Abrano, et al. v. Abrano, et al. (Lawyers Weekly No. 12-163-16)
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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
SUCV2015-1367-BLS2
BRYAN ABRANO and BRIDGET RODRIGUE,
derivatively and on behalf of BRYAN CORPORATION
Plaintiffs
vs.
FRANK ABRANO, KIM ABRANO, EDWARD HOLZEK and GARY TRAINOR
Defendants
vs.
BRYAN CORPORATION,
Nominal Defendant
MEMORANDUM OF DECISION AND ORDER
ON BRYAN CORPORATION’S MOTION TO DISMISS
PRUSUANT TO G.L.c 156D §7.44
This is one of three lawsuits involving members of a closely held corporation, the Bryan Corporation (the Company). The instant case is a derivative action brought on behalf of the Company by two minority shareholders, Bryan Abrano (Bryan) and his sister Bridget Rodrigue (Bridget). The Company now moves to dismiss the action on the grounds that a committee of two independent directors has determined, in “good faith” and after “reasonable inquiry,” that pursuing the action would not be in the “best interest” of the corporation. G.L.c. 156D §7.44 (a). After careful review of the parties’ submissions, this Court concludes that the Motion must be DENIED.
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BACKGROUND
The Company is a distributor of pharmaceuticals and medical devices. The defendant Frank Abrano (Frank) is its founder. In 2007, criminal charges were filed against him and the Company that resulted in his conviction and incarceration. Civil proceedings against him and the Company were resolved by way of a settlement agreement with the Food and Drug Admin-istration (FDA). As part of the settlement, Frank agreed not to have any affiliation with the Company or exercise any control over it. To satisfy that condition, Frank transferred his interest in the Company to his two children Bryan and Bridget and his estranged wife Kim, who holds a controlling interest. The Verified Complaint alleges that Frank, in violation of that agreement and with the assistance of Kim, has continued to meddle in the Company’s operations and has enriched himself at the Company’s expense.
In support of its motion to dismiss, the Company has submitted three affidavits together with attachments. That material, together with certain other material attached to plaintiffs’ Oppo-sition, reveals the following.
Before filing the derivative action, the plaintiffs made a Demand on the Company’s Board of Directors, as required by G.L.c. 156D §7.42. The date of the Demand was July 21, 2014. Pursuant to a resolution dated September 6, 2014, the Company’s Board of Directors ap-pointed a committee consisting of two directors, Edward A. Hlozek and Gary E. Trainor, to in-vestigate the Demand’s allegations. In addition to being named defendants in this action, Hlozek and Trainor are also personal friends of Frank. Both were nominated to the Board by Kim and elected immediately after the ouster of the plaintiffs and just one week before the De-mand was made. Before joining the Board, Hlozek was the CEO of QuantumCor, Inc., which owed Frank some undisclosed amount of money. Trainor owns a jewelry business in Nantucket.
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On August 28, 2014, Jennifer Chiunas, an attorney at Goodwin, Procter &Hoar (GPH) notified plaintiff’s counsel that GPH had been retained by the Company’s Board of Directors to conduct the investigation. The letter made no mention of a special committee; indeed, the letter was sent more than a week before the Company’s resolution purporting to appoint that commit-tee. It is not clear from the submissions before the Court how it came about that GPH was hired to conduct the investigation, much less that this was done at the behest of Hlozek and/or Trainor. The choice was a strange one in any event: Chiunas had represented Frank personally in the pro-ceedings brought by the United States Attorney’s Office and the FDA that ultimately resulted in the settlement agreement referenced in the Verified Complaint.
In a letter dated October 20, 2014, Chiunas informed plaintiff’s counsel that the “Board has determined that it is not in the best interests of the Company” for the shareholders to pursue the claims outlined in the Demand. The bulk of the letter dealt with the direct claims made by the plaintiffs that are the subject of a separate lawsuit. As to the derivative claims, Chiunas stated that an internal review revealed that Frank had been “uninvolved” in the Company since 2008, but that “there have been certain isolated instances of administrative oversight. ” She did not specify what those were but stated that “remedial measures” had been undertaken. In summarizing the steps that were taken to conduct this review, the letter listed certain financial records of the Company that were collected and analyzed. There is no indication that GPH inter-viewed either plaintiff or Frank Abrano.
