Partnership Not Entitled to Recover Fees from Derivative Action Plaintiff When Security for Fees Not Posted

On January 31, 2019, the First Department issued a decision in NWM Capital, LLC v. Scharfman, 2019 NY Slip Op. 00674, holding that where a derivative action plaintiff had not posted security pursuant to Partnership Law § 121-1003, the plaintiff could not subsequently be required to pay the partnership's attorneys' fees, explaining:

The court properly denied defendants' motion for attorneys' fees under Partnership Law § 121-1003 on the ground that plaintiff had not posted security for defendants' costs. Indeed, the court denied defendants' earlier motion to compel plaintiff to post security, and defendants did not appeal from that order. As defendants point out, Partnership Law § 121-1003 closely parallels Business Corporation Law (BCL) § 627, to which we look for guidance. We have held, in the context of BCL § 627, that, where no security has been posted, there can be no recovery.

(Internal citations omitted).

Partnership Law Section § 121-1003 provides in part that

In a derivative action, brought pursuant to section 121-1002 of this article, . . . the limited partnership in whose right such action is brought shall be entitled at any stage of the proceedings before final judgment to require the plaintiff or plaintiffs to give security for the reasonable expenses, including attorney's fees, which may be incurred by it in connection with such action and by the other parties defendant in connection therewith for which the limited partnership may become liable under this article or under any contract or otherwise under law. The limited partnership shall have recourse to such security in such amount as the court having jurisdiction of such action shall determine upon the termination of such action.

This decision stands for the proposition that a partnership cannot seek fees from a plaintiff suing derivativly on behalf of the partnership unless a demand under Partnership Law Section § 121-1003 had been made and the security sought had been posted by the plaintiff. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.