Commercial Division Blog

Posted: November 11, 2015 / Categories Commercial, Derivative Actions

Action Asserting Derivative Claims Directly Dismissed for Lack of Standing

On November 6, 2015, Justice Ramos of the New York County Commercial Division issued a decision in H & M Trading Co. LLC v. Jordache Ltd., 2015 NY Slip Op. 51607(U), dismissing an action for lack of standing because the plaintiff had asserted derivative claims as direct claims, explaining:

Under New York law, a shareholder lacks standing to pursue a direct claim to redress wrongs suffered by the corporation; such claims must be asserted derivatively for the benefit of the corporation. A stockholder has no individual cause of action against a person or entity that has injured the corporation. An exception exists where the wrongdoer has breached a duty owed directly to the shareholder which is independent of any duty owing to the corporation.

In order to distinguish a derivative claim from a direct one the First Department adopted the test developed by the Supreme Court of Delaware in Tooley v. Donaldson, Lufkin & Jenrette, Inc. (845 AD2d 1031, 1039 [Del 2004])(Yudell, 99 AD3d 108). Under the Tooley test, a court should consider (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually). If there is any harm caused to the individual, as opposed to the corporation, then the individual may proceed with a direct action. On the other hand, even where an individual harm is claimed, if it is confused with or embedded in the harm to the corporation, it cannot separately stand.

The complaint alleges that via its interest in Newco, H & M has suffered material losses. Specifically, due to JRA's alleged actions, Newco was forced to sell millions of dollars of inventory which it had purchased at full landed cost it also deprived Newco and H & M of its expectancy under Laniado's oral agreement that Laniado would be accorded at least five years to develop the home textiles business using the Double Horseman and USPA trademarks. Due to Newco's compliance with the March 19, 2013 cease and desist letter, Newco's losses on the sales approached $3,000,000 with H & M in turn bearing a loss of $1,500,000 (id. at 38).

H & M's counsel stated the loss that I am saying now is a loss that H & M suffers derivatively to the extent of 50 percent of the loss that is suffered by H & M. It is clear that the alleged harm at issue was suffered by Newco in the first instance. The harm that H & M alleges is embedded in the harm borne primarily to Newco, and cannot separately stand.

. . .

Because H & M lacks standing to pursue direct claims against defendants for alleged harm to Newco, the complaint is dismissed with leave to replead, if so advised.

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