Janssen v. Best & Flanagan, CX-01-2207.

• Decision Date: 22 May 2003
• Docket Number: No. CX-01-2207.,CX-01-2207.
• Citation: 662 N.W.2d 876
• Parties: George JANSSEN, et al., Respondents, v. BEST & FLANAGAN, et al., Defendants, and Minneapolis Police Relief Association, Petitioner, Appellant.
• Court: Minnesota Supreme Court

662 N.W.2d 876

George JANSSEN, et al., Respondents, v. BEST & FLANAGAN, et al., Defendants, and Minneapolis Police Relief Association, Petitioner, Appellant.

No. CX-01-2207.

Supreme Court of Minnesota.

May 22, 2003.

Patrick J. McLaughlin, Eric Moutz, Dorsey & Whitney, LLP, Minneapolis, for appellant.

William J. Mavity, Pamela Marie Miller, Mavity & Associates, Minneapolis, for respondents.

Martin J. Costello, Hughes & Costello, St. Paul, for Amicus Curiae, Minnesota Teamsters Joint Council 32, et al.

Heard, considered, and decided by the court en banc.

OPINION

MEYER, Justice.

We are called on to decide certain questions of first impression regarding the law of nonprofit corporations in Minnesota. The principal issue concerns how a nonprofit board may respond to a member's demand to commence legal action on behalf of the association. We also consider the degree of deference that a district court may give to a nonprofit board's decision to reject a member's demand to commence legal action.

The board of directors of the Minneapolis Police Relief Association (MPRA) made an improvident investment in a company known as Technimar and lost approximately fifteen million dollars. Certain members of MPRA (Janssen, et al., whom we will refer to collectively as "Janssen") brought a derivative suit on behalf of MPRA against Best & Flanagan alleging attorney malpractice with respect to the Technimar investment. MPRA appointed special counsel to review the merits of the derivative suit. Special counsel concluded that proceeding with the derivative suit would not be in the best interests of MPRA and MPRA moved to dismiss the suit. The district court treated special counsel as a special litigation committee, applied the business judgment rule to the committee's decision not to proceed with the derivative action, and dismissed Janssen's suit. The court of appeals reversed, concluding that the legislature had not granted nonprofit corporations authority to appoint special litigation committees, and the district court was precluded from deferring to the decision of MPRA's special counsel. MPRA petitioned for review, seeking a reversal of the court of appeals' decision.

MPRA is a Minnesota nonprofit corporation that administers a pension plan for Minneapolis police officers hired before June 15, 1980. Minn.Stat. § 423B.01-.04 (2002). MPRA was formed under and is subject to Minn.Stat. ch. 317A (2002), the Minnesota Nonprofit Corporation Act, and is governed by a board of nine directors. See Minn.Stat. § 423B.05, subd. 1 (2002).

In 1996 and 1997, MPRA lost approximately fifteen million dollars that it had invested with David Welliver in a company called Technimar. The circumstances surrounding this loss were the subject of several investigations and at least two prior lawsuits. The most important aspect of this history for the instant case is that two law firms, Jones, Day, Reavis and Pogue (Jones Day) and Dorsey & Whitney, LLP (Dorsey Whitney), had already conducted investigations surrounding some of the issues.

Janssen alleges in this action that MPRA's former attorneys, Best & Flanagan, committed malpractice in representing MPRA during and after the Welliver investments were made in 1996 and 1997. Janssen alleges, among other claims, that Best & Flanagan attorneys served as general counsel to MPRA and were negligent in failing to conduct a "due diligence" inquiry into the Welliver investment. In bringing this derivative suit, Janssen did not have an attorney-client relationship with Best & Flanagan, so their suit depended upon MPRA joining them as a plaintiff.

In response to this lawsuit, MPRA appointed attorney Robert A. Murnane (Murnane) as special counsel to investigate Janssen's claims and determine whether MPRA should join the derivative suit. The MPRA board issued a resolution in June of 2000 instructing Murnane to conduct an independent review and evaluate the derivative lawsuit to determine on behalf of MPRA's board of directors whether or not MPRA should join in legal action against Best & Flanagan. The resolution specifically instructed Murnane to "not reinvestigate, verify or otherwise attempt to prove or disprove the factual findings, determinations, events or circumstances" described in the prior investigative reports of Jones Day and Dorsey Whitney and a set of discovery materials in a related lawsuit. Murnane was specifically instructed to "accept as correct" the factual findings of these reports and discovery materials. Murnane was not limited, however, by the conclusions of the previous reports.

