Shareholder of Dissolved LLC Has Standing to Bring Derivative Action

On December 9, 2020, Justice Emerson of the Suffolk County Commercial Division issued a decision in Mari v. Quatela, 2020 NY Slip Op. 34274(U), holding that a shareholder in a dissolved limited liability company has standing to bring a derivative action, explaining:

The remaining allegations, that the individual defendants diverted firm monies and assets to themselves and paid personal expenses with firm monies, state a claim for breach of fiduciary duty. Allegations of mismanagement or diversion of firm assets plead a wrong to the business entity. The fifth cross claim is, therefore, derivative insofar as it alleges breach of fiduciary duty. The moving defendants seek dismissal thereof on the ground that Hargraves does not have standing to maintain a derivative action because she withdrew from the firm in February 2017.

In order to maintain a derivative cause of action, a plaintiff must be a shareholder of the corporation. The moving defendants are correct that, once a plaintiff withdraws from an LLC, she loses standing to maintain any derivative causes of action on its behalf. The requirement that ownership continue until commencement of the derivative action is rooted in practical considerations. Although a derivative action is theoretically brought for the benefit of the corporation (or LLC), in a very real sense, the standing of the shareholder (or member) is based on the fact that she is defending her own interests as well as those of the corporation (or LLC). When a plaintiff voluntarily disposes of stock, her rights as a shareholder cease, and her interest in the litigation is terminated. Being a stranger to the corporation, the former stockowner lacks standing to institute or continue the derivative suit.

When a corporation has dissolved, however, the shareholder's interest does not abruptly end. At a minimum, the stockholder possesses a substantial interest in the distribution of corporate assets. Even if dissolution and distribution of assets are accomplished contemporaneously, the shareholder's stake in any cause of action existing in favor of the corporation remains quite real. From a purely analytical standpoint, then, a shareholder of a dissolved corporation has sufficient interest in a derivative action to satisfy the spirit of the rule requiring ownership at the commencement of the action. Thus, corporate dissolution, in itself, will not preclude a qualified plaintiff from being deemed a shareholder at the time of bringing the derivative action.

The record reflects that, contrary to the moving defendants' contentions, Quatela Hargraves & Chimeri, PLLC, was dissolved as of March 1, 2017. Thus, contrary to the moving defendants' contentions, Hargraves has standing to maintain a derivative action.

(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.