Dismissals for lack of standing are routine in business divorce cases. Examples abound on this blog. Litigation over standing to sue takes an outsized role in business divorce cases for many reasons.

  • The judicial dissolution statutes all require equity holder status before one may sue to dissolve a closely-held business entity.
  • Derivative lawsuits brought on behalf of a business entity require the petitioner / plaintiff to plead and prove that he or she holds a sufficient interest to represent the entity.
  • A derivative claim is considered property of the entity, so a derivative petitioner / plaintiff must allege either pre-suit demand upon the entity’s board of directors or controllers or that such a demand would be futile.
  • Last but not least, as one astute judge noted many years ago in Matter of Pappas, “[i]n the real world, particularly that in which close corporations operate, clear evidence of share ownership is often not found in the corporate books and records, for any number of reasons.”

Some standing-based dismissals can be exceedingly hard fought, protracted, and expensive. There may be multiple rounds of litigation, such as a pre-answer motion to dismiss, an amended pleading designed to correct deficient standing allegations, a motion to dismiss the new pleading, a dismissal, an appeal, and an affirmance. All of this can take years and cost a small fortune.

It may, and often does, come as a surprise to litigants that after enduring a round or more of costly litigation resulting in a standing-based dismissal, the petitioner / plaintiff may, in most circumstances, bring the same claims again. How can this be so? The answer derives from New York’s closely related preclusionary doctrines of claim preclusion (known as res judicata), and issue preclusion (known as collateral estoppel).

A decision last week from Manhattan Commercial Division Justice Andrea Masley, Nusimow v Pinchevsky, tackles the res judicata consequences — or lack thereof — of a standing-based dismissal of shareholder derivative claims alleging fiduciary misconduct. With Nusimow as a springboard, we’ll take a look at the preclusionary consequences of a standing-based dismissal under both doctrines, res judicata and collateral estoppel.

The Doctrines of Res Judicata and Collateral Estoppel

The doctrine of res judicata prohibits a litigant from bringing a subsequent lawsuit with causes of action that were, “could have been,” or “should have been” brought in the prior lawsuit — “even if based upon different theories or if seeking a different remedy” — so long as the claims “aris[e] out of the same transaction or series of transactions” alleged in the original lawsuit (Sheodial v U.S. Bank N.A., ___ AD3d ___, 2023 NY Slip Op 03719 [2d Dept July 5, 2023]).

Res judicata has three elements: “[1] the existence of a prior judgment on the merits [2] between the same parties or those in privity with them [3] involving the same subject matter” (Brody v RBC Mtge. Co., 215 AD3d 724 [2d Dept 2023]).

The doctrine of collateral estoppel, on the other hand, prohibits re-litigation of specific legal issues and “precludes a party from relitigating in a subsequent action or proceeding an issue raised in a prior action or proceeding and decided against that party, whether or not the tribunals or causes of action are the same” (Weight v Day, 216 AD3d 702 [2d Dept 2023]).

Collateral estoppel has four elements: “[1] the issues in both proceedings are identical, [2] the issue in the prior proceeding was actually litigated and decided, [3] there was a full and fair opportunity to litigate in the prior proceeding, and [4] the issue previously litigated was necessary to support a valid and final judgment on the merits” (Li v Shih, 207 AD3d 444 [2d Dept 2022]).

The Necessary, But Absent, Requirement of a Decision “On the Merits”

Res judicata and collateral estoppel both require, as an essential element, proof of a final judgment “on the merits.” How do standing-based dismissals comply within this essential element? Poorly, as it turns out.

“Standing and capacity related dismissals are not on the merits” (Favourite Ltd. v Cico, 208 AD3d 99 [1st Dept 2022]), and are deemed to be “without prejudice” (B and H Florida Notes LLC v Ashkenazi, 182 AD3d 525 [1st Dept 2020]).

This means that “when the disposition of a case is based upon a lack of standing only, the lower courts have not yet considered the merits of the claim,” and the dismissal is “not intended to have any determinative effect ‘on the merits’ of the action” (Landau v LaRossa, Mitchell & Ross, 11 NY3d 8 [2008]).

Applying this principle, a long line of Appellate Division cases holds that a standing-based dismissal lacks preclusive effect under either res judicata or collateral estoppel:

  • Mudry v Giannattasio, 8 AD3d 455 [2d Dept 2004] [“Because the prior determination upon which the order appealed from was predicated did not indicate an intention to dismiss on the merits, the order cannot be deemed a basis for the application of the doctrines of res judicata or collateral estoppel. Accordingly, the defendant’s motion to dismiss should have been denied”];
  • Brandenberg v Primus Assoc., 304 AD2d 694 [2d Dept 2003] [“Supreme Court . . . properly denied that branch of the appellants’ motion which was to dismiss the complaint . . . as barred by the doctrines of res judicata and collateral estoppel where the prior action was dismissed without prejudice and the issue of legal sufficiency of the complaint was not ‘necessarily decided’” [citations omitted]; and

The law is no different for shareholder derivative actions.

