Valerie Humphreys, the majority shareholder and board member of Covenant Environmental Technologies, Inc., filed a lawsuit against attorney Stuart Breakstone and his law firm, alleging legal malpractice, negligence, collusion, misrepresentation, and interference with economic development due to Breakstone's representation of the corporation. Humphreys claimed that Breakstone's actions, including failing to respond to motions, misplacing exhibits, colluding with opposing parties, and accepting judgments without board authorization, resulted in adverse judgments against the corporation and damaged its credit profile.
The trial court ruled that Humphreys lacked standing to bring a derivative suit in her own name, as the injuries were sustained by the corporation, not by her personally. The court affirmed that such suits must be filed in the name of the corporation and that an individual shareholder cannot sue pro se on behalf of the corporation. Breakstone's motion to dismiss, initially filed incorrectly, was upheld, leading to the denial of Humphreys' motion for default judgment due to the timing of Breakstone’s motion. The judgment of the Circuit Court was affirmed by the Court of Appeals.
The trial court determined that despite the motion to dismiss being filed late and erroneously, it had discretion to deny default judgment since an affirmative pleading was submitted before the motion. Upon reviewing Breakstone’s motion to dismiss, the court concluded that Humphreys’ lawsuit only sought redress for injuries to Covenant, leading to the dismissal of her complaint. The court found that Humphreys did not comply with Tennessee Code Annotated 48-17-401, which mandates that a shareholder derivative suit be filed in the corporation's name and either include an allegation that a demand was made to the board of directors and denied or explain why such a demand was not made. Humphreys appealed, arguing that the statute does not require a derivative suit to be filed in the corporation's name and that proof of a denied demand is unnecessary if the demand would have been futile. Breakstone countered that Humphreys was not the proper party for the suit since the alleged injuries were to Covenant, asserting that only the corporation, as the true party in interest, could bring the suit. The legal standards for a motion to dismiss were discussed, emphasizing that all allegations in a complaint must be accepted as true, and the trial court's conclusions are reviewed de novo. Humphreys maintained her position that an individual shareholder can initiate a derivative suit in her own name for corporate injuries, as outlined in the statute, but the court clarified that such claims belong to the corporation, not the individual shareholder, thus requiring the suit to be in the corporation's name.
The harm alleged in the complaint arises from negligence by Breakstone, acting as corporate counsel for Covenant. Any injury claimed by Humphreys, a shareholder, is derivative and must be asserted through the corporation. Humphreys seeks to represent herself in the lawsuit and has signed the complaint. However, Tennessee law requires that pleadings be signed by an attorney or the party to the lawsuit. A corporation cannot file a lawsuit pro se, meaning a shareholder cannot represent the corporation in legal matters. Since Humphreys is not a licensed attorney, her signing of the complaint on behalf of Covenant is impermissible and renders the complaint effectively unsigned under Rule 11 of the Tennessee Rules of Civil Procedure. Breakstone's motion to dismiss highlighted this deficiency, but Humphreys took no corrective action. Consequently, the trial court's decision to strike the complaint and grant the motion to dismiss is affirmed, with costs assessed against Humphreys and her surety.
