Christoff v. Inglese

UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF FLORIDA

FORT MYERS DIVISION

MICHAEL J CHRISTOFF,

derivatively on behalf of Galexa,

Inc., a Florida corporation,

Plaintiff,

v. Case No.: 2:20-cv-546-SPC-NPM

PAUL INGLESE, NORTHSTAR

TECHNOLOGIES GROUP, INC.

and GALEXA, INC.,

Defendants.

/

OPINION AND ORDER1

Before the Court is Defendants Paul Inglese and Northstar Technologies

Group, Inc.’s Motion to Dismiss (Doc. 72). Plaintiff Michael Christoff

responded (Doc. 88). The Court denies the Motion.

1 Disclaimer: Documents hyperlinked to CM/ECF are subject to PACER fees. By using

hyperlinks, the Court does not endorse, recommend, approve, or guarantee any third parties

or the services or products they provide, nor does it have any agreements with them. The

Court is also not responsible for a hyperlink’s availability and functionality, and a failed

hyperlink does not affect this Order.

BACKGROUND2

This is a shareholder derivative action. Christoff sues on behalf of

nominal Defendant Galexa, Inc. for fraud (trademark and computer),

conversion, breach of fiduciary duties, and declaratory relief.

At various times, Christoff and Inglese were Galexa board members.

Christoff invested money in the company, receiving a note to secure the debt

(the “Note”). The Note was secured by some intellectual property (the “IP”).

The IP belonged to Galexa. But Inglese developed the IP and thought it was

his. So he took control of Galexa, created Northstar, and transferred the IP to

the new entity (or himself). Then, Northstar competed with Galexa. Through

other conduct, Inglese also breached fiduciary duties. If that wasn’t enough,

after resigning from Galexa, Inglese hacked into its website and data storage—

damaging the company’s ability to operate.

Now, Defendants move to dismiss. They say this isn’t a true derivative

action. Even if it were, Defendants think Christoff failed to make the required

statutory demand on Galexa before suing. Since that did not happen, as the

argument goes, Christoff lacks standing.

2 As described below, this is not a jurisdictional challenge. Rather, Defendants move to

dismiss for failure to state a claim. So these are the well-pled facts, which the Court accepts

as true and view most favorably to Christoff. Karantsalis v. City of Miami Springs, Fla., 17

F.4th 1316, 1319 (11th Cir. 2021).

LEGAL STANDARD

A complaint must recite “a short and plain statement of the claim

showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). “To

survive a motion to dismiss, a complaint must contain sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on its face.’”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,

550 U.S. 544, 570 (2007)). A facially plausible claim allows a “court to draw

the reasonable inference that the defendant is liable for the misconduct

alleged.” Id. Courts must accept all well-pled allegations as true and view

them most favorably to plaintiff. Almanza v. United Airlines, Inc., 851 F.3d

1060, 1066 (11th Cir. 2017).

DISCUSSION

In general, shareholders cannot sue for injuries to a corporation. James

Talcott, Inc. v. McDowell, 148 So. 2d 36, 37 (Fla. Dist. Ct. App. 1962). Instead,

the company must sue in its own name. Id. Sometimes, however, a

shareholder may bring a derivative action on behalf of the entity. Id. If so, the

company “is the real party in interest,” and the shareholder is “only a nominal

plaintiff.” Id. These actions may exist when “the corporation has wrongfully

refused to bring suit” based on the directors’ “fraud, bad faith, or gross abuse

of discretion.” Id.

Before filing a derivative action, the shareholder must first give the

company a chance to act. Rappaport v. Scherr, 322 So. 3d 138, 142 (Fla. Dist.

Ct. App. 2021). This is called making a demand. Id. And it makes good sense

because the directors—not the shareholders—manage corporate affairs. 13

Fletcher Cyclopedia of the Law of Corporations § 5963 (2021 update). So when

a shareholder demands action, the corporation (through its board) must decide

how to respond. Freedman v. magicJack Vocaltec, Ltd., 963 F.3d 1125, 1134

(11th Cir. 2020). In Florida, the shareholder demand requirement is codified

by statute. Fla. Stat. § 607.0742.

At this point, it is necessary to orient the analysis.

