Plaintiff Without Standing to Bring Derivative Action Not Entitled to Fee Award Under BCL Sec. 626

On November 29, 2017, the Second Department issued a decision in Sakow v. Waldman, 2017 NY Slip Op. 08403, holding that a prevailing plaintiff that did not have standing to bring a derivative action was not entitled to a fee award under Business Corporations Law Sec. 626, explaining:

Mawash moved for leave to renew its opposition to Sakow's motion for an award of an attorney's fee, arguing that it had recently discovered that Sakow was not a shareholder of Mawash when this action was commenced and, therefore, that he lacked standing to commence a derivative action and was not entitled to an award of an attorney's fee under Business Corporation Law § 626(e). In opposition, Sakow did not dispute that he had transferred his shares of Mawash to nonparty Mawash Realty Trust (hereinafter the Trust) more than two years before this action was commenced. However, Sakow asserted that he had standing to initiate the derivative action because he was acting as a nominee of the Trust. Upon granting renewal, the Supreme Court adhered to its determination that Sakow was entitled to an award of an attorney's fee under Business Corporation Law § 626(e), but lowered the award to the sum of $300,000 and vacated the money judgment. Mawash appeals.

Business Corporation Law § 626(e) provides, in pertinent part: "If the action on behalf of the corporation was successful, in whole or in part, the court may award the plaintiff . . . reasonable expenses, including reasonable attorney's fees." To be entitled to an award of an attorney's fee under Business Corporation Law § 626(e), a plaintiff must meet all of the requirements for standing to bring a derivative action on behalf of the corporation. These requirements include that the plaintiff be a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates at the time of the challenged transaction and at the time the action was commenced.

Here, upon renewal, the Supreme Court erred in determining that Sakow was entitled to an award of an attorney's fee under Business Corporation Law § 626(e). At the time this action was commenced, Sakow was not a holder of shares or of voting trust certificates of Mawash, and he did not have a beneficial interest in such shares or certificates. Accordingly, Sakow did not have standing to commence a derivative action. While Sakow contends that, as nominee of the Trust, he could have commenced a derivative action on Mawash's behalf, that was not the capacity in which he initiated the instant action. Since Sakow failed to satisfy the standing requirements for a derivative action, he was not entitled to an award of an attorney's fee.

(Internal quotations and citations omitted).

This decision touches on two areas of commercial litigation that are part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and seeking indemnification or an award of attorneys' fees. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding either of these issues.