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Martinez v. Cape Fox (06/10/2005) sp-5909
Martinez v. Cape Fox (06/10/2005) sp-5909
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
THOMAS MARTINEZ, )
) Supreme Court No. S-11197
Appellant, )
) Superior Court No.
v. ) 1KE-97-00294 CI
)
CAPE FOX CORPORATION, an ) O P I N I O N
Alaska Corporation, and the BOARD )
OF DIRECTORS OF CAPE FOX ) [No. 5909 - June 10, 2005]
CORPORATION )
)
Appellees. )
)
Appeal from the Superior Court of the State
of Alaska, First Judicial District,
Ketchikan, Michael A. Thompson, Judge.
Appearances: David W. Rosendin, David W.
Rosendin, P.C., Ketchikan, for Appellant.
Frank A. Pfiffner, Hughes Thorsness Powell
Huddleston & Bauman LLC, Anchorage, and James
D. Nelson, Betts, Patterson & Mines, P.S.,
Seattle, Washington, for Appellees.
Before: Bryner, Chief Justice, Matthews,
Eastaugh, Fabe, and Carpeneti, Justices.
FABE, Justice.
I. INTRODUCTION
This appeal challenges a superior court order imposing
a permanent bar from reelection on a former corporate director
who was found to have engaged in misconduct. The barred director
argues principally that the superior court was not authorized
under AS 10.06.463 to bar him from reelection because he was no
longer a director at the time of the judgment and that the courts
findings were inadequate to support a lifetime ban. He also
argues that he is entitled to partial indemnification of his
defense expenses. We conclude that the superior court had the
authority to impose a ban under the statute but that the courts
findings do not support the lifetime ban imposed by the court and
remand for entry of the fifteen-year ban imposed after a prior
trial. We also articulate seven factors that should be
considered by courts in future cases in deciding whether to bar a
director from board service under AS 10.06.463. Finally, we hold
that the appellant was not entitled to partial indemnification of
his legal expenses.
II. FACTS AND PROCEEDINGS
Cape Fox Corporation (Cape Fox) is an Alaska native
corporation based in Saxman. Cape Fox owned a gift shop known as
The Village Store, which was managed by Patricia Shields, the
sister of appellant Thomas Martinez. In 1996 the then Chief
Executive Officer of Cape Fox, Douglas Campbell, asked an
internal auditor to review the operations of The Village Store,
which was experiencing financial losses. In February 1997 the
auditor completed a partial audit and delivered a preliminary
report to the Audit Committee of the Cape Fox Board of Directors.
The auditor discovered that a significant amount of store
inventory and cash was missing and concluded that theft had
occurred. The board of directors asked the auditor to conduct a
thorough audit, which began in March 1997. The audit revealed
that $56,760.85 in inventory and $3,426.18 in cash were missing.
The audit also disclosed a pattern of short, late, or missing
cash deposits from The Village Store, improperly handled credit
card transactions, and an unusually large number of voided sales.
The auditor discovered that store employees, including manager
Patricia Shields, borrowed money from The Village Store for
personal use and gave store merchandise to family and friends
without paying for it.
In January 1996, during his term as chairman of the
board of directors, Martinez took six jackets valued at $200 each
without paying for them. In May 1997, during the investigation
into misconduct at The Village Store, Martinez arranged to have
$1,200 withheld from the money he received for attending director
meetings to pay for the jackets.
Between February 1995 and June 1996 Martinez improperly
charged Cape Fox for travel expenses. He charged meals, movies,
and personal phone calls above the $60 per diem travel allowance
for directors, charged Cape Fox for hotel lodging for personal
travel, and took a $750 travel advance for travel expenses for
which he had already been paid. After the auditor filed a report
on director business expenses, Martinez authorized a deduction of
$2,100 from the money he received for attending board meetings to
repay Cape Fox for the improperly charged travel expenses.
The superior court found that Martinez actively covered
up the misconduct of employees at The Village Store, including
the mismanagement and misconduct of his sister, Patricia Shields.
Martinez also retaliated against two directors by actively
campaigning to unseat them as directors for inquiring into
perceived irregularities at The Village Store and the job
performance of his sister, Patricia Shields. The superior court
found that Martinez was instrumental in causing the termination
of CEO Ernesta Ballard for castigating [the stores] manager,
Patricia Shields. While serving as chairman of the board of
directors, Martinez told Douglas Campbell, the next CEO, not to
mess around with The Village Store upon threat of termination of
his employment. Less than a week after Campbell gave Shields an
unsatisfactory review, Martinez scheduled a special board meeting
to discuss problems with Doug Campbell.
