Decision in Derivative Action by Different Shareholder Has Res Judicata Effect on Later Suit by Different Shareholder

On March 18, 2020, the Second Department issued a decision in Noor v. Mahmood, 2020 NY Slip Op. 01921, holding that a decision in an earlier derivative action by a different shareholder had res judicata effect on a subsequent derivative action, explaining:

The doctrine of res judicata bars the litigation of a claim if, in a former litigation between the parties, or those in privity with them, in which there was a final conclusion, the subject matter and the causes of action are identical or substantially identical. Because the claim asserted in a stockholder's derivative action is a claim belonging to and on behalf of the corporation, a judgment rendered in such an action brought on behalf of the corporation by one shareholder will generally be effective to preclude other actions predicated on the same wrong brought by other shareholders.

Here, the defendants presented evidence that, in December 2015, another shareholder had commenced a derivative action against them based on the same alleged wrongs, and that, in an order dated May 17, 2018, the Supreme Court granted the defendants' motion for summary judgment dismissing the complaint in that action. An order granting a motion for summary judgment is made on the merits and has preclusive effect. Additionally, the defendants demonstrated that the plaintiff's claims arose from the same operative facts as the claims raised in that action. In opposition, the plaintiff failed to raise a triable issue of fact. Accordingly, we agree with the Supreme Court's determination granting the defendants' motion for summary judgment dismissing the complaint as barred by the doctrine of res judicata.

(Internal quotations and 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.