perfect the security interest. Cases have uniformly held that a financing statement is not sufficient as a security agreement unless the financing statement itself, or some other writing, contains a "granting clause" indicating that the debtor intends to give a security interest to the secured party. In re Mann, 318 F. Supp. 32 (W.D. Va. 1970).

2. Description of the Collateral A description is sufficient, whether or not it is specific, if it reasonably identifies what is described. §9-108(a). F.S.A. §679.1081(1). Florida specifically provides that a description of collateral reasonably identifies the collateral if it identifies the collateral by: (1) specific listing; (2) category; (3) except as otherwise provided, a type of collateral defined in Article 9; (4) quantity; (5) computational or allocational formula or procedure; or (6) any other method, if the identity of the collateral is objectively determinable. §9-108(b). F.S.A. §679.1081(2). Thus, it has been held that a mistake in one digit of a serial number does not invalidate a financing statement covering a truck where the truck is described as one (1) 1967 Dodge 6 cyl. D-100 pickup." If it could be shown that the mistake actually prejudiced a third party, the result might be different.

3. Authentication Authentication means either to sign a written document or to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record.” §9-102(a)(7). F.S.A. §679.1021(1)(g).

B. POSSESSION/PLEDGE A written security agreement is necessary for the creation of a security interest unless the secured party has possession of the collateral. Where the secured party has possession, all that is needed is an agreement, which can be oral, that the secured party is to have a security interest. Such security interests are frequently referred to as pledges. The Code definition of agreement


includes not just language, but implication from other circumstances. §1-201(3). F.S.A. §671.201(3). With respect to certain types of collateral, such as investment property, the concept of control takes the place of possession. Possession or control may also give rise to perfection of the security interest. The secured party is obligated to use reasonable care in the custody and preservation of collateral in the secured party’s possession or control. §9-207(a). F.S.A. §679.2071(1).

C. ATTACHMENT A secured party has no security interest in any specific property until it attaches to the collateral. A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment. §9-203(a). F.S.A. §679.2031(1). In the usual case, the concept of attachment simply means that if the debtor does not own the collateral, he cannot give a security interest in it. The best example is a security agreement providing for a security interest in the debtor's after-acquired inventory. Until debtor has an interest in the inventory, no security interest can attach. For the security interest to attach:

(1) The debtor has authenticated a security agreement that provides a description of the collateral; OR

(2) The collateral (other than a certificated security) is in the possession of the secured party pursuant to the security agreement; AND

(3) Value has been given by the secured party; AND (4) The debtor has rights in the collateral, or the power to transfer rights in

the collateral to a secured party. §9-203(b). F.S.A. §679.2031(2).

These may occur in any order, with the security interest attaching when the last takes place. The concepts of value and rights in the collateral require particular attention. 1. Value

Value is given no special meaning for Article 9 purposes beyond the generally applicable Code definition:

(1) A binding commitment to extend credit or for the extension of immediately available credit whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection; or


(2) As security for or in total or partial satisfaction of a preexisting claim; or (3) Accepting delivery pursuant to a preexisting contract for purchase; or (4) Any consideration sufficient to support a simple contract. §1-201(44).

Thus, an executory or conditional promise constitutes value under Article 9. The Florida Statutes do not define value with respect to secured transactions. 2. Rights in Collateral

The term debtor's rights in the collateral is undefined. Where the debtor is the present owner of the collateral, there is no problem. But the debtor may have less substantial rights in the collateral and still meet this requirement. The security interest attaches only to whatever rights the debtor has. A debtor may also have the power to transfer greater rights than he himself owns and to that extent may create a security interest in property belonging to a third party. §2-403(2). F.S.A. §672.403(2). 3. After-Acquired Property

A security agreement may create or provide for a security interest in after-acquired collateral, except the security interest does not attach to a commercial tort claim or consumer goods (unless the debtor acquires rights in the consumer goods within 10 days after the secured party gives value). §§9-204(a), (b). F.S.A. §§679.2041(1), (2). 4. Future Advances

A security agreement may provide security for future advances or other value, whether or not the advances or value are given pursuant to commitment. §9-204(c). F.S.A. §679.2041(3).


D. PURCHASE MONEY SECURITY INTERESTS The Code gives special status to purchase money security interests, so it is important to distinguish them from other types of security interests. A purchase-money security interest can be created only in goods and software. A security interest in goods is a purchase money security interest to the extent that the goods are purchase money collateral with respect to that security interest. §§9-103(a), (b). F.S.A. §679.1031(2). In turn, purchase-money collateral means goods or software that secures a purchase-money obligation incurred with respect to that collateral. §9-103(a)(1). F.S.A. §679.1031(1)(a). A security interest is a purchase money security interest if:

(1) It is taken or retained collateral to secure all or part of its price; or (2) It gives value to enable the debtor to acquire rights in or the use of

collateral if such value is in fact so used. §9-103(a)(2). F.S.A. §679.1031(1)(b).

The first part of this definition includes any device whereby the seller is the secured party and the obligation secured is all or part of the price. The references to part of the price of the collatera and to the extent that the goods are purchase-money collateral indicate that the security interest may be part purchase money and part non-purchase money. A purchase money security interest may cover only the price of that which is purchased in the transaction and may not cover a pre-existing claim or antecedent debt. III. TYPES OF COLLATERAL

A. NATURE OF COLLATERAL IN GENERAL

The Code provides for certain broad types of collateral and then breaks down each into more specific components: (1) Goods (a) Consumer goods (b) Inventory (c) Farm products (d) Equipment (2) Tangible Intangibles (a) Instruments (b) Documents (c) Chattel paper


(3) Intangible Intangibles (a) Accounts (b) General intangibles (4) Investment Property (a) Securities, securities accounts and entitlements (b) Commodity contracts and accounts Collateral subject to a security interest may also be in the form of proceeds of the disposition of other collateral.

B. GOODS

1. Generally

Goods includes all things which are movable at the time the security interest attaches, including fixtures and computer programs imbedded in goods if (1) the program is associated with the goods in such a manner that it customarily is considered part of the goods, or (2) by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods. The term goods does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter of credit rights, letters of credit, money, or oil, gas, or other minerals before extraction. §9-102(a)(44). F.S.A. §679.1021(1)(rr). Goods also includes standing timber that is to be cut and removed under a conveyance or contract for sale; the unborn young of animals; crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes; and manufactured homes. §9-102(a)(44). F.S.A. §679.1021(1)(rr). Goods are further broken down into several categories depending on in what capacity and how the debtor primarily uses them. A debtor may use the same goods in more than one capacity, but it is the primary use which determines the characterization.

2. Consumer Goods Consumer goods are those used or bought for use primarily for personal, family, or household purposes. §9-102(a)(23). F.S.A. §679.1021(1)(w). Thus, a washing machine in the debtor's household is consumer goods; in the debtor's appliance store for resale, it is inventory; and in the debtor's automatic laundry, it is equipment.


3. Inventory Inventory is goods, other than farm products, that:

(1) Are leased by a person as lessor; (2) Are held for sale or lease or to be furnished under a contract of service; (3) Are furnished under a contract of service; or (4) Consist of raw materials, work in process, or materials used or

consumed in business. §9-102(a)(48). F.S.A. §679.1021(1)(vv). Inventory includes timber to be cut because this is excluded from the definition of farm products. §9-102(a)(48). In Florida, standing timber that is to be cut is included in the definition of goods. F.S.A. §679.1021(1)(vv).

4. Farm Products Farm products generally means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation, including crops, livestock, products of crops or livestock in their unmanufactured state, aquatic goods produced in aquacultural operations, and supplies used or produced in a farming operation. §9-102(a)(34). F.S.A. §679.1021(1)(hh).

5. Equipment Equipment is a catch-all category, defined merely as goods other than inventory, farm products, or consumer goods. It usually refers to goods that are used or bought for use primarily in a business, e.g., machinery used in farming operations or manufacturing, tools of a mechanic or repairman, delivery trucks. The fact that the debtor periodically sells and replaces his equipment does not convert it to inventory. §9-102(a)(33). F.S.A. §679.1021(1)(gg).

6. Fixtures In addition to pigeonholing the goods in one of the above categories, it is important to determine if any of the goods are, or will become, fixtures (parts of real estate) or accessions (identifiable parts of larger whole goods). These possibilities arise most often with consumer goods and equipment.

Fixture are goods which become so related to particular real estate that an interest in those goods arises under real property law. §9-102(a)(41). F.S.A. §679.1021(1)(oo). However, ordinary building materials, when incorporated into an improvement on land, are regarded by the Code as inseparable from the structure itself. The Article 9 priority rules are inapplicable to this situation, and


the secured party must look to other remedies. §9-334(a). Florida Statutes §679.334(1). A security interest in fixtures is generally subordinate to a conflicting interest in the related real estate by one other than the debtor. §9-334(c). F.S.A. §679.334(3).

7. Accessions An accession means goods that are physically united with other goods in such a manner that the identity of the original goods is not lost. §9-102(a)(1). F.S.A. §679.1021(1)(a). A security interest may be created in an accession, and continues in collateral that becomes an accession. If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected. §§9-335(a), (b). F.S.A. §679.335.

8. Commingled Goods Commingled goods are goods that are physically united with other goods in such a way that their identity is lost in a product or mass. It includes goods whose identity is lost through manufacturing or production (e.g., flour that has become part of baked goods) and through mere mixing with other goods from which they cannot be distinguished (e.g., ball bearings). A security interest does not exist in specific goods that have become commingled. However, a security interest may attach to a product or mass that results when goods become commingled. If a security interest in collateral is perfected before the collateral becomes commingled goods, the security interest that attaches to the commingled product or mass is perfected. §9-336. F.S.A. §679.336.

C. TANGIBLE INTANGIBLES Certain intangibles, such as contractual obligations to hold or deliver goods or to pay money, and ownership in goods or business entities, are commonly reduced to tangible or written form. By transferring the writing, the intangibles are transferred.

1. Instruments Instruments, as defined in Article 9, means negotiable instruments, i.e., drafts and notes as defined in Article 3, or any writing that evidences a right to the payment of a monetary obligation, but is not itself a security agreement or lease. The writing must be of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment. §9-102(a)(47). F.S.A. §679.1021(1)(uu).

