Boland v. Boland; Boland v. Boland Trane Associates, Inc. (Ct. of Appeals)

Filed: October 25, 2011
Opinion by Judge Sally D. Adkins.

Held:

Holding 1: After a motion to dismiss or for summary judgment against a derivative plaintiff, Maryland courts must review a special litigation committee's ("SLC") independence, and whether it made a reasonable investigation and principled, factually-based conclusions. In this inquiry, the SLC is not entitled to a presumption that it was sufficiently independent from a corporation's directors.

Holding 2: When a court grants summary judgment in a derivative suit based on an SLC's determination that continuing the lawsuit is not in the corporation’s best interest, that court decision is not a final adjudication on the merits so as to preclude a direct suit under the doctrine of res judicata. The court makes no determination of the merits of the allegations when reviewing an SLC's decision. Moreover, a direct action, which asserts individual rights, is an entirely different cause of action than a derivative action, which is brought on behalf of the corporation.

Facts: Two lawsuits arose when a family business, consisting of two corporations and owned primarily by eight siblings (collectively, the "Corporation"), attempted to repurchase the stock of one sister upon her death pursuant to a Stock Purchase Agreement. When the sister's estate refused to sell the stock, the Corporation filed a declaratory judgment action seeking enforcement of the Stock Purchase Agreement. Meanwhile, non-director siblings who had learned of earlier stock transactions that resulted in director siblings acquiring additional corporate stock for themselves, sent a demand for litigation to the Corporation and filed a derivative action in the Circuit Court alleging self-dealing and a breach of fiduciary duty. They also filed "direct" claims, as cross-claims in the declaratory judgment action.

In response, the corporations appointed an SLC consisting of two newly hired "independent directors" to examine the claims. The SLC determined that the stock transactions were legitimate and the Stock Purchase Agreement was enforceable.

The Circuit Court, applying the business judgment rule, deferred to the judgment of the SLC and granted summary judgment to the Corporation on the derivative action. The Circuit Court also dismissed the cross-claims relying on res judicata.

Analysis: On appeal in the Court of Appeals, the Court upheld the application of the business judgment rule by the Circuit Court and held that after a motion to dismiss or for summary judgment against a derivative plaintiff, Maryland courts must review the SLC’s independence, and whether it made a reasonable investigation and principled, factually-based conclusions. However, in this inquiry, the SLC is not entitled to a presumption that it was sufficiently independent from the directors. Because the Circuit Court presumed the independence and good faith of the SLC without requiring that the Corporation prove the SLC's independence, the Court of Appeals vacated the Circuit Court's judgment and remanded for further proceedings.

The Court referred to its holding as an "Auerbach enhanced" standard, in reference to Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979). In so holding, the Court rejected the so-called Zapata standard under which Delaware courts review a SLC’s recommendation on the merits, applying their “independent business judgment.”

The Court reasoned that "a procedural review under the business judgment rule, although clearly the more deferential standard [toward the Corporation], nonetheless provides for a thorough review of an SLC’s independence, good faith, and methodology, and such inquiry gives trial courts the ability to scrutinize SLC decisions and protect shareholders against collusive practices or inadequate investigations."

On the issue of whether the non-director siblings' "direct" claims, brought as cross-claims in the declaratory judgment action were precluded by res judicata, the Court held that the Circuit Court's grant of summary judgment in the derivative action, based on a recommendation of the SLC, does not form a basis for res judicata because it is not a determination on the merits. Accordingly, the Court held that a trial court's resolution of a derivative complaint, when based on the recommendation of an SLC, cannot be said to be a final judicial resolution on the merits of the claims.

The full opinion is available in PDF.

Corona Fruits & Veggies, Inc. v. Class Produce Group, LLC (Maryland U.S.D.C.)

Filed: May 25, 2010

Opinion by Judge Richard D. Bennett

Held: On an appeal from the Secretary of the US Department of Agriculture (“USDA”), the United States District Court for the District of Maryland denied Petitioner’s request to remand the case to a California State court for a number of reasons (including, but not limited to, res judicata and lack of authority) and granted Respondent’s motion for summary judgment because there was no genuine issue of material fact since the Petitioner made the same arguments in the USDA hearing.

