On August 7, 2012, in Yudell v. Gilbert, [
available here], the Appellate Division, First Department
adopted a test first articulated by the Delaware Supreme Court in
assessing whether a claim is direct or derivative in nature. The
key distinctions hinge on who really suffers the harm of alleged
wrongdoing and to whom the recovery will go. Prior to this
decision, New York lacked a precise approach for determining the
difference, rather focusing its analysis on a case-by-case basis
depending on the nature of the allegations.
The Yudell case involved a dispute among the
stakeholders of Baldwin Harbor Associates ("BHA"), a
joint venture established to construct and manage a Long Island
shopping center. At the time of the lawsuit, the Yudell Family
Trust, the Psaty Family Trust, and the Weiser Family Trust each
owned a third of BHA. In 2008, plaintiffs initiated this action
alleging that Jerrold Gilbert, the managing agent for the shopping
center and a trustee for the Psaty Family, had for years failed to
collect rent timely and to properly maintain the shopping center,
thereby breaching the joint venture agreement and the management
agreement. Plaintiffs further alleged that the other members of the
joint venture breached their fiduciary duty through "their de
facto alliance with Gilbert in support of [Gilbert's] exclusive
management and control of virtually every BHA transaction during
the past 17 years, and Gilbert's opposition to the exercise of
the partnership rights of the Yudell Trust." The suit
purported to bring claims both directly and derivatively.
In May 2010, on a motion to dismiss for failure to make a demand
or plead futility with requisite particularity, the court held that
all of the claims were derivative in nature and therefore granted
defendants' motion on all counts, including breach of fiduciary
duty. On appeal, plaintiffs maintained that the motion court erred
because the cause of action for breach of fiduciary duty by members
of the joint venture was a direct claim not subject to a demand
requirement.
The Appellate Division disagreed. In adopting a bright line test
first articulated by the Delaware Supreme Court in Tooley v.
Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del.
2004) [
available here], the New York court held that any claim of this
nature must undergo the following "common sense"
analysis: (1) whether a corporation or individual stockholder
suffered the alleged harm; and (2) who would receive the benefit of
a recovery. The court emphasized that "[a] plaintiff asserting
a derivative claim seeks to recover for injury to the business
entity, whereas, a plaintiff asserting a direct claim seeks redress
for injury to him or herself individually." Applying the
Tooley framework to the claims at issue in this case, the court
affirmed the lower court's dismissal, finding that the
allegations of mismanagement were harmful to the business entity
rather than individually.
By adopting the Tooley framework, claims that previously may
have been considered individual claims will now be subject to the
procedures and defenses of derivative litigation, including a prior
demand or demand futility requirement, the corporation's
ability to form a special committee to first investigate the
allegations, and possibly a more stringent business judgment
defense.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
A discussion on some practical tools lawyers can use, or consider using, in order to decrease defense costs and to increase the chance of concluding a case sooner rather than later.
Carlton Fields recently published a survey (pdf) of 368 general counsel and other in-house counsel at major companies across more than 25 industries regarding the class actions they faced in 2012 and their expectations for 2013.
A financial services organization is a party to a litigation in which plaintiffs are seeking information concerning business practices that impacts a number of the organization's customers.
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