TP Orthodontics, Inc. v. Kesling

• Decision Date: 03 September 2014
• Docket Number: No. 46S03–1405–MI–337.,46S03–1405–MI–337.
• Parties: TP ORTHODONTICS, INC., Appellant/Intervenor Christopher Kesling, DDS, MS, Adam Kesling, and Emily Kesling, Individually and derivatively on behalf of TP Orthodontics, Inc., Appellees (Plaintiffs below), v. Andrew KESLING, Individually and as Trustee of the Andrew C. Kesling Trust Dated March 28, 2001, and the Andrew C. Kesling Trust Dated March 28,2001, Appellees (Defendants below).
• Court: Indiana Supreme Court

15 N.E.3d 985

TP ORTHODONTICS, INC., Appellant/IntervenorChristopher Kesling, DDS, MS, Adam Kesling, and Emily Kesling, Individually and derivatively on behalf of TP Orthodontics, Inc., Appellees (Plaintiffs below)

v.Andrew KESLING, Individually and as Trustee of the Andrew C. Kesling Trust Dated March 28, 2001, and the Andrew C. Kesling Trust Dated March 28,2001, Appellees (Defendants below).

No. 46S03–1405–MI–337.

Supreme Court of Indiana.

Sept. 3, 2014.

Sean M. Clapp, Elizabeth M. Ellis, Fishers, IN, Attorneys for Appellant/Intervenor, TP Orthodontics, Inc.

Julia Blackwell Gelinas, David T. Kasper, Maggie L. Smith, Indianapolis, IN, Attorneys for Amicus Curiae, Indiana Legal Foundation.

Robert W. Wright, Indianapolis, IN, Shaw R. Friedman, LaPorte, IN, John A. Conway, John A. Drake, South Bend, IN, Attorneys for Appellees, Christopher Kesling, DDS, MS, Adam Kesling, and Emily Kesling.

Thomas G. Burroughs, Michael W. Hile, Indianapolis, IN, Attorneys for Appellee, Andrew Kesling.

On Petition to Transfer from the Indiana Court of Appeals, No. 46A03–1207–MI–324

DAVID

, Justice.

Following the initiation of a derivative suit by sibling minority shareholders, TP Orthodontics' board of directors formed a special litigation committee (the “SLC”) to investigate the derivative claims pursuant to Ind.Code § 23–1–32–4 (2007)

. After a year-long investigation, the SLC produced the report that is at issue here. As a result of the report's recommendations, TPO filed a motion to dismiss certain derivative claims and attached a heavily redacted version of the report in support of its motion. Approximately 120 of the report's 140 pages had been redacted “to prevent disclosure of attorney-client privileged information and attorney-work product prepared in anticipation of litigation.” (Appellant's App. at 183.)

Seeking access to the unredacted report in order to challenge the SLC's conclusions on one of only two grounds permitted by Indiana law, the sibling shareholders filed a motion to compel production of the full report. The trial court granted the sibling shareholders' motion, and the Court of Appeals affirmed on interlocutory appeal. After holding oral argument, we granted TPO's petition to transfer and are now faced with resolving two valid but competing interests: the siblings shareholders' desire to access the full SLC report in order to contest the SLC's conclusions, and TPO's desire to protect privileged attorney-client communications and attorney work product potentially contained within the SLC report.

Facts and Procedural History

TP Orthodontics is a closely-held corporation headquartered in Westville, Indiana, and the Kesling family business. Andrew Kesling, President of TPO, owns fifty-one percent of TPO's voting stock. Collectively, Andrew's siblings Christopher (DDS, MS), Adam, and Emily Kesling own eleven percent. In January 2010, the sibling minority shareholders filed, both individually and derivatively on behalf of TPO, a complaint against Andrew in the LaPorte Superior Court alleging wrongdoing causing a significant decrease in shareholder value.¹ The trial court granted TPO's motion to intervene, and pursuant to Ind.Code § 23–1–32–4

, TPO's board of directors formed a special litigation committee to investigate the derivative claims. After meeting thirty times and conducting forty interviews, the SLC ultimately recommended that only some derivative claims be pursued and issued the report that is the subject of this appeal.

Based on the report, TPO filed a motion to dismiss—or alternatively a motion for summary judgment—the rejected derivative claims and in support attached the 140–page report and other documents. However, claiming attorney-client privilege and work-product privilege, TPO redacted 120 pages of the report. In response, the sibling shareholders filed a motion to compel production of the full SLC report² in order to contest the SLC's conclusions on one of two grounds permitted by Indiana law: the SLC's determination “was not made after an investigation conducted in good faith.” Ind.Code § 23–1–32–4(c)

.