Both parties frame the issues in terms of Article III standing. “That is

incorrect.” Deal v. Tugalo Gas Co., 991 F.3d 1313, 1322 (11th Cir. 2021).

Despite the labels, Defendants do not attack Christoff’s constitutional

standing. Instead, they contend the claims fail for other reasons (i.e., Christoff

did not state a claim). On each disputed issue, state law governs. Id. at 1319;

magicJack, 963 F.3d at 1134. Florida is the relevant state.

If the Court can liberally construe Defendants’ argument to mean faulty

demand is a jurisdictional defect, it fails. Federal courts look to state law to

decide whether statutory notice is jurisdictional. See Morgan v. Plano Indep.

Sch. Dist., 724 F.3d 579, 583-84 (5th Cir. 2013); 13 Fletcher Cyclopedia of the

Law of Corporations § 5972.50 (2021 update).3 In other contexts, Florida courts

hold that lack of presuit notice is not a jurisdictional defect. E.g., Hosp. Corp.

of Am. v. Lindberg, 571 So. 2d 446, 448-49 (Fla. 1990) (“While such a condition

precedent to suit is necessary in order to maintain a cause of action, the failure

to do so does not divest the trial court of subject matter jurisdiction.”).4 To be

sure, Christoff needed to make a presuit demand on Galexa or provide reasons

it would be futile. Fla. Stat. § 607.0742(2)(a), (c); see also Fla. Stat.

§ 607.0741(1) (explaining who qualifies as a shareholder). But if the demand

is wanting, that raises trouble for Christoff’s statutory—not constitutional—

standing. See Tugalo, 991 F.3d at 1322-23.

In this context, the term “standing” is somewhat misleading. Whether

Christoff has prudential or statutory standing does not implicate subject-

matter jurisdiction; the inquiry is whether he has a cause of action. Lexmark

Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 128 & n.4 (2014).

So the statutory standing question follows Rule 12(b)(6), not Rule 12(b)(1).

3 See also Santander Bank, N.A. v. Harrison, 858 F. App’x 408, 409 (2d Cir. 2021) (“State law

governs the question whether state notice requirements are jurisdictional in a diversity

case.”); Freeman v. Fla. Dep’t of Bus. & Prof. Reg., No. 6:14-cv-333-Orl-37DAB, 2014 WL

6673559, at *5 (M.D. Fla. Nov. 24, 2014).

4 Splash & Ski, Inc. v. Orange Cnty., 596 So. 2d 491, 495 (Fla. Dist. Ct. App. 1992); Martinez

v. Abraham Chevrolet-Tampa, Inc., 891 So. 2d 579, 581 (Fla. Dist. Ct. App. 2004); see also

Mancini v. Personalized Aid Conditioning & Heating, Inc., 702 So. 2d 1376, 1377 (Fla. Dist.

Ct. App. 1997 (“Failure to comply with the notice provision of [the statute] requires dismissal

of the complaint for failure to state a cause of action.”); Oliveros v. Adventist Health

Sys./Sunbelt, Inc., 45 So. 3d 873, 875-76 (Fla. Dist. Ct. App. 2010).

Newton v. Duke Energy Fla., LLC, 895 F.3d 1270, 1274 n.6 (11th Cir. 2018);

Griffin v. S. Co. Servs., Inc., 635 F. App’x 789, 792 (11th Cir. 2015).

With that settled, the inquiry becomes much simpler. The Court will not

consider the depositions, affidavits, and other summary-judgment type

evidence attached to the briefing. See SFM Holdings, Ltd. v. Banc of Am. Sec.,

LLC, 600 F.3d 1334, 1337 (11th Cir. 2010). Instead, the Complaint and its

exhibits control. See Day v. Taylor, 400 F.3d 1272, 1275-76 (11th Cir. 2005).

And the dispute proceeds in two parts.

A. Nature of Suit

First, Defendants say this is not a true derivative action. According to

them, this is a direct suit Christoff should have brought in his own name. Like

Christoff, the Court disagrees.

A direct action is “a suit by a stockholder to enforce a right of action

existing in the stockholder.” Fort Pierce Corp. v. Ivey, 671 So. 2d 206, 207 (Fla.

