Derivative and Individual Claims Based on Same Facts Cannot be Brought in Same Action

On September 23, 2019, Justice Scarpulla of the New York County Commercial Division issued a decision in Jobar Holding Corp. v. Halio, 2019 NY Slip Op. 32813(U), holding that derivative and direct claims based on the same facts cannot be brought in the same action, explaining:

Although the complaint is rife with allegations that a serious wrong was committed, the drafting of the pleading makes it difficult to determine the precise causes of action that are being pled. Plaintiffs state in their opposition papers that derivative claims are only being asserted against Halio, however, some of the allegations stated in the causes of action asserted against Turman support derivative causes of action as well. In addition, while the causes of action asserted against Turman are stated as being on behalf of Buck individually, some of those causes of action would be inappropriate or unsustainable as causes of action on behalf of an individual.

The theft of a corporation's funds is a wrong against the corporation and a shareholder has no right to sue as an individual for a wrong committed against the corporation. This is so even if the wrongful act caused the shareholder's holdings to decrease in value. A shareholder may not obtain a recovery that belongs to the corporation or duplicates it. To remedy an injury to a corporation, a shareholder must bring a derivative action on behalf of the corporation.

However, if the wrongdoer breaches a duty owed directly to the shareholder and the duty is independent of any duty owed to the corporation, the shareholder may bring an individual action against the wrongdoer. Where the shareholder, rather than the corporation, suffers the harm and would receive the benefit of any recovery, the shareholder may proceed with a direct action against the wrongdoer.

The causes of action asserted against Halio and against Turman consist of the same factual assertions and allege the same injury, the loss of $1.5 million. That loss was to Jo bar and most of the claims asserted against Turman allege a wrong done to Jo bar, not to Buck. Although the complaint explicitly sets forth a cause of action based on BCL § 626 (shareholders' derivative action) against Halio and does not do the same against Turman, it is not clear from the complaint that derivative allegations are not also being asserted against Turman. For example, the aiding and abetting breach of fiduciary duty cause of action is based on the allegation that Turman aided and abetted Halio's wrongs against Jobar, not against Buck individually.

Regarding plaintiffs' allegations that Turman caused Buck individual harm, the complaint states that Turman consistently delayed delivery of K-ls to Buck and many times intentionally interfered with Buck's attempts to obtain financial information for Jobar. The complaint alleges that Buck relied on the allegedly falsified tax forms prepared by Turman to prepare his own and his mother's estate's taxes. These are not derivative claims, as Buck, not Jobar, suffered the alleged harm and would receive the benefit of any recovery. However, plaintiffs do not allege a clear injury to Buck or damages sustained by him resulting from this alleged misconduct. In sum, the causes of action asserted against Turman are an unclear mix of Buck's personal claims, derivative claims on behalf of Jo bar, and other claims that are not sustainable to any of the plaintiffs.

It is well settled that derivative and individual claims based on the same operative facts cannot be interspersed in the same action. Complaints that mingle derivative and individual claims are generally dismissed with leave given to replead. Because of the mixing of derivative and individual claims, and the unclear nature of the allegations being asserted against Turman, the complaint is dismissed insofar as asserted against Turman without prejudice to bring properly pled causes of action against this defendant.

(Internal citations omitted) (emphasis added).

This decision relates to something common in complex commercial litigation--the question of whether a claim can be brought by an individual on his or her own behalf or must be brought on behalf of a corporation or other entity in which the plaintiff has an ownership stake (that is, derivatively). 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.