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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: July 23, 2019

Claim Dismissed as Derivative, Not Direct

On July 5, 2019, Justice Masley of the New York County Commercial Division issued a decision in 600-602 10th Ave. Realty Corp. v. Estate of HY Nusimow, 2019 NY Slip Op. 31993(U), dismissing a claim as derivative, not direct, explaining:

Pinchevsky asserts that the first counterclaim must be dismissed because Larissa lacks standing as she is not a shareholder and the allegations of Pinchevsky’s mismanagement or diversion of assets of ARC for her own enrichment can only be brought as derivative claims. Pinchevsky asserts that Larissa does not have any standing because the Estate has not distributed the stocks to her. Pinchevsky further asserts that this court’s order dated January 10, 2017 precludes the transfer of the stocks to Larissa. Furthermore, she purports that Larissa will not have any standing until a final disposition is rendered on the corporation’s causes of action against the Estate.

Even if Larissa is a valid shareholder, her direct claim for breach of fiduciary duty must be dismissed as the harm alleged is that of the corporation and not a direct harm her.

A plaintiff asserting a derivative claim seeks to recover for injury to the business entity. A plaintiff asserting a direct claim seeks redress for injury to him or herself individually. Sometimes whether the nature of the claim is direct or derivative is not readily apparent. New York does not have a clearly articulated test, but approaches the issue on a case by case basis depending on the nature of the allegations. For instance, where shareholders suffer solely through depreciation in the value of their stock, the claim is derivative, even if the diminution in value derives from a breach of fiduciary duty. Allegations of mismanagement or diversion of corporate assets also plead a wrong to the corporation corporate opportunity.

Using corporate funds to defray her personal expenses, failing to maintain the building in a commercially suitable manner, failing to conduct required corporate formalities such as organizing board meetings and recordkeeping are all alleged wrongs to ARC. The injuries inflicted by these activities may only give rise to a derivative action. Thus, the first counterclaim is dismissed.

(Internal quotations and citations omitted).

This decision relates to something common in complex commercial litigation–the question of whether a claim can be brought by an individual on his or her own behalf or must be brought on behalf of a corporation or other entity in which the plaintiff has an ownership stake (that is, derivatively). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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