DISCUSSION
Section 7.44(a) of Chapter 156D provides that a court shall dismiss a derivative action after demand is made on the corporation’s board of directors if two or more independent direc-tors determined that “the maintenance of the derivative proceeding is not in the best interest of
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the corporation.” In order to make the showing required for dismissal, the corporation must submit a “written filing” setting forth facts demonstrating that the directors were in fact inde-pendent and that they made their determination “in good faith after conducting a reasonable in-quiry.” G.L.c. 156D §7.44(d). In opposing the motion, plaintiffs assert that the Company has not met the requisite showing, particularly since the law firm that conducted the investigation represented Frank Abrano in the proceedings that resulted in the civil agreement banning him from the Company. In the alternative, plaintiffs ask that they be permitted to conduct discovery as to the nature and scope of the special committee’s investigation. This Court concludes that the Company has not made the showing required by Section 7.44(d).
The plaintiffs’ Opposition sets forth the various deficiencies in the Company’s submis-sions. Although Hlozek and Trainor were appointed to investigate the allegations of the Demand, their affidavits are decidedly vague as to what they themselves did. Indeed, it is not at all clear that they had any role in choosing GPH to conduct the investigation; when Chiunas informed in-formed plaintiff’s counsel in an August 28 2014 letter that GPH was retained by the Company to look into the allegations of the Demand, the special committee had not even been appointed. Moreover, the selection of GPH is enough, standing alone, for this Court to question the deter-mination that was ultimately made: Chiunas was Frank’s personal attorney in the federal pro-ceedings which resulted in the settlement agreement that banned him from being involved in the Company. Among other things, the Demand alleged that Frank had not complied with that agreement, thus putting Chiunas in the position of investigate her own client. In response, the Company does not really dispute the existence of this conflict but argues instead that there has been some kind of waiver in light of the fact that plaintiff’s counsel did not raise this as a prob-
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lem until the lawsuit was actually filed. But it is the Company’s burden to demonstrate that a rea-sonable inquiry into the allegations was conducted; a failure to object pre-litigation, when coun-sel often are in discussions aimed at avoiding a lawsuit, does not in any way diminish the show-ing that must be made to warrant dismissal.
This Court also shares plaintiffs’ concerns as to the scope of the investigation that was conducted and the extent to which Hlozek and Trainor are truly independent. The October 2014 letter responding to the Demand listed a series of documents that were analyzed as part of the in-vestigation. GPH did not interview the plaintiffs, Bridget’s husband Dennon (who also worked for the Company during the relevant time period) or Frank. GPH also did not undertake a review of Frank’s email account, telephone records, or bank records – materials which seem to be di-rectly relevant to the issues raised by the Demand. As to Hlozek and Trainor, they were nomi-nated to the Board of Directors by Kim Abrano following the plaintiffs’ ouster from their Com-pany positions. According the Verified Complaint, Kim at Frank’s direction had the two men placed on the Board simply to “rubberstamp” decisions made by Frank. Although this may not be true, the fact remains that both men are personal friends of Frank, and the Company where Hlozek served as CEO owes Frank some amount of money. Given that Frank was the primary target of the Demand’s allegations, there is some basis to question their ability to independently assess the validity of those allegations.
The Company argues in the alternative that certain allegations in the Verified Complaint were not specifically raised by the Demand and therefore are procedurally improper. The Demand alleged, however, that Frank was meddling in Company operations in a way that put the Com-pany at risk of violating the settlement agreement with the federal government and for his
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own personal benefit. This is broad enough to encompass the more specific allegations that the Company seeks to strike from the case. This Court is also keenly aware of the age of this case and its companion cases. It is time to move beyond preliminary procedural skirmishes and on to the merits.
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Janet L. Sanders
Justice of the Superior Court
Dated: November 30, 2016