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Keywords

plaintiffdefendantlitigationappealfiduciarytrustcorporationfiduciary dutygood faithjudicial review
litigationappealsummary judgmenttrustcorporationappellee

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Joy v. North, 692 F.2d 880, 35 Fed.R.Serv.2d 223, Fed. Sec. L. Rep. P 98,860

Facts

In October 1977, Dr. Athalie Doris Joy filed a derivative suit on behalf of Connecticut Financial Services Corporation against Citytrust and its officers and directors, alleging breaches of fiduciary duty and violations of the National Bank Act due to loans made to the Katz Corporation for an office building in Norwalk, Connecticut. The loans exceeded the statutory limit, and the financial dealings led to significant losses for Citytrust. After a failed demand on the directors, a special litigation committee was formed to evaluate the case, ultimately recommending dismissal of the action against most defendants, which the District Court accepted.

In October of 1977, Dr. Athalie Doris Joy brought this shareholder's derivative suit on behalf of Connecticut Financial Services Corporation (now Citytrust Bancorp, Inc.) against its wholly-owned banking subsidiary, Citytrust, and the officers and directors of Citytrust.

Issue

Whether the business judgment rule limits judicial scrutiny of recommendations from a special litigation committee in a demand-not-required shareholder's derivative suit, and whether the District Court erred in dismissing the action based on that recommendation.

The Court of Appeals, Ralph K. Winter, Circuit Judge, held that: (1) under Connecticut law, the business judgment rule does not limit judicial scrutiny of recommendations of a special litigation committee to terminate an action in a demand-not-required shareholder's derivative suit.

Rule

The business judgment rule does not apply to recommendations from a special litigation committee in cases where the directors are defendants, and courts must conduct a more thorough review of the committee's recommendations.

The business judgment rule does not apply in cases, e.g., in which the corporate decision lacks a business purpose, is tainted by a conflict of interest, is so egregious as to amount to a no-win decision, or results from an obvious and prolonged failure to exercise oversight or supervision.

Analysis

The Court of Appeals determined that the District Court incorrectly applied the business judgment rule, which limits judicial scrutiny to the good faith, independence, and thoroughness of the committee. Instead, the court held that Connecticut law would require a more rigorous examination of the committee's findings, especially given the allegations of mismanagement and potential wrongdoing by the directors involved. The court emphasized that the committee's recommendation should not automatically lead to dismissal of the derivative action without a thorough judicial review.

We believe Connecticut would not adopt appellees' contention that the business judgment rule should play a major role where a special litigation committee recommends termination of an action in a demand-not-required case, such as the one before us.

Conclusion

The Court of Appeals reversed the District Court's decision to dismiss the action and remanded the case for further proceedings, emphasizing the need for a more detailed examination of the special litigation committee's recommendations.

We reverse as to both the grant of summary judgment and the sealing of the Committee report.

Who won?

The plaintiffs prevailed in the appeal, as the Court of Appeals ruled that the dismissal of the derivative action was improper and required further judicial scrutiny of the special litigation committee's recommendations.

We reverse as to both the grant of summary judgment and the sealing of the Committee report.

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