Superior Court of Massachusetts, Suffolk, Business Litigation Session
Bryan Abrano et al. Derivatively and on Behalf of Bryan Corporation
Frank Abrano et al No. 135612
MEMORANDUM OF DECISION AND ORDER ON BRYAN
CORPORATION'S MOTION TO DISMISS PURSUANT TO G.L.c. 156D
L. Sanders, Justice
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
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
Administration (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.
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' opposition, reveals the following.
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 a committee consisting of
two directors, Edward A. Hlozek and Gary E. Trainor, to
investigate 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 Demand 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.
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 committee. 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 proceedings brought by the United States Attorney's
Office and the FDA that ultimately resulted in the settlement
agreement referenced in the Verified Complaint.
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
interviewed either plaintiff or Frank Abrano.
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 directors determined that " the maintenance
of the derivative proceeding is not in the best interest of
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 independent and that they made their
determination " in good faith after conducting a
reasonable inquiry." 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).
plaintiffs' Opposition sets forth the various
deficiencies in the Company's submissions. 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 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 determination that was ultimately made: Chiunas
was Frank's personal attorney in the federal proceedings
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
investigating 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
problem until the lawsuit was actually filed. But it is the
Company's burden to demonstrate that a reasonable inquiry
into the allegations was conducted; a failure to object
pre-litigation, when counsel often are in discussions aimed
at avoiding a lawsuit, does not in any way diminish the
showing that must be made to warrant dismissal.
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 investigation. 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 directly relevant to the issues raised by
the Demand. As to Hlozek and Trainor, they were nominated to
the Board of Directors by Kim Abrano following the
plaintiffs' ouster from their Company 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.
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 Company at risk of violating
the settlement agreement with the federal government and for
his 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 ...