Sojitz America Capital Corporation v. Kaufman
1st Impression Issues Concerning Statute For Derivative Actions
Business Entities | Closely Held Corporations | Torts | Business Torts
- Connecticut Appellate Court
- Connecticut Appellate Court
- AC 33735
- Mar 26 2013 (Date Decided)
- Schaller, J.
Connecticut General Statutes §33-724(a) requires courts to dismiss a shareholder derivative proceeding if a majority vote of qualified directors constituting a quorum, or a committee appointed by qualified directors, determined in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that the maintenance of a derivative proceeding is not in the corporation's best interests. Sojitz America Capital Corporation commenced this shareholder derivative action against Todd Kaufman, for the nominal defendant, Keystone Equipment Finance Corporation, essentially alleging that Kaufman breached his fiduciary duties by providing certification to financial lending institutions falsely attesting to certain facts and, thereby, exposed Keystone to potential liability. The plaintiff asserted that Keystone suffered damages and two board members knew or acted in reckless disregard of Kaufman's actions and were not in a position to determine objectively whether this litigation was in Keystone's best interests. The court granted the defendants' motion to dismiss pursuant to C.G.S. §33-724. The plaintiff appealed claiming that the court erred in concluding that a majority of qualified directors determined in good faith, after conducting a reasonable inquiry that the action was not in Keystone's best interests. Unpersuaded, the Appellate Court affirmed the judgment. C.G.S. §33-724 derived from §7.44 of the Model Business Corporation Act. A motion to dismiss pursuant to C.G.S. §33-724 is distinguishable from other motions to dismiss, setting forth a unique, heightened pleading standard and elements to prove or disprove. Consequently, the issue of whether the court erred in dismissing the action, untypically, presented a mixed question of fact and law and was subject to plenary review. The trial court did not err in determining that a majority of the board consisted of qualified directors under C.G.S. §33-605. The plaintiff failed to make the particularized allegations necessary to overcome the heightened pleading standard in C.G.S. §33-724(c). The plaintiff also did not meet its burden of proving that the board did not reach its conclusion in good faith pursuant to a reasonable inquiry. C.G.S. §33-724 operates as a statutory embodiment of the business judgment rule, restricting review of a corporate manager's decision. The factors the board took into consideration for its inquiry were properly left within the board's discretion, subject only to the good faith and reasonableness requirements. Its conclusion to forgo the lawsuit followed logically from its findings.