Zhang v. YUAN

Background

The court considered Zhang’s motion to dismiss Yuan’s third amended derivative counterclaim. A derivative counterclaim is a claim brought by a shareholder on behalf of a corporation. The opinion refers to Camiwell and its board but does not describe the underlying dispute in detail.

Arguments and analysis

Zhang argued that the $50,000 state-court settlement could not have been a recovery on behalf of Camiwell because Yuan paid the settlement personally. The court rejected that argument, stating that it made no sense and contradicted the allegations in Yuan’s counterclaim.

Zhang also argued that the counterclaim failed to comply with Federal Rule of Civil Procedure 23.1 because it did not state both the efforts Yuan made to ask Camiwell’s board to act and the reason Yuan did not make those efforts. The court explained that Rule 23.1 requires a shareholder bringing a derivative suit to plead either the efforts made to demand action or why such a demand would have been futile; it does not require both.

Finally, Zhang argued that the counterclaim did not adequately explain why a demand on the Camiwell board would have been futile and did not satisfy California Corporations Code section 800(b)(2). The court held that these arguments were waived because Zhang raised them for the first time in the reply brief. The court also noted that Zhang’s motion did not include those arguments and conceded that Yuan had satisfied the second prong of Rule 23.1 by adequately stating why he made no demand on the Camiwell board.

Ruling

Judge Vince Chhabria denied the motion to dismiss Yuan’s third amended derivative counterclaim. The order did not decide the underlying merits of that counterclaim.