Much has been written about the pleading requirements unique to shareholder derivative lawsuits. For example, a derivative complaint must allege the plaintiff’s standing as a shareholder at all relevant times. Demand upon the board, or its futility, must also be pled with sufficient particularity. But fundamentally, a complaint may not assert direct claims derivatively, or vice versa. Thus, the Commercial Division recently held, as it has many times before, that where derivative and direct claims are asserted simultaneously by the same plaintiff, each cause of action in the complaint must clearly delineate whether it is being asserted directly or derivatively.
In Meshechok v Kaplan (NY County, Index No. 656337/2018), the plaintiff alleged on behalf of his former employer company (of which plaintiff claimed to be a co-owner with the defendant) that the defendant had misappropriated company trade secrets and funds and diverted business opportunities, among other things. Plaintiff also alleged that defendant had wrongfully suspended pro rata distributions in violation of the company’s operating agreement. Plaintiff sought damages, as well as injunctive relief. Defendant moved to dismiss.
The court granted defendant’s motion to dismiss the complaint in a decision entered July 10, 2019. As a threshold matter, the court noted that under Section 801 (a) of New York’s LLC Law and the company’s operating agreement the substantive law of Delaware governed the sufficiency of plaintiff’s allegations. By contrast, the procedure governing defendant’s motion to dismiss was governed by New York procedural law.
However, the court found it “impossible” to apply either procedural or substantive law to the complaint, because “[i]t is unclear which claims are being asserted directly, derivatively or perhaps both because [plaintiff] has not delineated any of the causes of action or specified which alleged facts apply to each cause of action.” Citing the Court of Appeals’ decision in Abrams v Donati (66 NY2d 951, 953 ), the court held that “a complaint will be dismissed when the allegations confuse a shareholder’s derivative and individual rights, though leave to replead may be granted,” even though Delaware law (which allows for dual-nature claims) governed the substance of plaintiff’s claims.
Further exacerbating the deficiencies in the complaint, plaintiff did not clearly specify damages in such a way that the court could discern the derivative or direct nature of each claim under the Delaware standard set forth in Tooley v Donaldson, Lufkin & Jenrette, Inc. (845 A.2d 1031, 1036 [Del. 2004]). Instead, plaintiff asserted the same “vague” damages for each cause of action—namely, that “[b]y reason of the foregoing, the Companies have been damaged in an amount to be determined at trial” and that plaintiff is entitled to “specific performance restoring [plaintiff’s] full and fair ownership in the Companies.” Under these circumstances, the court found plaintiff’s “failure to articulate which [claims] are individual and which are derivative [to be] fatal.”
Savvy readers, do not allow this to happen to your derivative pleadings. Delineate, or this may be your fate.