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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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District Court Explains When Suit Is Direct Or Derivative In The Alternative Entity Context

Gimaex Holding Inc. v. Spartan Motors USA Inc., No. 15-CV-00515-RGA (December 22, 2015)

Whether a claim is direct or derivative often determines if it will survive a motion to dismiss. Who would get the benefit of a recovery is one test applied to make that decision. But in the context of a partnership, that test has some weaknesses considering the wrongdoer will benefit from the recovery as a partner if the claim is cast as derivative.

A prior decision in the Cencom case seemed to conclude that in the context of a partnership, the suit may best be considered direct to avoid letting the wrongdoer benefit from his actions. This decision explains in depth why that reading of Cencom may go too far, at least in the context of a joint venture. The facts matter, including whether the entity has been dissolved before the suit is filled.