2. Documents of Title


Documents of title are negotiable or non-negotiable bills of lading, warehouse receipts, delivery orders, and documents (as provided in Article 7) which purport to be issued by or addressed to a bailee and purport to cover identified or fungible goods of an identified mass in his possession and which evidence that the person in possession of the goods is entitled to receive, hold, and dispose of the document and the goods it covers. Mere receipts for goods, such as dock warrants looking to later issuance of a bill of lading, are not documents of title. Unlike instruments, which represent intangibles with no other tangible form (e.g., obligations to pay money or representing corporate ownership), documents of title cover or represent ownership in tangible goods. It is those goods, or the property interests in them, in which the secured party is really interested. Thus, interests may be created and protected with reference to the documents, the goods or both. §1-201(15). F.S.A. §671.201(16).

3. Chattel Paper

Chattel paper means a writing or writings evidencing both a monetary obligation and a security interest in or a lease of specific goods. If the transaction is evidenced by a security agreement or lease that includes an instrument or series of instruments, the group of writings taken together constitutes chattel paper. §9-102(a)(11). F.S.A. §679.1021(1)(k). Security agreements, such as conditional sales contracts or chattel mortgages, are chattel paper. In Florida, “chattel paper” does not include contracts relating to the lease or hire of a vessel or records that allow payment through the use of a credit card. §9-102(a)(11). F.S.A. §679.1021(1)(k). Instruments such as notes accompanying them are also chattel paper, although if transferred separately, they are "instruments."

The new forms of chattel paper include monetary obligations in computer software and electronic chattel paper.

D. INTANGIBLE INTANGIBLES

Many intangibles, such as monetary obligations or literary rights, while

possibly evidenced by writings, are treated as intangibles. The writings take on no commercial significance of their own, i.e., they are not indispensable.

1. Accounts Accounts are rights to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not earned by performance. Generally these rights are: for property that has


been transferred or otherwise disposed of, for services, or for the use of a credit or charge card. §9-102(a)(2). F.S.A. §679.1021(1)(b). The term accounts includes health-care-insurance receivables, lottery winnings, credit card receivables, health care insurance receivables, but does not include: (1) rights to payment evidenced by chattel paper or an instrument, (2) commercial tort claims, (3) deposit accounts, (4) investment property, (5) letter-of-credit rights or letters of credit, or (6) rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card. §9-102(a)(2). F.S.A. §679.1021(1)(b). A deposit account means a demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument. §9-102(a)(29). F.S.A. §679.1021(1)(cc).

2. General Intangibles General intangibles is the name given to intangible collateral which fails to fit into any other category. It includes things (choses) in action, payment intangibles, and software. §9-102(a)(42). F.S.A. §679.1021(1)(pp). A payment intangible is a general intangible under which the account debtor’s principal obligation is a monetary obligation. §9-102(a)(61). F.S.A. §679.1021(1)(iii).

E. INVESTMENT PROPERTY Investment property includes certificated and uncertificated securities, securities accounts and entitlements, as defined in Article 8. It also includes commodity contracts and commodity accounts. §9-102(a)(49). F.S.A. §679.1021(1)(ww). Commodity contracts include commodity futures and options traded on or subject to the rules of a board of trade designated as a market for such contracts under the federal commodities laws. §9-102(a)(15). F.S.A. §679.1021(1)(o). A commodity account means an account maintained by a commodity intermediary in which a commodity contract is carried for a commodity customer. §9-102(a)(14). F.S.A. §679.1021(1)(n). F. PROCEEDS Proceeds, by definition, includes:


(1) Whatever is received upon the sale, lease, license, exchange, or other disposition of collateral;

(2) Whatever is collected on, or distributed on account of, collateral; (3) Rights arising out of collateral; (4) To the extent of the value of collateral, claims arising out of the loss of,

defects or infringement of rights in, or damage to, the collateral; or (5) To the extent of the value of collateral and to the extent payable to the

debtor or the secured party, insurance on the collateral. §9-102(a)(64). In Florida, proceeds includes whatever is received upon the sale, lease, license, exchange, collection, or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than to a party to the security agreement. F.S.A. §679.1021(1)(lll).

There are two kinds of proceeds: cash, i.e., money, checks, deposit accounts and the like, and non-cash, which includes all other proceeds. §§9-102(a)(9), (58). F.S.A. §§679.1021(1)(i), (fff).

Example: A security interest covers new automobiles held by a dealer for resale. He sells one car on a conditional sale contract, which is non-cash proceeds in the form of chattel paper; money paid by the buyer as down payment is cash proceeds; an automobile traded in is non-cash proceeds in the form of goods; and monthly payments by the buyer are more proceeds that are received when the chattel paper (proceeds) is collected. If dealer sells the trade-in, the cash received becomes proceeds of proceeds (the trade-in).

IV. REMEDIES OF THE SECURED PARTY UPON DEBTOR'S

DEFAULT A. GENERALLY

The basic creditor’s remedy is akin to foreclosure in real property mortgage cases: The secured party may obtain possession of the collateral, sell it, and use the proceeds of the sale to satisfy the obligation. §9-601(a). F.S.A. §679.601(1). Generally, the parties are free to specify in the security agreement the rights and remedies of the secured party upon default. However, the parties cannot alter a number of fundamental obligations, including notice of sale, commercial reasonableness, accounting for proceeds from disposition of the collateral,


calculation of a deficiency or surplus, explanation of calculation of deficiency or surplus, and the debtor’s right to redeem the collateral. §9-602. F.S.A. §679.602.

B. DEFAULT

Generally, a default occurs whenever the debtor fails to tender an obligation when due. Thus, if a debtor fails to meet an installment payment, there is a default. The parties may agree that other acts, e.g., taking the collateral out of the state, constitute a default.

C. OBTAINING POSSESSION Upon default, the secured party has an immediate right to possession of the collateral. He may obtain possession by self-help if this can be done without a breach of the peace. §9-609. F.S.A. §679.609. The Code does not define or describe conduct that will constitute a breach of the peace, leaving that to development by the state courts. If he cannot obtain the collateral peacefully himself, he has a right to bring an action in detinue to obtain possession. After the secured party obtains possession of the collateral, there are two alternative paths that he may follow:

(1) He may sell or otherwise dispose of the collateral and use the proceeds to satisfy the obligation (§9-610(a), F.S.A. §679.610(1)); or

(2) With certain conditions, he may keep the collateral in partial or full satisfaction of the obligation. §9-620(a). F.S.A. §679.620(1).

D. DEBTOR'S RIGHT TO REDEEM

The debtor has a right to redeem the collateral by tendering to the secured party the amount of the obligation, including interest, together with reasonable expenses and attorney’s fees caused by the default. §§9-623(a), (b). F.S.A. §§679.623(1), (2). However, redemption must be effected before a secured party has:

(1) Collected the collateral; (2) Disposed of the collateral or has entered into a contract for its

disposition; or (3) Accepted the collateral in full or partial satisfaction of the obligation.

§9-623(c). F.S.A. §679.623(3).


E. SECURED PARTY'S RIGHT TO ACCEPT COLLATERAL IN SATISFACTION OF OBLIGATION 1. Strict Foreclosure

Article 9 provides streamlined procedures for the secured party to acquire

the debtor’s interest in the collateral without the need for a sale or other disposition. There are two basic requirements: the debtor’s consent, and the absence of a timely objection from a junior interest holder or secondary obligor. 2. Notice to and Consent of Debtor If the secured party elects to “accept” (keep) the collateral in satisfaction of the obligation, then he must give notice of his intention to the debtor and follow the statutory procedures. A debtor consents to the acceptance of the collateral in partial satisfaction of the obligation only if the debtor agrees to the terms of the acceptance in a record authenticated after default. §9-620(c). F.S.A. §679.620(3). If the collateral is consumer goods, the collateral must not be in the possession of the debtor when the debtor consents to the acceptance, and the secured party may not accept the collateral in partial satisfaction of the obligation. §§9-620(a)(3), (g). F.S.A. §§679.620(1)(c), (7). The debtor is deemed to have consented if the secured party sends a proposal to the debtor and does not receive an objection within 20 days, except with respect to acceptances in partial satisfaction. §9-620(4). F.S.A. §679.620(2).

3. Notification to Other Claimants

The secured party must also send notification of its proposal to (1) those who have notified the secured party that they claim an interest in the collateral, (2) holders of certain security interests and liens who have filed a financing statement, and (3) holders of certain security interests who have perfected by compliance with a statute. §9-621(a). F.S.A. §679.621(1). A secured party that wishes to accept collateral in partial satisfaction of the obligation must send the proposal to any secondary obligor in addition to the persons listed above. §9-621(b). F.S.A. §679.621(2). They have 20 days after notification was sent in which to object to the secured party’s retention of the collateral. §9-620(d)(1). F.S.A. §679.620(4)(a). If they do not object, then the secured party may keep the collateral and the debt to him is discharged. There is no right to a deficiency judgment. If any of the parties entitled to notice objects to the secured party's retention in satisfaction, then the secured party must sell the collateral. §9-620(a). F.S.A. §679.620(1). 4. When Strict Foreclosure Not Available


The secured party has no right to keep the goods in satisfaction of the debt, and the goods must be sold if:

(1) The goods are consumer goods in the possession of the secured party; and

(2) The debtor has paid 60 percent of the cash price in the case of a purchase money

security interest, or 60 percent of the principal amount of the obligation secured has been paid in a non-purchased money security interest. §9-620(e). F.S.A. §679.620(5).

The sale must be made within 90 days from the time of taking possession of

the collateral. §9-620(f)(1). F.S.A. §679.620(6)(a). This right of the debtor cannot be waived except that the 90 day requirement can be waived after default. §9-602(10). F.S.A. §679.602(10).

