Commercial Division Blog

Posted: May 26, 2017 / Categories Commercial, Derivative Actions

Trustee Lacked Standing to Bring Derivative Action on Behalf of Trust

On May 2, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in 1993 Trust of Joan Cohen v. Baum, 2017 NY Slip Op. 30894(U), holding that a trustee lacked standing to bring a derivative action on behalf of a trust, explaining:

The First Department has adopted Delaware's Tooley test for determining whether a claim is direct or derivative, which requires the court to examine the nature of the wrong and to whom the relief should go. For a claim to be direct, the stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation. Thus, under Tooley, a court should consider (I) who suffered the alleged harm (the corporation or the stockholders); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually). Even where an individual harm is claimed, if it is confused with or embedded in the harm to the corporation, it cannot separately stand.

Baum, to be clear, was not a beneficiary, and thus a loss suffered by the Trusts is not a loss that affects Baum. Baum, personally, could not recover from Manocherian. Nor is there any basis to assert that Manocherian owed any duties directly to Baum, whose role was co-trustee of the Trusts (in which he prepared the Trusts' taxes). Baum cites no authority for the proposition that a trustee is personally owed a duty by a fiduciary of an LLC of which the trust}s a member. There is no logical reason for such a duty to exist, and more importantly, there is no legal basis for this court to conclude otherwise.

Under these circumstances, the claims asserted against Manocherian clearly are derivative. Leaving aside the question of whether Baum could have pursued these claims while serving as trustee, Baum cites no authority for the proposition that a former trustee may maintain a derivative action on behalf of the trust. Since Baum is not a beneficiary of the Trusts, and absent current authority to act on behalf of the Trusts, Baum has no basis to prosecute claims belonging to the Trusts.

(Internal quotations and citations omitted).