In Lugassy v. Lugassy, --- So. 3d ---, 2020 WL 3261409 (Fla. Dist. Ct. App. June 17, 2020), the court confronted a typical business divorce scenario -- two brothers and 50% shareholders unable to agree on how to proceed with their corporation’s business. One was in favor of signing loan documents, and one was not. In an unusual twist, the Florida circuit court ordered the dissenting brother to sign the loan documents, including a personal guarantee. On appeal, the Florida appellate reversed, holding that forcing the dissenting brother to sign the documents to break the deadlock violated his right to freedom of contract.
The appellate court held that “[c]ontracts are voluntary undertakings, and contracting parties are free to bargain for -- and specify -- the terms and conditions of their agreement. That freedom is indeed a constitutionally protected right.” Id. That is certainly true. The United States Supreme Court has stated that “liberty . . . guaranteed (by the Fourteenth Amendment) . . . denotes . . . the right of the individual to contract . . . .” Bd. of Regents of State Colleges v. Roth, 408 U.S. 564, 572 (1972) (quoting Meyer v. Nebraska, 262 U.S. 390, 399 (1923)). As the Florida appellate court put it, “The right to contract is one of the most sacrosanct rights guaranteed by our fundamental law. The right to make contracts is both a liberty and property right and is within the protection of the guaranties against the taking of liberty or property without due process of law.” Lugassy, 2020 WL 3261409, at *1 (citations and alteration omitted). The right also includes, with some exceptions such as public accommodations, “freedom not to contract.” Id. (emphasis added).
By ordering the dissenting brother to sign loan documents -- including a personal guaranty -- the circuit court deprived him of that right. “Not only was he forced to sign contracts and personally guarantee the loans, but the orders amount to an ongoing deprivation of freedom of contract because they require the dissenting brother to cooperate by signing other documents in the future necessary to secure funding.” Id.
So what should the circuit court have done? In Lugassy, where one brother filed a petition for dissolution of the corporation due to the brothers’ deadlock, the Florida Business Corporation Act permits the court to appoint a custodian to manage the business and affairs of the corporation pendent lite, i.e., while the dissolution action is pending. Fla. Stat. § 607.1432(1). “The custodian may exercise all of the powers of the corporation, through or in place of its board of directors or officers, to the extent necessary to manage the affairs of the corporation in the best interests of its shareholders and creditors.” Id.; see also van den Boom v. YLB Investments, Inc., 687 So. 2d 964, 965 (Fla. Dist. Ct. App. 1997) (court did not err in appointing a custodian and charging him with the management of a corporation and safeguarding of its assets). If this had been done in Lugassy, the custodian could have decided, in place of the brothers, whether the financing was in the best interests of the corporation, and, if so, signed the financing documents on its behalf.