Derivative Standing via Testamentary Trust Devolution and Temporal Limits on Faithless Servant Disgorgement: Commentary on Owen v. Hurlbut (2025 NY Slip Op 04311)

Introduction

Owen v. Hurlbut is a Fourth Department decision that both clarifies who may bring derivative corporate claims under New York’s contemporaneous ownership rule and refines the scope of disgorgement available under the faithless servant doctrine. The dispute arises out of a family-owned corporate enterprise—ROHM Services Corporation—once held in a marital trust created under the will of the parties’ father for the benefit of their mother (the decedent). After the mother’s death and distribution of the trust principal, the siblings, Christine Owen (plaintiff) and Robert W. Hurlbut (defendant), became shareholders.

The plaintiff, suing in multiple capacities (individually, derivatively as a ROHM shareholder and a shareholder of RHH Mendon Properties, Inc., and as executor of her mother’s estate), alleged that the defendant and his consulting entity devalued ROHM through a suite of alleged fiduciary breaches, including excessive executive compensation, underpayment for corporate assets, and undercharging for ROHM’s services. The trial court converted defendants’ CPLR 3211 motion to one for summary judgment under CPLR 3211(c) and issued mixed rulings. Both sides appealed.

The Appellate Division’s opinion addresses: (1) whether a post-wrongdoing shareholder can sue derivatively when shares later come to her through a testamentary marital trust; (2) whether an estate’s executor has derivative standing; (3) the viability of various derivative claims at the summary judgment stage; (4) whether a free-standing implied covenant claim lies absent a contract; and (5) the proper temporal scope of disgorgement under the faithless servant doctrine.

Summary of the Judgment

The Fourth Department unanimously modified and otherwise affirmed the Supreme Court’s order, holding:

Individual claims dismissed. The first through twelfth and nineteenth causes of action are dismissed to the extent asserted by plaintiff in her individual capacity, and also dismissed insofar as they were asserted by plaintiff as executor of the estate. The court reiterated that corporate wrongs must be pursued derivatively, absent an independent duty owed to the individual shareholder.
Executor derivative standing denied. The estate lacked derivative standing because it held neither shares nor a beneficial interest at the time suit was commenced.
Derivative standing confirmed for plaintiff-shareholder. Plaintiff may maintain derivative claims under Business Corporation Law (BCL) § 626(b) by virtue of the “operation of law” exception: she acquired her shares through a will (via distribution of a testamentary marital trust).
Demand futility adequately pleaded. Plaintiff’s particularized allegations satisfied BCL § 626(c)’s demand futility requirement.
Derivative claims survive summary judgment. Defendants failed to carry their initial burden to dismiss the derivative causes of action (first through twelfth, nineteenth); those claims proceed.
Undercharging claims reinstated. On plaintiff’s cross-appeal, the court reinstated derivative “undercharging” claims, finding triable issues preclude summary judgment for defendants.
Implied covenant claim (20th cause) dismissed. The claim for breach of the implied covenant of good faith and fair dealing was dismissed; no contractual relationship supported the claim.
Partial summary judgment denied on certain damages theories. Plaintiff is not entitled to partial summary judgment on “excessive compensation” and “underpayment for assets” claims because material fact issues remain.
Faithless servant liability upheld, but disgorgement period narrowed. Partial summary judgment on liability for disgorgement under the faithless servant doctrine stands; however, the disgorgement period is limited to the time of alleged disloyalty beginning in late 2019 (not 2017–2019), with the amount to be determined on remand.

