## Facts

- National Western Life Insurance Company (NWL), a Colorado life insurer, was controlled by Robert L. Moody, who held a large voting stake through dual-class shares.
- Beginning in 1977, Moody directed a highly leveraged investment program in GNMA and Freddie Mac mortgage-backed securities, typically financed by borrowing roughly 95% of the purchase price.
- By April 1979, NWL held about $97 million in the securities and had commitments for about $56 million more.
- When short-term rates rose above long-term rates, the leveraged position generated significant losses; risk was compounded by concentrating trades through a bond dealer that later experienced financial trouble.
- Shareholder Kent Bach filed a federal shareholder derivative action alleging fiduciary breaches and related misconduct arising from the investment program and corporate governance failures.
- NWL’s board formed a two-member Special Litigation Committee (SLC) of outside directors to investigate and decide whether continuing the derivative litigation served NWL’s interests.
- The SLC retained independent counsel and advisors, reviewed documents and transactions, interviewed relevant individuals, and recommended dismissal as not in NWL’s best interests.
- Bach challenged the SLC’s independence and good faith, citing the members’ companies’ reinsurance relationships with NWL, their prior votes approving litigation-expense reimbursements for defendant directors, and alleged social/professional closeness to the board.

## Issues

1. Whether Colorado law permits an SLC to seek dismissal of a shareholder derivative suit based on the business judgment rule when the SLC concludes continuation is not in the corporation’s best interests.
2. What level of judicial review applies to an SLC’s dismissal decision under Colorado law (independence, good faith, and adequacy of investigation).
3. Whether the summary-judgment record showed a genuine dispute of material fact regarding the SLC’s independence, good faith, or investigative thoroughness.

## Decision

- The Fifth Circuit affirmed summary judgment dismissing the derivative action.
- Colorado’s expansive business judgment rule permits an SLC to recommend termination of derivative litigation, and courts may dismiss if the SLC satisfies process requirements.
- Judicial review is limited to whether the SLC was independent, acted in good faith, and conducted a reasonable investigation; if so, courts defer to the SLC’s substantive judgment.
- Bach’s asserted conflicts (reinsurance relationships, earlier reimbursement votes, and resort/board interactions) did not create a triable issue of lack of independence.
- The record showed the SLC used independent counsel, gathered information through interviews and document review, and was not a management “rubber stamp,” defeating claims of bad faith or inadequate inquiry.

## Legal Principles

- Under Colorado law, the business judgment rule protects decisions by disinterested directors made in good faith after reasonable investigation, including an SLC’s decision to terminate derivative litigation.
- Courts reviewing an SLC recommendation focus on process: (1) independence, (2) good faith, and (3) reasonableness/thoroughness of the investigation; courts do not reweigh the merits once those elements are established.
- Ordinary arm’s-length business relationships and generalized collegial ties, without evidence of domination, coercion, or disproportionate benefit, are insufficient to show an SLC member is not independent.
- Prior board votes on matters related to litigation administration (such as expense reimbursements) do not alone create a disabling interest for otherwise disinterested SLC members.
- Summary judgment is appropriate when the record establishes SLC independence and investigative adequacy and the plaintiff offers only speculative or attenuated assertions of conflict or bad faith.

## Conclusion

The court held that, under Colorado’s business judgment rule, an SLC may obtain dismissal of a derivative action when it is independent, acts in good faith, and conducts a reasonable investigation, and that Bach failed to raise a genuine fact dispute on those process requirements.


Bach v. Nat'l W. Life Ins. Co., 810 F.2d 509 (5th Cir. 1987)