F. DISPOSITION OF THE COLLATERAL BY THE SECURED PARTY After default and taking possession, the secured party has the right to sell, lease, license, or otherwise dispose of the property and to use so much of the proceeds as are necessary to satisfy the obligation of the debtor. §9-610(a). F.S.A. §679.610(1). 1. Sale The sale by the secured party must be commercially reasonable. It may be a public sale (auction) or private sale; sale in one unit or in parcels; for cash or credit; at any time and place - but it must be reasonable. The fact that a better price could have been obtained, does not in itself mean that the sale was not commercially reasonable. §9-627(a). F.S.A. §679.627(1). The sale of collateral is commercially reasonable if the sale was in the usual manner on any recognized market, if the collateral is sold at the current price in a recognized market, or if in conformity with reasonable commercial practices among dealers in the type of property sold. §9-627(b). F.S.A. §679.627(2). Although judicial approval need not be obtained, if it is obtained the sale is conclusively presumed reasonable. §9-627(c). F.S.A. §679.627(3). 2. Notice of Sale Generally, notice must be given to the debtor (unless he has waived notice after default, §9-624), any secondary obliger, and if collateral is not consumer goods, to all other parties from whom the secured party has received written notice of a claim or interest in the collateral. §§9-611(b), (c). F.S.A.


§§679.624, 679.611(2), (3). The notice requirements do not apply if the collateral is perishable or threatens to decline speedily in value, or if it is of a type customarily sold on a recognized market. §9-611(d). F.S.A. §679.611(4). A notice sent after default and at least 10 days before the earliest time for disposition set forth in the notice is reasonable in a non-consumer transaction. §9-612. F.S.A. §679.612. In a consumer-goods transaction, the notification of disposition must provide (in addition to a description of the debtor, the secured party, the collateral, the intended time, place, and method of disposition, as required for notification in non-consumer transactions) information intended to help the consumer debtor determine the amount owed and his potential liability for a deficiency. §§9-613, 9-614. F.S.A. §§679.613; 614. 3. Right of Secured Party to Purchase The secured party may purchase the collateral at any public sale. The secured party may buy at a private sale if the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations. §9-610(c). F.S.A. §679.610(3). 4. Proceeds of the Sale The cash proceeds of the collection or distribution of the collateral are to be distributed as follows:

(1) Reasonable expenses of collection and enforcement which may include reasonable attorney’s fees and legal expenses;

(2) Satisfaction of the indebtedness for which the sale was made; (3) Satisfaction of subordinate security interests if demanded in writing by

the junior secured party before distribution of the proceeds is completed; and

(4) The remainder to the debtor. §§9-608(a)(1), 9-615(a). F.S.A. §§679.608(1)(a); 615(1).

A junior secured party that receives cash proceeds of a disposition in good

faith and without knowledge that the receipt violates the rights of a senior secured party or lienholder (one not subordinate to its security interest) takes the cash proceeds free of the security interest or other lien, is not obligated to apply the proceeds of the disposition to the satisfaction of the senior party’s lien or security interest, and is not obligated to account to or pay the debtor or other holder of the security interest or lien for any surplus. §9-615(g). F.S.A. §679.615(7).


The secured party need not apply or pay over any non-cash proceeds unless the failure to do so would be commercially unreasonable. §9-615(c). Florida Statutes §679.615(3).

5. Title of Purchaser at the Sale A sale of the collateral gives to the purchaser at the sale all of the debtor's rights in the collateral, discharges the security interest of the party selling, and discharges the security interest of all subordinate security holders. A transferee takes free of such interests even if the secured party fails to comply with the provisions of the Code, provided that the transferee acted in good faith. §9-617. F.S.A. §679.617. If there are superior security interests, the property is sold subject to them. 6. Deficiency Judgments If the sale of the goods does not produce sufficient revenue to satisfy the secured party's obligation, he may bring an action on the debt against the debtor or against any parties who have acted as sureties on the obligation. The secured party need not prove compliance with the Code in order to collect a deficiency, unless the debtor or surety places the secured party’s compliance in issue. If the secured party fails to prove such compliance, the debtor’s or surety’s liability for a deficiency is limited to the excess of the secured obligation, expenses, and attorney’s fees over the greater of the actual proceeds of the disposition or the amount of the proceeds that would have been realized had the secured party complied with the Code requirements. §9-626(a). F.S.A. §679.626. These rules apply only in non-consumer transactions; the proper approach to determining the collectibility of a deficiency in consumer transactions is left to case law. §9-626(b). Florida does not have an analogous provision. In a consumer-goods transaction, the secured party must send the debtor an explanation of the calculation of a deficiency or surplus from the disposition of the collateral. When the secured party accounts to the debtor and pays any surplus or first makes written demand on the debtor after the disposition for payment of the deficiency and written 14 days after the receipt of a request. §9-616(b). F.S.A. §679.616(2). 7. Damages The debtor or another secured party may recover damages for any loss caused by a secured party’s failure to comply with Article 9. §9-625(b). F.S.A. §679.625(2). If the collateral is consumer goods, a person that was a debtor or


a secondary obligor at the time the secured party failed to comply with Code requirements may recover at least the credit service charge plus 10 percent of the principal amount of the obligation. §9-625(c)(2). F.S.A. §679.625(3)(b). 8. Secured Party's Right to Collect Accounts Where the collateral is accounts, the secured party has the right, after default, to collect the accounts from the account debtors. He may also have this right by virtue of the security agreement, even before default, but he has it automatically after default. §9-607(a). F.S.A. §679.607(1). If the underlying transaction is a sale of accounts, chattel paper, payment intangibles, or promissory notes, the debtor is not entitled to any surplus and the obligor is not liable for any deficiency. §§9-608(b), 9-615(e). F.S.A. §§679.608(2); 615(5).

G. WAIVER OF DEFENSES CLAUSE A security agreement may contain a clause where the debtor waives defenses that he would have against the original secured party if the security interest is transferred to a third party. Thus, a clause in the security agreement to the effect that debtor agrees not to assert as against an assignee of this security interest any claim or defense that he has against the secured party is valid. The clause is operative, however, only as against those types of defenses that would be classified as personal defenses under §3-305. §9-403(c). F.S.A. §679.403(3). Also, in order to avail himself of the clause, the assignee must take the assignment for value, in good faith, and without notice of a claim of a property or possessory right to the property assigned or of a defense or claim in recoupment of the type that may be asserted against a person entitled to enforce a negotiable instrument. §9-403(b). F.S.A. §679.403(2). V. PERFECTION Perfection is the primary method by which the secured party protects its security interest against third parties. It is akin to the filing of a real property mortgage and has the general purpose of giving notice to the world of the secured party's interest, allowing other parties an opportunity to avoid dealing with the collateral if they do not want to subject themselves to the secured party's rights. There are four basic methods by which the secured party may perfect:

(1) By filing.


(2) By taking possession of the collateral. (3) By control. (4) Automatically, either temporarily or permanently.

Perfection cannot occur unless and until the security interest has attached.

Thus, attachment is a necessary prerequisite to perfection by any means. A. PERFECTION BY FILING

Filing is the most common method of perfection. The Code adopts the concept of notice filing, which means that the primary object of the filing is to give those interested notice that the security interest exists, but not notice of all its terms. Filing is not required where perfection has occurred by another permissible method such as by the secured party’s taking possession or control. §§9-310(b), (c). F.S.A. §§679.3101(1), (2). 1. What to File Article 9 provides a uniform national form of financing statement (called a UCC-1 form) that, if used, must be accepted in the filing offices of any state that accepts written records. §9-521. Florida Statutes §679.521. Any filing office may refuse to accept a filing on the ground that the record is not communicated by a medium of communication authorized by that filing office. §9-516(b)(1). F.S.A. §679.516(2)(a). To be sufficient on any form, the financing statement must:

(1) Provide the name of the debtor; (2) Provide the name of the secured party or a representative of the secured

party; and (3) Indicate the collateral covered by the financing statement. §9-502(a).

F.S.A. §679.502(1).

The debtor’s name is particularly important since financing statements are indexed under the name of the debtor. A financing statement that provides only the debtor’s trade name does not sufficiently provide the name of the debtor. §9-503(c). F.S.A. §679.5031(3). The debtor’s signature is not required on a financing statement. The elimination of the signature requirement facilitates paperless filing of financing statements. Of course, a filing has legal effect only to the extent it is in fact authorized by the debtor. §§9-509, 9-510. F.S.A. §§679.509; 510. A financing statement sufficiently indicates the collateral that it covers if it provides a description of the collateral pursuant to §9-108. F.S.A.


§679.1081(1). A description means it reasonably identifies what is described or indicates that the financing statement covers all assets or all personal property of the debtor. §9-504. F.S.A. §679.5041. Where the collateral is fixtures, timber to be cut, crops, minerals, or the like; the financing statement must show that it covers collateral of this type and must contain a description of the real estate to which the collateral is related and the name of a record owner. §9-502(b). F.S.A. §679.5021(2).

Minor errors will not affect the validity of the filing, unless any errors or omissions make the financing statement seriously misleading. §9-506. F.S.A. §679.5061(1). 2. Where to File Section 9-501 provides for filing where mortgages are filed with respect to fixtures or as-extracted collateral or timber to be cut; or in any office designated by the state with respect to other types of collateral. Florida provides for local filings with the office of the clerk of the circuit court for collateral that includes collateral that is extracted collateral, timber to be cut, or goods that are or will be fixtures; or, in all other cases, the Florida Secured Transaction Registry. F.S.A. §679.5011. Where more than one state is involved with the transaction, Article 9 contains a choice-of-law rule governing perfection that establishes the place to file for most collateral as the jurisdiction where the debtor is located. §9-301. F.S.A. §679.3011. When a financing statement is filed by the secured party in the wrong place, it is nevertheless good as to those who have knowledge of the contents of the statement. If the filing office fails to index the record correctly, the misfiling does not affect the effectiveness of the record – the secured party is protected. §9-517. F.S.A. §679.517. A person may file a correction statement with respect to any record believed incorrectly filed under that person’s name. §9-518(a). F.S.A. §679.518(1). 3. When to File A financing statement may be filed before a security agreement is made or a security agreement attaches. §9-502(d). F.S.A. §679.5021(4). A financing statement continues in effect for five years (30 years in a “public finance transaction” or a “manufactured home transaction”) from the date of filing, and then lapses unless a continuation statement is filed before the lapse. §9-515. F.S.A. §679.515(1).


