What a derivative action is
A derivative action is brought by a member in the association's name to remedy harm done to the association itself - for example, self-dealing contracts, misapplication of reserves, improper vendor arrangements, or a board's refusal to pursue claims the association plainly holds. Any recovery belongs to the association; the benefit to the member is a properly governed community.
Requirements for a derivative claim
- The demand requirement. For a derivative claim involving a Georgia nonprofit corporation, O.C.G.A. § 14-3-742 requires a written demand that the corporation take suitable action. Ordinarily, 90 days must elapse before suit is filed, unless the demand is rejected sooner or waiting would cause irreparable injury to the corporation. The firm prepares the demand and evaluates the timing for suit.
- Standing and the distinction between direct and derivative claims. Courts closely examine whether the alleged harm belongs to the association (derivative) or to the member personally (direct). Where both types of claim exist, they must be pleaded separately and deliberately.
- The business judgment rule. Boards receive deference for honest exercises of judgment. Derivative claims succeed on evidence of conflict of interest, bad faith, or abdication of duty - not on disagreement with a board's discretionary decisions. The firm evaluates the records and conduct to determine which category the facts support.
Documents and timing: derivative litigation requires substantial document review. If the alleged harm belongs to the homeowner personally, the firm evaluates whether a direct action is appropriate.