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

Derivative Claims Allowed to go Forward; Demand Futility was Properly Alleged

On November 13, 2019, the Second Department issued a decision in Guzman v. Kordonsky, 2019 NY Slip Op. 08176, allowing derivative claims to go forward based on adequate allegations of demand futility, explaining:

[W]e agree with the Supreme Court’s denial of the Board members’ motion pursuant to CPLR 3211(a) and Business Corporation Law ยง 626(c) to dismiss the amended complaint insofar as asserted against them. In a shareholders’ derivative action a complaint must set forth with particularity the plaintiff’s efforts to secure the initiation of such action by the board of directors or the reasons for not making such effort. Demand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit. Here, the amended complaint alleged with sufficient particularity that each Board member either had an interest in the challenged transactions or was controlled by a self-interested director.

(Internal quotations and citations omitted).

This decision illustrates one of the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). 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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