Legal Memorandum: Exceptions to Derivative Claim Rules in UT

Issue: Under Utah law, are there exceptions to the derivative claim rules for certain causes of action, e.g., breach of fiduciary duty, waste, misappropriation, when dealing with close corporations?

Area of Law: Business Organizations & Contracts, Corporate & Securities
Keywords: Derivative claim rules; Breach of fiduciary duty, waste, misappropriation; Close corporation exception
Jurisdiction: Utah
Cited Cases: 20 P.3d 868; 134 P. 3d 1139; 970 P.2d 1273; 163 P.3d 636
Cited Statutes: Utah R. Civ. P. 23A
Date: 09/01/2012


Utah follows the general rule that claims for breach of fiduciary duty, waste, misappropriation and the like belong to the corporation and are therefore derivative.  A claim for dissolution and accounting, in contrast, is a direct claim.  See GLFP, Ltd. v. CL Mgmt., Ltd., 2007 UT App. 131, ¶ 8, 163 P.3d 636  (citing Aurora Credit Servs., Inc. v. Liberty W. Dev. Inc., 970 P.2d 1273, 1280 (Utah 1998)).  “Claims of mismanagement, breach of fiduciary duties, and appropriation or waste of corporate opportunities are claims that corporation has been injured.  Accordingly, the cause of action belongs to the corporation and shareholders may sue only on its behalf.”  Warner v. DMG Color, Inc., 2000 UT 102, ¶ 12, 20 P.3d 868.  Accord Aurora Credit Servs. Inc. v. Liberty West Dev., Inc., 970 P.2d 1273, 1280 (Utah 1998); Richardson v. Ariz. Fuels Corp., 614 P.2d 636, 639-40 (Utah 1980) (“[t]he rule in Utah is that mismanagement of the corporation gives rise to a cause of action in the corporation, even if the mismanagement results in damages to stockholders”)). 

There is an exception to the general rule, the “close corporation exception,” which gives the trial court the discretion to allow shareholders to pursue a derivative claim through a direct action without first making a demand.  GLFP, 2007 UT App. 131, ¶ 17.  The exception is permitted “only in very limited circumstances, and only when complying with strict pleading requirements.”  […]

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