Murnane reviewed "thousands of pages of reports, documents and deposition transcripts" over a few months in investigating the merits of a malpractice action against Best & Flanagan. However, the record does not indicate that he conducted any of his own investigation, nor did he personally speak to the Janssen claimants or their counsel. Murnane submitted his report to the MPRA board on September 26, 2000, concluding that "the totality of the materials reviewed does not support a finding that Best & Flanagan committed legal malpractice in its handling of the MPRA affairs," and that "to spend money in the pursuit of a legal malpractice claim against Best & Flanagan would not be prudent use of the MPRA funds." Following submission of Murnane's report, the MPRA board brought a motion to dismiss the instant lawsuit under the principle of law that the court should defer to the business judgment of Murnane, MPRA's special litigation committee.

In considering MPRA's motion to dismiss, the district court described the appropriate role that special litigation committees play in acting on behalf of for-profit corporations. The court determined that a nonprofit corporation is also authorized to utilize the special litigation committee procedure. The court treated Murnane as a special litigation committee and applied the business judgment rule to the committee's report. Under the business judgment rule enunciated by the court, it examined only whether the committee conducted its investigation with independence and good faith. The court concluded that "[Murnane's] investigation cannot survive even this limited review." The court could not find that Murnane was independent because "he was told by the board of directors what to believe." The court could not find good faith because there was no indication from Murnane that he sought or received input from the plaintiffs and the court was left to assume that such input was not sought because the board's instructions limited the scope of the investigation. Finally, the court could not clearly discern whether Murnane was offering legal advice or, in fact, rendering a business judgment decision.

Rather than deny MPRA's motion to dismiss the Janssen lawsuit, the district court postponed a decision on the motion to allow MPRA an opportunity to remedy the deficiencies in MPRA's delegation of authority to its special litigation committee. The court instructed MPRA that if it sought deference for its committee's litigation decision, the court would not grant such deference unless and "until adequate evidence of independence and good faith is submitted by the MPRA, and until it is clear that Murnane has rendered a business judgment."

Consequently, MPRA issued a second resolution in December of 2000 to Murnane, declaring that he was to function as a special litigation committee, not being limited in any way as to how to conduct his investigation or what material he may consider: "[s]pecial counsel shall have complete independence and may undertake whatever good faith investigation he chooses." The resolution asked Murnane to exercise his "business judgment" regarding whether it was in the best interest of MPRA to join in the derivative suit. Murnane conducted an investigation that included meeting with certain of the named plaintiffs in the action and the involved attorneys at Best & Flanagan. Murnane submitted a second report and in that report concluded it would be a "poor business judgment" for MPRA to join in litigation against Best & Flanagan. MPRA renewed its motion to dismiss. The district court reviewed Murnane's second report and concluded that MPRA's special litigation committee (Murnane) had conducted an investigation that was independent and conducted in good faith. The court deferred to the committee's business judgment and granted MPRA's motion to dismiss the complaint against Best & Flanagan.

Janssen appealed and the court of appeals reversed. It concluded that a nonprofit corporation lacks the statutory authority to appoint a special litigation committee to evaluate derivative claims. Additionally, the court concluded that even if a nonprofit corporation has the authority to appoint a special litigation committee, in this case the special litigation committee failed to meet the threshold test of the business judgment rule. The court reversed and remanded for trial. This appeal followed.

I.

We concern ourselves with two questions: (1) whether the Minnesota Nonprofit Corporations Act prohibits a nonprofit corporation's board of directors from establishing an independent committee with authority to make decisions about derivative lawsuits; and (2) whether Murnane, as special counsel, displayed sufficient independence and good faith to be entitled to the deference of the business judgment rule. We exercise de novo review of the primary issues in this case, as they involve statutory interpretation and novel questions of law. State v. Loge, 608 N.W.2d 152, 155 (Minn.2000). We also note that other states have recently held that they will review de novo a decision of a district court to dismiss a derivative suit. See Brehm v. Eisner, 746 A.2d 244, 253 (Del.2000)

; In re PSE & G S'holder Litig., 173 N.J. 258, 801 A.2d 295, 313 (2002).

A. The Business Judgment Rule and Derivative Lawsuits

To resolve this case we must strike a balance between two competing interests...