Regular trusts practitioners see it often—settlors establish trusts to hold a certain business interest, and the appointed trustee, frequently one with whom the trust creator enjoys a position of confidence, is also put in charge of the business. The potential for a conflict of interest then turns into an actual conflict when the business manager partakes in improper conduct that damages the business, and yet the said manager, in his capacity as trustee, forgoes any action on behalf of the trust-owner to pursue accountability.

Since New York case law generally holds that a trustee is the proper party to a suit in these circumstances, the aggrieved trust beneficiary is seemingly without options. Practitioners, however, should be familiar with two exceptions to the general rule in this context—the so-called "double-derivative" standing of a trust beneficiary and the "equitable owner" approach to standing. This piece sets forth a brief basis for each theory and a few strategic considerations when bringing these types of matters.

Derivative Suits Generally

A derivative suit is instituted by the owner of the business to prosecute a claim on behalf of the company. This frequently applies when those charged with availing the business of court remedies are the alleged wrongdoers. A derivative claim belongs to the business and not the owner (see Derivative v. Direct Claims below).