BKNS Management LLC v. Messner Reeves LLP

Background

BKNS Management LLC, which held a 39% membership interest in Abbson LLC, brought derivative claims on Abbson’s behalf. Abbson had entered into an agreement for a prospective $14 million loan and sent Messner Reeves LLP, acting as an escrow agent, a $3.5 million interest-reserve deposit. The loan was not funded, and the deposit was not returned.

BKNS alleged claims under the Racketeer Influenced and Corrupt Organizations Act, a federal anti-racketeering statute, and common law claims for conversion, aiding and abetting conversion, fraud, aiding and abetting fraud, and negligence. Defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(6) and 23.1.

Derivative-demand issue

Rule 23.1 requires a plaintiff bringing a derivative action to describe with particularity its efforts to ask the company’s managers or other authorized decisionmakers to bring the lawsuit. Under the New York law applied by the court, the demand must identify the complained-of conduct, potential defendants, and specific relief sought.

BKNS alleged that, beginning in January 2024, its principal asked Abbson’s managers to “take action” to recover the deposit. The court found that these allegations did not identify the dates, contents, or requested relief with enough detail to show that BKNS had demanded that Abbson file a lawsuit. The court also considered a March 2024 conversation in which BKNS urged the managers to send a termination notice to the purported lender. The court stated that this conversation showed agreement about next steps, not a refusal to sue.

BKNS made a more specific demand on July 8, 2024, asking Abbson’s management to bring an action asserting RICO and state-law and common-law claims. Abbson’s managers responded that an attorney would file such an action for Abbson. BKNS filed this case on July 24, 2024. Abbson then filed its own lawsuit in the District of Utah on July 25, 2024.

Court’s ruling

The court held that a wrongful refusal to bring suit is required for a derivative action to proceed. Because Abbson agreed to file suit before BKNS began this derivative action, and then filed its own lawsuit shortly afterward, there was no wrongful refusal. The court stated that Abbson had to be given sufficient time to carry out its decision to litigate, including consulting attorneys about venue, claims, defendants, and pleadings.

The court therefore concluded that BKNS’s derivative suit had to be dismissed under Rules 12(b)(6) and 23.1. It did not reach the sufficiency of BKNS’s RICO claims. The court granted defendants’ motion to dismiss and directed the Clerk to terminate the motion and close the case.