What’s On Their Minds? Interpreting Ohio’s Corporate Advancement Statute. Miller v. Miller.

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 Supreme Court of Ohio heard oral argument in Murray Miller et al. v. Sam Miller et al., 2011-0024. The issue is whether a corporation has to advance attorney fees to one of its own directors who was sued by shareholders for breach of fiduciary duty. 

Trumbull Industries is a privately-held corporation that sells plumbing supplies. Two sets of cousins owned the stock. (Murray and Sam H. Miller are one side; Sam M. and Ken Miller on the other)

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 that belonged to the company. 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.

Read the oral argument preview of this case here.

Sam M.’s (the appellant) lawyers (he had three sharing oral argument, including one from amicus Ohio State Bar Association ) came out swinging. I usually think divided arguments don’t work very well.  This one did. Appellant’s counsel argued that the appellees really were not challenging any of their propositions of law, and were improperly raising new arguments for the first time in front of the Supreme Court. They argued that Ohio’s advancement statute, which was enacted with strong participation from the Ohio State Bar Association, is clear and unambiguous, and requires that a director’s attorney fees be advanced whenever the director is sued, and for whatever reason. They also argued that corporations could opt out of the statutory advancement provisions by provisions in their own articles of incorporation, but Trumbull had not.

The lawyer for Sam H., Murray and the corporation (appellees) started out in a deep hole.  She argued that Sam M was being sued in his capacity as an officer, rather than a director (which would mean no mandatory fee advancement), that Sam M. had failed to cooperate with the company as required, that the court of appeals was right for the wrong reasons, and the case should be dismissed as improvidently allowed because it was so fact specific to these parties, with the directive that it could only be cited as precedent among these parties. She argued that the error was in trying to apply a statute whose purpose was to help corporations recruit outside directors by shoring up protections for directors, and trying to apply it to a case that involves no outside directors, no application of the business judgment rule, and a non-functional board of directors.

Ahhh, the Bad Old Days….

Justice Cupp waxed on a bit about what prompted the enactment of the advancement statute—hostile take-overs of Ohio companies like Goodyear, Marathon, and Federated.

 But Justice Pfeifer noted that the climate in which the advancement statute was enacted was to protect directors accused of protecting incumbent management in hostile take-over situations to the disadvantage of shareholders if the company was sold, which is very different factually from what is going on in this case.

The Plain Language of the Statute

Justice Cupp asked if there was a distinction between a director being sued because of his vote on an opportunity that might belong to the company, and a suit against a director who never casts a vote on that issue.

Justice Lanzinger asked if the advancement statute was so broad that it covered any defense costs.

Justice O’Donnell asked if it mattered who the plaintiffs were in triggering the advancement statute.

Justice Stratton was quite heated in her questioning of appellees’ counsel, insisting counsel was asking the court to write many things into the statute that just weren’t there. She asked who was paying the plaintiffs’ fees for suing here, and under what authority.

Justice Lanzinger commented that appellees’ counsel seemed to be complicating a very clear statute –if a director is sued the company must advance fees subject to recoupment, unless the company had opted out. She seemed to agree with Justice Stratton that appellees were asking the court to add words to the statute.

Undertaking and Cooperation

Appellees’s counsel argued that in order to have the corporation pay a director’s expenses during the pendency of a suit, the statute requires the director to execute an undertaking, in which the director agrees to cooperate with the corporation, and Sam M never did this.  (Sam M’s counsel argued in rebuttal that this claim had never been raised before.)

 Justice Stratton asked how reasonable it would be to cooperate when the corporation has sued you? What cooperation is required then? Should the statute apply or not if the court found it wasn’t reasonable to expect cooperation from a director who had been sued by his own company? Should impossibility to cooperate be some kind of affirmative defense?

Opt-Outs and Recoupment

Justice McGee Brown wanted to make very sure that there was an opportunity for recoupment here. If the plaintiffs were successful in their allegations of breach of fiduciary duty, Sam M would be required to repay the advanced expenses?(answer: yes)

She later commented that the real issue wasn’t that the law was bad, but that when the corporation drew up its articles of incorporation, it failed to take advantage of the advancement opt-out provision

 Justice Stratton also noted that there were already protections in the statute—a company could opt out of the advancement requirements through its own articles of incorporation, and could demand re-payment from a director later found to have committed malfeasance.

 Officer or Director?

Justice O’Donnell asked if it was fair to raise the argument—that Sam M was acting as an officer, not a director when he usurped the corporate opportunity —for the first time on appeal.  Should the Court even consider this argument? He asked what evidence was in record support to support the contention that Sam M’s actions were taken as an officer and not as director.

 Has the Breach of Fiduciary Duty Question Even Been Resolved Yet?

Justice O’Donnell asked whether, factually, there had been a determination whether Sam M had breached his fiduciary duty to the company.

 What relief do you seek?

Chief Justice O’Connor asked appellants what relief they sought if they prevailed—send the case back to the court of appeals (answer: no!—reinstate the order of the trial court requiring advancements to Sam M)

 How it Looks from the Bleachers

It looks like something of a rout for the appellant.  The court, probably unanimously, is likely to find that Sam M was sued as a director, that under the plain language of the statute, his attorney fees must be advanced, subject to recoupment, and that the company could have taken advantage of the opt-out provisions in its articles of incorporation, but failed to do so.


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