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Posted: October 29, 2016

Family Relationship of Majority of Managers Does Not Excuse Demand in Derivative Suit

On October 11, 2016, Justice Scarpulla of the New York County Commercial Division issued a decision in Danial v. Monasebian, 2016 NY Slip Op. 31909(U), holding that a family relationship among managers did not excuse demand in a derivative action, explaining:

Demand is deemed futile and thus excused in the following three situations when alleged with particularity by a plaintiff: 1) a majority of the board of directors either has a self-interest in the challenged transaction or is controlled by a self-interested director; 2) the board of directors did not fully inform themselves about the challenged transaction to a reasonably appropriate extent; and 3) the challenged transaction was so egregious that it could not have be~n the product of sound business judgment.

Here, Plaintiff commenced this derivative action without first making a demand upon the LLC to institute an action in the LLC’s favor. She alleges that demand would have been futile because Albert, and his family, and Nader, and his family, control the affairs of the LLC. . . .

Plaintiffs first demand futility argument is that the majority of 260 Manager’s board either was self-interested in the challenged transactions or was controlled by a self interested director thereby excusing demand. For purposes of demand futility analysis, the relevant board is the LLC’s board at the time the action was commenced. And, directors are self-interested in a challenged transaction where they will receive a direct financial benefit from the transaction which is different from the benefit to shareholders generally.

The board members relevant to the demand futility analysis in this case are N. Hakakian, M. Monasebian and Jeanette Kudla (“Kudla”). Despite naming N. Hakakian as a defendant, the Complaint is devoid of any factual allegations of self-interest by N. Hakakian. The Complaint’s only reference to M. Monasebian is to identify him as an owner of 260 Manager and A. Monasebian’s son. It makes no reference whatsoever to Kudla. Indeed, the only person in the Complaint who is alleged to have a self-interest in the challenged transactions is A. Monasebian, based on his receipt of excessive compensation via his ownership of Quartz. Even assuming arguendo that these allegations are sufficient as to A. Monasebian, they do not show self-interest by a board member as he is not a member of the current 260 Manager board.

Because Plaintiff fails to allege that any board member was interested in a challenged transaction, she must provide sufficient factual allegations to show that at least two of the three members of the board are under A. Monasebian’s control. As stated above, the Complaint lacks any substantive allegations concerning M. Monasebian. In her memorandum in opposition, Plaintiff argues that the fact that a son owns 260 Manager and his father owns Quartz establishes self-interest. Additionally, Plaintiff implies that because the LLC is run by a cabal of close friends and family, the board is therefore under A. Monasebian’s control.

Without more, these conclusory allegations against M. Monasebian and N. Hakakian, devoid of any underlying factual basis, fail to satisfy the particularity requirement for demand futility. In fact, there is no New York case law holding that a mere assertion of familial relationship amongst the majority of managers of a company excused the demand requirement in a shareholder derivative suit.

(Internal quotations and citations omitted).

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