Facts: This case is about strawberries, trucking, pulp temperatures and rejected produce. Petitioner is an owner of strawberry farm in California and entered into a contract with the Respondent, who is a distributor, for the sale of flats of strawberries. The Petitioner packaged the strawberries and loaded them on a truck operated by a third party carrier at its place of business in California for shipment Free-on-Board, and informed the carrier that the strawberries must be kept in an environment cooled to a temperature of 32 degrees Fahrenheit. The Respondent initially routed the carrier to a large third party retailer in Virginia who rejected the strawberries upon arrival.

The shipment was then re-routed to Respondent’s location in Jessup Maryland. Upon arrival, a USDA inspection was performed on the strawberries while they were on the truck and the inspection found 24% of the strawberries were in a defective condition. Based on these results, the Respondent rejected the strawberries. The Petitioner, however, upon learning of the rejection, notified the Respondent that the strawberries were hot and that the Respondent had a claim against the carrier rather than the Petitioner.

After its rejection, the Respondent routed the shipment to a retailer located in Philadelphia, which accepted the shipment at a reduced price. The Respondent never paid for any of the strawberries, nor did it receive any of the sale proceeds collected by retailer in Philadelphia.

Subsequently, the carrier sued the Petitioner in California state court for failure to pay the transportation costs; and the Petitioner filed an informal complaint with the USDA seeking reparations for the rejected strawberries. The Petitioner also filed a cross-complaint against the Respondent in the California state court for its failure to pay for the strawberries.

The USDA Secretary ruled that the Respondent was not liable to the Petitioner because the Petitioner failed to ship strawberries in suitable shipping condition. The Petitioner appealed the USDA Secretary’s ruling in the US District Court for MD and the California state court action was stayed pending a final ruling.

Analysis: With respect to Petitioner’s request to remand the case to the California state court where its cross claim was filed against Respondent, the Court denied the Petitioner’s motion. The Petitioner argued that the Court should remand the case to the California state court because it was within the Court’s “inherent prudential authority and the “the abstention doctrine” to remand the case so it could be consolidated with the California state case, and argued, that if the remand was denied, that the Court should adopt the discovery conducted and certain evidentiary sanctions that were imposed on the Respondent in the state court case.

In denying the Petitioner’s request, the Court determined that: (i) since the California court did not originate the case, the Court could not remand the case to the California court, (ii) there were no exceptional circumstances in the case that would compel the Court to decline to exercise its jurisdiction pursuant to any abstention doctrine, and (iii) there were no convincing reason for the Court to adopt the discovery rulings issued in the separate state court action. After making such determinations, the Court determined that the matter was properly before the Court and that the Petitioner had chosen to pursue redress through the USDA process rather than the completion of the state court proceeding, and that the resolution of the matter through the USDA process will result in res judicata as to the California state court action.

With respect to the Respondent’s motion for summary judgment, the Court granted the motion because the Petitioner failed to demonstrate a material issue of fact regarding the cause of the strawberries’ defective condition. Petitioner argued that it satisfied contractual obligations by ensuring that the strawberries were in suitable shipping condition at the time they were loaded in the truck, and maintained that the carrier should be responsible for their condition. Respondent alleges that the strawberries were in poor condition prior to being loaded onto the truck because they were overripe or otherwise damaged during the harvesting.

In the USDA hearing, the USDA ruled that the Petitioner bore the burden of showing both that the strawberries were in a suitable shipping condition at the time they were loaded and that the transportation conditions were abnormal. The USDA held that the strawberries were defective before loading even though the temperatures in the truck fluctuated during transport.

The Court reasoned that Petitioner’s declarations submitted by the Petitioner’s principles following the USDA hearing regarding the shipping of strawberries in general did not establish a genuine dispute regarding the condition of the strawberries during shipment. The Court found no material factual disputes from the Secretary’s original finding of fact, which is prima-facie evidence of the same on appeal, that the temperature conditions in transit did not adversely impact the strawberries. The Court also held that the Petitioner did not provide any evidence that the strawberries were properly handled prior to loading, and consequently, ruled in favor of the summary judgment motion since there was no genuine issue of fact existed as to the condition of the strawberries.

The full opinion is available in PDF.