There can be no perfection by filing where the collateral is money, deposit accounts or letter-of-credit rights. §9-312(b). F.S.A. §679.3121(2). A security interest in money may be perfected only by the secured party’s taking possession, and security interests in deposit accounts and letter-of-credit rights are perfected by control. §9-312(b). F.S.A. §679.3121(2). However, a security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing although perfection by possession or control may also be possible. §9-312(a). F.S.A. §679.3121(1). This represents a change from former Article 9, under which a security interest in instruments could only be perfected by the secured party’s taking possession. A security interest in investment property that is perfected only by filing is subordinate to a conflicting security interest perfected by control. §§9-328(1), (5). F.S.A. §679.328(1). Thus, although filing is a permissible method of perfection, a secured party who perfects by filing takes the risk that the debtor has granted or will grant a security interest in the same collateral to another party who obtains control. Also, perfection by filing does not give the secured party protection against other types of adverse claims under Article 8, where the cut-off rules require control. §8-511. F.S.A. §678.5111.

B. PERFECTION BY POSSESSION

If the secured party is in possession of the collateral, then the transaction is very similar to the common-law pledge. There is no need for filing in such a transaction and there is perfection from the time that possession is taken and lasting so long as possession is retained by the secured party. A secured party may perfect a security interest in negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral. §9-313(a). F.S.A. §679.3131(1). The secured party may take possession of collateral that is in the possession of a person other than the debtor (or a lessee of the collateral from the debtor in the ordinary course of the debtor’s business) when:

(1) The person in possession of the collateral authenticates a record acknowledging that it holds possession of the collateral for the secured party’s benefit; or

(2) The person takes possession of the collateral after having authenticated a record acknowledging that he will hold possession of the collateral for the secured party’s benefit. §9-313(c). F.S.A. §679.3131(3).

However, there can be no perfection by possession where the collateral is accounts or payment intangibles. Thus, in order to perfect a security interest in


accounts or payment intangibles, the secured party must file unless automatic perfection occurs.

C. PERFECTION BY CONTROL A security interest in investment property, deposit accounts, letter of credit rights, or electronic chattel paper may be perfected by control of the collateral. The security interest remains perfected only while the secured party retains control. §9-314(b). F.S.A. §679.3141(2). There are detailed rules specifying what constitutes control over each of these types of collateral, set forth in Sections 9-104 (deposit accounts), 9-105 (electronic chattel paper), 9-106 (investment property), and 9-107 (letter-of-credit rights). F.S.A. §§679.1041 – 679.1071. For example, “control” with respect to a deposit account occurs (even if the debtor retains the right to direct the disposition of funds from the deposit account) if:

(1) The secured party is the bank at which the account is maintained; (2) The debtor, secured party, and bank have agreed in an authenticated

record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor; or

(3) The secured party becomes the bank’s customer with respect to the deposit account. §9-104. F.S.A. §679.1041.

Perfection by control is not available for bank accounts that are evidenced

by a negotiable instrument, which by definition are instruments and not deposit accounts.

What constitutes control of a certificated security, uncertificated security, or security entitlement is specified in Article 8. §8-106. F.S.A. §678.1061. A purchaser has "control" of a certificated security in bearer form if the certificated security is delivered to the purchaser. Section 9-106(b) adopts provisions relating to control of commodity contracts analogous to those in §8-106 for other types of investment property. Control over a security account or commodity account is defined in terms of obtaining control over the security entitlements or commodity contracts. F.S.A. §679.1061.

A security interest in investment property is perfected by control from the time the secured party obtains control, and remains perfected until the secured party no longer has control, and one of the following occurs:

(1) If the collateral is a certificated security, the debtor has or acquires possession of the security certificate;


(2) If the collateral is an uncertificated security, the issuer has registered or registers the debtor as the registered owner; or

(3) If the collateral is a security entitlement, the debtor is or becomes the entitlement holder. §9-314(c). F.S.A. §679.3141(3).

When there is no longer an outstanding secured obligation and the secured party is not committed to give value, Section 9-208 imposes an obligation on the secured party to release control of the collateral within 10 days after receiving an authenticated demand by the debtor. F.S.A. §679.2081(2).

D. AUTOMATIC PERMANENT PERFECTION If the security interest is a purchase money security interest in consumer goods, perfection is automatic as soon as the security interest attaches and remains effective permanently. This excludes motor vehicles and fixtures. §9-309(1). F.S.A. §679.3091(1). So, the secured party need neither file nor have possession to have perfected the purchase money security interest in consumer goods. Automatic perfection also occurs in other situations, including:

(1) The assignment of accounts or payment intangibles that does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles;

(2) The sale of a payment intangible or promissory note; (3) A security interest arising in the delivery of a financial asset; (4) A security interest in investment property created by a broker or

securities intermediary or in a commodity contract or commodity account created by a commodity intermediary; or

(5) An assignment for the benefit of all creditors of the transferor and subsequent transfers by the assignee. §9-309. F.S.A. §679.3091.

E. AUTOMATIC TEMPORARY PERFECTION

A security interest attaches to any identifiable proceeds of collateral upon disposition of the collateral. §9-315(a)(2). F.S.A. §679.3151. A perfected security interest in proceeds is provided by the Code automatically when the security interest in the original collateral is perfected, unless the security agreement specifically provides that proceeds are not covered. §9-315(c). F.S.A. §679.3151(1)(b).


However, this automatic perfection for proceeds continues for only 20 days after attachment (i.e., receipt of the proceeds by the debtor) unless: (1) A filed financing statement covers the original collateral, the proceeds are collateral

in which a security interest may be perfected by filing in the office in which the financing statement has been filed, and the proceeds are not acquired with cash proceeds;

(2) The proceeds are identifiable cash proceeds; or (3) The security interest in proceeds is otherwise perfected when the security interest

attaches to the proceeds or within 20 days thereafter. §9315(d). F.S.A. §679.3151(4).

The loss of perfected status under §9-315(d) is prospective only, unlike the retroactive effect of the lapse of a financing statement as against a purchaser for value under §9-315(c). F.S.A. §679.3151(3). Other situations where Article 9 provides for termporary automatic perfection of a security interest include: (1) In certificated securities, negotiable instruments, or instruments, for 20 days after

attachment of the security interest to the extent that it arises for new value given under an authenticated security agreement. §9-312(e). F.S.A. §679.3121(5).

(2) In certificated securities or instruments, for 20 days after the secured party delivers

them to the debtor for the purpose of ultimate sale or exchange, or presentation, collection, enforcement, renewal, or registration of transfer. §9-312(g). F.S.A. §679.3121(7).

(3) In negotiable documents or goods in possession of a bailee, other than one that has

issued a negotiable document for the goods, if the secured party makes available to the debtor the goods or documents representing the goods for the purpose of ultimate sale or exchange, or loading, unloading, storing, shipping, transshipping, manufacturing, processing, or otherwise dealing with them in a manner preliminary to their sale or exchange. §9-312(f). F.S.A. §679.3121(6).


F. GRACE PERIOD FOR PURCHASE MONEY SECURITY INTERESTS Perfection generally takes place at the moment of filing or of possession; however, the Code provides what is equivalent to a limited, twenty-day (20 day) grace period where the security interest is a purchase money security interest. If the financing statement is filed within 20 days after the debtor receives delivery of the collateral, perfection relates back to the date the security interest attached upon the debtor’s receipt of the collateral. However, this relation back is good against only intervening buyers, lessees, and lien creditors. §9-317(e). F.S.A. §679.3171(5).

If a store gives a purchase money security interest to the B Bank on a cash register that it is purchasing, and the bank files it within twenty days of the time the store obtains possession of the register, then the bank's security interest would be perfected as to those who obtained a lien or who purchased the equipment as part of a bulk transfer between the time that the store got possession and the filing, but it would not be perfected as to anyone who bought the cash register during the twenty-day period as a simple good faith purchaser.

In a sense, there is also a twenty-day grace period in connection with the priority given by §9-324(a), which provides that a purchase money security interest in collateral other than inventory prevails over all other security interests, provided it is perfected within 20 days of the time possession is given to the debtor. Thus, in the above hypothetical, the security interest of the B Bank would also prevail over intervening security interests, so long as the B Bank perfected within twenty days. F.S.A. §679.324(1). G. MOTOR VEHICLES The filing of a financing statement is generally neither necessary nor effective to perfect a security interest in property that is subject to a certificate-of-title statute covering automobiles or the like, providing for a security interest to be indicated on the certificate as a condition or result of perfection. §9-311(a)(2). Florida Statutes §679.3111(1)(b). In states with certificate-of-title laws, when a car is registered, a certificate of title is issued. The certificate of title is prima facie evidence of the facts appearing on it. In practice, one dealing with the motor vehicle looks to the certificate of title to determine who owns the car and the extent to which the named owner's title is subject to the interests of others. Article 9 contemplates that perfection of a security interest in goods covered by a certificate of title


occurs upon receipt by the appropriate state officials of a properly tendered application for a certificate of title on which the security interest is indicated. Under these statutes, no certificate of title is necessary while the car is being held for sale by a dealer. Thus, inventory is not affected by such statutes and perfection of a security interest in inventory that consists of a motor vehicle is accomplished by filing under the UCC rules or by taking possession of it. VI. OTHER CLAIMANTS

A. IN GENERAL

The focus of most Article 9 bar exam questions deals with the priority of claims that various parties may have in specific property. Third persons with interests that may conflict with a secured party’s interest fall roughly into three groups:

(1) Creditors; (2) Transferees; and (3) Trustees in bankruptcy of the debtor. B. CREDITORS

1. General Creditors A general creditor is one who has a claim (including a judgment), but who has no lien on the property in question. A secured party always prevails over a general creditor. Creditors without liens have no interest to assert by virtue of Article 9. 2. Judicial Lien Creditors

A judicial lien creditor is one who acquires a lien on the collateral by attachment, levy, or the like, either before or after the security interest attaches. Once a levy (taking of the goods into actual or constructive possession by the sheriff) is made, a creditor obtains a lien on the goods. §9-102(a)(52). F.S.A. §679.1021(1)(zz). Lien creditor also includes an assignee for the benefit of creditors (from the time of appointment), a trustee in bankruptcy (from the date of filing the petition), or a receiver in equity (from the time of appointment). §9-102(a)(52). F.S.A. §679.1021(1)(zz).


