Court Opinion

ID: 4360933
Source: CourtListenerOpinion
Date Created: 2019-01-23 15:42:13.607116+00
Date Added: 2024-06-11T14:47:29.149711
License: Public Domain

[J-26A-2018 and J-26B-2018] [MO: Baer, J.]
               IN THE SUPREME COURT OF PENNSYLVANIA
                           WESTERN DISTRICT

PITTSBURGH HISTORY AND                :   No. 53 WAP 2017
LANDMARKS FOUNDATION, A               :
PENNSYLVANIA NON-PROFIT               :   Appeal from the Order of the
CORPORATION; LANDMARKS                :   Commonwealth Court entered April
FINANCIAL CORPORATION, A              :   21, 2017 at No. 113 CD 2016,
PENNSYLVANIA NON-PROFIT               :   vacating the Order of the Court of
CORPORATION; HENRY P. HOFFSTOT,       :   Common Pleas of Allegheny County
JR.; DAVID E. BARENSFELD; PETER H.    :   entered September 21, 2015 at No.
STEPHAICH; PATRICK R. WALLACE;        :   GD 13-23355, and remanding.
ALEXANDER SPEYER; AND HENRY P.        :
HOFFSTOT, III                         :   ARGUED: April 11, 2018
                                      :
                                      :
          v.                          :
                                      :
                                      :
ARTHUR P. ZIEGLER, JR.; MARK S.       :
BIBRO; JACK R. NORRIS; PITTSBURGH     :
HISTORY AND LANDMARKS                 :
FOUNDATION, A PENNSYLVANIA NON-       :
PROFIT CORPORATION; AND               :
LANDMARKS FINANCIAL                   :
CORPORATION, A PENNSYLVANIA           :
NON-PROFIT CORPORATION                :
                                      :
                                      :
APPEAL OF: ARTHUR P. ZIEGLER JR.,     :
MARK S. BIBRO, JACK R. NORRIS,        :
PITTSBURGH HISTORY AND                :
LANDMARKS FOUNDATION AND              :
LANDMARKS FINANCIAL                   :
CORPORATION                           :

PITTSBURGH HISTORY AND                :   No. 54 WAP 2017
LANDMARKS FOUNDATION, A               :
PENNSYLVANIA NON-PROFIT               :   Appeal from the Order of the
CORPORATION; LANDMARKS                :   Commonwealth Court entered April
FINANCIAL CORPORATION, A              :   21, 2017 at No. 113 CD 2016,
PENNSYLVANIA NON-PROFIT               :   vacating the Order of the Court of
CORPORATION; HENRY P. HOFFSTOT,       :   Common Pleas of Allegheny County
JR.; DAVID E. BARENSFELD; PETER H.    :
    STEPHAICH; PATRICK R. WALLACE;     : entered September 21, 2015 at No.
    ALEXANDER SPEYER; AND HENRY P.     : GD 13-23355, and remanding.
    HOFFSTOT, III                      :
                                       : ARGUED: April 11, 2018
                                       :
               v.                      :
                                       :
                                       :
    ARTHUR P. ZIEGLER, JR.; MARK S.    :
    BIBRO; JACK R. NORRIS; PITTSBURGH :
    HISTORY AND LANDMARKS              :
    FOUNDATION, A PENNSYLVANIA NON- :
    PROFIT CORPORATION; AND            :
    LANDMARKS FINANCIAL                :
    CORPORATION, A PENNSYLVANIA        :
    NON-PROFIT CORPORATION             :
                                       :
                                       :
    APPEAL OF: HENRY P. HOFFSTOT, JR.; :
    DAVID E. BARENSFELD; PETER H.      :
    STEPHAICH; PATRICK R. WALLACE;     :
    ALEXANDER SPEYER; AND HENRY P.     :
    HOFFSTOT, III                      :

                      CONCURRING AND DISSENTING OPINION

JUSTICE MUNDY                                    DECIDED: JANUARY 23, 2019
        Because I would confine the analysis to the scope of discovery permitted in

proceedings on a corporation’s motion to dismiss a derivative action, I dissent.

        Here, Derivative Plaintiffs filed their complaint on December 13, 2013, before the

Independent Investigating Committee (IIC) issued its recommendation on whether it was

in the Foundation’s and the Corporation’s best interest to pursue derivative litigation. On

March 3, 2014, the trial court denied the Foundation’s and the Corporation’s motion to

stay, even though the IIC had not completed its report.1 On April 6, 2015, the Foundation

1This is contrary to the procedure contemplated by Section 7.06 of the ALI Principles of
Corporate Governance, which this Court adopted in Cuker v. Mikalauskas, 692 A.2d 1042

                     [J-26A-2018 and J-26B-2018] [MO: Baer, J.] - 2
and Corporation filed a motion to dismiss the derivative claims based on the IIC’s report.

While that motion was pending, the Derivative Plaintiffs filed the motion to compel

production on June 4, 2015. Therein, Derivative Plaintiffs sought discovery of both

materials provided to and generated by the IIC and materials contemporaneous with the

reorganization of the boards, including materials purportedly protected by the attorney-

client privilege.

       At the motion to dismiss stage in derivative litigation, the scope of discovery is

limited to the board’s decision not to pursue the derivative action.          In Cuker v.

