parties who successfully obtained protective orders, fee award would be denied in the latter situation); Providence Journal Co. v. Mason, 116 R.I. 614, 359 A.2d 682 (R.I. 1976) (where legislature explicitly provided for fee award in some situations but not in others, it is not for the courts to award attorneys' fees in the latter situation). Therefore, plaintiff may not recover attorneys' fees under Rhode Island law.
New York, like Rhode Island, allows the recovery of attorneys' fees only where they have been specifically provided for by statute or contract. Glenn v. Hoteltron Systems, Inc., 74 N.Y.2d 386, 547 N.Y.S.2d 816, 819, 547 N.E.2d 71 (1989). The relevant statute in New York permits attorneys' fees in derivative suits where "the action on behalf of the corporation was successful, in whole or in part, or if anything was received by the plaintiff or plaintiffs or a claimant or claimants as the result of a judgment, compromise or settlement of an action or claim." N.Y. Bus. Corp. Law § 626(e) (McKinney 1986). There was no judgment or settlement reached here, and the plaintiff did not recover anything on behalf of the corporation as a claimant. The issue, therefore, is whether making a demand upon the corporation without actually instituting litigation constitutes an "action" for the purposes of section 626(e).
In Ripley v. International Rys. of Cent. Am., 16 A.D.2d 260, 227 N.Y.S.2d 64 (App. Div.), aff'd, 12 N.Y.2d 814, 187 N.E.2d 131, 236 N.Y.S.2d 64 (N.Y. 1962), the court addressed this very question. The shareholders in that case made "inquiries" of the corporation regarding the low rates it charged for transportation, and in order to prevent a derivative lawsuit the corporation took action to renegotiate a contract so that it received higher rates for its services. The shareholders then brought a derivative action on behalf of the corporation, as a result of which the rates were raised again. The court determined that although as a result of the shareholders' demand the corporation took action leading to the initial fare hike, the shareholders were not entitled to receive attorneys' fees for making the demand. Id. at 68. The court ruled that "it would be unwise to authorize compensation to counsel for a stockholder whenever management took action beneficial to the corporation as a result of a request or demand by a stockholder." Id. Plaintiff attempts to distinguish Ripley on the basis that the shareholders in that case had brought a successful derivative suit for which they were awarded attorneys' fees. Plaintiff's argument is unavailing because the court in Ripley considered the actions taken prior to the institution of the lawsuit separately from those taken after the lawsuit was filed, and therefore the fact that a lawsuit was eventually instituted was irrelevant to the court's holding on the question at issue.
An examination of the reasons underlying the demand requirement supports the holding that the court reached in Ripley. Although the primary rationale for the demand requirement is to ensure that the board of directors be given the initial opportunity to manage the corporation without interference by the courts, Barr v. Wackman, 36 N.Y.2d 371, 329 N.E.2d 180, 185-86, 368 N.Y.S.2d 497 (N.Y. 1975); see also Galfand v. Chestnutt, 402 F. Supp. 1318, 1331 (S.D.N.Y. 1975) (Brieant, J.), aff'd & modified on other grounds, 545 F.2d 807 (2d Cir. 1976), an important secondary reason for the requirement is to "discourage 'strike suits' by shareholders making reckless charges for personal gain rather than corporate benefit." Barr, 329 N.E.2d at 186; see also Miller v. Schreyer, 200 A.D.2d 492, 606 N.Y.S.2d 642, 644 (App. Div. 1994) (demand requirement "provide[s] safeguards against strike suits"); Galfand, 402 F. Supp. at 1331 (demand requirement "prevent[s] the initiation and maintenance of strike suits brought solely to . . . extract legal fees"); Laufer v. Olla Indus., Inc., 96 F.R.D. 230, 233 (S.D.N.Y. 1982) (Pollack, J.) (demand requirement "protect[s] corporate directors from harassment by litigious dissidents"), aff'd, 729 F.2d 1444 (2d Cir. 1983). Without the requirement, shareholders could bring frivolous lawsuits merely to accrue attorneys' fees or to force the company to enter into clandestine settlements, Gordon v. Elliman, 306 N.Y. 456, 119 N.E.2d 331, 346 (N.Y. 1954); Shapiro v. Magaziner, 418 Pa. 278, 210 A.2d 890, 894 (Pa. 1965), and allowing shareholders to recover attorneys' fees for making a demand would defeat the purpose of the requirement.
Furthermore, the language of New York Business Corporations Law § 626 indicates that "action" does not refer to the preliminary demand on a corporation prior to the commencement of litigation. Section 626(a) refers to "an action" which may be brought "to procure a judgment," which a demand cannot do. Section 626(c) provides that "in any such action, the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort," implying that the initial demand is not part of the "action." Section 626(d) prohibits the discontinuance, compromise or settlement of "such action" without court approval, a requirement that clearly does not apply to a mere demand. Therefore, New York law provides no basis for recovery of attorneys' fees in a derivative lawsuit when the plaintiff has not actually initiated a lawsuit.
Defendant's motion to dismiss is granted. The clerk is directed to enter final judgment in favor of defendant.
IT IS SO ORDERED.
Dated: New York, New York
July 5, 1995
Robert L. Carter