Houle v. Low

• Decision Date: 05 July 1990
• Citation: 556 N.E.2d 51,407 Mass. 810
• Parties: Roland E. HOULE 1 v. Richard H. LOW, et al. 2
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 51

556 N.E.2d 51

407 Mass. 810

Roland E. HOULE ¹ v. Richard H. LOW, et al. ²

Supreme Judicial Court of Massachusetts Norfolk.

Argued Feb. 6, 1990.

Decided July 5, 1990.

Howard B. Cloth, Boston, for plaintiff.

Robert S. Frank, Jr. (Edward H. Seksay, Boston, with him), for Brent W. Lambert, et al.

William F. Lee (Veronica Serrato, with him), Boston, for Eye Health Services, Inc.

Before LIACOS, C.J., and WILKINS, ABRAMS, NOLAN, LYNCH, O'CONNOR and GREANEY, JJ.

NOLAN, Justice.

The plaintiff is an ophthalmologist who formed a corporation, the defendant, Eye Health Services, Inc. (Eye Health), with the individual defendants in 1971. He joins as defendants two affiliated corporations, New England Eye Surgical Center, Inc. (Surgical Center), and Eye Health Services--Optical Products, Inc. (Optical Products). The plaintiff sued individually and derivatively as a minority shareholder, charging fraud, breach of fiduciary duty, and misappropriation of corporate opportunities. Eye Health filed a motion for summary judgment which was allowed as to the plaintiff's derivative action. The motion for summary judgment of Optical Products was denied because of the genuine issue of material fact as to its formation. Motions for summary judgment filed by the individual defendants and Surgical Center were allowed. The plaintiff filed a motion for voluntary dismissal under Mass.R.Civ.P. 41(a)(2), 365 Mass. 803 (1974), as to Optical Products which he concedes had not been formed. Ultimately, final judgment was entered for all defendants as to all claims of the plaintiff. From these judgments the plaintiff appealed. We transferred the case to this court on our own motion. We affirm in part and reverse in part.

The plaintiff and individual defendants had been practicing ophthalmology under the corporate umbrella as shareholders and directors of Eye Health since 1971. The plaintiff and individual defendants in 1983 began discussing at length the possibility of forming a surgical center designed as a hospital facility to provide outpatient operating services to patients with eye disorders. Toward this goal, the plaintiff visited an outpatient surgical facility in North Carolina and submitted a written report to his fellow shareholders and directors, the defendants.

In early February, 1984, the individual defendants met in Florida without the plaintiff to investigate the merits of opening a surgical center. They decided to launch the surgical center as a venture separate from Eye Health but to locate it in the offices of Eye Health in Weymouth. They voted unanimously not to invite the plaintiff to participate and one of their members informed him of this vote on February 6 or 7, 1984. The opportunity to participate in the new venture was not extended to Eye Health. On January 18 1985, Surgical Center was incorporated in Massachusetts by the individual defendants for the purpose of operating the surgical eye venture. The plaintiff commenced an action against the individual defendants and against Eye Health and Surgical Center on January 15, 1988.

A motion for summary judgment shall be allowed "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Mass.R.Civ.P. 56(c), 365 Mass. 824 (1974).

1. Claims against individual defendants. The defendants rely on the bar of the statute of limitations. The plaintiff's claims are governed by G.L. c. 260, § 2A (1988 ed.), which contains a three-year limitation. Woodcock v. American Investment Co., 376 Mass. 169, 173-174, 380 N.E.2d 624 (1978). The plaintiff's cause of action accrued on February 6 or 7, 1984, when he was informed of the vote not to invite him to participate. His action, then, should have been commenced on or before February 6 or 7, 1987. In fact, it was not commenced until January 15, 1988. The facts which support the plaintiff's allegation of wrongdoing were not inherently unknowable (see Hendrickson v. Sears, 365 Mass. 83, 88-91, 310 N.E.2d 131 [1974] ), nor is there even a contention of fraudulent concealment. The plaintiff's claim of corporate "freeze out" is a tort claim, but it is not a continuing tort which would save the day for the plaintiff in showing that he had seasonably commenced his action. See Kirley v. Kirley, 25 Mass.App.Ct. 651, 654-655, 521 N.E.2d 1041 (1988). The defendants' alleged breach of fiduciary duty occurred when they voted not to invite him to participate and gave him notice of such rejection. The cause of action for this breach of fiduciary duty arose, if at all, at that time (February 6 or 7, 1984). See Akin v. Warner, 318 Mass. 669, 676, 63 N.E.2d 566 (1945). Accordingly, the judgments entered in behalf of the individual defendants are affirmed.

