Hasan v. CleveTrust Realty Investors

Decision Date04 May 1984
Docket NumberNo. 82-3691,82-3691
Citation729 F.2d 372
PartiesFed. Sec. L. Rep. P 99,704 Dr. Malik M. HASAN and Seeme Hasan, Plaintiffs-Appellants, v. CLEVETRUST REALTY INVESTORS, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Sixth Circuit

Jerome Congress/Melvyn I. Weiss (argued), Milberg, Weiss, Bershad & Spectrie, New York City, Edward W. Cochran (Lead Counsel), Kohrman, Jackson & Weiss, Co., LPA, Cleveland, Ohio, for plaintiffs-appellants.

Daniel W. Hammer (argued), Thompson, Hine & Flory, Cleveland, Ohio, for CleveTrust Realty Investors.

Richard Cusick, Brian M. Eisenberg, Michael E. Brittian, Calfee, Halter & Griswold, Cleveland, Ohio, for Merchant Navy Officers.

Before MERRITT and JONES, Circuit Judges; and HOLSCHUH, District Judge. *

NATHANIEL R. JONES, Circuit Judge.

This shareholder derivative action is presently before the Court upon the appeal of stockholders, Dr. Malik M. Hasan and Seeme Hasan (Hasan), from an order of the district court, 548 F.Supp. 1146, granting appellees' motion for summary judgment. Appellants contend that summary judgment in favor of CleveTrust, eight trustees, an advising firm and the Merchant's Fund (CleveTrust) was improperly based upon the recommendation of a Special Litigation Committee, the independence, good faith and thoroughness of which presented genuine issues of material fact. Hasan also argues that the district court erred as a matter of law in its particular application of the business judgment rule to the facts of this case. Upon consideration of the complex issues presented by this appeal, we conclude that the district court erred in granting summary judgment because of the existence of genuine issues of material fact which preclude summary judgment as a matter of law.

CleveTrust is a Massachusetts Real Estate Investment Trust with its principal place of business in Ohio. On a national level, CleveTrust's stock prices declined to an amount less than the appraised value of their investment properties. The corporation thus became attractive to companies with an eye toward take over ventures. Two such companies, Tulip and Champion, each acquired 22.4% of CleveTrust's outstanding stock and expressed an interest in purchasing a controlling block of shares. In the event of a takeover, appellee Trustees and Advisers would forfeit their positions. They arranged therefore to repurchase with corporate funds at a price exceeding the fair market value the stock which Tulip and Champion had previously acquired. The Trustees and Advisers also arranged to sell 30% of the CleveTrust's outstanding shares at two-thirds their appraised value to appellee Merchant Navy Officers Pension Fund Trustee, Ltd., (Merchant Fund). In return for the stock, the Merchant Fund agreed to support CleveTrust's current management, to refrain from selling any stock for a five year period and to give the Trustees and Advisers the first option to repurchase the entire block of CleveTrust stock. The revenue acquired from this sale was used to pre-pay CleveTrust's prior debts, two years before they matured.

As a holder of a significant amount of CleveTrust stock, Hasan brought a derivative action in district court alleging that, through these stock transactions, the Trustees, Advisers and Merchant Fund caused direct and intentional harm to CleveTrust by wasting corporate assets in order to protect their own lucrative positions. The trustees thereafter appointed a special committee of non-defendant, board members to investigate the challenged transactions and to determine whether the derivative suit would be in the corporation's best interests. Hasan, however, named all but one member of the board of trustees in his suit. The special committee therefore consisted only of Peter Galvin, who was appointed to the board just after the disputed transactions had been completed.

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. The report also stated that Galvin held a 2% interest in an investment partnership with another named defendant. Galvin concluded however that his own business associations with these named defendants did not compromise the disinterestedness of his investigation and recommendation. Galvin's report rejected each of Hasan's allegations, found that the stock transactions benefitted CleveTrust and concluded that the derivative action was not in the corporation's best interests.

