Court Opinion

ID: 6700800
Source: CourtListenerOpinion
Date Created: 2022-07-20 22:08:39.528556+00
Date Added: 2024-06-11T16:01:24.643191
License: Public Domain

Diane V. Grendell, Judge,
concurring.
{¶ 61} I concur fully in the judgment and disposition of this case as set forth in the majority opinion. I write separately, however, to emphasize that the inappli*469cability of R.C. 1701.13(E)(5) in the present circumstances rests on that statute’s incorporation of the “business judgment rule.”
{¶ 62} Under R.C. 1701.13(E)(5), a director shall be reimbursed for expenses, including attorney fees, when he is the subject of a “an action, suit, or proceeding referred to in division (E)(1) or (2) of this section.” Divisions (E)(1) and (2) provide for indemnification by the corporation when the director is the subject of an action, suit, or proceeding “if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation.” A director’s obligations to the corporation are set forth in R.C. 1701.59(B): “A director shall perform the director’s duties as a director, including the duties as a member of any committee of the directors upon which the director may serve, in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.”
{¶ 63} In the present case, the plaintiffs’ allegations against the director are solely for actions taken in violation of the duty of good faith and contrary to the best interests of the corporation, specifically breach of his fiduciary duties to the corporation and its shareholders, fraud, and usurpation of a business opportunity. These allegations place the director’s conduct outside the protection of the business-judgment rule, as codified at R.C. 1701.59(B), and, therefore, beyond the application of R.C. 1701.13(E)(5). Gries Sports Ents., Inc. v. Cleveland Browns Football Co., Inc. (1986), 26 Ohio St.3d 15, 20, 26 OBR 12, 496 N.E.2d 959 (the protections of the business-judgment rule “can only be claimed by disinterested directors whose conduct otherwise meets the tests of business judgment”; “this means that directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally”).
{¶ 64} There are further conditions on which the application of R.C. 1701.13(E)(5) depend that cannot be satisfied in the present case. In order to have the corporation pay a director’s expenses during the pendency of a suit, the director must execute an undertaking in which he agrees, among other things, to “[rjeasonably cooperate with the corporation concerning the action, suit, or proceeding.” R.C. 1701.13(E)(5)(a)(ii). Given the circumstances of the present case, it is evident that it is impossible for the director to reasonably cooperate with the corporation concerning the action inasmuch as the corporation’s and the director’s interests are opposed. Cf. Westbrook v. Swiatek, 5th Dist. No. 2009 CAE 05 0048, 2010-Ohio-2868, 2010 WL 2521361, at ¶ 24 (“a corporation may be *470reluctant to advance funds to an officer who is perceived by the corporation as being unfaithful, or fear the funds will never be paid back”).
{¶ 65} The director/appellees claim that at the time the undertaking was executed, Trumbull Industries was a not a party to the action. This argument is unavailing in that Trumbull Industries is currently a party to the action and was a party at the time the trial court held it in contempt for failing to pay the director’s fees. This argument is also disingenuous in that it ignores the reality that the corporation is composed of four persons: the plaintiffs, the director, and his brother, thus forestalling action in the name of the corporation. Under the statute, however, the focus is not on whether the action is pursued in the name of the corporation, but, rather, whether the director’s conduct falls within the boundaries of the business-judgment rule.
{¶ 66} In the present case, the allegations are based solely on conduct outside these boundaries. Accordingly, R.C. 1701.13(E)(5) does not apply, and the director is not entitled to have his expenses paid during the pendency of this action.