The New York Supreme Court, Appellate Division, First Department, issued a ruling this past week in which it adopted a “clear approach” for determining the difference between direct and derivative claims. The decision clarifies heretofore murky New York law on the topic. A copy of the slip opinion, Yudell v. Gilbert, 2012 N.Y. Slip Op. 05896 (N.Y. App. Div. 1st Dep’t Aug. 7, 2012), is available here.
Yudell involved a dispute between the members of a joint venture that was formed in order to build and manage a shopping center. One member of the joint venture was a trust. The trustees brought what they described as both direct claims against the other members of the joint venture and derivative claims against the joint venture itself.
The trial court dismissed certain causes of action in the complaint, based on a finding that those causes of action were derivative in nature, and the plaintiffs had failed to “plead demand futility with the requisite particularity.” The plaintiffs appealed the decision, contending that one of those causes of action – breach of fiduciary duty – was in fact a direct claim, rather than a derivative claim.
The Appellate Division held that the breach of fiduciary duty claim was derivative. It reached this conclusion by adopting Delaware’s so-called “Tooley Test.” Pursuant to this test, “[a] court should look to the nature of the wrong and to whom the relief should go. 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 ‘(1) 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)’.”
Yudell clarifies a heretofore murky area of New York law and provides litigants with a “common sense approach” to pleading and defending against complaints that purport to contain both direct and derivative causes of action. Yudell is also of interest to insurers to the extent that their policies provide different coverage for direct and derivative claims.