Update: On July 3, 2012, the Supreme Court of Ohio issued a merit decision in this case.  Read the analysis here.

On November 2, the Ohio Supreme Court will hear oral argument in the case of Murray Miller et al. v. Sam Miller et al., 2011-0024. At issue in this case is the interpretation of Ohio’s corporate advancement statute and whether it applies in this case to require a corporation to reimburse a director for legal fees incurred from a lawsuit over breach of fiduciary duty.

 Ohio Revised Code 1701.13(E) provides for the advancement or reimbursement of attorney fees of a corporate director who has been sued in that capacity. Section (E)(2) of the statute permits reimbursement of a director who has been successful on the merits, after the litigation is over.

Section (E)(5) of the statute is a mandatory provision that requires the corporation to advance a director’s attorney fees during the course of the litigation as they are incurred (rather than waiting for a decision on the merits.) The director or other individual must have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation.

This case involves a long-standing, ongoing feud in a family-owned business.  Trumbull Industries is a privately-held corporation that sells plumbing supplies. Two sets of cousins owned stock: one set was comprised of brothers Murray and Sam H.  and the other set was comprised of brothers Sam M. and Ken Miller.

In 2003, Murray and Sam H. brought a shareholders’ derivative action for breach of fiduciary duty against Sam M. and Daniel Umbs, the former president of Briggs Plumbing Products, one of Trumbull’s suppliers. The complaint alleged that Sam M. and Umbs had usurped a business opportunity from Trumbull Industries by entering an agreement to sell plumbing products to Jacuzzi Inc. on more favorable terms under a different brand name. The trial judge ordered the plaintiffs to reimburse Sam M. for fees he had already incurred, and to advance payments for ongoing fees. When the company refused, the trial court held the company in contempt. The company appealed the contempt order, but the main focus of the appeal was that the trial court was incorrect in ordering the company to advance Sam M.’s fees during the course of the litigation.

The 11th District Court of Appeals reversed, in a decision with a separate concurrence and a dissent. It found that 1701.13(E)(5)(a) (the advancement provision) did not apply to the facts of this case, because that section only applies when a director has been sued as a result of an act or omission made on behalf of the corporation. The court found that Sam M. was not sued as a result of any act or omission on behalf of the corporation, but rather his actions were allegedly contrary to the company’s interests.  The court also found that Trumbull Industries’ Articles of Incorporation did not require reimbursement under these circumstances.

Sam M. Miller appealed to the Supreme Court of Ohio. He argues that the appeals court wrongly interpreted the statute when it held that Section (E)(5) does not apply to this case. He argues that (E)(2) allows reimbursement whether a director is a plaintiff or a defendant. Miller further argues that Section (E)(5), which requires corporations to advance fees to directors, is not limited to cases where a director is alleged to have committed acts or omissions on behalf of the corporation. According to him, the statute would never apply under this interpretation. Because the section was designed to provide directors with relief if sued for a breach of fiduciary duty, (E)(5) could never allow fee payment because breach of fiduciary duty always involves  claims that the director acted contrary to the interests of the corporation rather than on behalf of the corporation. Finally, Sam M. Miller argues that since the Company’s Articles of Incorporation do not expressly preclude the advancement of attorney fees, the company must comply with the mandatory advancement provisions of the statute.

 In response, the appellees Murray Miller, Sam H. Miller, and Trumbull Industries argue that the 11th District correctly interpreted Section (E)(5) as requiring advancement only when a director is sued in that capacity for an act or omission on behalf of the corporation. Because Sam M.’s actions were on behalf of his own business interests with Umbs, the statute does not apply. Appellees insist that the corporation should not be required to reimburse Sam M. for legal fees he incurred for breaching a fiduciary duty that he owed the company.

The Ohio State Bar Association filed an amicus brief on behalf of appellants. The Bar Association played a major role in the development of the mandatory advancement statute to address the growing problem of corporations leaving the state due to directors’ increasing exposure to meritless lawsuits. The Bar Association argues that (1) the lower court’s holding wrongly restricts the availability of indemnification and advancement to suits where directors are plaintiffs, even though the statute was intended to protect directors as defendants (2) the holding “permits a plaintiff’s unproven allegations to nullify a director’s right to advancement,” (3) the holding conflicts with Section (E)(5)’s mandatory language, and (4) the concurring opinion at the lower court introduced conditions on directors’ rights to advancement that have little support in Ohio case law. The OSBA will share time with the appellants at oral argument.

 Student Contributor: Greg Kendall

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