5 Things You Should Consider Before Filing a Complaint Involving a Business.
Direct v. Derivative Claims. If you are considering filing a complaint against a business you have ownership in, you (or hopefully your attorney) should first understand the critical difference between a direct and derivative claim.
In theory, determining the difference between direct and derivative claims is relatively simple. A direct claim is a claim brought directly against the business, director(s), or other party for harm suffered by the claimant (you) individually. A derivative claim, on the other hand, is a claim brought by the claimant (you) on behalf of the business against the business, director(s), or other party for harm suffered by a group of persons, usually shareholders in a corporation / members in an LLC. While the distinction between direct and derivative claims may appear easy to distinguish at the outset, seemingly unimportant facts can alter whether a claim is direct or derivative.
Why should I consider this? Among other reasons, if your claim is a derivative claim, special procedural steps must be followed before your complaint is filed. Importantly, failure to follow the required procedural steps will likely result in your case being dismissed, unless you can demonstrate a special and limited exception applies.
Books and records inspection. As an owner in a business you likely have the ability to conduct a books and records inspection. See this article for more information on books and records inspections.
Why should I consider this? Conducting a books and records inspection before filing a complaint can provide you with critical information prior to framing the issues and claims in your complaint. By inspecting the business’ books and records you may uncover additional information and facts that dispel your concerns of wrongdoing, confirm the corruption you suspect, and/or provide you with information to overcome the business judgment rule (described here). Either way, it is better to have such information before spending time and money on filing a complaint. Moreover, if you are filing a derivative claim, some courts may require a claimant conduct an inspection before filing a complaint. Failure to conduct an inspection before filing a derivative claim may result in the court precluding you from later conducting an inspection – read more on this latter issue here.
The Business Judgment Rule. The business judgment rule, which is more fully described here, is a rule courts generally apply when they are asked to resolve complaints regarding how a business is run. In short, the business judgment rule allows the court to presume a business’ management acted properly regardless of how poor the decision turns out. A claimant, who is challenging the business’ management and/or their decision(s), can overcome this presumption in several ways, which should be considered while drafting a complaint.
Why should I consider this? By failing to consider and address the effects of the business judgment rule before filing your complaint, your complaint may not be able to overcome the presumptions of the business judgment rule, which can result in the complete dismissal of your claim(s). By including the appropriate allegations in your complaint (assuming facts exist to support the allegations) you can minimize the risks of your complaint being dismissed as a result of the protections afforded under business judgment rule.
Advancement of expenses. Once a claim is brought or even threatened against a business’ management, such as directors / officers in a corporation or members / managers in an LLC, the business may elect to advance expenses (pay legal bills) to the person(s) being sued.
Why should I consider this? Initially, this may not seem so important, but if the alleged wrongdoers control the business and approve their own advancement, the business’ ability to operate may become severely impaired. You can imagine, if the wrongdoer’s reputation, job, and/or form of livelihood is on the line, he/she may be willing to spend every penny in the corporate coffer to protect it. So, while you may be successful in your lawsuit, you may be left with business without assets. Consequently, pre-suit planning on how to prevent and/or stop such action may be something you want to consider.
Additionally, if you are filing a derivative claim and are also a member of the business’ management, you may qualify for advancement of expenses, which could mean the business would pay your legal bills to prosecute the claim(s).
E-discovery. Electronic discovery, or e-discovery, has become increasingly important as businesses go digital. Once you file a claim, you will most likely want to review the opposing party’s documents and other forms of information that are relevant to your claim(s). If, however, the opposing party has not preserved their electronic data, such as e-mails, Word documents, voicemails, metadata, and even Facebook posts, such information may be lost forever, along with your claim. See more about Electronically Store Information here.
Why should I consider this? By notifying the opposing party, typically through a written letter, that a claim exists and all relevant information should be preserved, they have a continuing obligation to protect and preserve all relevant information, including electronic data. And if they comply with the obligation to protect and preserve the data, it should be available for your review during litigation. Consequently, before you file a complaint or along with filing it, it may be best to send the opposing party a document preservation letter demanding they take immediate steps to protect and preserve all information, including electronic information that could be lost due to inadvertent corruption / archiving or intentional deletion.
Additionally, if you or the opposing party fails to protect and preserve such information, especially after sending / receiving a preservation letter, a court may later enter sanctions against that party for failing to preserve the information. Sanctions can range from monetary penalties to complete dismissal of the case.
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