2. Claims against Eye Health. The plaintiff as a stockholder and director of Eye Health has brought a derivative stockholder's action in behalf of Eye Health, alleging violations of the defendants' fiduciary obligations to Eye Health and demanding damages in behalf of Eye Health. ³

Responding to this derivative action, the directors of Eye Health appointed Dr. Shelley G. McKee, to serve as "a special litigation committee" to recommend a course of conduct for Eye Health as to the derivative action. McKee is a director and shareholder of Eye Health but is not a defendant in this action.

McKee retained an experienced attorney to investigate the derivative claim, and to recommend whether Eye Health should pursue the claims. The attorney's report concluded that pursuit of the derivative claims would not be in the best interests of Eye Health. On the strength of this report, McKee recommended to the board of directors of Eye Health that no action be taken on the plaintiff's derivative claims. The directors unanimously accepted McKee's recommendation and voted to seek dismissal of the derivative claims by the filing of a motion for summary judgment.

The motion judge examined the record "to determine whether a genuine issue of material fact exists as to the committee's independence, good faith and procedural fairness." The judge ruled that there was no such genuine issue. He declined "to invade the domain of Dr. McKee's independent business judgment," and allowed Eye Health's motion for summary judgment.

The issues in this case are (1) whether Massachusetts law permits the use of a special litigation committee, appointed by a majority of directors, to determine the propriety of pursuing a derivative action, and (2) if so, what degree of judicial scrutiny should be applied to that committee's decision? Before turning to Massachusetts law, we deem a brief review of the law in other jurisdictions to be necessary.

The majority of courts facing the special litigation committee issue have determined that the use of such committees is permissible. See, e.g., Zapata Corp. v. Maldonado, 430 A.2d 779 (Del.1981); Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979); Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323 (1987). See Annot., Propriety of Termination of Properly Initiated Derivative Action by "Independent Committee" Appointed By Board of Directors Whose Actions (or Inaction) Are Under Attack, 22 A.L.R. 4 th 1206 (1983). While these jurisdictions differ on the proper degree of judicial oversight, they agree that the propriety of accepting a special litigation committee decision can be determined on a case-by-case basis.

Other courts have held that the special litigation committee device cannot be used. In Miller v. Register & Tribune Syndicate, Inc., 336 N.W.2d 709, 715-718 (Iowa 1983), the Supreme Court of Iowa was concerned with the anomalous situation where a majority of the directors, because they were named as defendants, could not terminate a derivative action, yet could appoint a committee of their choosing which would have that power. The court reasoned that "the potential for structural bias on the part of a litigation committee appointed by directors who are parties to derivative actions is sufficiently great and sufficiently difficult of precise proof in an individual case." Id. at 718. Accordingly, the court adopted a prophylactic rule, prohibiting the use of special litigation committees, at least in cases where a majority of directors are named as the defendants in a derivative suit. Id. ⁴ The Court of Appeals of North Carolina reached the same conclusion in Alford v. Shaw, 72 N.C.App. 537, 324 S.E.2d 878 (1985), aff'd after modification, 320 N.C. 465, 358 S.E.2d 323 (1987). ⁵ The court cited the danger of "structural bias" and North Carolina's policy favoring derivative litigation. Id. at 547. The per se rule of Miller, preventing the appointment of special litigation committees by a majority of interested directors, would best serve North Carolina, the court reasoned. Alford v. Shaw, supra.

The concern expressed by the Miller court and by the lower court in Alford with the "structural bias" of special litigation committees is not unfounded. A number of commentators have recognized the possibility of inherent bias when "independent" directors pass judgment on other directors. In Cox & Munsinger, Bias in the Boardroom: Psychological Foundations and Legal Implications of Corporate Cohesion, 48 Law & Contemp.Probs. 83, 84-85 (No. 3, 1985), the authors "examine[d] several social-psychological mechanisms that can generate bias in the directors' assessment of the suit, including biases established by appointment of members to the board or a special litigation committee, control of pecuniary or nonpecuniary rewards made available to the independent directors by the defendant members of the board of directors, the independent directors' prior associations with the defendants, and their common cultural and social heritages." Id. at 84-85. They concluded that, "in...