On August 5, 1997, Cape Fox filed suit against Martinez
and three employees of The Village Store, including Patricia
Shields. On August 13, 1998, Cape Fox filed an amended
complaint. The claims against Martinez included conversion,
breach of fiduciary duties, and negligent mismanagement. Cape
Fox also requested that Martinez be removed from office as
director and be barred for life from reelection as a director of
Cape Fox. Martinezs three-year term as a director expired before
the trial, and he did not seek reelection. He last served on the
board in September 1998.
After a trial in January 1999 the jury returned a
special verdict in favor of Cape Fox on all counts. The jury
also determined that Martinez should have been removed from the
board of directors and should be barred for fifteen years from
serving as a director. The court treated this portion of the
jurys special verdict as advisory and entered an order barring
him from service on the board for fifteen years.
On appeal, we held that the trial court had erred in
failing to instruct the jury on comparative fault.1 We also
determined that the superior courts conclusory statement that
Martinez had engaged in fraudulent or dishonest acts, gross
neglect of duty and gross abuse of authority or discretion with
regard to Plaintiff Cape Fox Corporation did not constitute
adequate findings under Civil Rule 52(a) and therefore vacated
the courts order banning him from board service.2
The case was retried in March 2003. The jury again
found for Cape Fox on all grounds,3 and advised that Martinez
should be barred for life from serving as a director of Cape Fox.
On June 27, 2003, the superior court entered findings of fact and
conclusions of law. The superior court found that Martinez had
committed fraudulent and dishonest acts in regard to the
corporation and had grossly abused his authority and discretion
as a director, and concluded that he should be barred for life
from serving as a director of Cape Fox. The court also entered
judgment against Martinez in the amount of $23,542.63.
Martinez appeals the order barring him for life from
service as a director of Cape Fox. He also
contends that he is entitled to partial
indemnification for his defense expenses.
III. STANDARD OF REVIEW
Legal issues are subject to de novo review.4 Because
there is a range of reasonable decisions a trial judge might make
in determining how long a bar from corporate board service to
impose upon a defendant, this determination is reviewed for abuse
of discretion.5
IV. DISCUSSION
A. Alaska Statute 10.06.463 Authorizes the Superior Court
To Bar a Former Director Who Was Not Removed from
Office by the Court.
The superior court barred Martinez from serving as a
director of Cape Fox pursuant to AS 10.06.463, which provides:
Removal of director by superior court.
The superior court may, at the suit of the
board or the shareholders holding at least 10
percent of the number of outstanding shares
of any class, remove from office a director
for fraudulent or dishonest acts, gross
neglect of duty, or gross abuse of authority
or discretion with reference to the
corporation and may bar from reelection a
director removed in that manner for a period
prescribed by the court. The corporation
shall be made a party to the suit.
Martinez argues on appeal that AS 10.06.463 applies only to
current directors and does not authorize the superior court to
bar a former director from future board service. Because
Martinez did not raise this issue in the superior court, he must
establish plain error to prevail on this issue.6 Plain error
exists where an obvious mistake has been made which creates a
high likelihood that injustice has resulted.7
Martinez notes that according to the statute the
superior court may remove a director for misconduct and may bar
from reelection a director removed in that manner.8 He argues
that according to the plain language of the statute the superior
court may only bar from reelection a director that it has removed
for misconduct under the statute. Martinez was a director at the
time the complaint was filed, but was no longer a director at the
time of the trial. Martinez therefore contends that AS 10.06.463
did not authorize the superior court to bar him from serving as a
director because the court did not also remove him from office.
Cape Fox argues that Martinezs interpretation of AS 10.06.463
would undermine the objective of the statute by permitting a
dishonest director to thwart a suit to bar him by resigning from
the board before trial.
The plain language of the statute arguably suggests
that the courts removal of a director is a condition for imposing
a ban on his service on the board. But we have rejected the
plain meaning rule;9 [i]n interpreting a statute, we consider its
language, its purpose, and its legislative history, in an attempt
to give effect to the legislatures intent, with due regard for
the meaning the statutory language conveys to others.10 The
plainer the language of the statute, the more convincing the
evidence of contrary legislative intent must be.11 We will ignore
the plain meaning of an enactment . . . where that meaning leads
to absurd results or defeats the usefulness of the enactment.12
Interpreting AS 10.06.463 to permit a court to bar from
reelection only directors still sitting on the board at the time
the court enters judgment would defeat the statutes objective.
