Standards of Review Count!

As an alumnae of Sweet Briar College, the decision made by the board of directors this past February to close the school broke my heart. Which is why the announcement made this weekend that the school would stay open next year was so emotional for me. While I am not involved with the legal proceedings, nor am I admitted to practice in Virginia where the proceedings have taken place, I have been monitoring the proceedings through various media outlets. The fight to keep the school open highlights the importance of a legal principal called the standard of review.

The process of going from closing operations to continuing them has been very much a legal one. The proceedings started when the County Attorney filed suit against the school. The most significant event was the recent ruling by the Virginia Supreme Court which sided with the County Attorney. The issue essentially was whether the decision to close was subject to the rules of trust or to the rules of a corporation. The standards of review between a trustee as a fiduciary and a corporation under the business judgment rule are vastly different.

When a court looks at a decision made by a trustee, it reviews that decision on a very high standard. A trustee has a fiduciary duty to place the interests of the beneficiary above his or her own. The duty of a trustee was described by Justice Cardozo in Meinhard v. Salmon as “A [fiduciary] is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”

However, when a court looks at the decision made by a board member of a corporation, the court applies what is known as the business judgment rule. Under the business judgment rule, great deference is given to the board members and generally, a court will not question the validity of that decision unless the decision was so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.

By ruling on behalf of the County Attorney, the Supreme Court stated that the rules applying to a trust can also apply to a corporation. Therefore, the board of directors for Sweet Briar would be subject to a much higher standard under the trust rules rather than the business rules. While I was not part of the settlement negotiations that resulted in the agreement to keep the school open and the board resign, I am not surprised that the agreement was reached following the Supreme Court’s ruling. Sweet Briar’s first loss was likely a sign of more to come.

While standards of review are not the most interesting areas of law, however, Sweet Briar is a good case study as to why they can be so important.

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