Co-authored by Joseph E. Gallo.
The New York Appellate Division recently adopted the Delaware test for determining whether a plaintiff’s claims are direct or derivative in nature.
Plaintiffs, trustees of a member of a joint venture that owned and managed a shopping center, sued other members of the joint venture and the managing agent of the shopping center, alleging mismanagement of the shopping center’s property and finances. Plaintiffs purported to assert both derivative and direct claims, including waste, breach of contract, breach of fiduciary duty, and negligence claims. The lower court dismissed Plaintiffs’ claims, holding that the claims were entirely derivative in nature, and that Plaintiffs had failed to plead demand futility, which is required to successfully plead derivative claims.
Plaintiffs appealed, asserting that some of their claims were direct in nature and therefore did not require allegations of demand futility. After finding that New York courts do not have a uniform test for determining if a claim is direct or derivative in nature, the Appellate Division adopted the standard established in the Delaware courts. The Delaware standard holds that a direct claim must allege an injury to a plaintiff that is “independent of any alleged injury to the corporation” in which the plaintiff holds a financial interest. In addition, a plaintiff bringing a direct claim “must demonstrate that the duty breached was owed to [plaintiff] and that he or she can prevail without showing an injury to the corporation.” The Appellate Division held that all of Plaintiffs’ claims were based on alleged injuries to the joint venture that controlled the shopping center. Accordingly, Plaintiffs were required to plead demand futility for all of their claims. Because Plaintiffs failed to do so, the Appellate Division upheld the lower court’s dismissal of all of Plaintiffs’ claims.
Yudell v. Gilbert, — N.Y.S.2d —-, 2012 N.Y. Slip Op. 05896, 2012 WL 3166788 (1st Dept. Aug. 7, 2012).