The statute provides two forms of relief for a corporation faced
with a sitting director who engages in gross misconduct: removal
from office and a bar from reelection. Martinezs reading of AS
10.06.463 would deny Cape Fox the second statutory remedy of
banning a dishonest director from future office simply because
that director chose to leave the board before judgment was
entered. Moreover, the legislative history indicates that the
judicial removal statute was designed to facilitate removal of a
director for serious misconduct in cases where there are
insufficient shareholder votes to do so.13 If AS 10.06.463 is
read to mean that a court may not impose a future bar from
service on a director who has left the board prior to judgment,
directors who are sued under the statute may avoid the courts
future bar from service simply by resigning from the board or
declining to stand for reelection at the end of their term and
then seeking reelection at a later date.
Martinez argues that once a director leaves the board,
shareholder democracy is sufficient to ensure that an abusive
director will not be reelected. But the premise of AS 10.06.463
is that in some situations shareholder democracy is insufficient
to ensure removal or to prevent reelection of an unfit director
and that therefore the court must have the power not only to
remove the director but also to bar that director from reelection
for a period of time. The official comment to the portion of the
Model Business Corporation Act governing removal of directors by
a court describes situations where shareholder removal of a
director is impracticable, such as where the director charged
with misconduct personally owns or controls sufficient shares to
block removal, or where the director was elected by a voting
group or cumulative voting and the shareholders with voting power
refuse to remove the director.14 In addition, commentators have
pointed out that where a director is engaging in misconduct such
as fraud that benefits the corporation, the shareholders have no
incentive to remove the director.15 These scenarios apply with
equal force to the reelection of a director who leaves the board
in the face of a suit under the judicial removal statute.
We therefore hold that AS 10.06.463 should be read to
permit the superior court to bar a former director from
reelection where that director was serving on the board when the
complaint was filed.16 The superior court did not commit plain
error by barring Martinez from reelection even though it did not
remove him from office.
B. The Superior Courts Findings Support a Fifteen-Year Ban
from Board Service, But Not a Lifetime Ban.
Martinez argues that it was an abuse of discretion for
the superior court to bar Martinez for life from service as a
Cape Fox director. We agree.
After the first trial, the jury found that Martinez
should be barred from service on the board for fifteen years.
Because a bar from service under AS 10.06.463 is an equitable
remedy, the superior court properly treated this portion of the
jurys special verdict as advisory.17 The superior court found
that Martinez engaged in fraudulent or dishonest acts, gross
neglect of duty, and gross abuse of authority or discretion with
regard to Cape Fox and barred Martinez for fifteen years. On
appeal, we held that the superior courts conclusory order
regarding the ban from service did not satisfy the requirement
under Civil Rule 52(a) that the trial court in actions tried
without a jury or with an advisory jury make specific findings of
fact and conclusions of law18 and ordered the court to make and
enter findings specifying the particular conduct of Martinez upon
which the relief granted is based.19 We also ordered a new trial
on the issues of comparative fault and damages.20 The jury in the
second trial advised that Martinez should be barred for life from
the Cape Fox board. The superior court made findings of fact
regarding Martinezs misconduct, and imposed a lifetime ban from
board service on Martinez.
Although the superior court made detailed findings
regarding the nature of Martinezs misconduct, none of those
findings suggests a reason for increasing the ban from fifteen
years to life following the second trial. The evidence at both
trials revealed Martinezs multiple efforts to cover up his
misconduct. And the superior courts findings detailed the same
conduct that was described in the first trial: taking leather
jackets without paying for them, improperly charging Cape Fox for
travel expenses, and covering up the misconduct at The Village
Store by threatening and retaliating against those who inquired
about irregularities at the store. The second advisory jurys
finding that Martinez should be barred for life cannot by itself
justify the courts decision to increase the length of the bar
since it is the court, not the jury, that must determine the
appropriate equitable relief.21 Because there is no evidence in
the record justifying the trial courts decision to increase the
bar from the fifteen years imposed after the first trial to the
lifetime bar imposed after the second trial and because the trial
courts findings of wrongdoing were all matters available at the
first trial when the court imposed the fifteen-year ban, we
conclude that it was an abuse of discretion to increase the bar
from fifteen years to life following the appeal.
