Considerations When Determining Whether Or Not To Join a Business Entity As A Third-Party Defendant In Your Florida Divorce Action

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When a couple decides to move forward with a divorce, as part of that dissolution of marriage action the parties’ marital assets and debts become subject to Florida’s equitable distribution scheme. If the parties are also parents to a minor child(ren), a parenting plan with time-sharing schedule along with the child support is also established.

But what if in addition to having bank accounts, retirement accounts, brokerage accounts, personal property and a marital home to divide, there is also a business that was started during the marriage by one of the parties? So what do you do then? How should you then treat that business entity in your divorce proceeding? Do you address it in the same manner as other marital assets or do you actually join that business entity as a third-party defendant? The ultimate decision on how to treat that business entity would depend on the type of business entity that is at issue and the spouse’s claim against that business entity.

It should be noted that if one of the spouses is seeking an equitable distribution of real property or other property owned by a business entity, a joinder of the business entity would be required as the trial court in a divorce proceeding does not have jurisdiction to adjudicate property rights of non-parties. See Ray v. Ray, 624 So. 2d 1146, 1148 (Fla. 1st DCA 1993) (internal citations omitted).

Where a trial court in a divorce action determines spouses’ property rights, it is proper to bring in any third-party claimants to property in which spouses claim an interest. See Picchi v. Picchi, 100 So. 2d 627, 629-30 (Fla. 1958). A trial court does not have the power to order the transfer of corporate property or assets without joinder of the corporation. Austin v. Austin, 120 So. 3d 669, 674 (Fla. 1st DCA 2013) (referencing Mathes v. Mathes, 91 So. 3d 207, 208 (Fla. 2d DCA 2012); Sandstrom v. Sandstrom, 617 So. 2d 327, 328 (Fla. 4th DCA 1993); Keller v. Keller, 521 So. 2d 273, 276 (Fla. 5th DCA 1988); Ashourian v. Ashourian, 483 So. 2d 486, 486 (Fla. 1st DCA 1986)).

However, in order to have the Court adjudicate the spouse’s claim(s) over the business entity, that spouse must ensure that the joinder is proper and would survive a motion to dismiss. This means that the “suing” spouse must ensure that the service of process over the entity is sufficient and that there is a basis for personal jurisdiction over the entity. In other words, it is not until a valid service of process has been accomplished and personal jurisdiction established, will the business entity be compelled to Answer.

It is important to be aware that even when the business entity has been properly served, the suing spouse must still take steps to establish personal jurisdiction, which, depending on the type of business entity at issue, may not be an easy task.

For example, when a business entity is a foreign entity, the suing spouse would then be required to either satisfy the statutory requirements of Florida’s long-arm statute contained in Section 48.193, Florida Statutes (2017) or pursue the alter ego theory as a basis for jurisdiction.

When the Florida’s long-arm statute is invoked, the suing spouse would then have to satisfy the two-part test which consists of a showing of either specific or general jurisdiction and then the satisfaction of the minimum contacts prong. Consequently, the suing spouse must ensure that the petition for dissolution of marriage does contain the specific facts that would form the basis for subjecting the foreign entity to Florida’s jurisdiction.

However, this two-part test for establishing jurisdiction does not apply when the suing spouse pursues the alter ego theory for jurisdiction. In order to establish personal jurisdiction under the alter ego theory, the suing spouse must allege that the other spouse is in fact the business entity. In other words, the suing spouse must allege that the business entity has operated as the mere instrumentality or alter ego of the other spouse and has been formed and/or used by the other spouse for an improper purpose.

To that end, the Fourth District Court in Hoecker v. Hoecker found that a joinder of a corporation is proper where “[t]he parties’ course of conduct demonstrate[d] a blending of marital and business partnerships”. Hoecker v. Hoecker, 426 So. 2d 1191, 1192 (Fla. 4th DCA 1983). In Hoecker, the parties had access to corporate checkbooks and paid both corporate and personal expenses from them, the husband paid for trips to Nassau and Las Vegas from corporate funds, and the wife’s car was purchased and maintained by the corporation. Id. at 1192. The Hoecker court went on to state that “[a]lthough a court may order a husband to transfer stock to his wife without joinder of the corporation as a party, where the husband’s intimacy with the corporation makes the wife’s actions against them inextricably intertwined, the court should not dismiss the corporation.” Id. (internal citations omitted).

