On September 8, 2022, Justice Crane of the New York County Commercial Division issued a decision in Johnson v. Cestone, 2022 NY Slip Op. 33011(U), dismissing claims for harm to a business brought as individual claims by an investor, explaining:
In Count VII, Johnson alleges that she entered into an agreement with WEP VII, Holdings LLC, and Worldview Inc. pursuant to which these defendants promised that [l] no financing, production and/or management fees would be paid out of funds contributed by Johnson to WEP VII until Johnson recouped her investment plus 20% ROI return on investment and, [2] that Johnson’s investment would be handled with, at a minimum, ordinary care and reasonable diligence. Johnson alleges that they
breached this agreement by causing unauthorized financing, production and/or management fees to be paid to Worldview Inc. and/or Holdings LLC and by recklessly engaging in acts that have resulted in the effective freezing of the distribution of returns to investors. The moving defendants argue that this cause of action must be dismissed because it alleges derivative claims that Johnson cannot bring in her individual capacity. They correctly contend that a shareholder of a corporation does not have standing to pursue a direct claim to redress wrongs that a corporation suffered.A plaintiff asserting a derivative claim seeks to recover for injury to the business entity. A plaintiff asserting a direct claim seeks redress for injury to him or herself individually. Sometimes whether the nature of the claim is direct or derivative is not readily apparent. The First Department has adopted the test developed by the Supreme Court of Delaware in Tooley v Donaldson, Lufkin & Jenrette, Inc. (845 A2d 1031, 103 9 [Del 2004]) as a common sense approach to resolving such issues and held that such test is consistent with existing New York State law. The courts consider (1) who suffered the alleged harm (the corporation or the suing stockholders, individually) and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually).
The lost value of an investment in a corporation is quintessentially a derivative claim by a shareholder. However, a plaintiff can maintain an individual claim when the wrongdoer has breached a duty owed to the shareholder independent of any duty owing to the corporation wronged. This is a narrow exception.
Here, Johnson alleges that defendants did not handle her investment in WEP VII with ordinary care and reasonable diligence as promised — i.e., that defendants mismanaged her investment. The nature of this alleged injury is derivative.
Johnson also alleges that defendants breached their promise not to use the funds she contributed to WEP VII for financing, production or management fees until she recouped her investment plus a 20% return. To the extent this claim alleges direct harm, it cannot separately stand if it is confused with or embedded in the harm to the corporation.
(Internal quotations and citations omitted).