## Facts

- Ketek Electric Corp. was a closely held corporation owned 50/50 by Jacob Schachter and Herbert S. Kulik, who were its only officers.
- Schachter wholly owned Hoteltron Systems, Inc.
- In earlier appellate proceedings, Schachter was found to have breached fiduciary duties by diverting Ketek’s assets and corporate opportunities to Hoteltron.
- On remand for damages, the trial court found over $362,000 in Hoteltron profits attributable to the diversion and awarded additional damages for lost royalties.
- The trial court ordered Schachter to pay damages directly to Kulik (rather than to Ketek) and also awarded Kulik legal expenses and attorneys’ fees individually.
- The Appellate Division modified the judgment, directing that damages be awarded to Ketek and that attorneys’ fees and expenses be paid from the corporate recovery.
- Kulik appealed, seeking direct payment to avoid indirectly benefitting Schachter as a 50% shareholder; Schachter cross-appealed on allocation issues.

## Issues

1. In a derivative action involving a closely held corporation, may a court award damages directly to the innocent shareholder rather than to the corporation because the wrongdoer-shareholder would indirectly benefit from a corporate recovery?
2. Must the successful shareholder-plaintiff’s reasonable legal expenses and attorneys’ fees be paid directly by the wrongdoer, or are they payable from the corporation’s recovery?

## Decision

- The Court of Appeals affirmed the Appellate Division.
- Damages for diversion of corporate assets and opportunities were required to be awarded to Ketek, not directly to Kulik.
- The fact that the wrongdoer-shareholder would indirectly benefit from a corporate recovery did not justify an exception for closely held corporations.
- Reasonable legal expenses and attorneys’ fees incurred in prosecuting the derivative action were payable out of the recovery awarded to the corporation.

## Legal Principles

- A shareholder derivative action vindicates a corporate right; the claim belongs to the corporation, and any damages recovered are awarded to the corporation.
- Courts do not redirect derivative recoveries to an individual shareholder solely because a wrongdoing shareholder will share indirectly in the corporate recovery.
- Direct payment to a shareholder risks bypassing the corporate form and impairing the priority interests of corporate creditors in corporate assets.
- In a successful derivative action, the corporation generally bears reasonable litigation expenses and attorneys’ fees incurred to obtain the corporate benefit, commonly paid from the recovery.

## Conclusion

The court held that derivative-suit recoveries must be paid to the injured corporation, not to an individual shareholder, and that fee reimbursement to the shareholder who prosecuted the action is paid from the corporate recovery, even where the wrongdoer owns half of the closely held corporation and will indirectly benefit.


Glenn v. Hoteltron Sys., Inc., 74 N.Y.2d 386, 547 N.E.2d 71 (N.Y. 1989)