With a jury deliberating, there is nothing more exactingly scrutinized by trial lawyers than a written question emanating from the jury deliberation room to the trial judge. As the judge reads the question, the lawyers, exhausted from having just tried the case and having nothing left to do but await a verdict, spend hours deciphering whether even the most innocuous question will lead to victory or defeat.
In 2018, every eye on our trial team was focused on a folded piece of paper that originated with the deliberating jury and was being held by our judge as he retook the bench. An hour earlier, we had delivered our closing argument to a New York jury in a dispute involving shareholders and executives in a startup vodka distillery. Our client, the plaintiff, was one of three key co-equal majority shareholders and principals who had been forced out of the distillery by the other two majority shareholders. When our client was ousted, he lost his salary, his right to future shares accrued by continued service to the distillery, and his position as the public face of the business.
The theory of our case was that the two defendant-shareholders had executed a quintessential power grab. Defendants elevated their own interests ahead of their fellow shareholders by unjustifiably eliminating our client from the business and precluding our client from receiving any further vested shares. By defendants’ continued service to the distillery, they would become the two co-equal majority shareholders in short order.
Our trial team braced for the judge to read the one question that concerned us most: Is the harm to our client or to the vodka distillery? The answer to this question is one of the most difficult to determine under the law in virtually every state. Everything hangs in the balance by this determination because fundamentally disparate rules apply to derivative and individual fiduciary duty claims.
To oversimplify the legal issue, a stakeholder suing for harm to a corporation, limited liability company, partnership, trust, estate, or similar entity, is a derivative claim owned by the entity. Direct harm to an individual, e.g., a stakeholder who is deprived of some individual right, is a claim for breach of fiduciary duty owned by that individual. Judges, lawyers, arbitrators, and juries often struggle distinguishing between a derivative and individual fiduciary duty claim, because the case law and the applicable legal tests are hardly the model of clarity.
In New York, for example, one of the leading courts in the state, the Appellate Division, First Department, has held, “New York does not have a clearly articulated test, but approaches the issue on a case-by-case basis depending on the nature of the allegations.” Yudell v. Gilbert, 99 A.D.3d 108, 114 (1st Dept. 2012). Given this freedom to maneuver, New York often looks to Delaware and analyzes “the nature of the wrong and to whom the relief should go” to determine whether the fiduciary claim is derivative or individual.1
In our case, we took great pains, with extensive but imperfect case law, to establish in the jury instructions that the harm had been to our client, individually. Despite all our efforts, if we heard the Court read aloud: “Is Plaintiff’s claim for breach of fiduciary duty a derivative or individual claim?” I would be both encouraged by the likelihood of winning our case and distraught by the possibility that our hard-fought win would belong to the corporation, possibly to be shared with the very wrongdoers who caused the harm. A win that would feel like a gut punch.
From the inception of the case, we had successfully navigated the proverbial minefield of fiduciary duty issues, many of which are illustrated in Gold Medal Bakery, In Re: the Trust of the Arnold B.A. Schauer and Yvonne B. Schauer Family Irrevocable Trust and In Re: the Estate of Sylvia Ann Mourning. An additional obstacle is whether minority shareholders lie in wait to intervene in the matter to try to convert a direct claim into a derivative one if the defendants themselves do not raise the question. We had managed to keep the attorney-client privilege intact with our client, and we worked cooperatively with the remaining minority shareholders, who were upset at our client’s ouster but did not join our lawsuit.
Still, our precise concern revolved around our client’s identity as the public face of the company. An argument could be made that his expulsion caused harm to both our client and the distillery, because the distillery’s marketing efforts had suffered after our client was removed. Under these circumstances, how can the distillery not have been harmed?
Looking directly at our trial team, the judge unfolded the note and announced: “The foreman of the jury wants to know if the jury can use a calculator.”
After years of battling, including numerous trips to the appellate court (in New York state court, just about every order is immediately appealable), the three shareholders stepped out into the hallway. Shepherded by a mutual friend with an interest in the distillery who had remained neutral, the parties promptly settled the case. The essential terms of the settlement were read into the record. The fiduciary duty treachery that lurks in so many of these cases had been avoided.
1 “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." Yudell, 99 A.D.3d 108, 114, citing, Tooley v Donaldson, Lufkin & Jenrette, Inc., 845 A2d 1031, 1039 (Del 2004).
