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Current Developments in the Commercial Divisions of the
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Posted: May 17, 2014

Prevailing Plaintiff in Derivative Action Entitled to Fees, But From Corporation, Not Defendant

On April 2, 2014, Justice Emerson of the Suffolk County Commercial Division issued a decision in Motherway v. Cartisano, 2014 NY Slip Op. 31215(U), holding that a prevailing plaintiff in a derivative action is not entitled to indemnification from the losing party under BCL § 626(e).

In Motherway, the plaintiff prevailed on derivative claims against the defendants and sought “an award of attorney’s fees pursuant to § 626(e) of the Business Corporation Law in the amount of $250,000” to be paid by the defendants. The court refused, explaining:

The general rule regarding attorney’s fees under New York law is that the prevailing party may not collect them from the loser unless such an award is authorized by an agreement between the parties or by a statute or court rule.

Business Corporation Law § 626 (e) provides as follows:

If the action on behalf of the corporation was successful, in whole or in part, or if anything was received by the plaintiff or plaintiffs or a claimant or claimants as the result of a judgment, compromise or settlement of an action or claim, the court may award the plaintiff or plaintiffs, claimant or claimants, reasonable expenses, including reasonable attorney’s fees, and shall direct him or them to account to the corporation for the remainder of the proceeds so received by him or them. This paragraph shall not apply to any judgment rendered for the benefit of injured shareholders only and limited to a recovery of the loss or damage sustained by them.

Although Business Corporation Law § 626(e) provides that a successful plaintiff in a shareholder derivative action may recoup legal expenses and attorney’s fees from the proceeds of any judgment, compromise, or settlement in favor of the corporation, it does not authorize the imposition of such expenses on the losing party. The basis for an award of attorney’s fees in a shareholder derivative suit is to reimburse the plaintiff for expenses incurred on behalf of the corporation. Those costs should be paid by the corporation, which has benefitted from the plaintiff’s efforts and which would have borne the costs had it sued in its own right. Thus, an award of legal expenses and attorney’s fees to the innocent shareholder who brought the action is payable out of the award to the corporation.

(Internal quotations and citations omitted) (emphasis added).

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