In Tong v Hang Seng Bank, Ltd. (210 AD2d 99 [1st Dept 1994]), the motion court dismissed an original complaint because the plaintiff incorrectly sued in his own individual capacity rather than derivatively. Reversing dismissal of a later shareholder derivative suit under res judicata and collateral estoppel, Tong ruled that the original dismissal “did not preclude the present derivative suit and reassertion of the same claims.”

Tong held that the original standing-based dismissal “was not a judgment on the merits conclusive of the issues of fact and questions of law raised in the complaint and therefore, the res judicata doctrine (or claim preclusion) does not apply,” and “since the issues . . . were not necessarily raised and decided in the prior action, collateral estoppel (or issue preclusion) does not apply.”

In Tico, Inc. v Borrok (57 AD3d 302 [1st Dept 2008]), the Court wrote, “Although the court properly determined that plaintiffs lacked standing on the basis that they did not make a formal demand on all of the general partners and failed to demonstrate that such a demand would have been futile, dismissal of the complaint with prejudice was improper.”

Tico concluded that it was reversible error to make a standing-based dismissal “with prejudice.” “If given effect,” wrote the Court, “the provision of the judgment that the dismissal was ‘with prejudice’ would bar plaintiffs from thereafter filing an amended complaint even if they would have standing at that time. For this reason alone the provision should be deleted from the judgment.”

The Nusimow Case

In Nusimow, Justice Masley granted not one, but two standing-based dismissals in a prior lawsuit, ruling that the counterclaimant (1) improperly sued directly when she should have sued derivatively, (2) failed to name the corporation as a nominal defendant, and (3) made “no allegations that demand was made or that demand would have been futile.”

Hoping to resurrect her dismissed claims, Nusimow commenced a separate lawsuit alleging essentially the same claims, but adding some additional derivative allegations, mostly regarding demand futility, including that there was no functioning board upon which to make a pre-suit demand.

Indignant, her opponent moved to dismiss and for sanctions for “frivolous” filing of her “repetitive” new lawsuit. Nusimow opposed and cross-moved for sanctions. You can read the briefs here, here, and here.

Relying primarily upon Landau, Justice Masley ruled: “Dismissal on the face of the complaint because there were no allegations as to demand made on the board of demand futility is not a determination on the merits. Thus, res judicata does not bar this action without a valid and final judgment on the merits in a prior action.”

Interestingly, the Court contrasted cases like Nusimow – where the prior pleading contained no allegations regarding pre-suit demand or demand futility – with those where the prior pleading contained pre-suit demand or demand futility allegations, but the allegations were inadequate.

Justice Masley viewed this to be a distinction with a significant difference, writing that “dismissals for failure to adequately allege demand futility [a]re on the merits and entitled to res judicata effect.” Justice Masley drew this distinction based upon a single case relying upon federal cases, Wietschner ex rel. JPMorgan Chase & Co. v Dimon (139 AD3d 461 [1st Dept 2016]), imposing res judicata based upon prior rulings that the plaintiffs “failed to allege particularized facts to support their claims of demand futility”]).

Under stare decisis, Justice Masley is bound to follow decisions of the Appellate Division – First Department. As bloggers, we are not so constrained. In my view, it seems difficult to explain why the preclusive effect of a standing-based dismissal should turn upon whether the prior pleading was inadequate, versus silent, on an issue like pre-suit demand or demand futility. A standing dismissal, regardless of grounds, is, by its nature, “not on the merits” (Favourite Ltd. v Cico), and “without prejudice” (B and H Florida Notes LLC v Ashkenazi).

I can envision future panels of the First Department choosing to follow other panels of the same Court, specifically, Tico and Tap Holdings, LLC v Orix Fin. Corp. (109 AD3d 167 [1st Dept 2013]), both reaching the opposite conclusion as Wietschner: a dismissal for inadequately pled allegations of pre-suit demand or demand futility is “not a dismissal on the merits for res judicata purposes.”


In the end, the lesson for litigators and their clients is simple.

When defending a business divorce case, although lack of standing may seem like a relatively quick and easy option for dismissal, any such victory may be short lived.

Courts will permit the petitioner / plaintiff to attempt to cure inadequate or nonexistent standing allegations in a subsequent pleading, and a prior standing dismissal will lack preclusive effect on the merits in future litigation.