C. TRANSFEREES Transferees of the collateral are those who acquire full title to the goods as a result of purchasing the collateral from the debtor. Essentially, the question in priority problems is whether the transferee takes title subject to the security interest. There are a variety of types of transferees under Article 9.

1. Buyers in Ordinary Course of Business This is the most important and favored third person under the UCC. The Code defines the buyer in ordinary course of business as:

…a person that buys goods in good faith and without knowledge that the sale violates the rights of another person in the goods, and buys in ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller’s own usual or customary practices. * * * A buyer in ordinary course may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a pre-existing contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course of business. A person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt is not a buyer in ordinary course of business. §1-201(9). F.S.A. §671.201(9).

Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. §§1-201(19); 9-102(a)(44). F.S.A. §§679.1021(1)(qq); 201(20). Knowledge means actual knowledge, not mere notice or reason to know. §1-201(25). To disqualify the buyer, it must be knowledge not merely of the third party's interests, but that the sale is in violation of those interests. A buyer in ordinary course otherwise takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. §9-320(a). F.S.A. §679.320(1). 2. Consumer Buyers

A buyer of consumer goods takes free of a security interest even though perfected if he buys, for value, without knowledge of the security interest for his


own personal, family, or household purposes, unless prior to the purchase, the secured party has filed a financing statement covering such goods. §9-320(b). F.S.A. §679.320(2). 3. Buyers Not in the Ordinary Course

A buyer other than a buyer in the ordinary course has rights comparable to a lien creditor whose rights arise after perfection of a security interest. 4. Bulk Transferees

Bulk transferees are those receiving a transfer not in the ordinary course of the transferor's business of a major part of the materials, supplies, merchandise, or other inventory of an enterprise. §6-102. 5. Holders in Due Course of Negotiable Instruments and Protected

Purchasers of Securities

A holder in due course of a negotiable instrument is one who takes the instrument for value, in good faith, without notice that it is overdue, has been dishonored, or of any defense against or claim to it on the part of any person. §3-302. F.S.A. §679.3021(1).

Generally, a purchaser of a certificated or uncertificated security acquires all

rights in the security that the transferor had or had power to transfer. A purchaser of a limited interest acquires rights only to the extent of the interest purchased. A purchaser of a certificated security who as a previous holder had notice of an adverse claim does not improve its position by taking from a protected purchaser. §8-302. The filing of a financing statement under Article 9 is often not notice of an adverse claim to a financial asset. §8-105.

6. Holders of Duly Negotiated Documents of Title

These are persons to whom the documents are negotiated and who purchase them in good faith without notice of any defense against or claim to them on the part of any person and for value, unless it is established that the negotiation is not in the regular course of business, financing, or involves receiving the documents in settlement or payment of a money obligation. §7-501(4). F.S.A. §677.501(1). 7. Purchasers of Instruments and Chattel Paper


These are persons who give new value and take possession of the instrument in the ordinary course of business and the chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser. §9-330(a). Florida Statutes §679.330(1). The new value requirement means that the purchaser of the instrument or paper must give something akin to fresh consideration, such as cash or credit, to the transferor in exchange. This automatically excludes a secured party who took the instruments or chattel paper as collateral for an antecedent debt, or as proceeds of other collateral. Such a transferee must take such writings as part of his business, and the specific writings must be so taken. §9-330(b). F.S.A. §679.330(2). The purchaser is protected if the paper does not carry a legend warning that it has been assigned. The purchaser need not be concerned about other facts or circumstances that might be deemed to provide knowledge of a security interest in the paper. §9-330(f). F.S.A. §679.330(6). 8. Other Good Faith Transferees

These are persons who fit in none of the above categories, but who give value and who receive delivery of the collateral without knowledge of the security interest.

D. TRUSTEE IN BANKRUPTCY The trustee in bankruptcy of the debtor is in a category by himself. His rights and interests are conferred by the Federal Bankruptcy Code as well as by the UCC. 1. Trustee as a Hypothetical Ideal Lien Creditor

Under §544 of the Federal Bankruptcy Code, the trustee is a lien creditor of the bankrupt. He is given similar status under §9-102(a)(53) of the UCC. Under the Bankruptcy Code, he is a "hypothetical ideal lien creditor." This means that he takes without notice or without knowledge of security interests or other dispositions of the property made by the debtor prior to the time that the debtor filed a petition in bankruptcy. Even though the trustee personally had notice of the security interest, he does not have notice in his official capacity unless all of the creditors in bankruptcy had knowledge of it. Thus, the trustee is to be treated as one who, without knowledge of any outstanding security interests, has a lien on the property of the bankrupt as of the date that the petition in bankruptcy is filed.


2. Trustee's Right to Avoid Preferential Transfers

Section 547 of the Bankruptcy Code allows the trustee in bankruptcy to avoid "preferential transfers." The following are the elements of a preferential transfer:

(1) Transfer of debtor's property; (2) To a creditor; (3) While the debtor is insolvent there is a presumption that the debtor is

insolvent during the ninety-day period preceding the date on which the petition in bankruptcy is filed;

(4) In payment of an antecedent debt; (5) Within ninety days of the filing of the petition in bankruptcy his time

period is extended to one year if the transfer is to an "insider" who had reason to know that the debtor was insolvent at the time of the transfer; and

(6) The effect of which is to enable the creditor to receive a greater proportion of his claim than he would have received had the transfer not been made. 3. Transfer

The definition of transfer includes the giving of a security interest under

Article 9. Thus, every time a debtor gives a security interest in his property, he makes a transfer within the definition of §547. The time of the transfer is critical for it must be within ninety days (or one year as explained above) of the filing of the petition in bankruptcy. Also, it must be after the debt was incurred. Under §547, the transfer is accomplished when the security interest is perfected. Thus, if the security interest is given on May 1st, but there is no perfection until October 1st, the transfer, for the purposes of §547, was made on October 1st. However, where Article 9 provides for a 20 day grace period, perfection within 20 days after the security interest is given relates back for the purposes of §547. In the example above, for instance, the transfer occurs on May 1st so long as the security interest is perfected on or before May 21st. Generally, where there is a late filing, preferential transfer results if the debtor is insolvent at the time of the filing.


Debtor gives Secured Party a non-purchase money security interest in his car on May 1st in return for a loan of $500. The security interest is not perfected until October 1st. If Debtor files a petition in bankruptcy within ninety days after October 1st, this is a preferential transfer.

E. OTHER THIRD PERSONS

Other third persons not to be ignored are those with interests in the real estate, such as mortgages, when the collateral is fixtures; collecting banks; and the holders of statutory and common law liens, including for payment of family support. §§4-208, 9-333, 9-334. F.S.A. §§679.333; 334. VII. PRIORITY RULES

A. IN GENERAL

Priority problems occur when two or more parties claim rights in the same property. One of these parties will always be claiming a security interest under Article 9. The other parties will be other creditors, other secured parties, purchasers of the property from the debtor, or a trustee in bankruptcy. In "setting up" your solution, you should follow these steps:

(1) Establish the status of the secured parties: (a) Are the security interests involved valid? (b) What is the nature of the collateral? (c) Is the security interest a purchase money security interest? (d) Have the security interests attached? (e) Have the security interests been perfected? When? How?

(2) Establish the status of the other parties. Once these steps have been followed, all that remains is to apply the appropriate priority rule of Article 9. The priority rules of Article 9 do not lend themselves to easy generalization. The approach of the drafters has been to look at particular situations and to draft rules that are limited in their application. There is a basic rule that can be used as a starting place, but it is subject to many variations and exceptions. The basic rule is: First in time, first in right. In other words, you look to see whose rights were perfected first and that person prevails.


B. SECURED PARTY VS. OTHER SECURED PARTIES 1. General Rule

Where there are two or more secured parties contesting rights in the same collateral, the basic rule is again first in time, first in right. There are three sub-rules that apply:

(1) Both security interests perfected. Priority dates from the time a filing is first made covering the collateral, or the time the security interest is first perfected, whichever is earlier.

(2) One security interest is perfected, but the other is not. Perfected takes over unperfected.

(3) Neither security interest is perfected. First in time, first in right, with the critical time being the time of attachment. §9-322(a). F.S.A. §679.322(1).

2. Preference Given to Purchase Money Security Interests

Article 9 adopts two special rules where a purchase money secured party is claiming rights against a non-purchase money secured party:

(1) Where the collateral is not inventory. The purchase money secured party prevails over all other security interests in the collateral (even though they were previously perfected), if he perfects before or within twenty (20) days after the debtor receives possession. §9-324(a). F.S.A. §679.324(1).

(2) Where the collateral is inventory. A purchase money security interest in inventory prevails over all other security interests in the same collateral, even if the others were perfected first, provided that the party claiming under the purchase money security interest: (a) perfects before the debtor receives possession, and (b) sends an authenticated notification to the holder of any conflicting security interest that had filed a financing statement covering the same types of inventory. The notification must state that the sender has or expects to acquire a purchase-money security interest in inventory of the debtor and describe the inventory. The holder of the conflicting security interest must receive the notification within five (5) years before the debtor receives possession of the inventory. §§9-324(b), (c). F.S.A. §§679.324(2), (3).


Debtor borrows money from the B Bank and gives the bank a security interest in all present and hereafter-to-be-acquired inventory. Six months later, Debtor purchases new inventory from Supplier and Supplier gives Debtor six months in which to pay. Supplier takes back a security interest in the inventory that he has sold to Debtor. If Supplier perfects (files) his security interest before he gives Debtor possession, and also notifies B Bank, in writing, of the security interest he has taken, Supplier prevails over the B Bank in a contest between them.

If there is more than one purchase-money security interest in the same collateral, they compete against each other according to the general priority rules between secured parties in §9-322(a). F.S.A. §679.322. However, a security interest securing an obligation incurred as all or part of the price of the collateral has priority over a security interest securing an obligation incurred for value given to enable the debtor to acquire rights in or the use of the collateral. §9-324(g). F.S.A. §679.324(7). 3. Priority of Security Interest in Fixtures vs. Encumbrances on Owner

of Real Estate

A perfected interest in fixtures has priority over conflicting real estate interests of an encumbrancer or owner that arose before the goods became fixtures if:

(1) The security interest in the fixtures is a purchase money security interest; (2) The interest of the encumbrancer or owner arises before the goods

become fixtures; and (3) The security interest is perfected by a fixture filing before the goods

become fixtures or within 20 days thereafter. §9-334(d). F.S.A. §679.334(4).

