Free to Wheel and Self-Deal?

In In re Mi-Lor Corp., the First Circuit examined the ability of a close-corporation to release its members from liability arising from self-dealing. The court concluded that close-corporations may indeed execute such releases when there is unanimous and fully informed shareholder approval. So long as all shareholders of a close-corporation know and approve of the self-dealing transaction, there can be no liability, thus a release may be given. This rationale is supported by the "non-exclusive rule" in the Delaware corporate statutes. The court summarized this rule as follows: "a self-dealing transaction may be approved by the consent of all shareholders – whether interested or not – so long as there is disclosure to those shareholders of all material facts concerning self-dealing." The First Circuit noted that state laws may add texture to the rule regarding release of self-dealing claims. For instance, it noted that state law may require an additional fairness analysis when assessing whether a release was properly given. Corporate counsel should consider this when advising close-corporations about their authority to release self-dealing claims. In re Mi-Lor Corp., Nos. 02-2578, 02-2659 (1st Cir., Nov. 3, 2003).

Interlocutory Appeals Regarding Defendant Classes, Guidance from the Court

In a case of first impression, the First Circuit announced in Tilley v. TJX Companies, Inc. a set of criteria to govern the exercise of its discretion to entertain interlocutory appeals from orders granting or denying a defendant class. The First Circuit re-examined the criteria regarding the exercise of such discretion for plaintiff classes and grafted them (for the most part) onto the defendant-class limb of the class-action tree. In sum, "interlocutory appeals of class certification orders in cases involving defendant classes are warranted when one of three circumstances exists: (i) denial of certification effectively disposes of the litigation because the plaintiff’s claim would only be worth pursuing as against a full class of defendants; or (ii) an interlocutory appeal would clarify an important and unsettled legal issue that would likely escape effective end-of-case review; or (iii) an interlocutory appeal is a desirable vehicle either for addressing special circumstances or for avoiding manifest injustice." Tilley v. TJX Companies, Inc., No. 03-8001 (1st Cir., Oct. 2, 2003).

Law School Con. Law. Exam?

For anyone longing for a case that reads like an exam question on the dormant commerce clause (yes, the dormant commerce clause), I recommend Doran v. MTA, No. 03-1312 (1st Cir., Nov. 6, 2003). The plaintiffs sued the Massachusetts Turnpike Authority, alleging that its "Fast Lane" electronic toll service discriminates against non-residents and serves no legitimate local interest. Indeed, the court goes into a riveting yet concise analysis of the elements of the dormant commerce clause, concluding that the MTA’s actions are constitutional. A real "sleeper" of a case. Really.

Another Eleventh Amendment Conundrum

The Third Circuit recently considered whether state immunity issues under the Eleventh Amendment are questions of Article III jurisdiction or sufficiently similar to such questions as to require a court to answer them before reaching the merits of the case. See Steel Co. v. Citizens for Better Environment, 523 U.S. 83 (1998). Adopting the First Circuit’s rationale, the Third Circuit held that a court "may reserve judgment on Eleventh Amendment issues even when advanced by a state where it can resolve the case on other grounds and the prevailing party on the merits would be the same as the prevailing party if immunity were recognized." The Fifth, Tenth and Eleventh Circuits take a contrary view, perhaps making this case ripe for Supreme Court review. See Bowers v. NCAA, No. 02-1789 (3rd Cir., Aug. 20, 2003). (This case stemmed from the NCAA’s denial of Bowers’ high school credentials, apparently because the NCAA questioned whether he properly earned the credits or received too much help for his learning disability. Thus, Bowers was ineligible to play football or take a scholarship from any of the over 300 schools that recruited him. Bowers paid his way to Temple and earned a 3.67 g.p.a., but he was still not eligible to play football. Prior to the resolution of this case and the NCAA’s adverse decision, Bowers died. He never got the chance to play college football.)

Can Parties Dictate the Scope of Review for Arbitral Awards?

Late this past summer, the Ninth Circuit held, en banc, that the Federal Arbitration Act enumerates "limited grounds" on which a federal court may review an arbitral award. As such, "private parties may not contractually impose their own standard on the court." In the case before the Ninth Circuit, the contract between the parties purported to grant federal courts the power to review any award where the arbitrator’s findings of fact were not supported by substantial evidence or where the conclusions of law were erroneous. This attempt to expand the scope of review, the Ninth Circuit concluded, is expressly barred by the FAA. The court’s decision is aligned with the Seventh, Eighth and Tenth Circuits. The Third and Fifth Circuits, however, take a contrary approach. Practitioners in the First Circuit should be cautious about drafting arbitration clauses that seek to expand the scope of review beyond the terms of the FAA. Kyocera Corp. v. Prudential-Bachet Servs., Nos. 01-15630 et al. (9th Cir., Aug. 29, 2003)

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