Derivative Standing and Personal Animus: How Much Acrimony is Enough?

• Posted on: Oct 10 2018

A shareholder’s derivative action is a lawsuit “brought in the right of a … corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.” Marx v. Akers, 88 N.Y.2d 189, 193 (1996) (quoting Business Corporation Law § 626 (a)). Derivative claims against corporate officers and directors belong to the corporation itself. Auerbach v. Bennett, 47 N.Y.2d 619, 631 (1979).  As the New York Court of Appeals explained long ago:

The remedy sought [in a derivative action] is for wrong done to the corporation; the primary cause of action belongs to the corporation; recovery must enure to the benefit of the corporation. The stockholder brings the action, in behalf of others similarly situated, to vindicate the corporate rights and a judgment on the merits is a binding adjudication of these rights.

Isaac v. Marcus, 258 N.Y. 257, 264 (1932) (citations omitted.). See also Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (“The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.”).

Since a derivative action binds the corporation’s interest holders, courts require the plaintiff to demonstrate that he/she “will fairly and adequately represent the interests of the shareholders and the corporation, and that [he/she] is free of adverse personal interest or animus.” Steinberg v. Steinberg, 106 Misc. 2d 720, 721 (Sup. Ct. N.Y. County 1980) (citation omitted); see also Gilbert v. Kalikow, 272 A.D.2d 63, 63 (1st Dept. 2000) (“[D]erivative causes of action were properly dismissed on the ground that plaintiff has failed to demonstrate that he will fairly and adequately represent the interests of the [limited partnership].”).

This Blog previously addressed derivative standing in a post about Pokoik v. Norsel Realties, No. 5733, 2018 WL 4353859 (1st Dept. Sept. 13, 2018), a case involving the business breakup of two managing partners of a general partnership. (Here.) In that case, the court found that there was no personal animus despite the plaintiff being very litigious and strategic about the use of litigation to gain an advantage over adversaries. Today, this Blog looks at D’Angelo v. Watner, 2018 N.Y. Slip Op. 32324(U) (Sup. Ct., N.Y. County Sept. 17, 2018) (here), a case involving the standing of a derivative plaintiff alleged to be an inadequate representative because of personal animus with the other member of the company.

Broadly stated, D’Angelo involved the breakup of two limited liability companies (“LLCs”) that were equally owned by the plaintiff, James D’Angelo, and the defendant, Gregg Watner. Watner claimed that D’Angelo could not represent the interests of the LLCs because of the “high degree of hostility and animus between D’Angelo” and Watner. D’Angelo accused Watner of, among other things, inappropriate behavior, abandoning his duties, cutting Watner out of the business (e.g., locking him out of his e-mail account and preventing him from accessing the LLCs’ information), and distributing confidential information to Watner’s friends and associates, some of whom were competitors of the LLCs. According to Watner, D’Angelo’s accusations were “driven by personal animus.”

The court rejected the challenge to D’Angelo’s standing. The Court noted that in the absence of extreme animus, alleged bad acts would disqualify virtually every derivative plaintiff from bringing a claim. This was especially true, said the Court, with regard to 50/50 LLC members: “To find otherwise would mean that no derivative claim could be brought on behalf of a two-member entity, except under the most civil of circumstances.” Indeed, alleging bad acts, noted the Court, “is common in a litigation.” Since Watner failed to show conduct “indicating any extreme degree of animus,” the Court found that Watner “failed to show [that D’Angelo] is not an adequate member representative.” Accordingly, the Court denied Watner’s standing challenge.

Takeaway

As this Blog has noted previously, breaking up a business relationship is hard to do. It can be, and often is, acrimonious and/or emotional. D’Angelo shows, like the First Department’s decision in Pokoik, that the degree of acrimony alleged is important. It must be extreme. Without such conduct, no plaintiff could survive a standing challenge on personal animus grounds.

Tagged with: Business Litigation, Derivative Litigation, Derivative Standing, Personal Animus, Shareholder Litigation