Based upon Galvin's report, the named defendants moved for summary judgment and opposed discovery on the merits. Although the district court allowed discovery on the good faith, independence and thoroughness of Galvin's Committee, Hasan did not participate in such a discovery. Instead, Hasan submitted a sworn affidavit, challenging the substantive charges, and contended that Galvin's report and the circumstances surrounding its creation themselves demonstrated the committee's bias.

The district court, however, granted the defendants' motion for summary judgment and dismissed the complaint with prejudice. The court considered summary judgment proper because the facts relevant to the case were "not in dispute." The court also 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." Because Hasan failed through discovery to introduce any affirmative evidence of the committee's bias, the district court reasoned, the presumption of good faith was not rebutted and the committee's report was controlling. The district court determined that the defendants had the power to dismiss this derivative suit against themselves and therefore concluded that summary judgment was appropriate as a matter of law.

In reviewing the district court's summary judgment order, we must first determine whether Federal Rule of Civil Procedure 56(c) applies in the special context of a derivative action. The shareholder derivative action emanates historically from equity jurisdiction. Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827 (1881). Rule 56(c) applies equally to actions at law and actions in equity. The Advisory Notes to that rule state explicitly that the summary judgment standard "is applicable to all actions." As is true generally under Rule 56(c), therefore, summary judgment must be denied in a proceeding for equitable relief either where genuine issues of material fact exist, S.E.C. v. Koracorp Industries, Inc., 575 F.2d 692 (9th Cir.), cert. denied, 439 U.S. 953, 99 S.Ct. 348, 58 L.Ed.2d 343 (1978); Hess v. Schlesinger, 486 F.2d 1311, (D.C.Cir.1973), or where judgment is inappropriate as a matter of law. Booth v. Barber Transportation Corp., 256 F.2d 927 (8th Cir.1958). We are thus guided in our review of the district court's summary judgment order in this equitable, derivative action by the normal Rule 56(c) standard. See Gaines v. Haughton, 645 F.2d 761, 769 (9th Cir.), cert. denied, 454 U.S. 1145, 102 S.Ct. 1006, 71 L.Ed.2d 297 (1982). We must therefore view the evidence in the light most favorable to the non-moving party to determine whether a genuine issue of material fact existed as to the disinterestedness of the special litigation committee. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); Malis v. Hills, 588 F.2d 545 (6th Cir.1978).

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. If that presumption is not rebutted by affirmative evidence, the district court reasoned, then the special litigation committee's recommendation to dismiss the derivative suit must be followed. The initial question before us on appeal therefore is whether the district court erred "as a matter of law" in granting to Galvin's special litigation committee a presumption of good faith.

The basic authority of directors to terminate shareholder derivative litigation is governed by applicable state law unless that law is inconsistent with the federal policies on which the litigation is based. Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979). Because CleveTrust is a Massachusetts corporation, the law of that state governs this action. The Massachusetts courts have not addressed the precise issue before this Court. We must predict whether those courts would approve the dismissal of a derivative action upon the recommendation of a special litigation committee, which committee enjoys a presumption of good faith. In so predicting, we must consider the decisions of those states which have analyzed this issue in order to determine which line of analysis Massachusetts, in light of its general approach to derivative suits, is likely to follow.

The corporate law in most states is fairly uniform in sanctioning the general power of a special litigation committee to terminate a stockholder suit. See Burks, 441 U.S. at 480, 99 S.Ct. at 1838; Lewis v. Anderson, 615 F.2d 778, 782-83 (9th Cir.) cert. denied, 449 U.S. 869, 101 S.Ct. 206, 66 L.Ed.2d 89 (1980) (applying California law); Abbey v. Control Data Corp., 603 F.2d 724, 729 (8th Cir.), cert. denied, 444 U.S. 1017, 100 S.Ct. 670, 62 L.Ed.2d 647 (1980) (applying Delaware law); Grossman v. Johnson, 89 F.R.D. 656, 662-63 (D.Mass.1981) (applying Maryland law); Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979).

The law in these jurisdictions is split, however, on the question of the scope of appropriate judicial inquiry into the findings of a special litigation committee. In Zapata Corp....

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