Commercial Division Blog

Posted: July 20, 2014 / Categories Commercial, Derivative Actions

Double Derivative Claim Dismissed For Failure to Show Control of Subsidiary

On July 9, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in USHA SOHA Terrace, LLC v. Robinson Brog Leinwand Greene Genovese & Gluck, P.C., 2014 NY Slip Op. 31813(U), dismissing derivative claims for lack of standing.

In USHA SOHA Terrace, the plaintiff "assert[ed] both direct and derivative claims against legal counsel for the owner and the developer with regard to a construction project in which plaintiff . . . was a minority investor in the developer." The court granted the defendants' motion to dismiss, holding that the plaintiff lacked standing to bring either direct or derivative claims. With respect to the plaintiff's double derivative claim, the court explained:

Plaintiff also cannot maintain this as a double derivative action in the name of 2280 FOB. A double derivative action is one brought by a shareholder not only for wrongs inflicted directly on the corporation in which he holds stock, but for wrongs done to that corporation's subsidiaries, which make indirect, but nonetheless real, impact upon the parent corporation and its stockholders. In order for a plaintiff to pursue a double derivative claim, it must allege that the company in which it owned shares controlled the subsidiary corporation that owned the claim. It cannot be maintained by the shareholder of a corporation which merely owns stock in the wronged corporation, or which is merely a creditor of the second corporation by virtue of preferred stock ownership. The key consideration is control at the time of the supposed harm.

(Internal quotations and citations omitted) (emphasis added). The court, after analyzing the 2280 FOB operating agreement, concluded that the defendant developer lacked the necessary control to support a double derivative claim.