Making up another cause of action - the self-serving derivative suit

In Virginia, the derivative action for shareholders is a creature of statute. Under the statute, Va. Code 13.1-672.1, a shareholder cannot bring a derivative action on behalf of the corporation unless he or she can show four facts, in addition to fulfilling the procedural prerequisites to such an action:

A shareholder shall not commence or maintain a derivative proceeding unless the shareholder:

1. Was a shareholder of the corporation at the time of the act or omission complained of;

2. Became a shareholder through transfer by operation of law from one who was a shareholder at that time; or

3. Became a shareholder before public disclosure and without knowledge of the act or omission complained of; and

4. Fairly and adequately represents the interests of the corporation in enforcing the right of the corporation.

In Cattano v. Bragg, the Virginia Supreme Court in a 6-1 decision held that in the circumstance of a corporation with two shareholders, a minority shareholder with personal claims as a creditor against the corporation could also have standing under section 13.1-672.1 to bring suit on behalf of the corporation to recover money from the other shareholder, so that there would be more money to satisfy the personal claims.

Justice McClanahan dissented, and I agree with her view, that at least where the corporation was already defunct, the proper remedy was simply judicial dissolution. Unless I am mistaken, fees and costs of about $289,228.71 were charged to the corporation, so that the plaintiff could get 27.35% of $234,412.18 that the defendant was held to have owed the firm. It seems to me that the court-appointed receiver should have been the one to decide what if anything the corporation should have spent to recover the $234,412.18, of which most would evidently go back to the Defendant if the shareholders are going to get a distribution. The opinion notes that the circuit court could have empowered the receiver to garner the assets of the corporation, instead of allowing the derivative claims to proceed.

The majority opinion has a footnote about why this was not done. It concludes: "the amended complaint was a sufficient alternative mechanism to allocate assets without authorizing additional suits by the receiver." On the face of things, the description of the plaintiff's claims as "a sufficient alternative mechanism" suggests that somehow the majority was indifferent to the possibility that the receiver might have been more efficient than the plaintiff.