Joy v. North

Citytrust (defendant) made a series of questionable loans, sometimes unsecured or exceeding federal statutory limits, to the Katz Corporation (Katz) in connection with Katz’s construction of an office building. The loans totaled more than $2.5 million. Citytrust obtained a second mortgage on the office building, and Katz’s partnership later turned over title to the building to Citytrust, which assumed Katz’s mortgage to an outside lender. Citytrust sold the building, but the buyer defaulted. There was no evidence that the rental income derived from the building was sufficient to meet the obligations assumed by Citytrust. Dr. Athalie Joy (plaintiff) filed a shareholder’s derivative claim on behalf of Citytrust Bancorp, Inc. (previously known as Connecticut Financial Services Corporation) (Bancorp), Citytrust’s parent company, after making an unsuccessful demand on the board. The suit alleged claims against Citytrust, its officers, and directors for breach of trust, fiduciary duty, and federal law. Bancorp’s board authorized a Special Litigation Committee to investigate, and the committee recommended dismissing the suit for most defendants and settling with others who may have been negligent. Joy refused to withdraw the lawsuit. The district court took discovery on the committee’s competence and independence before granting summary judgment to the outside defendants, concluding that the committee was entitled to the protection of the business-judgment rule. Joy appealed to the United States Court of Appeals for the Second Circuit.