Opposing the sibling shareholders' motion, TPO argued that it should not have to produce the unredacted report because, among other reasons, (1) the business judgment rule prohibited inquiry into the substance of the SLC's report; and (2) the report contained protected attorney-client communications and attorney work product.³ Though TPO stated it would have no objection to an in camera review by the trial court in order for the court to determine whether the redacted material is privileged, in camera review did not occur.

Following a hearing, the trial court granted the sibling shareholders' motion, ordered TPO to file the full SLC report under seal, and issued a protective order preventing any party from disclosing the report's contents. On interlocutory appeal, the Court of Appeals affirmed and held that (1) under Ind. Evidence Rule 401

, the entire unredacted SLC report was relevant to the issue of whether the SLC acted in good faith; and (2) TPO waived its privilege as to the SLC report. In re TP Orthodontics, Inc., 995 N.E.2d 1057 (Ind.Ct.App.2013).

TPO subsequently petitioned this Court for transfer. Amicus curiae Indiana Legal Foundation filed a brief aligned with TPO. Following oral argument, we granted transfer, thereby vacating the Court of Appeals opinion. Ind. Appellate Rule 58(A)

.

Standard of Review

Our standard of review in discovery matters is limited to determining whether the trial court abused its discretion. Richey v. Chappell, 594 N.E.2d 443, 447 (Ind.1992)

. Furthermore, although TPO filed a motion to dismiss, it designated the SLC report and other documents as evidence. Thus, pursuant to Ind. Trial Rule 12(B), TPO's motion shall be treated as one for summary judgment.⁴

⁵

An appellate court's standard of review for a grant or denial of a summary judgment motion is the same as that used by the trial court: summary judgment is appropriate only where the designated evidence shows that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Reeder v. Harper, 788 N.E.2d 1236, 1240 (Ind.2003)

. See also Ind. Trial Rule 56(C). All facts and reasonable inferences drawn therefrom are construed in favor of the non-moving party. Reeder, 788 N.E.2d at 1240.

Discussion

This case presents us with two compelling but competing interests: the sibling shareholders' desire to access the full SLC report in order to contest the SLC's conclusions, and TPO's desire to protect privileged attorney-client communications and attorney work product potentially contained within the SLC report. Addressing these competing interests, the trial court reasoned that “[i]t would seem only fair that the parties involved should be provided an opportunity to adequately conduct a review of the SLC report to determine if they did, in fact, conduct their investigation in good faith and that they are in fact disinterested” and accordingly ordered TPO to file the unredacted SLC report under seal. (Appellant's App. at 11.) On appeal, TPO contends that (1) the business judgment rule; and (2) attorney-client privilege and work product privilege prevent disclosure of the full SLC report to the sibling shareholders.

I. Business Judgment Rule and Relevancy of Unredacted SLC Report to Sibling Shareholders' Good Faith Inquiry

First, TPO contends that the trial court erred by compelling production of the unredacted SLC report in violation of Indiana's business judgment rule. Embedded in American corporate law, In re PSE & G S'holder Litig., 173 N.J. 258, 801 A.2d 295, 306 (2002)

(internal citation omitted), the business judgment rule generally describes judicial reluctance to interfere in corporate decision making, See

In re Guidant S'holders Derivative Litig., 841 N.E.2d 571, 575 (Ind.2006) ; G & N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 238 (Ind.2001). It originated over a hundred years ago “as a means of limiting the liability of corporate directors and officers for mistakes made while performing their duties.” Cramer v. Gen. Telephone & Electronics Corp., 582 F.2d 259, 274 (3rd Cir.1978) ; see also

Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924, 35 L.Ed. 662 (1891).

More specifically, in order to “promote and protect the full and free exercise of the power of management,” In re PSE & G S'holder Litig., 801 A.2d at 306

(internal citations omitted), the business judgment rule “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.” Auerbach v. Bennett, 47 N.Y.2d 619, 629, 419 N.Y.S.2d 920, 393 N.E.2d 994 (N.Y.1979). A court “will not substitute its judgment for that of the board if the latter's decision can be attributed to any rational business purpose.” Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del.1985) (internal citation omitted). This is because “in order for the corporation to be managed properly and efficiently, directors must be given wide latitude in their handling of corporate affairs.” Cramer, 582 F.2d at 274.

Judicial reluctance to interfere in corporate decision making is also “grounded in the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments ... by definition the responsibility for business judgments must rest with corporate directors.” Auerbach, 47 N.Y.2d at 630–31, 419 N.Y.S.2d 920, 393 N.E.2d 994

. Accordingly, “absent evidence of bad faith or fraud ... the courts must and properly should respect” corporate directors' determinations, however ultimately unwise or inexpedient the decision or result is viewed in hindsight. Id. at 631, 419 N.Y.S.2d 920, 393 N.E.2d 994. Because the rule presumes that directors exercised sound business judgment, the party challenging the directors' decision has the burden of establishing the facts necessary to rebut...