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To Maintain Standing to Bring a Derivative Action Against a Not-for-Profit Corporation At Least Five Percent of the Members Must Be Plaintiffs at All Times As the Suit Progresses

The Third Department determined that in order to maintain standing for a derivative action against a not-for-profit corporation the plaintiffs must constitute five percent of the members at all times. In this case, the five percent requirement was met when lawsuit began but subsequently a member left and the five percent requirement was thereby no longer met:

N-PCL 623 is derived from the Business Corporation Law, but it is different in that it does not require ownership at the time of the transaction and does not allow plaintiffs to post security for expenses if they do not meet the five percent requirement (compare N-PCL 623, with Business Corporation Law §§ 626, 627). The requirement that plaintiffs in a derivative action against a not-for-profit corporation consist of at least five percent of any class of members was “necessitated by the elimination from the new law of the ‘security for expenses’ provision embodied in [Business Corporation Law § 627]” (Mem of Joint Legislative Committee to Study Revision of Corporation Laws, 1969 McKinney’s Session Laws of NY at 2485; see L 1969, ch 1066; see also E. Lisk Wyckoff, Jr., Practice Commentaries, McKinney’s Cons Laws of NY, Book 37, N-PCL 623). Because the N-PCL specifically eliminated the ability of less than five percent of shareholders to continue an action by posting security for expenses, we conclude that the ownership requirement of N-PCL 623 (a) must continue throughout the action in order to maintain standing … . Pall v McKenzie Homeowners’ Assn Inc, 2014 NY Slip Op 07392, 3rd Dept 10-3014

 

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