Rule 3.502.Secondary Action by Shareholders

MCR 3.502 covers the shareholder suit brought because the association will not sue for itself. The rule speaks to an action brought by one or more shareholders in an incorporated or unincorporated association that has refused or failed to enforce rights the association could properly assert. It addresses four things: the pleading, the security, the notice, and the fallback when the representation turns out to be thin.

The sworn complaint

Subrule (A) puts a verification requirement at the front of the case. The complaint must set forth under oath and with particularity the efforts the plaintiff made to secure from the managing directors or trustees the action the plaintiff wants, and the reasons those efforts did not produce it. A plaintiff who made no such effort must instead plead, to the same standard, the reasons for not making one.

Two phrases carry the weight. Under oath means the allegations are sworn rather than merely pleaded. With particularity means the subrule asks for specifics either way — what was asked of the directors or trustees and what came back, or why nothing was asked at all.

Security

Subrule (B) lets the court act at any stage of the action. It may require such security and impose such terms as will adequately protect the interests of the class or association on whose behalf the action is brought or defended. The security runs to the interests of the class or association rather than to the party who posts it, and the subrule covers an action brought or defended on their behalf.

Notice

Subrule (C) leaves notice to the court, both in manner and in audience. The court may order notice given to the persons it directs of any of the following:

• the right of absent persons to appear and present claims and defenses;
• the pendency of the action;
• a proposed settlement;
• entry of judgment; or
• any other proceedings in the action.

The subrule is written as a grant of authority, not a checklist of required mailings. Nothing in it makes any of these notices automatic.

When representation falls short

Subrule (D) is the release valve for absent persons. Whenever the representation appears to the court inadequate to protect the interests of absent persons who may be bound by the judgment, the court may order an amendment of the pleadings that eliminates references to representation of absent persons. It may do so at any time prior to judgment.

The judgment that follows is then entered in a form that affects only the parties to the action and those adequately represented. The case does not end when representation fails. It narrows to the people who are before the court, and the judgment is entered in a form that does not reach the absent persons.