Detailed Analysis

Precedents Cited and Their Influence

Abrams v. Donati, 66 NY2d 951 (1985), rearg denied 67 NY2d 758 (1986): The Court of Appeals’ core rule that mismanagement and diversion of corporate assets constitute wrongs to the corporation, enforceable via derivative actions—not direct shareholder suits—anchors the dismissal of plaintiff’s individual claims. The Fourth Department applies Abrams to conclude that none of the asserted claims stemmed from a duty owed personally to the plaintiff independent of her shareholder status.
Davis v. Magavern, 237 AD2d 902 (4th Dept 1997); Jobson v. Progno, 100 AD3d 1407 (4th Dept 2012); Albany‑Plattsburgh United Corp. v. Bell, 307 AD2d 416 (3d Dept 2003), lv dismissed in part & denied in part 1 NY3d 620 (2004): These decisions reiterate and apply the derivative-versus-direct distinction. The court relies on them to confirm that plaintiff’s harms (loss of corporate value, mismanagement) must be pursued derivatively.
Independent Investors Protective League v. Time, Inc., 50 NY2d 259 (1980), rearg denied 50 NY2d 1059 (1980): This case articulates the “contemporaneous ownership” requirement and the policy behind rigorous enforcement—to deter litigation speculation. The court canvasses this rule in evaluating plaintiff’s derivative standing.
Business Corporation Law § 626(b) and Pessin v. Chris‑Craft Indus., 181 AD2d 66 (1st Dept 1992): The statute and Pessin carve out a limited exception to contemporaneous ownership where shares devolve “by operation of law,” including through a will or by intestacy. The Fourth Department applies that exception to a testamentary marital trust distribution, confirming that plaintiff, though not a shareholder at the time of the alleged wrongs, may sue derivatively because her shares came to her by operation of law.
BCL § 626(c); Bansbach v. Zinn, 1 NY3d 1 (2003), rearg denied 1 NY3d 593 (2004); Lizard O’s, Inc. v. Baha Lounge Corp., 214 AD3d 597 (1st Dept 2023); Miller v. Kastner, 100 AD2d 728 (4th Dept 1984): These authorities govern demand futility. The court finds plaintiff alleged with particularity why a pre-litigation demand would have been futile, satisfying § 626(c).
Sakow v. Waldman, 155 AD3d 1078 (2d Dept 2017): Establishes that only a shareholder or beneficial owner at the time of commencing suit may sue derivatively. The estate, being neither, lacked standing here.
Victor G. v. North Syracuse Cent. Sch. Dist., 158 AD3d 1287 (4th Dept 2018), lv denied 32 NY3d 904 (2018): Supports dismissal of an implied covenant claim where no contract between the parties exists. The court applies this principle to dismiss the 20th cause of action.
Taylor v. Wynkoop, 132 AD3d 843 (2d Dept 2015); Mobarak v. Mowad, 117 AD3d 998 (2d Dept 2014); Zuckerman v. City of New York, 49 NY2d 557 (1980): Provide summary judgment standards (initial burden, triable issues). The court uses these to deny dismissal of most derivative claims and to reject plaintiff’s bid for partial summary judgment on the compensation and underpayment theories.
Barasch & McGarry, PC v. Marcowitz, 219 AD3d 1242 (1st Dept 2023), lv dismissed 41 NY3d 996 (2024): Confirms availability of disgorgement under the faithless servant doctrine. The Fourth Department affirms partial summary judgment on liability for disgorgement.
X‑Med, Inc. v. Western N.Y. Spine, Inc., 74 AD3d 1708 (4th Dept 2010): Limits faithless servant forfeiture to compensation “paid during the time period of disloyalty.” This case drives the appellate modification narrowing the disgorgement period to begin in late 2019, the alleged start of disloyalty.
Feldmeier v. Feldmeier Equip., Inc., 164 AD3d 1093 (4th Dept 2018): Supports denial of summary judgment on excessive compensation where factual disputes remain, informing the court’s refusal to grant plaintiff partial summary judgment on that issue.

Legal Reasoning

1) Direct vs. Derivative Claims

The plaintiff’s individual claims were dismissed because the alleged harms—mismanagement, asset diversion, depressed corporate value—are quintessential corporate injuries. Under Abrams and its progeny, such wrongs must be vindicated via derivative actions unless the plaintiff can show a duty running directly to her independent of her shareholder status. The court found no such independent duty here. The same reasoning foreclosed the estate’s pursuit of individual relief.

2) Derivative Standing and the “Operation of Law” Exception

BCL § 626(b) normally requires that a derivative plaintiff own shares both at the time of suit and at the time of the complained-of transaction (the “contemporaneous ownership” rule). The policy is to discourage litigation-motivated acquisitions of stock. The statute, however, creates a narrow exception where the shares devolve upon the plaintiff “by operation of law.”

