Opinion ID: 1057806
Heading Depth: 2
Heading Rank: 2

Heading: Litigation Committee's Report

Text: Following multiple hearings in which the plaintiff, McLaren, and others testified, the trial court, on January 16, 2004, approved McLaren's report recommending that the case be settled by Edmondson paying Ram-Tenn $552,501. See Tenn.Code Ann. § 48-17-401(c) (derivative suits may not be discontinued or settled without the court's approval). The trial court found that McLaren's findings and recommendations were in the corporation's best interests and that, once a settlement was reached, the derivative suit would be dismissed. If the case failed to settle, the derivative action would proceed. The plaintiff maintains that the trial court erred in approving McLaren's report. According to the plaintiff, McLaren improperly limited his investigation of Edmondson's activities to four years prior to the filing of the complaint. The plaintiff contends that had the investigation been broadened by going back further McLaren would have discovered larger sums misappropriated by Edmondson. The plaintiff also asserts that McLaren's report should have been rejected by the trial court because his conclusions and recommendations were the product of an inadequate investigation. Resolving these issues requires that they be viewed in the context of certain well-established principles. Generally, the proper party to bring a claim on behalf of a corporation is the corporation itself acting through its directors or a majority of its shareholders. Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 531-32, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984). However, since at least 1874, the courts of this state have been available to enforce the rights of corporations and their stockholders through what is called a derivative action. See Deaderick v. Wilson, 67 Tenn. (8 Baxt.) 108 (1874). A derivative action is a suit brought by one or more shareholders on behalf of a corporation to redress an injury sustained by, or to enforce a duty owed to, the corporation. See Bourne v. Williams, 633 S.W.2d 469, 471 (Tenn.Ct. App.1981). Thus, a derivative action is an exception to the rule that the corporation itself is the proper party to bring suit on its own behalf. Tennessee, like other jurisdictions, has approved a corporation's appointment of an independent individual or group, called a special litigation committee, as a mechanism for assessing the merits of a shareholder's derivative action and for making recommendations to the corporation concerning its resolution. See Lewis v. Boyd, 838 S.W.2d 215, 222-24 (Tenn.Ct. App.1992). As our courts have recognized, these litigation committees provide a legitimate vehicle for expressing a corporation's interest in derivative litigation. Id. at 223. Given that a shareholder derivative action cannot be dismissed or settled without court approval, Tenn.Code Ann. § 48-17-401(c), courts deciding whether to accept a litigation committee's recommendations consider a number of factors, including the committee's independence, good faith, procedural fairness, and the soundness of the committee's conclusions and recommendations. Lewis, 838 S.W.2d at 225. Although courts should critically evaluate the committee's findings and recommendations to determine whether they were made in good faith, are supported by the record of the investigation, and are consistent with the corporation's best interests, they should not substitute their own business judgment for that of the committee's. Id. at 224. In this case, the plaintiff does not challenge Ram-Tenn's decision to appoint McLaren to serve as a one-person litigation committee. Nor does the plaintiff challenge McLaren's independence or his good faith. [9] Rather, the plaintiff's arguments for rejecting McLaren's report center on whether McLaren acted with procedural fairness and whether his conclusions and recommendations were the product of an inadequate investigation. As to the procedure employed by McLaren, the plaintiff argues that McLaren improperly restricted the scope of his review of Ram-Tenn's records to 1994 four years prior to the filing of the complaint. In deciding to limit his inquiry to the period 1994 forward, McLaren applied the three-year statute of repose found at Tennessee Code Annotated section 48-18-601, which governs actions alleging a breach of fiduciary duty by a director or officer of a corporation. That statute adopts a one-year statute of limitations for such claims, but provides that [i]n no event shall any such action be brought more than three (3) years after the date on which the breach or violation occurred, except when there is fraudulent concealment on the part of the defendant, in which case the action shall be commenced within one (1) year after the breach is or should have been discovered. Tenn.Code Ann. § 48-18-601 (2002). McLaren, relying upon section 48-18-601 in framing the scope of his investigation, applied a three-year statute of repose and added an additional year for any fraudulent concealment that may have occurred. [10] The plaintiff maintains that McLaren should have broadened the scope of his investigation even further by covering a ten-year period under Tennessee Code Annotated section 28-3-110 (2000), which provides that cases not expressly provided for must be commenced within ten years after the cause of action accrues. Alternatively, the plaintiff argues that McLaren should have broadened the scope of his investigation by covering a six-year period under Tennessee Code Annotated section 28-3-109 (2000), the limitations period applicable to breach of contract