Derivative Complaint Dismissed for Failure Adequately to Allege Demand Futility

On June 27, 2016, Justice Ash of the Kings County Commercial Division issued a decision in Guzman v. Kordonsky, 2016 NY Slip Op. 31208(U), dismissing a complaint for failure adequately to allege demand futility.

In Guzman, the plaintiff shareholders in a black car service brought a derivative action alleging that the president of the service had breached his fiduciary duty and that the board had aided and abetted this misconduct. Among the grounds on which the defendants moved to dismiss the action was that the plaintiffs failed either to make a demand on the board or adequately to allege demand futility. The court granted the motion, explaining:

Pursuant to BCL 626(c), in order to assert a derivative cause of action, shareholders must set forth with particularity their efforts to secure the initiation of such action by the board or the reasons for not making such effort. Here, Plaintiffs conceded that they did not make a request upon the Board to commence the instant action. As such, the Court must determine whether Plaintiffs' failure to make a demand on the Board would have been futile and therefore should be excused.

Demand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit. A plaintiff may satisfy this standard by alleging with particularity that a majority of the board of directors is interested in the challenged transaction or is controlled by a self-interested director. It is not sufficient to merely name a majority of the directors as defendants with conclusory allegations of wrongdoing or control by wrongdoers.

Here, Plaintiffs' complaint identifies only Kordonsky and Goldberg as being interested in the challenged transactions, not a majority of the Board. Further, Plaintiffs fail to allege, with particularity, that a majority of the Board were under Kordonsky's or Goldberg's control. As such, Plaintiffs have not demonstrated that a demand on the Board would have been futile.

(Internal quotations and citations omitted).