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Kesling v. Kesling

Court of Appeals of Indiana

August 31, 2017

Christopher K. Kesling, DDS, MS, Adam Kesling and Emily Kesling, individually and derivatively on behalf of TP Orthodontics, Inc., Appellants-Plaintiffs,
v.
Andrew C. 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 and TP Orthodontics, Inc., Intervenor-Appellee

         Appeal from the LaPorte Superior Court The Honorable Richard R. Stalbrink, Jr., Judge Trial Court Cause No. 46D02-1001-MI-15

          ATTORNEYS FOR APPELLANTS Shaw R. Friedman Friedman & Associates, P.C. La Porte, Indiana John A. Conway Stephen M. Judge LaDue Curran & Kuehn LLC South Bend, Indiana

          ATTORNEY FOR APPELLEE ANDREW C. 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 John P. Higgins Katz & Korin, PC Indianapolis, Indiana

          ATTORNEYS FOR APPELLEE TP ORTHODONTICS, INC. Sean M. Clapp Ian T. Keeler Clapp Ferrucci

          Crone, Judge.

          Case Summary

          [¶1] Christopher K. Kesling, DDS, MS, Adam Kesling, and Emily Kesling, individually and on behalf of TP Orthodontics, Inc. (collectively "the Sibling Shareholders"), appeal the trial court's entry of summary judgment in favor of intervenor TP Orthodontics, Inc. ("TPO"), and defendants Andrew C. 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 (collectively "Andrew").[1] This matter involves extremely contentious litigation following the initiation of a lawsuit by three sibling minority shareholders against their brother, who is the majority shareholder and president of the family orthodontics manufacturing and distributing business. The Sibling Shareholders raised numerous claims against Andrew alleging, among other things, breach of fiduciary duties and mismanagement of TPO.

         [¶2] Upon TPO's motion following an investigation of the claims by a disinterested special litigation committee appointed by TPO's board of directors, and after a stay of proceedings to resolve discovery disputes between the parties, the trial court entered summary judgment, dismissing several of the Sibling Shareholders' claims and determining that the four remaining claims were derivative claims for alleged injuries to TPO. The court further concluded, in its discretion, that the Sibling Shareholders would not be permitted to proceed directly in their own names to redress the derivative injuries allegedly suffered by TPO, but that TPO, acting through its board, retained the authority to pursue those claims. On appeal, the Sibling Shareholders assert that the trial court abused its discretion in declining to allow them to proceed in a direct action against Andrew to redress the derivative injuries allegedly suffered by TPO. Additionally, the Sibling Shareholders assert that the trial court abused its discretion in determining that TPO, acting through its board, is the proper party to prosecute any derivative claims on TPO's behalf. Finding no abuse of discretion, we affirm.

         Facts and Procedural History[2]

         [¶3] In the most recent appeal involving these same parties, our supreme court gave the following brief recitation of facts:

[TPO] 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.[3] 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. 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 [("SLC")]to investigate the derivative claims. After meeting thirty times and conducting forty interviews, the SLC ultimately recommended that only some derivative claims be pursued ….

TP Orthodontics, Inc. v. Kesling, 15 N.E.3d 985, 988-89 (Ind. 2014) (footnote omitted).

         [¶4] Specifically, in August 2011, the SLC issued a report containing its determinations that it was not in TPO's best interest to pursue most of the claims alleged in the complaint (hereinafter "the rejected claims") but that it was in TPO's best interest to pursue four of the claims (hereinafter "the remaining claims").[4] Thereafter, TPO moved to dismiss the rejected claims and moved for summary judgment as to the Sibling Shareholders' rights regarding the remaining claims. As to the remaining claims, TPO asserted that those claims involved alleged injuries to TPO and therefore are derivative claims. TPO cited the well-established rule that individual shareholders may not maintain actions at law in their own names to redress injuries to the corporation, and further that the closely held corporation exception to that general rule enunciated in Barth v. Barth, 659 N.E.2d 559, 560 (Ind. 1995), should not apply here. Thus, TPO asserted that the Sibling Shareholders should not be discretionarily permitted by the trial court to pursue the remaining claims in a direct action against Andrew. TPO designated in support of its motion a heavily redacted version of the SLC report based upon TPO's desire to protect privileged attorney-client communications and attorney work product potentially contained within the report. The parties agreed to stay the proceedings while the Sibling Shareholders pursued a motion to compel the full, unredacted SLC report. This discovery dispute led to several more years of litigation, which was finally resolved by our supreme court, and the case was remanded to the trial court in 2014. See TP Orthodontics, 15 N.E. 3d at 998.[5]

         [¶5] On remand, and in accordance with our supreme court's directive, the trial court ordered TPO to produce a modified redacted version of the SLC report. The Sibling Shareholders then filed their response to TPO's motion to dismiss and for summary judgment in November 2015. The Sibling Shareholders challenged the SLC's determinations by designating evidence and affidavits to support their assertion that SLC failed to conduct a good-faith investigation of their claims and that the SLC members were not disinterested. The Sibling Shareholders also argued that the trial court "can and should allow" them to bring the remaining claims in a direct action pursuant to the Barth exception to the general rule regarding derivative claims, and that TPO failed to meet its burden to show that the exception should not apply. Appellants' App. Vol. 2 at 143, 154.