Moreover, we note that increasing the length of the bar
after a successful appeal without an explicit discussion of the
reasons for so doing may constitute a denial of due process. In
Shagloak v. State, we held that imposing a more severe sentence
on a criminal defendant after a retrial violates the due process
clause of the Alaska Constitution.22 The United States Supreme
Court has held that the federal constitution requires that
whenever a sentencing judge imposes a more severe sentence on a
criminal defendant after a retrial following a successful appeal,
the reasons for him doing so must affirmatively appear.23
Although we have not considered the effect an increased penalty
following retrial in a civil case would have on a civil
defendants due process rights, the same analysis has been applied
by other courts, though the interest at stake may be less
important than that in criminal cases.24 We need not decide
whether the lifetime bar is constitutionally infirm because we
hold that the lifetime bar is not supported by the superior
courts findings.
We next address whether the original fifteen-year ban
from service is supported by the superior courts findings.
Martinez argues that before imposing a bar of any length under AS
10.06.463, the court must find that there is a likelihood of
future misconduct if the bar is not imposed.25 Cape Fox argues
that the statute does not require such a finding.
By its terms, AS 10.06.463 does not require the court
to make any specific findings prior to imposing a bar from board
service beyond the finding of fraudulent or dishonest acts, gross
neglect of duty, or gross abuse of authority or discretion with
reference to the corporation required for removal of a director.
The other state courts that have addressed barring a director
from reelection under similar judicial removal statutes do not
require that the court make a specific finding as to the
likelihood of future violations, nor do they mention the
defendants likelihood of future misconduct as a factor in the
decision to impose a bar.26
Federal courts interpreting a statute that permits a
court to bar a person who has committed securities fraud from
serving as a director of any public company27 have articulated a
list of factors that may be considered by the trial court in
making its determination.28 These factors include: (1) the
egregiousness of the underlying violation; (2) the defendants
past record of misconduct; (3) the defendants role or position at
the time of the violation; (4) the defendants degree of scienter;
(5) the defendants economic stake in the violation; and (6) the
likelihood that the misconduct will recur.29 Martinez urges us to
adopt this approach and require the trial court to make findings
on these six factors before imposing a ban under AS 10.06.463.
Because AS 10.06.463 and its legislative history offer
the superior court little guidance about when a ban might be
appropriate, we prospectively adopt the six-factor test used by
the federal courts as a list of considerations that the superior
court should consider in reaching its determination. We also add
a seventh factor to be considered by the superior court in
deciding whether to impose a ban under AS 10.06.463: whether
there is reason to suspect that shareholder democracy will be
insufficient to prevent reelection of an unfit director. This
may be true where, for example, the director charged with
misconduct personally controls a large number of shares, or where
the directors misconduct benefitted the corporation. This factor
is relevant because it indicates that intervention by the court
is necessary to ensure that a director who has committed gross
misconduct will not simply be reelected to office. The trial
court need not find that all seven factors are present in order
to impose a ban under AS 10.06.463, but should take each factor
into consideration.
Because neither the statute nor our case law required
findings on these factors at the time Martinez was barred, we
decline to impose these requirements on the superior court in
this case. But we note that although the superior court did not
phrase its findings explicitly in terms of the seven-factor test
we announce today, its findings and conclusions suggest that five
of the seven factors are present, including the likelihood of
future misconduct. The superior court found that Martinez
improperly charged Cape Fox for personal travel expenses,
actively and intentionally covered up the misconduct at The
Village Store, retaliated against directors and executives who
inquired about the perceived irregularities at the store, and
used his position as chairman of the board to intimidate the CEO
in an attempt to prevent inquiries into misconduct. The
dishonesty required for these actions and the evidence of abuse
of power are sufficient to support a finding that Martinez was
likely to commit misconduct in the future. The facts found by
the superior court would also support a finding that Martinezs
conduct was egregious, required a high degree of scienter,
involved abuse of a position of trust in the company, and was
motivated by personal economic gain. These findings of
misconduct are sufficient to support the fifteen-year ban from
board service originally imposed by the superior court. We
therefore conclude that the lifetime ban from service on the Cape
Fox board should be reduced to fifteen years on remand.
C. The Superior Court Did Not Err in Not Making a Specific
Finding Regarding Martinezs Unclean Hands Defense.
Martinez argues that the superior court failed to
satisfy the requirements of Civil Rule 52(a) because it did not
make any specific findings on the defense of unclean hands in its
findings of fact and conclusions of law.
