Judson C. Ball Revocable Tr. v. Phx. Orchard Grp. I, LP – 10/2/2018

October 23, 2018

Arizona Court of Appeals Division One holds that to have standing, a plaintiff in a derivative action must continue to possess an interest in the entity on whose behalf it sues throughout the litigation.

A trust purchased an interest in a limited partnership.  Several years later, the trust sued the limited partnership alleging securities fraud and sought rescission or damages.  The limited partnership rescinded the investment and, after rescission, counterclaimed for declaratory judgment that the rescission was valid and complete.  The trust then filed a derivative action on behalf of the limited partnership against the other limited partner, alleging breach of the partnership agreements.  After the derivative action was filed, the superior court approved rescission, entered a final judgment, and the trust intervened to dismiss the derivative action on the basis that the trust lacked standing.  The superior court agreed and granted the motion to dismiss.

The court of appeals affirmed, adopting the continuous ownership rule, which requires a plaintiff (absent narrow exceptions not present in the case) to possess an interest in the entity throughout the litigation to have standing.  The trust claimed that the statutory language governing derivative actions does not explicitly require ownership after filing a derivative action and had recently eliminated a requirement that the plaintiff “fairly and adequately represent the interests of shareholders or members similarly situated. . . .”  However, the court was persuaded by Delaware law, which requires continuous ownership to ensure the plaintiff has an actual interest in the outcome of the litigation, which would be lost absent an interest in the entity.  In following Delaware law, the court noted that Arizona and Delaware law had no material differences on the issue of standing for derivative actions.  The court rejected the notion that the reimbursement of attorneys’ fees alone was adequate incentive for a plaintiff to pursue a derivative action on behalf of an entity in which it no longer had an interest.  The court further distinguished precedent permitting standing where the plaintiff had no ownership interest as applying only where the plaintiff was involuntarily divested of the ownership interest in the entity.

Judge Jones authored the opinion; Judges Johnsen and McMurdie joined.