The Appellate Division, First Department of the New York Supreme Court recently adopted a test from the Delaware Supreme Court to determine whether a claim is direct or derivative. Prior to deciding the case Yudell v. Gilbert, New York courts lacked a clear approach for assessing when a claim was direct or derivative in nature, and employed a case by-case analysis that was not always predictable. The distinction is important because derivative claims require additional action before a party can bring such claims, such as a prior demand requirement, and allow for broader defenses including the business judgment rule.

By adopting the Delaware Supreme Court’s test from Tooley v. Donaldson, Lufkin & Jerette, Inc., the First Department opted for what it deemed a “clear and simple” framework that focuses on who really suffers the harm of alleged wrongdoing and to whom the recovery will go as the key factors in determining whether a claim is direct or derivative. The case is significant because it will provide corporate defendants with additional defenses in certain types of cases.

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