We have held that where a party properly asserts a
defense and presents evidence related to that defense, Rule 52(a)
requires the trial court to make specific findings regarding the
defense.30 But Martinezs attorney conceded at oral argument that
he did not present evidence of Cape Foxs unclean hands at the
second trial and did not submit any evidence of this sort to the
court prior to its decision on the requested equitable remedy of
a ban from board service. Martinezs memorandum on post-verdict
issues asserts that Cape Fox has unclean hands, but does not
include exhibits or other evidence supporting these assertions.
Martinezs attorney conceded at oral argument that he did not
request an evidentiary hearing to present evidence supporting the
unclean hands defense. Because no evidence was presented to the
superior court regarding the unclean hands defense, the superior
court was not required to make a specific finding on this
defense.
D. Martinez Is Not Entitled to Partial Indemnification
Under AS 10.06.490(c).
Martinez argues that because the money judgment against
him on retrial was much smaller than the judgment in the first
trial, he has partially prevailed and is therefore entitled to
indemnification under AS 10.06.490(c). He argues that the
judgment against him should have included a partial offset for
his defense expenses.
Alaska Statute 10.06.490(c) describes the circumstances
in which a corporation must indemnify directors and others for
legal expenses:
To the extent that a director, officer,
employee, or agent of a corporation has been
successful on the merits or otherwise in
defense of an action or proceeding referred
to in (a) or (b) of this section, or in
defense of a claim, issue or matter in the
action or proceeding, the director, officer,
employee, or agent shall be indemnified
against expenses and attorney fees actually
and reasonably incurred in connection with
the defense.
Martinez is not entitled to indemnification of his expenses under
AS 10.06.490(c). He was not partially successful in the defense
of this action; the jury found against Martinez on all issues.
The fact that the jury in the second trial assessed a smaller
damage award against Martinez than the jury in the first trial
does not render his defense partially successful for purposes of
AS 10.06.490(c). We therefore affirm the superior courts
decision not to grant the offset and to enter judgment for
$23,542.63 against Martinez.
V. CONCLUSION
We hereby AFFIRM the judgment against Martinez, VACATE
the order barring Martinez for life from board service, and
REMAND to the superior court with instructions to enter an order
barring Martinez from service on the Cape Fox board for a period
of fifteen years.
_______________________________
1 Shields v. Cape Fox Corp., 42 P.3d 1083, 1090 (Alaska
2002).
2 Id. at 1092.
3 The jury also found that twenty-five percent of
responsibility for negligence and ten percent of responsibility
for interference with the right to possess inventory and funds
was attributable to Cape Fox.
4 Turner v. Alaska Communications Sys. Long Distance,
Inc., 78 P.3d 264, 266 (Alaska 2003).
5 Cf. Nelson v. State, 68 P.3d 402, 406 (Alaska App.
2003) (noting that on matters involving challenges to jurors the
normal standard of review is abuse of discretion because there is
generally a range of reasonable responses that a trial judge
might make to a particular problem).
6 In the Matter of L.A.M., 727 P.2d 1057, 1059 (Alaska
1986).
7 Miller v. Sears, 636 P.2d 1183, 1189 (Alaska 1981).
8 AS 10.06.463 (emphasis added).
9 Alaska Ctr. for the Envt v. State, 80 P.3d 231, 242-243
(Alaska 2003).
10 Alyeska Pipeline Serv. Co. v. DeShong, 77 P.3d 1227,
1234 (Alaska 2003) (internal quotations omitted).
11 Hermosillo v. Hermosillo, 962 P.2d 891, 894 (Alaska
1998).
12 Davenport v. McGinnis, 522 P.2d 1140, 1144 n.15 (Alaska
1974).
13 The relevant portion of the legislative councils
sectional analysis states:
Official Comment to ACC Section 10.06.463.
REMOVAL OF DIRECTOR BY SUPERIOR COURT.
SCOPE: The primary recourse for shareholders
dissatisfied with the performance of a
director is to seek removal under sec. 460.
However, if there are insufficient votes,
sec. 463 specifies the serious grounds under
which holders of at least ten percent of the
shares of any class or a majority of the
board of directors have standing to seek
removal in the superior court.
Sectional Analysis of Proposed Code Revision Bills revising the
Corporations Code, House and Senate Joint Supp. No. 9 at 105,
1987 Senate-House Joint Journal Supplements.
14 Model Bus. Corp. Act 8.09 cmt. (2002).
15 See, e.g., Philip F.S. Berg, Unfit to Serve:
Permanently Barring People from Serving as Officers and Directors
of Publicly Traded Companies After the Sarbanes-Oxley Act, 56
Vand. L. Rev. 1871, 1894 (2003).
