Also known as: derivative actions · derivative suit
Written by attorneys · grounded in primary & secondary sources — see 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.
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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.
Only 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.…