A perfected non-purchase money security interest in fixtures has priority over subsequent real estate interests (including liens) that arise if there has been a fixture filing before the real estate interest is recorded. A fixture filing requires that a financing statement covering goods that are (or are to become) fixtures be filed in the office where a mortgage would be recorded in order to give notice to persons having an encumbrance or interest in the real estate. A perfected security interest in fixtures will, in general, compete with other real estate interests according to the usual priority rules of property conveyancing, i.e., first to record. §9-334(e). F.S.A. §679.334(5).


Regardless of whether a security interest in fixtures is perfected or not, that interest prevails over a real estate interest where the debtor has a right as against the owner or encumbrancer to remove the goods. §9-334(f). F.S.A. §679.334(6). Thus, a security interest in a stove installed as a fixture by a lessee, with the landlord's consent that the stove will be removed upon termination of the tenancy, is not subordinated if a bank forecloses on the building in which the stove is affixed. 4. Exception for Construction Mortgages

The above rules giving priority to a fixture interest over a real estate interest (except the rule governing properly filed purchase money security interest in fixtures) do not apply when a construction mortgage has been filed before the goods actually become fixtures, so long as the goods become fixtures before the completion of construction. In such cases, the construction mortgage interest prevails. §9-334(h). F.S.A. §679.334(8). 5. Secured Party's Right to Remove

A secured party who has established his priority may in all cases sever and remove his collateral, subject, however, to a duty to reimburse any real estate claimant (other than the debtor himself) for any physical injury caused by removal. §9-334(f). F.S.A. §679.334(6). 6. Security Interests in Crops

A perfected security interest in crops growing on real property has priority over a conflicting interest of an encumbrancer or owner of the real property, if the debtor has an interest of record in or is in possession of the real property. §9-334(i). F.S.A. §679.334(9). 7. Purchase Money Security Interest in Software A perfected purchase money security interest in software has priority over a conflicting security interest in the same collateral, and, except as otherwise provided in §9-327 for deposit accounts, a perfected security interest in its identifiable proceeds also has priority, to the extent that the purchase money security interest in the goods in which the software was acquired for use has priority in the goods and proceeds of the goods. §9-324(f). F.S.A. §679.324(6). 8. Security Interests in Deposit Accounts


The following rules govern priority among conflicting security interests in the same deposit account: (1) A security interest held by a secured party having control of the deposit account under

§9-104 has priority over a conflicting security interest held by a secured party that does not have control;

(2) Except as otherwise provided in subdivisions (3) and (4) below, security interests

perfected by control under §9-314 rank according to priority in time of obtaining control;

(3) Except as otherwise provided in subdivision (4), a security interest held by the bank

with which the deposit account is maintained has priority over a conflicting security interest held by another secured party; and

(4) A security interest perfected by control under §9-104(a)(3) has priority over a security

interest held by the bank with which the deposit account is maintained. §9-327. F.S.A. §679.327.

9. Security Interests in Investment Property The following rules govern priority among conflicting security interests in the same investment property: (1) A security interest held by a secured party having control of investment property

under §9-106 has priority over a security interest held by a secured party that does not have control of the investment property.

(2) Except as otherwise provided in subdivisions (3) and (4) below, conflicting security

interests held by secured parties each of which has control under §9-106 rank according to priority in time of:

(a) If the collateral is a security, obtaining control; (b) If the collateral is a security entitlement carried in a securities account and: (i) If the secured party obtained control under §8-106(d)(1), the secured party’s

becoming the person for which the securities account is maintained;

(ii) If the secured party obtained control under §8-106(d)(2), the securities


intermediary’s agreement to comply with the secured party’s entitlement orders with respect to security entitlements carried or to be carried in the securities account; or

(iii) If the secured party obtained control through another person under §8-

106(d)(3), the time on which priority would be based under this subdivision if the other person were the secured party; or

(c) If the collateral is a commodity contract carried with a commodity intermediary,

the satisfaction of the requirement for control specified in §9-106(b)(2) with respect to commodity contracts carried or to be carried with the commodity intermediary.

(3) A security interest held by a securities intermediary in a security entitlement or a

securities account maintained with the securities intermediary has priority over a conflicting security interest held by another secured party.

(4) A security interest held by a commodity intermediary in a commodity contract or a

commodity account maintained with the commodity intermediary has priority over a conflicting security interest held by another secured party.

(5) A security interest in a certificated security in registered form that is perfected by

taking delivery §9-313(a) and not by control under §9-314 has priority over a conflicting security interest perfected by a method other than control.

(6) Conflicting security interests created by a broker, securities intermediary, or

commodity intermediary that are perfected without control under §9-106 rank equally.

(7) In all other cases, priority among conflicting security interests in investment property

is governed by §9-322 and §9-323. §9-328. F.S.A. §679.328.

C. SECURED PARTIES VS. UNSECURED CREDITORS

Three types of creditors will be considered here: judicial lien creditors, statutory lien creditors, and general creditors.

1. Judicial Lien Creditors

A security interest is senior to the rights of a person who becomes a lien creditor, unless the person becomes a lien creditor before the security interest


is perfected and before a financing statement covering the collateral is filed. If a judicial lien is acquired after attachment, the creditor must be without knowledge of the security interest at the time his lien attaches (i.e., when there has been a levy on the property). §9-317(a)(2). F.S.A. §679.3171(1)(b). A judicial lien that arises after a financing statement is filed, but before attachment and perfection is subordinate to all advances secured by the security interest, even the first advance, except as otherwise provided in Section 9-323(b) dealing with future advances. F.S.A. §679.323. However, if the security interest becomes unperfected, such as by the lapse of the financing statement, before the judicial lien arises, the security interest is subordinate. If a financing statement is filed, but a security interest does not attach, the lien creditor has the only claim to the property. The time when an advance is made plays no role in determining priorities among conflicting security interests except when a financing statement was not filed and the advance is the giving of value as the last step in attachment and perfection. A secured party generally takes subject to all advances secured by a senior security interest, regardless of how the other security interest is perfected or whether the advances are made pursuant to a commitment. §9-323. F.S.A. §679.323. 2. Liens Arising by Operation of Law

In general, the party holding the lien arising by operation of law prevails over even a prior perfected security interest, so long as the lienholder has possession of the collateral, unless a statute creating the lien subordinates it to security interests. §9-333(b). F.S.A. §679.333(2). 3. General Creditors

A general creditor is a creditor who does not have a lien on the property. Until he obtains a lien on some property, he remains a general creditor. Generally, a lien is obtained either by attaching property at the time of the commencement of an action, or by a writ of execution against the property after a judgment. In either case, the lien attaches at the time a levy is made under the writ. Where the creditor has not obtained a lien, and the secured party has not perfected, the Code provides that the secured party prevails.


D. SECURED PARTY VS. TRANSFEREES OF THE COLLATERAL 1. General Rule

Again, the first in time, first in right rule is a good starting point where there is a conflict between one who has a security interest and one who has purchased the goods from the debtor. A purchaser who gives value and takes delivery without knowledge of an outstanding unperfected security interest prevails over the secured party. Putting it another way, if one purchases (gives value and takes delivery) without knowledge of the security interest, he prevails over the secured party if he purchases before the secured party has perfected. On the other hand, if he purchases after the secured party has perfected, he takes subject to the security interest unless one of the following special rules applies. §9-317(b). F.S.A. §679.3171(2). 2. Where Debtor Has Permission to Sell Collateral

If the secured party gives the debtor permission to sell the collateral, the security interest of the third party is extinguished upon its sale, and the buyer and all subsequent purchasers take free and clear of it. §9-315(a). F.S.A. §679.3151(1). 3. Buyers in Ordinary Course

A buyer in ordinary course takes free of all security interests created by his seller even though the security interests are filed or otherwise perfected, and even though the buyer in ordinary course knew of the security interest. §9-320(a). F.S.A. §679.320(1).

If Retailer gives Bank a security interest in all of its inventory and Buyer as a customer of Retailer purchases goods from Retailer's stock, Buyer takes free and clear of the Bank's security interest even though the Bank has filed and perfected.

4. Buyers Not in Ordinary Course

A buyer other than a buyer in the ordinary course of business takes free of a security interest where an advance is made after the secured party acquires knowledge of the buyer’s purchase, or more than 45 days after the purchase, whichever occurs first. §9-323(d). F.S.A. §679.323(4). 5. Consumer Buyers


Consumer buyers take free and clear of all unfiled security interests. A purchase money security interest in consumer goods (other than motor vehicles) is perfected automatically. No filing is required. If the secured party does in fact file, then his security interest is good even as against a subsequent consumer buyer. §9-320(b). F.S.A. §679.320(2).

Debtor gives Bank a purchase money security interest in his television set which is used for his own personal and family use. Debtor then sells the television to Consumer Buyer. Bank wants to take possession of the television under its security agreement given by Debtor because Debtor has defaulted. If Bank had filed its security interest before Consumer Buyer purchased, then it can recover the television. If Bank had not filed its security interest, then Consumer Buyer took free and clear of the security interest.


SECURED TRANSACTIONS

I. SECURED TRANSACTIONS GENERALLY

A. ARTICLE 9 1. Scope of Article 9 §9-109(a) F.S.A. §679.1091(1)

Article 9 applies to security interests in: a) Personal property, b) Fixtures, c) Agricultural liens, d) Sale of accounts, e) Chattel paper, f) Payment intangibles, and g) Promissory notes.

2. Exclusions from Article 9 §9-109(d) F.S.A. §679.1091(4)

Article 9 does not apply where preempted by federal statute, regulation, or treaty. The following commercial transactions are excluded:

a) Landlord liens, b) Statutory or common law liens for services or

materials, c) Interests in or claims in or under insurance

policies, except health care policies, d) Rights represented by a judgment and rights of

recoupment or set-off, except when judgment is collateral,

e) Creations or transfers of liens on or interests in real property,

f) Assignments of tort claims, except commercial torts, and

g) Assignment of deposit accounts in a consumer transaction.