16 We do not decide whether the superior court may also
bar from reelection a director who, knowing that a complaint
under AS 10.06.463 is likely to be filed against him, leaves the
board before the complaint is filed.
17 See Shields, 42 P.3d at 1092; see also Alaska R. Civ.
P. 39(c) (noting that in actions not triable of right by a jury
the court may use an advisory jury).
18 Rule 52(a) states in pertinent part: In all actions
tried upon the facts without a jury or with an advisory jury, the
court shall find the facts specially and state separately its
conclusions of law thereon . . . .
19 Id.
20 Id.
21 See id. (because ban on future board service is a form
of equitable relief, jury verdict on this question is merely
advisory); see also State v. IAnson, 529 P.2d 188, 190 (Alaska
1974) (where an advisory jury is used, it is entirely within the
trial courts discretion to accept or reject, in whole or in part,
the verdict of the advisory jury).
22 597 P.2d 142, 145 (Alaska 1979).
23 Alabama v. Smith, 490 U.S. 794, 798 (1989) (quoting
North Carolina v. Pearce, 395 U.S. 711, 726 (1969)); see also id.
at 802 (noting that the Pearce rule has been limited by
subsequent decisions but still applies where the sentencing judge
who presides at both trials can be expected to operate in the
context of roughly the same sentencing considerations after the
second trial as he does after the first).
24 See Dan J. Sheehan Co. v. Occupational Safety & Health
Review Commn, 520 F.2d 1036, 1040-41 (5th Cir. 1975) (applying
Pearce and its progeny in a case involving a civil penalty
assessed by the Secretary of Labor under the Occupational Safety
and Health Act); Bezar v. De Buono, 659 N.Y.S.2d 547, 549 (N.Y.
App. Div. 1997) (declining to apply Pearce in civil case
involving suspension of physicians license by Board for
Professional Medical Conduct because the second board was
composed of different individuals from the first); Avery v.
Rechter, 423 N.Y.S.2d 514, 516 (N.Y. App. Div. 1979) (Although
the cited cases dealing with retaliatory motivation [for
increased penalties following retrial] have all been criminal in
nature, the theory should apply to all interest[s] protected by
the due process clause.).
25 On his first appeal, Martinez argued that the fifteen-
year bar was not supported by the trial courts findings. Because
we decided that the superior courts findings were inadequate
under Rule 52(a), we remanded for further findings without
addressing whether the trial courts findings supported a fifteen-
year ban from service. See Shields, 42 P.3d at 1092.
26 See Purcell v. Vogt, No. CV000175088, 2003 WL 21100656,
at *4 (Conn. Super. Ct., Apr. 30, 2003) (unpublished opinion);
Markovitz v. Markovitz, 8 A.2d 46, 48 (Pa. 1939).
27 The statute provided that a court may prohibit,
conditionally or unconditionally, and permanently or for such
period of time as it shall determine a person who commits certain
types of securities fraud from acting as an officer or director
[of a public company] if the persons conduct demonstrates
substantial unfitness to serve as an officer or director. See
SEC v. Patel, 61 F.3d 137, 140-41 (2d Cir. 1995). In 2002
Congress changed the test from substantial unfitness to serve to
unfitness to serve because it believed that courts were applying
too stringent a standard. Sarbanes-Oxley Act of 2002, Pub. L.
No. 107-204, 305(a), 116 Stat. 745 (codified at scattered
sections of 11, 15, 18, 28, and 29 U.S.C.); see also Michael
Dailey, Comment, Officer and Director Bars: Who is
[Substantially] Unfit to Serve After Sarbanes-Oxley?, 40 Hous. L.
Rev. 837 (2003) (describing why Congress changed the wording of
the test and the contours of the new test).
28 See Patel, 61 F.3d at 141; see also SEC v. First
Pacific Bancorp, 142 F.3d 1186, 1193 (9th Cir. 1998).
29 See Patel, 61 F.3d at 141(citing Jayne W. Barnard, When
is a Corporate Executive Substantially Unfit to Serve?, 70 N.C.L.
Rev. 1489, 1492-93 (1992)).
30 See Graham v. Rockman, 504 P.2d 1351, 1354-55 (Alaska
1972) (requirements of Rule 52(a) not met where trial court
concluded that defendant had no defenses to liability but did not
make specific findings on evidence presented regarding asserted
defense of assumption of risk).