The Fourth Department held that plaintiff satisfies this exception because she became a shareholder through a testamentary distribution (the marital trust created by will, which later distributed principal to the children after the mother’s death). Relying on Pessin, the court confirms that acquisition “through a will” qualifies as devolution by operation of law—even where shares were initially held in a testamentary marital trust and only later distributed. This is the decision’s central clarification: the “operation of law” exception applies to testamentary trust distributions, not only direct bequests or intestacy.

3) Demand Futility Pleading

The derivative plaintiff must plead with particularity why making a pre-suit demand on the board would have been futile. Applying § 626(c) and authorities such as Bansbach, Lizard O’s, and Miller, the court concluded that the complaint sufficiently alleged futility (for example, by indicating director conflicts or involvement in the challenged transactions), allowing the derivative claims to proceed without a prior demand.

4) Executor’s Lack of Derivative Standing

The estate was neither a shareholder nor a beneficial owner of ROHM at the time suit was filed. Under § 626(a), (b) and Sakow, an executor in those circumstances cannot sue derivatively. The court therefore dismissed derivative claims to the extent asserted by the plaintiff in her capacity as executor.

5) Summary Judgment Standards and Triable Facts

On the merits of the derivative claims (breach of fiduciary duty and related theories), defendants did not meet their initial burden of demonstrating entitlement to judgment as a matter of law. Hence, the court denied summary judgment as to the bulk of those claims and reinstated the undercharging claims on plaintiff’s cross-appeal, citing Zuckerman and similar authorities that emphasize the presence of factual disputes.

Conversely, plaintiff was denied partial summary judgment on the “excessive compensation” and “underpayment for assets” theories because material disputes (e.g., valuation, reasonableness of compensation, fairness of pricing) remain—issues ill-suited to resolution as a matter of law on this record.

6) Implied Covenant Claim Requires a Contract

The 20th cause of action for breach of the implied covenant of good faith and fair dealing was dismissed because plaintiff failed to identify an underlying contract with defendants from which such an implied covenant could arise. Victor G. underscores that the implied covenant is contract-dependent; fiduciary duty and corporate governance claims cannot be reframed as implied covenant claims in the absence of contractual privity.

7) Faithless Servant Doctrine—Liability and Temporal Limits on Disgorgement

The court affirmed partial summary judgment on liability under the faithless servant doctrine, which compels a disloyal fiduciary to disgorge compensation. However, binding Fourth Department precedent (X‑Med) limits forfeiture to compensation “paid during the time period of disloyalty.” Because the complaint alleged the disloyal “scheme” began in late 2019, the appellate court narrowed the disgorgement period to begin then and vacated the trial court’s broader 2017–2019 award. The precise amount is to be determined on remand.

Impact and Implications

A. Derivative Litigation and Standing

Expanded clarity on § 626(b): This decision confirms that the “operation of law” exception encompasses shares received through a testamentary marital trust distribution. Beneficiaries who become shareholders via such a distribution may challenge prior misconduct done while the shares were in trust.
Executor limitations: Estates cannot sue derivatively unless they hold shares or a beneficial interest at commencement. Practitioners representing estates should secure or document beneficial ownership before filing derivative claims.
Demand futility: The decision underscores the importance of particularized pleadings. Where control, conflicts, or participation in alleged wrongdoing can be specifically alleged, courts will allow derivative claims to proceed without a pre-suit demand.

B. Corporate Governance in Closely Held and Family Corporations

Undercharging and asset transfer scrutiny: Transactions that allegedly siphon value from the corporation—e.g., below-market service pricing or self-dealing asset purchases—will likely generate triable issues, especially in closely held contexts where overlapping roles and related-party dealings abound.
Compensation challenges: Executive compensation disputes often turn on factual questions (market comparators, performance metrics, board process), making summary judgment difficult for either side absent robust, undisputed records.

C. Remedies and the Faithless Servant Doctrine

Temporal precision matters: Plaintiffs should plead and prove the start and end dates of disloyal conduct with care because disgorgement is strictly limited to compensation paid during the period of proven disloyalty.
Quantification deferred: Even with liability established, the amount of disgorgement remains a fact-intensive calculation reserved for later proceedings.

D. Contract Framing and the Implied Covenant

No contract, no implied covenant: Parties should not expect fiduciary duty disputes to be shoehorned into implied covenant claims without an underlying contract. This reinforces doctrinal boundaries and directs litigants to the appropriate corporate and fiduciary duty frameworks.