B. THE SECURITY AGREEMENT

1. Granting Clause §9-102(a)(73) F.S.A. §679.1021(ttt)

A security agreement must contain a granting clause. This means the agreement creates a security interest.

2. Description of Collateral §9-108(a) F.S.A. §679.1081(1)

A description of the collateral is sufficient, whether or not it is specific, if it reasonably identifies what is described.


3. Authentication §9-102(a)(7) F.S.A. §679.1021(1)(9)

Authentication means either to sign a written document or to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent to identify the person and adopt or accept a record.

D. POSSESSION/PLEDGE §9-201(3) F.S.A. §679.201(3)

If a secured party has possession of the collateral, all that is needed is an agreement that there is to be a security interest in that collateral.

E. ATTACHMENT §9-203(a) F.S.A. §679.203(1)

For the security interest to attach: a) The debtor has authenticated a security

agreement that provides a description of the collateral; OR

b) The collateral is in the possession of the secured party pursuant to the security agreement; AND

c) Value has been given by the secured party; AND d) The debtor has rights in the collateral, or the

power to transfer rights in the collateral to a secured party.

F. PURCHASE MONEY SECURITY INTERESTS §9-103(a)(2) F.S.A. §679.1031(1)(b)

A security interest is a purchase money security interest if: a) It is taken or retained collateral to secure all or

part of its price; or b) It gives value to enable the debtor to acquire

rights in or the use of collateral if such value is in fact so used.

II. COLLATERAL A. GOODS


1. Goods Generally §9-102(a)(44) F.S.A. §679.1021(1)(rr)

Goods include all things that are movable at the time the security interest attaches, including fixtures and computer programs embedded in goods. Goods also includes standing timber that is to be cut and removed under a conveyance or contract for sale, unborn young of animals, crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and manufactured homes. Goods do not include:

a) Accounts, b) Chattle paper, c) Commercial tort claims, d) Deposit accounts, e) Documents, f) General intangibles, g) Instruments h) Investment property, i) Letter of credit rights, j) Letters of credit k) Money, or l) Oil, gas, or other minerals before extraction.

2. Consumer Goods §9-102(a)(23) F.S.A. §679.1021(1)(w)

Consumer goods are used or bought for use primarily for personal, family, or household purposes.

3. Inventory §9-102(a)(48) F.S.A. §679.1021(1)(vv)

Inventory is goods, other than farm products, that: a) Are leased by a person; b) Are held for sale or lease or to be furnished

under a contract of services; c) Are furnished under a contract of service; or d) Consist of raw materials, work in process, or

materials used or consumed in business. 4. Farm Products §9-102(a)(34) F.S.A. §679.1021(1)(gg)

Farm products generally means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation, including crops, livestock, products of crops or livestock in their unmanufactured state, aquatic goods produced in aquacultural operations, and supplies used or producd in a farming operation.

5. Equipment §9-102(a)(33) F.S.A. §679.1021(1)(gg)

Equipment is a catchall category, defined merely as goods other than inventory, farm products, or consumer goods.

6. Fixtures §9-102(a)(41) F.S.A. §679.1021(1)(oo)

Fixtures are goods which become so related to particular real estate that an interest in those goods arises under real property law.


7. Accessions §9-102(a)(1) F.S.A. §679.1021(1)(a)

Accessions means goods that physically united with other goods in such a manner that the identity of the original goods is not lost.

8. Commingled Goods §9-336 F.S.A. §679.336

Commingled goods are goods that are physically united with other goods in such a way that their identity is lost in a product or mass.

B. TANGIBLE INTANGIBLES Certain intangibles, such as contractual obligations to hold or deliver goods or to pay money, and ownership in goods or business entities, are commonly reduced to tangible or written form. By transferring the writing, the intangibles are transferred.

1. Instruments §9-102(a)(47) F.S.A. §679.1021(1)(uu)

Instruments means negotiable instruments, or any writing that evidences a right to the payment of a monetary obligation, but is not itself a security agreement or lease.

2. Documents of Title §9-201(15) F.S.A. §679.201(16)

Documents of title are negotiable or non-negotiable bills of lading, warehouse receipts, delivery orders, and documents to be issued by or addressed to a bailee and cover identified fungible goods of an identified mass in his possession and which evidence that the person in possession of the goods is entitled to receive, hold, and dispose of the document and the goods it covers.

3. Chattel Paper §9-102(a)(11) F.S.A. §679.1021(1)(k)

Chattel paper means a writing or writings evidencing both a monetary obligation and a security interest in or a lease of specific goods.

C. INTANGIBLE INTANGIBLES

Many intangibles, such as monetary obligations or literary rights, while possibly evidenced by writings are treated as intangibles.

1. Accounts §9-102(a)(2) F.S.A. §679.1021(1)(b)

Accounts are rights to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not earned by performance.

2. General Intangibles §9-102(a)(42) F.S.A. §679.1021(1)(pp)

General intangibles is the name given to intangible collateral which fails to fit into any other category.

D. INVESTMENT PROPERTY §9-102(a)(49) F.S.A. §679.1021(1)(ww)

Investment property includes certificated and uncertificated securities, securities accounts and entitlements, commodity contracts, and commodity accounts.


E. PROCEEDS §9-102(a)(64) F.S.A. §679.1021(1)(lll)

In Florida, proceeds includes whatever is received upon the sale, lease, license, exchange, collection, or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than to a party to the security agreement.

III.REMEDIES OF THE SECURED PARTY UPON DEBTOR’S DEFAULT

A. DEFAULT A default occurs whenever the debtor fails to tender an obligation when due.

B. OBTAINING POSSESSION §9-609 F.S.A. §679.609

Upon default, the secured party has an immediate right to possession of the collateral. He may obtain possession by self-help if this can be done without a breach of the peace.

C. DEBTOR’S RIGHT TO REDEEM §§9-623(a), (b) F.S.A. §§679.623(1), (2)

The debtor has a right to redeem the collateral by tendering to the secured party the amount of the obligation, including interest, together with reasonable expenses and attorney’s fees caused by the default.

D. SECURED PARTY’S RIGHT TO ACCEPT COLLATERAL IN SATISFACTION OF OBLIGATION

1. Strict Foreclosure There are two basic requirements for the secured party to acquire the debtor’s interest in the collateral without the need for a sale or other disposition:

a) Debtor’s consent, and b) Absence of a timely objection from a junior

interest holder or secondary holder.


2. Notice to and Consent of Debtor §9-620 F.S.A. §679.620

If the secured party elects to keep the collateral in satisfaction of the obligation, then he must give notice of his intention to the debtor and follow the statutory procedures. A debtor consents to the acceptance in partial satisfaction if the debtor agrees in a record authenticated after default. If the collateral is consumer goods, the collateral must not be in the possession of the debtor when the debtor consents to the acceptance, and the secured party may not accept the collateral in partial satisfaction of the obligation. The debtor is deemed to have consented if the secured party sends a proposal to the debtor and does not receive an objection within 20 days.

3. Notification to Other Claimants §9-621(a) F.S.A. §679.621(1)

The secured party must also send notification of its proposal to:

a) Those who have notified the secured party that they claim an interest in the collateral,

b) Holders of certain security interests and liens who filed a financing statement, and

c) Holders of certain security interests who have perfected by compliance with a statute.

4. When Strict Foreclosure Not Available §9-620(e) F.S.A. §679.620(5)

The secured party has no right to keep the goods in satisfaction of the debt, and the goods must be sold if:

a) The goods are consumer goods in the possession of the secured party, and

b) The debtor has paid 60% of the principal amount of the obligation secured.

E. DISPOSITION OF THE COLLATERAL BY THE SECURED PARTY §9-610(a) F.S.A. §679.610(1)

After default and taking possession, the secured party has the right to sell, lease, license, or otherwise dispose of the property and to use so much of the proceeds as are necessary to satisfy the obligation of the debtor.

1. Sale §9-627 F.S.A. §679.627

The sale by the secured party must be commercially reasonable. The sale is commercially reasonable if the sale was in the usual manner on any recognized market, if the collateral is sold at the current price in a recognized market, or if in conformity with reasonable commercial practices among dealers in the type of property sold.


2. Notice of Sale §9-624 F.S.A. §679.624

Notice must be given to the debtor, any secondary obligor, and if the collateral is not consumer goods, to all other parties from whom the secured party has received written notice of a claim or interest in the collateral.

3. Right of Secured Party to Purchase §9-610(c) F.S.A. §679.610(3)

The secured party may purchase the collateral at any public sale.

4. Proceeds of the Sale §§9-608(a)(1), 9-615(a) F.S.A. §§679.608(1)(a), 679.615(1)

The cash proceeds of the collection or distribution of the collateral are to be distributed as follows:

a) Reasonable expenses of collection, b) Satisfaction of the debt, c) Satisfaction of subordinate security interests if

demanded in writing by the junior secured party, and

d) Remainder to the debtor. 5. Title of Purchaser at the Sale §9-617 F.S.A. §679.617

A sale of the collateral gives to the purchaser at the sale all of the debtor’s rights in the collateral, discharges the security interest of the party selling, and discharges the security interest of all subordinate security holders.

6. Deficiency Judgments §9-626 F.S.A. §679.626

If the sale of the goods does not produce sufficient revenue to satisfy the secured party’s obligation, he may bring an action on the debt against the debtor or against any parties who have acted as sureties on the obligations.

7. Damages §9-625(b) F.S.A. §679.625(2)

The debtor or other secured party may recover damages for any loss caused by a secured party’s failure to comply with Article 9.

8. Secured Party’s Right to Collect Accounts §9-607(a) F.S.A. §679.607(1)

Where the collateral is accounts, the secured party has the right, automatically, after default, to collect the accounts from the account debtor.

F. WAIVER OF DEFENSE CLAUSE §9-403(c) F.S.A. §679.403(3)

A security agreement may contain a clause where the debtor waives defenses that he would have against the original secured party if the security interest is transferred to a third party. A clause in the security agreement to the effect that debtor agrees not to assert as against an assignee of his security interest his claim or defense that he has against the secured party is valid. The clause is operative, however, only as against those types of defenses that would be classified as personal defenses.

