Also known as: derivative actions · derivative suit
Written by attorneys — see sources below.
A suit by a beneficiary of a fiduciary to enforce a right belonging to the fiduciary. The action permits a shareholder, member, or partner to assert a claim on behalf of the entity when those in control refuse to act.
Dorothy Daniels acquired her membership interest in Decker Electronics after the managers allegedly diverted corporate assets. She commenced a derivative action in state court to recover the diverted funds on the LLC's behalf. The court dismissed the suit because Daniels was not a member when the conduct occurred and her interest did not devolve by operation of law.
Devon Drake, a limited partner in Drake Logistics, sent a written demand to the general partner requesting suit over a diverted opportunity. After four months with no action, Drake filed a derivative action on the partnership's behalf. The court allowed the suit to proceed because the general partner had failed to bring the action within a reasonable time.
Dwight Dorsey prevailed in a derivative action on behalf of Dominion Capital, obtaining a judgment against a manager for self-dealing. The court ordered the entire recovery paid directly to the LLC rather than to Dorsey. Dorsey received no portion of the judgment proceeds.
Dylan Duffy, a limited partner in Dynamic Solutions, obtained a settlement in a derivative action against the general partner. The court directed that the settlement funds be paid to the partnership. Duffy immediately remitted any amounts he had received to the partnership treasury.
Deanna Davenport succeeded in a derivative action that recovered substantial assets for Decker Electronics. The court awarded her reasonable attorneys' fees and costs from the LLC's recovery. The award compensated the plaintiff without reducing the net benefit to the company.
Doris Duffy filed a derivative action in federal court under diversity jurisdiction on behalf of a corporation. The court applied Federal Rule of Civil Procedure 23.1 to determine whether the action could proceed despite a conflicting state security-for-expenses statute. The federal rule controlled the procedural prerequisites for maintaining the suit.
Shady Grove Orthopedic Associates, P.A., provided medical care to Sonia E. Galvez for injuries she suffered in an automobile accident. As partial payment for that care, Galvez assigned to Shady Grove her rights to insurance benefits under a policy issued in New York by Allstate Insurance Co. Shady Grove tendered a claim for the assigned benefits to Allstate, which under New York law had 30 days to pay the claim or deny it. Allstate apparently paid, but not on time, and it refused to pay the statutory interest that accrued on the overdue benefits at two percent per month. Shady Grove filed this diversity suit in the Eastern District of New York to recover the unpaid statutory interest. Alleging that Allstate routinely refuses to pay interest on overdue benefits, Shady Grove sought relief on behalf of itself and a class of all others to whom Allstate owes interest. The individual claim was worth roughly $500, which fell far short of the amount-in-controversy requirement for individual suits under 28 U.S.C. § 1332(a). The District Court dismissed the suit for lack of jurisdiction. It reasoned that N.Y. Civ. Prac. Law Ann. § 901(b), which precludes a suit to recover a penalty from proceeding as a class action, applies in diversity suits in federal court despite Federal Rule of Civil Procedure 23. Concluding that statutory interest is a penalty under New York law, it held that § 901(b) prohibited the proposed class action.
View caseOnly a person who is a member at the time the action is commenced and who was a member when the conduct occurred, or whose membership devolved by operation of law, may maintain the action.
Any proceeds or other benefits belong to the limited liability company or limited partnership, not to the plaintiff. The plaintiff must remit any proceeds received to the entity.
Yes. If the action succeeds in whole or in part, the court may award the plaintiff reasonable expenses, including attorneys' fees and costs, from the entity's recovery.
The member must first make a demand on the managers or other members requesting that they cause the company to bring the action, unless a demand would be futile.
…theory, under which the stock in the corporation was considered the subject of the lawsuit because the suit was a shareholder’s derivative action, is not a basis for jurisdiction because the stock was not the subject of the lawsuit. The suit was based on claims against the individual defendants, not on the stock itself. Pp. 200-209.…