The Fourth District Court in Johnson v. Johnson also found a joinder of a corporation in a dissolution of marriage action to be proper where the wife worked as a bookkeeper in the husband’s corporation without a salary and therefore claimed special equity. Johnson v. Johnson, 454 So. 2d 797, 799 (Fla. 4th DCA 1984). The Johnson court went on to state that “[w]hen a wife takes an active part in a family business, her direct contribution to the commercial enterprise must be recognized as a special equity in that business when the marriage assets are being allocated upon dissolution of marriage. … Accordingly, [the Johnson court] vacate[d] the … award and remand[ed] with instructions to grant the wife’s motion to join the closely held corporation as a party defendant.” Id. (internal citations omitted).

The alter ego theory has also been applied to a non-profit corporation. The First District Court in Barineau v. Barineau, when addressing whether a non-profit corporation can be the alter ego of an individual for the purpose of equitable distribution in a dissolution of marriage, has found that:

The mere fact that the corporation involved is a nonprofit corporation does not by itself preclude a court from applying the equitable remedy of piercing the corporate veil. The equitable character of the remedy permits a court to look to the substance of the organization, and its decision is not controlled by the statutory framework under which the corporation was formed and operated. While it may appear to be impossible for a person to exercise ownership control over a nonstock, not-for-profit corporation, a person can be held personally liable under the alter ego theory if the evidence shows that the person controlling the corporation did in fact exercise control, even though there was no stock ownership.

Barineau v. Barineau, 662 So. 2d 1008, 1009 (Fla. 1st DCA 1995) (emphasis added).

The suing spouse may also invoke the “outsider reverse corporate piercing” theory when the business entity has been formed to evade a preexisting obligation. The Third District Court in Braswell v. Ryan Investments, Ltd., when addressing the so-called “outsider reverse corporate piercing” theory, did acknowledge that under such theory:

A corporation’s veil will be pierced where the corporation’s controlling shareholder formed or used the corporation to defraud creditors by evading liability for preexisting obligations. The usual result of piercing the corporate veil is that the controlling shareholder or shareholders become liable for the corporate liabilities. The remedy is equally available, however, to hold the corporation liable for the debts of controlling shareholders where the shareholders have formed or used the corporation to secrete assets and thereby avoid preexisting personal liability.

Braswell v. Ryan Investments, Ltd., 989 So. 2d 38, 39 (Fla. 3d DCA 2008) (emphasis added) (internal citations omitted).

The Florida Supreme Court in Dania Jai-Alai Palace, Inc. v. Sykes has found that “[w]hen the conception of corporate entity is employed to defraud creditors, to evade an existing obligation, to circumvent a statute, to achieve or perpetuate monopoly, or to protect knavery or crime, the courts will draw aside the web of entity … and will do real justice between real persons.” Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114, 1118 (Fla. 1984) (internal citations omitted). The Florida Supreme Court in Dania Jai-Alai Palace, Inc. has also found that a corporate veil should be pierced when “the corporate property was converted or the corporate assets depleted for the personal benefit of the individual stockholders … or that property belonging to the corporation can be traced into the hands of the stockholders.” Id. at 1120 (internal citations omitted). Finally, the Fifth District Court in Walton v. Tomax Corp. has also found the piercing of the corporate veil appropriate to hold an officer of a corporation liable when “[a]n officer of a corporation who is in control of the corporation … personally use[d] its assets for payment of personal obligations …, even if the officer is not a shareholder of the company.”  Walton v. Tomax Corp., 632 So. 2d 178, 180-81 (Fla. 5th DCA 1994).

Consequently, if you are headed for a divorce and a business entity was formed during your marriage, it is imperative that a determination is made prior to the filing of a divorce action on whether that business entity should be joined as a third-party defendant in your dissolution of marriage action.

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