Dist. Ct. App. 1996). To bring that case, a shareholder must meet two

requirements:

(1) there is a direct harm to the shareholder or member

such that the alleged injury does not flow

subsequently from an initial harm to the company,

and (2) there is a special injury to the shareholder or

member that is separate and distinct from those

sustained by the other shareholders or members.

magicJack, 963 F.3d at 1136 (quoting Dinuro Invs., LLC v. Camacho, 141 So.

3d 731, 739-40 (Fla. Dist. Ct. App. 2014)). If she cannot satisfy that test (or

fall into an exception), “the action must be maintained derivatively.” Dinuro,

141 So. 3d at 740.

“An injury is not direct if it flows first to the company and only

secondarily to the aggrieved shareholder.” Arbitrage Fund v. Petty, 307 So. 3d

119, 125 (Fla. Dist. Ct. App. 2020). This analysis “must compare the

individual’s harm to the company’s harm.” Dinuro, 141 So. 3d at 736. And a

direct suit exists “if the damages are unrelated to the damages sustained by

the company.” Id. In other words, “the company would have no right to recover

in its own action.” Id.

Here, it is easy to conclude the harm alleged is not direct. According to

Defendants’ characterization, all this case relates to is the IP Christoff wants

to get his hands on by foreclosing on the Note. To be sure, Defendants’ conduct

involving the IP is central. But the Complaint also alleges Defendants

committed other wrongs that harmed Galexa only. These include computer

hacking and breaching fiduciary duties. Defendants do not contend those could

somehow be directed to Christoff.

What’s more, even if Defendants are correct, the harm is still indirect.

As alleged, any harm to Christoff flows secondarily from Galexa’s injury.

According to Christoff, Inglese essentially stole Galexa’s IP. So Galexa

sustained the direct injury regardless of any knock-on effect that may have on

Christoff’s right to foreclose the Note.

Finally, this action pursues several claims and remedies—enforcing the

Note is not among either. While a shareholder-plaintiff’s motivations may be

relevant, they are not determinative on these allegations. See Adiel v. Elec.

Fin. Sys., Inc., 513 So. 2d 1347, 1347-48 (Fla. Dist. Ct. App. 1987) (holding

shareholder not adequate representative because “his motivation in pursuing

the suit was inimical to the interests of the [other] shareholders”). The fact

Christoff may ultimately try to foreclose the Note does not automatically make

his motivation inimical to the interests of Galexa shareholders. As pled,

Defendants stole Galexa’s IP. Christoff seeks to recover that for Galexa. This

is in the interests of other shareholders despite what may—or may not—

happen with the IP later. So right now, there is no reason to doubt Christoff

“fairly and adequately represent[s] the interest of [other] shareholders.” See

Fed. R. Civ. P. 23.1(a).

Because the Complaint plausibly alleges a proper derivative action, the

Motion is denied in part.

B. Demand

Having concluded the action is derivative, the Court must next decide

whether Christoff satisfied the demand requirement. Christoff plausibly

alleges he made the required demand.

Christoff alleges he complied with the presuit demand requirement. For

a typical condition precedent, that usually is enough. Fed. R. Civ. P. 9(c) (“In

pleading conditions precedent, it suffices to allege generally that all conditions

precedent have occurred or been performed.”). But derivative action demands

have a higher pleading standard. Fed. R. Civ. P. 23.1; Staehr v. Alm, 269 F.

App’x 888, 891 (11th Cir. 2008). Still, the Complaint is enough. The pleading

did not stop with a general allegation. Christoff alleges the demand was

refused. And he provided the demand served on Galexa’s board members.®

(Doc. 41-3 at 5-6). In short, the allegations on Christoff's demand are enough

to go forward. Any factual dispute outside the pleadings will need to be

resolved at a later stage.

So as to the demand, the Motion fails too.

Accordingly, it is now

ORDERED:

Defendants’ Motion to Dismiss (Doc. 72) is DENIED.

DONE and ORDERED in Fort Myers, Florida on January 11, 2022.

UNITED STATES DISTRICT JUDGE

Copies: All Parties of Record

5 At a minimum, Christoff served his demand on Galexa’s registered agent, which is

sufficient. Fla. Stat. § 607.0504 “Any notice or demand on a corporation under this chapter

may be given or made to... the registered agent of the corporation at the registered office.”).