## Facts

- A shareholder (Greenberg) filed a derivative action against corporate directors alleging mismanagement and seeking recovery for the corporation.
- Before trial, Greenberg privately settled with the defendants and discontinued the derivative action without notice to other shareholders and without court approval.
- Under the settlement, Greenberg transferred his shares and received $9,000, far exceeding the shares’ alleged market value (about $51.88).
- The settlement included releases by Greenberg in both his individual and representative capacities, effectively releasing the corporation’s asserted claims.
- The corporation later entered reorganization, and the trustee (Clarke) sued Greenberg, alleging the $9,000 was consideration for extinguishing the corporate derivative claims and was therefore held in trust for the corporation.
- The trial court dismissed for failure to state a claim; the intermediate appellate court affirmed.

## Issues

1. Whether a shareholder who sues derivatively must account to the corporation for money received in a private settlement paid in consideration for discontinuing and releasing corporate claims.

## Decision

- The New York Court of Appeals reversed.
- The court held the complaint stated a cause of action for an accounting: settlement proceeds paid to end a derivative action belong to the corporation, not to the shareholder-plaintiff personally.
- The case was remitted for further proceedings.

## Legal Principles

- A derivative action is prosecuted on behalf of the corporation; recoveries attributable to the corporate claim, whether by judgment or settlement, are corporate property.
- A derivative plaintiff acts in a representative, fiduciary capacity regarding the corporate cause of action and its proceeds.
- If payment is plausibly consideration for discontinuing and releasing the corporation’s claims, the derivative plaintiff may be treated as holding the funds in trust for the corporation and may be required to account.
- A claim seeking to recover settlement proceeds for the corporation may proceed without seeking to set aside the settlement or revive the discontinued derivative action.

## Conclusion

The court recognized that a derivative plaintiff cannot privately appropriate value paid to terminate corporate claims; where settlement consideration is paid to discontinue a derivative action, the plaintiff may be required to account to the corporation for those proceeds.


Clarke v. Greenberg, 296 N.Y. 146, 71 N.E.2d 443 (N.Y. 1947)