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Keywords

defendantlitigationtrialsummary judgmentburden of prooftrustcorporationgood faith

defendantlitigationtrialsummary judgmenttrustcorporationgood faith

Related Cases

Hasan v. CleveTrust Realty Investors, 729 F.2d 372, 38 Fed.R.Serv.2d 1180, Fed. Sec. L. Rep. P 99,704

Facts

CleveTrust, a Massachusetts Real Estate Investment Trust, faced a decline in stock prices, making it a target for takeover. In response, the trustees arranged to repurchase stock at inflated prices and sold shares at a discount to a pension fund in exchange for support. Dr. Malik M. Hasan, a significant shareholder, filed a derivative action alleging that these transactions harmed CleveTrust to protect the trustees' positions. A special committee was appointed to investigate, but its sole member, Peter Galvin, had significant ties to the defendants, raising questions about his impartiality.

Galvin retained counsel and, based upon interviews with named defendants and others, prepared a 122 page report. The report revealed that Galvin, a real estate broker, owned 25% of a firm that received substantial leasing fees from a company managed by James Carney, the Chairman of the CleveTrust Board.

Issue

Did the district court err in granting summary judgment based on the presumption of good faith applied to the special litigation committee's decision?

The court held that: (1) it was error to apply to special litigation committee presumption of good faith with respect to its decision; (2) corporation did not meet its burden of demonstrating good faith and disinterestedness of committee; and (3) genuine issues of material fact existed with respect to good faith and fairness of special litigation committee, precluding summary judgment.

Rule

The court held that a presumption of good faith does not apply to the members of a special litigation committee, especially when there are allegations of self-dealing and bias.

The district court concluded that the applicable Massachusetts version of the business judgment rule would grant a special committee 'a presumption of good faith, subject to concrete evidence to the contrary.'

Analysis

The appellate court determined that the district court incorrectly applied a presumption of good faith to the special litigation committee's findings. It emphasized that the burden of proof lies with the corporation to demonstrate the committee's independence and thoroughness. The court found that Galvin's close business relationships with the defendants compromised the committee's impartiality, and the investigation was inadequate, failing to interview key parties involved in the transactions.

The district court found no such genuine issue of material fact. That finding was based upon the legal conclusion that a presumption of good faith attaches to the report and recommendation of a special litigation committee.

Conclusion

The appellate court vacated the district court's summary judgment and remanded the case for a trial on the merits, concluding that the corporation did not meet its burden of proving the good faith and thoroughness of the special litigation committee's investigation.

We hold therefore that the Massachusetts courts, mindful of Auerbach, Zapata, the proper scope of the business judgment rule and the potential for corporate abuse of that rule, would vacate the district court's summary judgment order and remand for a trial on the merits of Hasan's substantive allegations.

Who won?

The shareholders, Dr. Malik M. Hasan and Seeme Hasan, prevailed because the appellate court found that genuine issues of material fact existed regarding the special committee's independence and the adequacy of its investigation.

The appellate court found that the corporation has not met its burden of demonstrating the good faith and disinterestedness of Galvin's 'committee.'

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