         [¶6] On May 16, 2016, the trial court entered its order granting TPO's motion to dismiss and/or for summary judgment. Specifically, the trial court determined that the Sibling Shareholders did not meet their burden to show that the members of the SLC were not disinterested or did not conduct a good-faith investigation pursuant to Indiana Code Section 23-1-32-4(c), and therefore the SLC's findings were conclusive as to the rejected claims and those claims were dismissed.[6] The trial court further concluded that all the Sibling Shareholders' remaining claims were for the benefit and on behalf of TPO and thus derivative. The court acknowledged that it had the discretion to permit the Sibling Shareholders to proceed directly against Andrew on the remaining claims pursuant to the Barth exception; however, the court concluded that the Barth exception did not apply and that the Sibling Shareholders would not be allowed to proceed in a direct action against Andrew regarding the remaining claims but that TPO, as a board, retained the authority to pursue those derivative claims on TPO's behalf.[7] Upon TPO's motion, and finding no just reason for delay, the trial court entered final judgment on December 15, 2016. This appeal ensued.

         Discussion and Decision

         [¶7] We begin by noting that the issues raised on appeal are much narrower than those considered by the trial court below. The Sibling Shareholders do not challenge the trial court's dismissal of the rejected claims, nor do they challenge the trial court's determination that the remaining claims asserted against Andrew are derivative, rather than direct in nature.[8] They maintain that, pursuant to our supreme court's decision in Barth, as shareholders of a closely held corporation, they should be permitted to pursue the remaining four derivative claims in a direct action against Andrew. In other words, the Sibling Shareholders seek to proceed directly in their individual names regarding the remaining claims to redress the derivative injury to TPO, and they argue that the trial court abused its discretion in entering summary judgment and determining that they would not be permitted to do so. Additionally, they challenge the trial court's determination that TPO's board of directors is a proper party to prosecute the derivative claims on TPO's behalf.

         Section 1 - The trial court did not abuse its discretion in declining to apply the Barth exception here.

         [¶8] The Sibling Shareholders assert that the trial court abused its discretion in entering summary judgment and declining to allow them to proceed by direct action against Andrew on the remaining derivative claims. We observe that a trial court's order granting summary judgment comes to us "cloaked with a presumption of validity." Town of Lapel v. City of Anderson, 17 N.E.3d 330, 332 (Ind.Ct.App. 2014) (citation omitted). On appellate review of the trial court's order, we construe all facts and reasonable inferences in favor of the nonmoving party to determine whether the moving party has shown, by way of designated evidence, that there is no genuine issue as to any material fact, such that it is entitled to judgment as a matter of law. Id. Where the dispute is one of law rather than fact, however, we apply a de novo standard of review to those materials designated to the trial court for summary judgment. Id. A trial court's findings on summary judgment aid our review by giving insight into the rationale for its decision, but they are neither required nor binding, and they do not change our standard of review. Milbank Ins. Co. v. Ind. Ins. Co., 56 N.E.3d 1222, 1229 n.6 (Ind.Ct.App. 2016). We will affirm the trial court's entry of summary judgment if it can be sustained on any basis supported by the evidence. Id. The party that lost in the trial court bears the burden of persuading us that the trial court erred. Morris v. Crain, 71 N.E.3d 871, 879 (Ind.Ct.App. 2017).

         [¶9] Indiana recognizes the "'well-established general rule' that shareholders of a corporation may not maintain actions at law in their own names to redress an injury to the corporation, even if the injury has the effect of impairing the value of their stock." Barth v. Barth, 693 N.E.2d 954, 957 (Ind.Ct.App. 1998) (citing Barth v. Barth, 659 N.E.2d 559, 560 (Ind. 1995)), trans. denied. However, Indiana recognizes a limited exception to the general rule preventing shareholders from maintaining actions in their own names and grants trial courts the discretion to permit a shareholder in a closely held corporation to bring a direct action to recover for injury to the corporation, even when such a claim would be derivative. Specifically, "in 1995 [our supreme court] held that a shareholder in a close corporation need not always bring claims of corporate harm as derivative actions. Rather, in such an arrangement, the shareholders are more realistically viewed as partners, and the formalities of corporate litigation may be bypassed." G & N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 236 (Ind. 2001) (citing Barth, 659 N.E.2d at 561 & n.6).

         [¶10] Thus,

[i]n the case of a closely held corporation, the court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of ...

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