Officers and the Business Judgment Rule: Hellman v. Hellman

On March 12, 2008, the Supreme Court of New York dismissed a suit involving the alleged improper execution of a lease executed by the president of Maynard Electric Supply Inc. (Maynard). Hellman v. Hellman, No. 2005/09695, slip op. at 1 (N.Y. Sup. Ct. Mar. 12, 2008).  The court found that the execution of the lease was within the president’s presumptive power and that his actions were to be examined under the business judgment rule.

The main parties in the case are brothers that are 50-50 co-owners and the exclusive directors of Maynard. The controversy stemmed from President Bruce Hellman’s decision to move the company away from a family owned property to a more expensive one.  Glenn Hellman, the plaintiff, objected to the move.  Nevertheless, Bruce decided to execute the lease and move the company.

The plaintiff first argued that Bruce did not have the power to execute the lease without board approval, especially since one of the two directors objected to the move. The court, however, found that the transaction was within the ordinary course of business and the board had previously acquiesced to the president making routine management decisions in a wide variety of areas.  As a result, Bruce did indeed have presumptive authority to execute the lease.  The court rejected an argument based upon the holding in Sterling Industries Inc. v. Ball Bearing Pen Corp., 84 N.E.2d 790 (N.Y. 1947) that an officer’s presumptive power could be rebutted when the officer knows that his or her actions would not pass a board vote. The court held that under Sterling an officer’s presumptive powers were only rebutted when a formal board meeting was called and the officer acted contrary to the board’s decision. In this case, no board meeting was called; therefore, Bruce Hellman, as president of the company, had the authority to enter into the new lease.

Next, the plaintiff claimed that the lease executed by Bruce constituted corporate waste, a cause of action that only required a showing of negligence under New York statutory law.  In resolving the issue, the court considered whether the business judgment rule applied to the transaction.  Although the business judgment rule traditionally applied only to the actions of directors, the Hellman court opted to extend the doctrine to officers. The court acknowledged that the rule had not been explicitly applied to officers, but found support in case law and scholarly literature.  

To do otherwise, the court reasoned, would “encroach on a president/general manager’s presumptive powers” and interfere with the board’s corporate management by second guessing their “delegation decision.” The court also relied on Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979), which applied the business judgment rule to a special litigation committee.  Auerbach stood for the principle that the rule is to shield delegated bodies of the board, so long as the delegation was not a “pretext or sham.” After determining that the board’s delegation was not a sham, the court held that Bruce Hellman’s decision to execute the new lease was shielded by the business judgment rule. The court then found that there was no issue of material fact, as the plaintiff did not make any allegations of fraud, unconscionability, or self dealing to rebut the presumption of “reasonable diligence” under the business judgment rule.