Closely-held business entities come in all shapes and sizes. By definition, under Partnership Law § 10, it takes “two or more” owners to form a general partnership. But corporations and LLCs have no such impediment, ranging in size from just one owner to hundreds.
For close entities with many owners, legal fights can and often do break out between a small group or faction of owners or controllers, leaving other interested stakeholders on the sidelines. Sometimes, owners who are not invited to the litigation may want to participate nonetheless, whether to directly influence the direction or outcome of the case, or perhaps just to feel their voices have been heard.
How is a spurned partner, shareholder, or LLC member of a close business entity not named as a party litigant able to participate in the case? In New York, there’s a statute for that. Two, actually.
The Intervention Statutes and Standards
Under the “mandatory” intervention statute, CPLR 1012 (a), courts “shall” grant a proposed intervenor’s motion to intervene:
- “when a statute of the state confers an absolute right to intervene”;
- “when the representation of the person’s interest by the parties is or may be inadequate and the person is or may be bound by the judgment”; or
- “when the action involves the disposition or distribution of, or the title or a claim for damages for injury to, property and the person may be affected adversely by the judgment.”
Under the “permissive” intervention statute, CPLR 1013, courts “may” grant intervention:
- “when a statute of the state confers a right to intervene in the discretion of the court”; or
- “when the person’s claim or defense and the main action have a common question of law or fact.”
In the case law, there is something of a presumption in favor of intervention: “Whether intervention is sought as a matter of right under CPLR 1012 (a), or as a matter of discretion under CPLR 1013, is of little practical significance since a timely motion for leave to intervene should be granted, in either event, where the intervenor has a real and substantial interest in the outcome of the proceedings” (Maggi v U.S. Bank Tr., N.A., 221 AD3d 678 [2d Dept 2023] [quotations omitted] [emphasis added]).
A “real and substantial interest” standard sounds rather favorable for an unnamed shareholder hoping to intervene in a derivative suit. After all, a derivative plaintiff sues in a representative capacity to vindicate a wrong done to the entity, the recovery of which ultimately passes through to the equity owners pro rata, so every shareholder, at least in theory, has some degree of “interest” in the outcome of the case.
With these principles in mind, it seems fairly logical that interested shareholders ought to have a say – if they want – in how the plaintiff advances the entity’s interests. Thus, in Auerbach v Bennett (47 NY2d 619 [1979]), New York’s highest court held that courts have the power in shareholder derivative litigation to grant unnamed interested shareholders leave to intervene – even for the first time on appeal.
But a recent decision by Kings County Commercial Division Justice Leon Ruchelsman, Kordonsky v Brudoley, Decision and Order [Sup Ct, Kings County Mar. 26, 2024]), highlights some of the shortcomings of the intervention procedure for unnamed owners in derivative cases.
The Many Years of Litigation Over the Dial Car Livery Business
Kordonsky is the latest skirmish in more than a decade and a half of litigation between and among various shareholders and board members over the management and affairs of Dial Car, Inc. (“Dial”), a livery car company.
As far as I can tell, there have been at least three appeals court decisions in the prior litigations (read here, here, and here) and at least a half dozen lower court decisions, including three from Justice Ruchelsman (read here, here, and here).
In their Complaint, two minority shareholders of Dial, suing derivatively on behalf of the company, named seven of Dial’s board members and officers as defendants alleging claims for Breach of Fiduciary Duty, Dissolution (no particular statute specified), Accounting, Declaratory Judgment, Conversion, Unjust Enrichment, Constructive Trust, and Injunction.
The Complaint wrote that Dial – an entity with more than 400 shareholder/drivers – was “once one of the leading black car corporate limousine services in the New York City metropolitan area,” but its business model was “decimated” by the recent “proliferation of app-based car services such as Uber and Lyft.”
The Complaint alleged that Dial is now run by an “unauthorized, illegitimate and illegal board,” who treated Dial “like their personal piggy bank” to “fund their salaries, other perks, and vindictive lawsuits against several of Dial’s former board members,” including against the two plaintiffs.
The most serious allegation in the Complaint was that Dial’s board engaged in an “all or substantially all” sales transaction by conveying the entity’s sole remaining asset, the entity’s headquarters in Brooklyn, to a third-party purchaser for a below-market price without shareholder approval in violation of Business Corporation Law § 909, a subject about which we recently blogged.
The Intervention Motion
A couple of months into the case, the plaintiffs’ lawyer filed a motion supported by an attorney affirmation on behalf of 32 pro se (unrepresented by counsel) Dial shareholders asking permission to intervene under CPLR 1012 and 1013. In short supporting affidavits, each proposed intervening shareholder wrote:
- “I have a material interest in this lawsuit”;
- “I could be adversely affected by any judgment made in this lawsuit”;
- “I cannot afford an attorney”; and
- “I adopt the complaint as my complaint in this action.”
The defendants fiercely opposed intervention arguing:
- there is a “presumption of adequate representation” by the parties currently in litigation, which the proposed intervenors failed to “rebut”; and
- a shareholder cannot appear pro se in a derivative suit because, under CPLR 321, corporate entities are required to appear through counsel.
In an unusual submission by a purported “nominal defendant” behaving in a most non-nominal manner, Dial’s counsel called the motion “ridiculous,” plaintiffs’ counsel “delusional,” and wrote that “most of the shareholders that supposedly are seeking to intervene in this action are wives of the Plaintiffs herein, defendants in the 2015 action . . . and their wives, and the rest are either close friends or direct relatives.”
You can read all the opposition papers here, here, and here.
The Decision
Denying intervention, Justice Ruchelsman took a narrow view of the intervention statutes, writing:
- “admittedly, the proposed intervenors are all pro se individuals seeking to join this derivative action. Any derivative action that is pursued on behalf of a corporation must be pursued with counsel since a corporation can[not] appear without counsel”; and
- “the interests of the corporation are adequately protected by the derivative action already filed,” and the proposed intervenors failed to “demonstrate inadequate representation by the current plaintiffs.”
Commentary
In Park v Song (61 Misc 3d 1047 [Sup Ct, NY County 2018]), Manhattan Commercial Division Justice Schechter ruled as a “question of first impression” that a shareholder suing derivatively on behalf of a corporation cannot appear pro se, only through counsel. Kordonsky denied the shareholders intervention based upon their pro se status under Park, but I think there may be room for debate over whether the shareholders sought intervention solely in a representative capacity on behalf of the entity, rather than to advocate for their own individual interests as shareholders. Unfortunately, their papers were not clear on this point.
The obstacle for asserting such a position is that the proposed intervenors declined to file their own complaints – a requirement of CPLR 1014 for any proposed intervenor – instead merely “adopt[ing]” the original complaint as their own. By doing so, the Court may have felt constrained to conclude that the proposed intervenors were essentially proposing to proceed derivatively but without counsel, prohibited under Park.
Optically, it may have been a bad move for the plaintiffs’ lawyer to file the motion on behalf of the proposed intervenors. It’s a bit of a stretch to argue “inadequate” representation by the current plaintiffs when the plaintiffs’ lawyer is the one filing the intervention motion.
Finally, it’s hard not to conclude that the protracted history of prior litigations may have had an impact upon the decision. After many years of litigation between the same parties, judges tend to find ways to narrow litigation, not expand it.
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