actions. The plaintiff's argument that McLaren improperly limited the scope of his investigation into Edmondson's activities is unpersuasive. The legislature has clearly provided a limitations period applicable to cases of this type in section 48-18-601. Under its own terms, that statute applies to [a]ny action alleging a breach of fiduciary duties by directors or officers of a corporation. The present case falls squarely within the ambit of section 48-18-601. Therefore, the limitations periods set forth in sections 28-3-109 (six years for breach of contract) and 28-3-110 (ten years for cases not expressly provided for) do not apply. Thus, we conclude, as the Court of Appeals did, that McLaren did not improperly limit the scope of his investigation. The plaintiff also argues that McLaren's conclusions and recommendations are the product of an inadequate investigation and are inconsistent with the corporation's best interests. In considering this issue, we note that courts take into account several factors in determining the adequacy of a litigation committee's investigation. These factors include the length and scope of the investigation, the committee's use of independent experts, the corporation's or the defendant's involvement in the investigation, and the adequacy and reliability of the information supplied to the committee. Lewis, 838 S.W.2d at 224. Moreover, in assessing whether the committee has reached a decision that is in the corporation's best interests, courts consider the likelihood that the plaintiff will succeed on the merits, the financial burden on the corporation of litigating the case, the extent to which dismissal will permit the defendant to retain improper benefits, and the effect continuing the litigation will have on the corporation's reputation. Id. Mindful of these principles, we note that the record before us establishes that McLaren, an experienced commercial litigator, began his investigation in December 1999 and rendered his first report in October 2000 and a supplemental report in July 2001. Thus, McLaren's investigation spanned nineteen months. During that time, he employed an accounting firm to assist in the investigation at a cost of at least $50,000 to Ram-Tenn. The accounting firm spent 275 hours on the case. McLaren's law firm spent 313 hours performing the investigation at a cost of $70,000 to Ram-Tenn. Further, McLaren consulted with an expert in the hotel industry, along with the real estate appraiser involved in the sale of Ram-Tenn's hotel in Nashville. Thus, not only did McLaren employ outside experts to assist in the lengthy investigation, he spent many hoursat least 250on the case himself. Furthermore, we note that McLaren's reports, along with exhibits to the reports, are detailed and extensive, encompassing hundreds of pages. The accounting firm's report by itself is sixty-three pages in length and details the areas of inquiry. Numerous exhibits to the reports, along with the testimony of McLaren and the accountant who assisted him, more than adequately reflect their extensive efforts at uncovering Edmondson's activities. McLaren testified that none of Ram-Tenn's officers or directors attempted to prevent him from receiving any information and that nothing was concealed from him. McLaren described Edmondson as open and willing to provide whatever he requested. Indeed, it is uncontraverted that McLaren examined all of Ram-Tenn's records that could be located. The record also reflects that McLaren deposed witnesses and reviewed thousands of documents supplied by the plaintiff and others. He also met several times with individuals who could provide useful information including, among others, the custodian of Ram-Tenn's records, corporate counsel, the plaintiff, Edmondson, and their lawyers. Further, McLaren reviewed the law concerning stock transfers, statutes of limitations, damages, and the role of special litigation committees. The record also demonstrates that in arriving at his recommendation that the case be settled, McLaren took into account a number of relevant factorsthe likelihood of success on the merits, the extraordinary expense of going forward with the case, [11] the delay in wrapping up the affairs of the nonfunctioning corporation, the age of [Edmondson who was in his eighties and in poor health], the length of time involved to try the case, and the almost certain appellate process following any trial. In the event Edmondson refused to settle in accordance with terms specified in his reports, McLaren recommended that Ram-Tenn pursue the case against him. Based upon the extensive record before us, we find unconvincing the plaintiff's argument that McLaren's conclusions and recommendations were the product of an inadequate investigation. Indeed, it is difficult to pinpoint what more McLaren could have done in the nineteen months that he conducted the investigation on behalf of Ram-Tenn. Moreover, we have no basis to find that McLaren failed to exercise sound business judgment in determining that the best interests of Ram-Tenn a nonfunctioning, closely held company would be served if the case were settled, especially given that the company's primary asset had been sold, the litigation has spanned nearly nine years, and the company is in wind-up mode pending the conclusion of this suit. [12] In short, the record more than adequately demonstrates that McLaren's conclusions and recommendations were the product of much time, effort, and expense. In light of these circumstances, we will not, as we have said, substitute our business judgment for that of the duly appointed independent litigation committee. [13]