Metropolitan News-Enterprise

 

Friday, June 24, 2022

 

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Corporation Suing Director Can’t Deny Access to Books on That Fact Alone, C.A. Declares

 

By a MetNews Staff Writer

 

A director’s right to look at a corporation’s books may not be denied simply on the basis of that director being a defendant in an action by the corporation for breach of fiduciary duties, the Third District Court of Appeal held yesterday.

While Sacramento Superior Court Judge James P. Arguelles saw it the same way—granting a writ of mandate sought by Rick Fowler in his quest to inspect the books of Golden Pacific Bancorp, Inc.—the appeals court reversed the judgment on the ground of mootness. In light of an acquisition of Bancorp by another corporation, Fowler is no longer a director.

Despite mootness, it opted to decide the issue presented, and said in an opinion by Justice Peter A. Krause:

“We shall conclude the mere possibility that information could be used adversely to the corporation is not by itself sufficient to defeat a director’s inspection rights. Rather, any exception to the general rule favoring unfettered access must be limited to extreme cases, where enforcing an ‘absolute’ right of inspection would produce an absurd result, such as when the evidence establishes the director’s clear intent to use the information to breach fiduciary duties or otherwise commit a tort against the corporation.”

Directors’ Right

A director’s right is spelled out in Corporations Code §1602 which provides:

“Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director and also of its subsidiary corporations, domestic or foreign.”

Bancorp—which Fowler founded, along with Golden Pacific Bank, in 2010, and in which he held more than 19 percent of the stock—asserts that he was seeking to “dismantle and undermine” its lawsuit against him and the law firm of Kronick, Moskovitz, Tiedemann & Girard of which he is chief operating officer. It contends in that action that the law firm committed malpractice in the course of representing it in now-settled litigation and that Fowler had breached his fiduciary duties to Bancorp by recommending use of that firm which, it alleges, did not possess the competence to undertake the representation.

Access to the books had been denied to Fowler in the lawsuit against him and the law firm, Bancorp pointed out, saying he was attempting an “end-run” around the adverse discovery ruling.

Krause’s Decision

While acknowledging that there are cases saying that the directors’ “absolute” right to inspection does have exceptions, Krause said that public policy in favor of a director’s access to books would be frustrated in an exception were made other than in a rare instance. He explained:

“[T]o construe the exception broadly would risk allowing the exception to swallow the rule. Differences of opinion invariably will arise among corporate directors. If a minority director can lose access to corporate records merely because the director is deemed hostile or adverse to management, the exception could remove the very protections that the ‘absolute right’ of inspection was intended to supply. This invariably would impede inspections pursued for indisputably proper purposes, such as ascertaining the condition of corporate affairs or investigating possible mismanagement.”

The jurist noted that if a director uses information gained through an inspection to harm the corporation, it has redress in the form of suing for breach of fiduciary duties.

Present Circumstances

“The only accusation in this case was that Fowler intended to breach his fiduciary duties in some fashion by using the records sought adversely to the corporation in the malpractice lawsuit,” Krause wrote. “Under these circumstances, the trial court properly considered whether Bancorp showed by a preponderance of the evidence that a protective order was necessary to prevent Fowler from breaching his fiduciary duties or otherwise committing a tort against the corporation.”

On remand, he said, the Sacramento Superior Court must dismiss as moot Fowler’s claim to a right of inspection in his role as a director. However, that court is to consider whether Fowler’s claim to a right of inspection as a shareholder, pursuant to §1600(a), has merit, Krause added.

The case is Fowler v. Golden Pacific Bancorp, Inc., 2022 S.O.S. 2655.

Michael D. Stein of the Century City law firm of Tisdale & Nicholson, which represented Fowler, commented yesterday:

“The Third District Court of Appeal’s published opinion confirms what Rick Fowler has known for several years; namely, that Golden Pacific Bancorp used a separate, baseless lawsuit against him as an excuse to conceal the company’s books and records, thereby violating his absolute statutory inspection right as a sitting director.  So frivolous, in fact, was the lawsuit that after almost four years of litigation, and only 48 hours before jury selection was set to begin, Golden Pacific Bancorp dismissed Mr. Fowler for which it received nothing in return.”

He continued:

“We are thankful that as a result of this decision, corporations will be forced to think twice before concocting a pretext to deny a sitting director the single most important tool to carry out his or her fiduciary duties to shareholders.”

 

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