IV.PERFECTION Perfection is the primary method by which the secured party protects its security interest against third parties.


A. PERFECTION BY FILING §§9-310(b), (c) F.S.A. §§679.3101(1), (2)

The concept of notice filing which means that the primary object of the filing is to give those interested notice that the security interest exists, but not notice of all of its terms.

1. What to File §9-502(a) F.S.A. §679.502(1)

To be sufficient on any form, the financing statement must:

a) Provide the name of the debtor, b) Provide the name of the secured party or a

representative of the secured party, and c) Indicate the collateral covered by the financing

statement. 2. Where to File §9-501 F.S.A. §679.5011

Filing is where mortgages are filed with respect to fixtures or as extracted collateral or timber to be cut, or in any office designated by the state with respect to other types of collateral.

3. When to File §9-515 F.S.A. §679.515(1)

A financing statement may be filed before a security agreement is made or a security agreement attaches. A financing statement continues in effect for 5 years from the date of filing, and then lapses unless a continuation statement is filed before the lapse.

B. PERFECTION BY POSSESSON §9-313 F.S.A. §679.313

A secured party may perfect a security interest in negotiable documents, goods, instruments, money, or tangible chattel paper taking possession of the collateral. The secured party may take possession of collateral that is in possession of a person other than the debtor when:

a) The person in possession of the collateral authenticates a record acknowledging that it holds possession of the collateral for the secured party’s benefit, or

b) The person takes possession of the collateral after having authenticated a record acknowledging that he will hold possession of the collateral for the secured party’s benefit.

C. PERFECTION BY CONTROL §9-314(B) F.S.A. §679.314(2)

A security interest in investment property, deposit accounts, letter of credit rights, or electronic chattel paper may be perfected by control of the collateral. The security interest remains perfected only while the secured party retains control.

D. AUTOMATIC PERMANENT PERFECTION §9-309(1) F.S.A. §679.3091(1)

If the security interest is a purchase money security interest in consumer goods, perfection is automatic as soon as the security interest attaches and remains effective permanently. This excludes motor vehicles and fixtures.


E. AUTOMATIC TEMPORARY PERFECTION §9-315(d) F.S.A. §679.3151(4)

Automatic perfection for proceeds continues for only 20 days after attachment unless:

a) A filed financing statement covers the original collateral, the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed, and the proceeds are not acquired with cash proceeds;

b) The proceeds are identifiable cash proceeds; or c) The security interest in proceeds are otherwise

perfected when the security interest attaches to the proceeds or within 20 days thereafter.

F. GRACE PERIOD FOR PURCHASE MONEY SECURITY INTERESTS §9-317(e) F.S.A. §679.317(5)

There is a 20 day grace period where the security interest is a purchase money security interest. If the financing statement is filed within 20 days after the debtor receives delivery of the collateral, perfection relates back to the date the security interest attached upon the debtor’s receipt of the collateral.

G. MOTOR VEHICLES §9-311(a)(2) F.S.A. §679.3111(1)(b)

The filing of a financing statement is generally neither necessary nor effective to perfect a security interest in property that is subject to a certificate of title statute covering automobiles or the like, providing for a security interest to be indicated on the certificate as a condition or result of perfection.

V. OTHER CLAIMANTS A. CREDITORS 1. General Creditors A general creditor is one who has a claim, but who has no

lien on the property in question. 2. Judicial Lien Creditors §9-102(a)(52) F.S.A. §679.1021(1)(zz)

A judicial lien creditor is one who acquires a lien on the collateral by attachment, levy, or the like, either before or after the security interest attaches. Once a levy is made, a creditor obtains a lien on the goods. Lien creditor also includes an assignee for the benefit of creditors, a trustee in bankruptcy, or a receiver in equity.

B. TRANSFEREES Transferees of the collateral are those who acquire full title to the goods as a result of purchasing the collateral from the debtor.

1. Buyers in the Ordinary Course of Business §9-320(a) F.S.A. §679.320(1)

A buyer in ordinary course otherwise takes free of a security interest even though perfected and the buyer knows of its existence.


2. Consumer Buyers §9-320(b) F.S.A. §679.320(2)

A buyer of consumer goods takes free of a security interest even though perfected, if he buys for value, without knowledge of the security interest for his own personal, family, or household purposes, unless prior to the purchase, the secured party has filed a financing statement covering such goods.

3. Buyer Not in the Ordinary Course

A buyer other than a buyer in the ordinary course has rights comparable to a lien creditor, whose rights arise after perfection of a security interest.

4. Holders in Due Course and Protected Purchasers of Securities §9-302 F.S.A. §679.3021(1)

A holder in due course of a negotiable instrument is one who takes the instrument for value, in good faith, without notice that it is overdue, has been dishonored, or of any defense against or claim to it on the part of any person.

5. Holders of Duly Negotiated Documents of Title §7-501(4) F.S.A. §677.501(1)

These are persons to whom the documents are negotiated and who purchase them in good faith without notice of any defense against or claim to them on the part of any person and for value, unless it is established that the negotiation is not in the regular course of business, financing, or involves receiving the documents in settlement or payment of a money obligation.

6. Purchasers of Instruments and Chattel Paper §9-330(b) F.S.A. §679.330(2)

These are persons who give new value and take possession of the instrument in the ordinary course of business and the chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser.

7. Other Good Faith Transferees These are persons who fit in none of the above categories, but who give value and who receive delivery of the collateral without knowledge of the security interest.

C. TRUSTEE IN BANKRUPTCY

1. Trustee as Hypothetical Ideal Lien Creditors

This means that he takes without notice or without knowledge of security interests or other dispositions of the property made by the debtor prior to the time that the debtor filed a petition in bankruptcy.


2. Trustee’s Right to Avoid Preferential Transfers

The following are the elements of a preferential transfer: a) Transfer of debtor’s property, b) To a creditor, c) While the debtor is insolvent there is a

presumption that the debtor is insolvent during the 90 days preceding the date on which the petition in bankruptcy is filed,

d) In payment of an antecedent debt, e) Within 90 days of the filing of the petition in

bankruptcy his petition is extended to 1 year if the transfer is to an insider who had reason to know that the debtor was insolvent at the time of the transfer, and

f) The effect of which is to enable the creditor to receive a greater proportion of his claim than he would have received had the transfer not been made.

3. Transfer Every time a debtor gives a security interest in his property, he makes a transfer within the definition of the statute.

D. OTHER THIRD PERSONS §§9-333, 9-334 F.S.A. §§679.333, 679.334

Other third persons not to be ignored are those with interests in the real estate, such as mortgages, when the collateral is fixtures; collecting banks; and the holders of statutory and common law liens, including for payment of family support.

VI.PRIORITY RULES A. SECURED PARTY V. OTHER SECURED PARTIES

1. General §9-322(a) F.S.A. §679.322(1)

When there are 2 or more parties contesting rights in the same collateral, the basic rule is 1st in time, 1st in right.


2. Preference Given to Purchase Money Security Interests §9-324 F.S.A. §679.324

When collateral is not inventory, the purchase money secured party prevails over all other security interests in the collateral, if he perfects before or within 20 days after the debtor receives possession. A purchase money security interest in inventory prevails over all other security interests in the same collateral, even if the others were perfected first, provided that the party claiming under the purchase money security interest:

a) Perfects before the debtor receives possession, and

b) Sends an authenticated notification to the holder of any conflicting security interest that had filed a financing statement covering the same types of inventory.

3. Priority of Security Interest In Fixtures v. Encumbrances on Owner of Real Estate §9-334(d) F.S.A. §679.334(4)

A perfected interest in fixtures has priority over conflicting real estate interests of an encumbrancer or owner that arose before the goods became fixtures if:

a) The security interest in the fixtures is a purchase money security interest,

b) The interest of the encumbrancer or owner arises before the goods become fixtures, and

c) The security interest is perfected by fixture filing before the goods become fixtures or within 20 days.

4. Exception for Construction Mortgages §9-334(h) F.S.A. §679.334(8)

The priority rules do not apply when a construction mortgage has been filed before the goods actually become fixtures, so long as the goods become fixtures before the completion of construction, then the construction mortgage prevails.

5. Secured Party’s Right to Remove §9-334(f) F.S.A. §679.334(6)

A secured party who has established priority may sever and remove his collateral, subject to a duty to reimburse any real estate claimant for any physical injury caused by removal.

6. Security Interests in Crops §9-334(i) F.S.A. §679.334(9)

A perfected security interest in crops growing on real property has priority over a conflicting interest of an encumbrancer or owner of the real property, if the debtor has an interest of record in or is in possession of the real property.

B. SECURED PARTIES V. UNSECURED CREDITORS


1. Judicial Lien Creditors §9-317(a)(2) F.S.A. §679.3171(1)(b)

A security interest is senior to the rights of a person who becomes a lien creditor, unless the person becomes a lien creditor before the security interest is perfected and before a financing statement covering the collateral is filed.

2. Liens Arising by Operation of Law §9-333(b) F.S.A. §679.333(2)

The party holding the lien arising by operation of law prevails over even a prior perfected security interest, if the lien holder has possession of the collateral.

3. General Creditors Where the creditor has not obtained a lien, and the secured party has not perfected, the secured party prevails.

C. SECURED PARTY V. TRANSFEREES OF THE COLLATERAL

1. Where Debtor has Permission to Sell Collateral §9-315(a) F.S.A. §679.3151(1)

If the secured party gives the debtor permission to sell the collateral, the security interest of the third party is extinguished upon its sale, and the buyer and all subsequent purchasers take free and clear of it.

2. Buyers in Ordinary Course §9-320(a) F.S.A. §679.320(1)

A buyer in ordinary course takes free of all security interests created by his seller even though the security interests are filed or otherwise perfected, and even though the buyer in ordinary course knew of the security interest.

3. Buyers Not in Ordinary Course §9-323(d) F.S.A. §679.323(4)

A buyer not in the ordinary course of business takes free of a security interest when an advance is made after the secured party acquires knowledge of the buyer’s purchase, or more than 45 days after the purchase, whichever occurs first.

4. Consumer Buyers §9-320(b) F.S.A. §679.320(2)

Consumer buyers take free and clear of all unfiled security interests.