Complex Concepts Simplified

Derivative Action: A lawsuit brought by a shareholder on behalf of the corporation to redress wrongs done to the corporation (e.g., mismanagement, waste, self-dealing).
Direct vs. Derivative: Direct claims seek redress for harms uniquely personal to the shareholder; derivative claims address harms to the corporation as a whole. Most mismanagement and asset diversion claims are derivative.
Contemporaneous Ownership Rule (BCL § 626(b)): To sue derivatively, the plaintiff must be a shareholder at the time of the suit and at the time of the wrongful acts. Aim: prevent buying into lawsuits.
Operation of Law Exception: An exception to the contemporaneous ownership rule where shares are acquired through an automatic legal process (e.g., inheritance under a will, intestacy). Owen confirms this covers shares distributed from a testamentary marital trust.
Demand Futility (BCL § 626(c)): Before suing derivatively, a shareholder usually must demand that the board act. If the board is conflicted or complicit, a plaintiff can plead with particularity that a demand would be futile and proceed without it.
Implied Covenant of Good Faith and Fair Dealing: A duty read into every contract requiring parties not to undermine the contract’s benefits. It cannot exist without a contract between the parties.
Faithless Servant Doctrine: A disloyal employee or fiduciary must forfeit compensation earned during the period of disloyalty. The forfeiture is time-bound: only pay received while disloyal can be disgorged.
Summary Judgment: A procedure to resolve a case (or issues) without trial when there is no genuine dispute over material facts and the movant is entitled to judgment as a matter of law. If factual disputes exist, the case proceeds.
Beneficial Interest: An economic interest in shares (e.g., through a trust) even if not the record holder. Only shareholders or beneficial owners at the time of suit may bring derivative actions.

Practical Takeaways

Standing strategy: Beneficiaries who receive shares via testamentary trusts can rely on the § 626(b) “operation of law” exception to reach pre-distribution misconduct. Document the chain of title and timing of distribution carefully.
Plead demand futility with specifics: Identify conflicts, control, or board participation in the challenged transactions to satisfy § 626(c).
Executor caution: Verify and plead the estate’s shareholder or beneficial ownership status at filing; otherwise, derivative standing will be denied.
Prepare for fact-intensive battles: Compensation reasonableness, asset pricing, and undercharging claims often turn on expert evidence and contemporaneous records; early summary judgment is unlikely without a robust, undisputed record.
Faithless servant timing: Align allegations, proof, and requested remedies with the precise start of disloyalty; expect courts to confine disgorgement to that window.
Contract vs. fiduciary frameworks: Keep contract-based claims distinct from fiduciary duty theories; do not rely on the implied covenant absent a clear contract with the defendant.

What Proceeds on Remand

Derivative claims (first through twelfth, nineteenth) continue, including undercharging claims that have been reinstated.
Plaintiff’s individual and executor-based claims (first through twelfth and nineteenth) are out, as is the implied covenant claim (twentieth).
The court must determine the amount of disgorgement under the faithless servant doctrine for the period beginning in late 2019.
Excessive compensation and underpayment for assets claims will proceed to factual development and, potentially, trial or later dispositive motions.

Conclusion

Owen v. Hurlbut significantly clarifies two recurring issues in New York corporate litigation. First, it confirms that the BCL § 626(b) “operation of law” exception to the contemporaneous ownership rule encompasses shares distributed from a testamentary marital trust, enabling derivative claims for pre-distribution misconduct. Second, it reinforces the temporal precision required for faithless servant remedies: disgorgement is strictly confined to pay earned during the proven period of disloyalty.

The decision also restates important guardrails: individual shareholders cannot recover for corporate harms absent an independent duty; executors lack derivative standing without share or beneficial ownership; and implied covenant claims do not lie absent a contract. On the merits, the Fourth Department’s insistence on trial for fact-heavy issues—compensation reasonableness, asset valuations, and pricing—signals the evidentiary rigor that will govern related-party transactions in closely held corporations.

In the broader legal landscape, Owen strengthens shareholder oversight of closely held corporations through derivative actions while preserving doctrinal boundaries between contract and fiduciary regimes and refining equitable remedies to match the scope of proven misconduct. It will guide litigants, boards, and counsel in structuring governance processes, documenting transactions, and pleading and proving complex corporate claims in New York.