Drilling v. Berman

• Decision Date: 09 March 1999
• Docket Number: No. C9-98-1571,C9-98-1571
• Citation: 589 N.W.2d 503
• Parties: Lloyd DRILLING, et al., on Behalf of Themselves and Derivatively, on Behalf of Grand Casinos, Inc., Appellants, v. Lyle BERMAN, et al., Respondents, Grand Casinos, Inc., Respondent.
• Court: Minnesota Court of Appeals

Page 503

589 N.W.2d 503

Lloyd DRILLING, et al., on Behalf of Themselves and Derivatively, on Behalf of Grand Casinos, Inc., Appellants, v. Lyle BERMAN, et al., Respondents, Grand Casinos, Inc., Respondent.

No. C9-98-1571.

Court of Appeals of Minnesota.

March 9, 1999.

Review Denied May 18, 1999.

Syllabus by the Court

Judicial review of a special litigation committee recommendation to terminate a derivative action is limited to determining whether the committee was independent and conducted its investigation in good faith.

Karl L. Cambronne, Becky L. Erickson, Kevin Roddy, Chestnut & Brooks, P.A., Minneapolis, MN (attorneys for appellants)

Craig W. Gagnon, Michael E. Keyes, Thomas E. Ring, Oppenheimer, Wolff & Donnelly, Minneapolis, MN (attorneys for respondent Grand Casinos)

Michael Berens, Kelly & Berens, P.A., Minneapolis, MN (attorneys for respondents Lyle Berman, et al.)

Considered and decided by HALBROOKS, Presiding Judge, CRIPPEN, Judge, and HOLTAN, Judge. ^*

O P I N I O N

HALBROOKS, Judge.

Appellants Lloyd Drilling, Carolyn Chalmers, Eric S. Janus and Brickell Partners appeal from a judgment dismissing their shareholder derivative claims against respondent Grand Casinos, Inc. and individual respondents Lyle Berman, Patrick R. Cruzen, Timothy J. Cope, Stanley M. Taube, David W. Anderson, Morris Goldfarb, Ronald Kramer, and David L. Rogers. We affirm.

FACTS

Respondent Grand Casinos, Inc. (Grand) is a publicly traded corporation involved in the gaming industry. Lyle Berman, Patrick R. Cruzen, Stanley M. Taube, Morris Goldfarb, Ronald Kramer, and David L. Rogers are members of Grand's board of directors. Timothy J. Cope is Grand's chief financial officer. David W. Anderson was Grand's executive vice president and a director until he resigned in February 1996.

Appellants initiated this shareholder derivative action in February 1997. Appellants alleged the individual respondents breached their fiduciary duty and misused corporate assets by: (1) using Grand's funds to make equity and debt investments in Stratosphere Corporation; (2) misappropriating and misusing material, non-public corporate information to profit personally through insider trading in Grand's stock; and (3) exposing Grand to liability for violations of federal and Nevada securities laws.

In response to appellants' action, Grand's board appointed a special litigation committee pursuant to Minn.Stat. § 302A.241, subd. 1 (1996), to investigate appellants' claims and determine whether or not they should be pursued. The committee members were Carl Platou, Samuel Hanson, and Murray Harpole. The committee in turn appointed Stanley Efron as legal counsel to the committee.

Both Platou and Harpole have extensive business experience. Hanson is an attorney with substantial business law experience; Efron is an attorney with prior experience as counsel to special litigation committees. Neither the committee members nor Efron had any prior relationship with Grand, its directors, or any of the individual respondents.

Throughout its investigation, the committee reviewed thousands of documents provided by the parties. It also interviewed four witnesses. Appellants' counsel actively participated in the questioning of the witnesses, but the committee independently determined which witnesses to interview.

The committee issued its final report in December 1997, recommending none of appellants' claims be pursued. The committee's report did not include any analysis. Based on the committee's recommendation, respondents moved for summary judgment. The district court granted summary judgment in favor of respondents and dismissed appellants' derivative claims on the grounds that the special litigation committee appointed to investigate those claims was independent and recommended dismissal after a good faith investigation.

ISSUE

Did the district court err in dismissing appellants' shareholder derivative claims on the ground the special litigation committee conducted its investigation in good faith?

ANALYSIS

On appeal from a summary judgment, this court examines the record to determine whether any genuine issues of material fact exist and whether the district court properly applied the law. Offerdahl v. University of Minn. Hosps. & Clinics, 426 N.W.2d 425, 427 (Minn.1988). This court must view the evidence in the light most favorable to the nonmoving party. Id.However, a court is not required to draw unreasonable inferences in order to save the nonmoving party. City of Savage v. Varey, 358 N.W.2d 102, 105 (Minn.App.1984), review denied (Minn. Feb. 27, 1985). We need not defer to the district court's decision on a legal issue. Frost-Benco Elec. Ass'n v. Minnesota Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn.1984).

