Brief Fact Summary. Plaintiff, one of Defendant’s shareholders, brought a shareholder derivative action against Defendant alleging Defendant’s officers and directors defrauded millions of dollars from the shareholders. Plaintiff submitted an affidavit verifying the allegations of the complaint, which is allegedly required by the federal rule. Defendant moved to dismiss on the grounds that the complaint was a “sham” and Plaintiff was not a proper party because Plaintiff did not understand or know anything about the complaint.
Synopsis of Rule of Law. In a shareholder derivative action, the Plaintiff need not know every detail about the complaint, nor understand that a lawsuit has been filed alleging certain claims. The good faith allegations made by a lawyer suffice to require the Defendant to respond to the complaint.
The verification requirement was originally adopted and has served since in part as a means to discourage strike suits by people who might be interested in getting quick dollars by making charges without regard to their truth so as to coerce corporate managers to settle worthless claims in order to get rid of them.View Full Point of Law
Issue. Should Plaintiff’s case been dismissed as frivolous even though lawyers had investigated the allegations in the complaint prior to filing the lawsuit?
Held. No. Reversed and remanded. Rule 23.1(Formerly Rule 23(b)) of the Federal Rules of Civil Procedure, requires that allegations be verified by oath, which Plaintiff did. Rule 23.1 of the Federal Rules of Civil Procedure was not meant to bar all shareholder derivative suits. It was only meant to prevent companies from settling worthless claims. Plaintiff was concerned about her investment and forwarded documents she received from Defendant to Brilliant. It does not matter that she was not familiar with the intricacies of the law. The stock was bought long before this investigation commenced, showing that Brilliant once had confidence in Defendant. The purpose of the shareholder’s derivative suit is to allow those who had confidence in Defendant but were subsequently wronged by Defendant to bring a lawsuit. Allegations were made in good faith, which is all that is required in order to compel Defendant to respond to the allegations. Concurrence. Rule 23.1 of the Federal Rules of Civil Procedure only requires that allegations be verified by oath by an individual. Verification by the attorney should be enough to meet the requirements of Rule 23.1.
Discussion. This case demonstrates that evidence of a pre-filing investigation or other evidence demonstrating good faith is relevant in determining whether or not a complaint is “frivolous.” It should be noted that this case is a shareholder derivative action and not an average civil action where there are few plaintiffs. The analysis hinges on whether the Plaintiff is a proper representative, not whether she knew her lawyer would file a lawsuit.