Prior to 1989, Minn.Stat. § 302A.243 (1988) restricted judicial review of a special litigation committee decision to terminate a derivative suit to a determination of whether the committee was disinterested and made its decision in good faith. Black v. NuAire, Inc., 426 N.W.2d 203, 209-10 (Minn.App.1988), review denied (Minn. Aug. 24, 1988). In 1989, the legislature repealed Minn.Stat. § 302A.243.1989 Minn. Laws ch. 172, § 11. In repealing the section, the legislature made it clear it was not commenting on the substance of the section and that its repeal "must be interpreted in the same manner as if section 302A.243 had not been enacted." Id., § 12. The legislature took that action in recognition that Minnesota was one of the few states with legislation governing judicial review of special litigation committees. Hearing on S.F. No. 190 Before the Senate Comm. on the Judiciary (Apr. 11, 1989) (statement of Sen. Luther). The repeal represented "a commitment to let the caselaw develop," id., and a desire to give our courts flexibility. Hearing on S.F. No. 190 Before the Senate Comm. on the Judiciary, Civil Law Division (Mar. 17, 1989) (statement of Sen. Luther).

Special litigation committees are now governed by Minn.Stat. § 302A.241, subd. 1 (1996):

A resolution approved by the affirmative vote of a majority of the board may establish committees having the authority of the board in the management of the business of the corporation only to the extent provided in the resolution. Committees may include a special litigation committee consisting of one or more independent directors or other independent persons to consider legal rights or remedies of the corporation and whether those rights and remedies should be pursued. Committees other than special litigation committees * * * are subject at all times to the direction and control of the board.

Since the 1989 repeal of section 302A.243, there has been one prior opportunity to consider what standard of review applies to recommendations of special litigation committees in Minnesota. In Skoglund v. Brady, this court determined that the standard set forth in Black, limiting judicial review to determining whether the committee was independent and conducted its review in good faith, continued to apply. Skoglund v. Brady, 541 N.W.2d 17, 21 (Minn.App.1995), review denied (Minn. Feb. 27, 1996).

This approach is in line with the New York approach, applying a deferential business judgment standard in recognition that courts are "ill-equipped to evaluate business judgments while corporate directors [are] peculiarly qualified to discharge that responsibility." Black, 426 N.W.2d at 210 (citing Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979)); see also Lewis v. Anderson, 615 F.2d 778 (9th Cir.1979) (construing California law), cert. denied, 449 U.S. 869, 101 S.Ct. 206, 66 L.Ed.2d 89 (1980).

Other jurisdictions have added a second step to the Auerbach test in order to apply more scrutiny to a committee's conclusions. First, the corporation must establish the committee is independent, acted in good faith and had reasonable bases for its conclusions. Then the court applies its own business judgment to the committee's conclusions. Zapata Corp. v. Maldonado, 430 A.2d 779, 789 (Del.1981); see also Joy v. North, 692 F.2d 880, 891 (2d Cir.1982) (construing Connecticut law), cert. denied, 460 U.S. 1051, 103 S.Ct. 1498, 75 L.Ed.2d 930 (1983); Abella v. Universal Leaf Tobacco Co., 546 F.Supp. 795, 799-800 (E.D.Va.1982); Watts v. Des Moines Register & Tribune, 525 F.Supp. 1311, 1326 (S.D.Iowa 1981); Strougo v. Padegs, 1 F.Supp.2d 276, 281 (S.D.N.Y.1998) (construing Maryland law). The use of the second step is within the court's discretion. Kaplan v. Wyatt, 499 A.2d 1184, 1192 (Del.1985).

Some courts have chosen to articulate their own standards rather than follow Auerbachor Zapata. See, e.g., Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 328 (1987) (applying a "modified Zapata rule" where reviewing court must determine whether the transaction complained of was just and reasonable to the corporation); Houle v. Low, 407 Mass. 810, 556 N.E.2d 51, 59 (1990) (establishing a standard of review whereby the court determines whether the committee is disinterested and whether the committee "reached a reasonable and principled decision").

Appellants argue this court should extend the law to more closely scrutinize a special litigation committee recommendation by inquiring into the reasonableness of the committee's decision in addition to the committee's independence and good faith. We disagree. This is not a question of first impression. On review from the dismissal of a derivative suit based on the recommendation of a special litigation committee, we limit our inquiry to whether the committee was independent and conducted its investigation in good faith. Skoglund, 541 N.W.2d at 21; Black, 426 N.W.2d at 209-10.

Appellants do not challenge the independence of the committee members, but rather the good faith with which the investigation and recommendation were made. Appellants argue that the brevity of the committee report and the nature of its investigation do not demonstrate good faith.

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