Mikalauskas, 692 A.2d 1042 (Pa. 1997), this Court established that a corporation’s

decision in response to a shareholder demand to pursue a derivative action is a business

decision subject to narrow judicial review. Cuker, 692 A.2d at 1048. Pursuant to the

business judgment rule, a court’s review of a corporation’s decision not to pursue

derivative actions is limited to the circumstances surrounding the board of directors’

decision to terminate litigation. Id. “Without considering the merits of the action, a court

should determine the validity of the board’s decision to terminate the litigation; if that

decision was made in accordance with the appropriate standards, then the court should

dismiss the derivative action prior to litigation on the merits.” Id.

       In order to evaluate the board’s decision, the Cuker Court set forth the following

factors: “whether the board or its special litigation committee was disinterested, whether

it was assisted by counsel, whether it prepared a written report, whether it was

independent, whether it conducted an adequate investigation, and whether it rationally

(Pa. 1997). See ALI Principles of Corporate Governance § 7.06 (providing “[i]n the
absence of special circumstances, the court should stay discovery and all further
proceedings by the plaintiff in a derivative action on the motion of the corporation and
upon such conditions as the court deems appropriate pending the court’s determination
of any motion made by the corporation under § 7.04(a)(2) [dismissal based on the IIC’s
recommendation] . . . .”).

                     [J-26A-2018 and J-26B-2018] [MO: Baer, J.] - 3
believed its decision was in the best interests of the corporation (i.e., acted in good faith).”

Id. If the board’s decision falls under the business judgment rule, “the court will never

proceed to an examination of the merits of the challenged decisions, for that is precisely

what the business judgment rule prohibits.” Id. (noting further that a court may stay the

derivative action while it assesses the board’s decision to terminate it). The Cuker Court

explained these considerations and procedures related to derivative actions are

established in the ALI Principles of Corporate Governance Sections 7.02-7.10 and 7.13,

which the Court adopted as consistent with Pennsylvania law. Id. at 1049.

       Section 7.13 of the ALI Principles provides that when the corporation, in support

of a motion to dismiss a derivative action, submits to the court an independent

investigating committee’s report and recommendation that contains the legal opinions of

the committee’s counsel, it must disclose those legal opinions to plaintiff’s counsel. ALI

Principles of Corporate Governance § 7.13(a), (e). The comment to subsection 7.13(e)

explains the rationale of this rule:

              [I]t would be unfair if the board or committee could rely on
              legal advice from its counsel that the action was not
              meritorious as a ground for dismissing the action and then
              deny plaintiff access to the substance of that advice.
              Accordingly, § 7.13(e) requires the disclosure of any formal
              opinion (including an oral opinion summarizing written advice)
              or other written legal advice given by counsel to the board or
              to the committee with regard to the action if any legal opinion
              is tendered to the court. The decision belongs to the
              corporation whether to submit such an opinion to the court,
              but once one is tendered, all other formal legal opinions
              (including those in draft or oral form) given to the board or
              committee and pertaining to the same general subject matter
              must be given to the plaintiff. This rule is intended to
              discourage opinion shopping without chilling the board's or
              committee's access to confidential legal advice. Otherwise,
              absent special circumstances, the plaintiff should not be

                      [J-26A-2018 and J-26B-2018] [MO: Baer, J.] - 4
              permitted to depose the counsel or to reconstruct the dialogue
              between the board or the committee and its counsel.
ALI Principles § 7.13 cmt. e. Importantly, neither Cuker nor Section 7.13 requires the

disclosure of privileged materials related to the underlying events giving rise to the

derivative claims.2

       Despite these limitations on the scope of discovery available to derivative plaintiffs

in proceedings on a corporation’s motion to dismiss the derivative action, the Majority

considers whether we should recognize a qualified attorney-client privilege in derivative

actions, based on Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), discussed in

comment e to Section 7.13. The Garner Court held that the attorney-client privilege for

materials that were contemporaneous with the events giving rise to shareholder litigation

was subject to the corporation’s shareholders’ ability to show good cause that the

privilege should not apply. Garner, 430 F.2d at 1103. The rationale for this good cause

exception was that corporate management has a fiduciary duty to act for the benefit of

the shareholders. Id. at 1101.

       In my view, the Majority’s consideration of Garner is premature, and it is not

necessary to resolve the issue of whether Garner permits derivative plaintiffs to obtain

discovery related to the underlying claims in responding to a motion to dismiss based on

2 Section 7.13(c) provides for certain discovery at the motion to dismiss stage if the
derivative plaintiff shows a material dispute over whether the board or committee followed
the proper procedures in seeking dismissal of the derivative claims. ALI Principles
§ 7.13(c) (stating “if the plaintiff has demonstrated that a substantial issue exists whether
the applicable standards of § 7.08, § 7.09, § 7.10, § 7.11, or § 7.12 have been satisfied
and if the plaintiff is unable without undue hardship to obtain the information by other
means . . . .”). Further, comment c to Section 7.13 indicates “Section 7.13(c) does not
adopt the distinction made in some cases that permits discovery as to the independence
of a litigation committee or the adequacy of its procedures, but precludes discovery as to
the merits of the action.” ALI Principles § 7.13 cmt. c. As outlined above, the Cuker Court
prohibited discovery into the merits of the underlying action as long as the board satisfied
the business judgment rule. Accordingly, this portion of comment c of the ALI Principles
is inconsistent with Pennsylvania law. See Cuker, 692 A.2d at 1048.

                      [J-26A-2018 and J-26B-2018] [MO: Baer, J.] - 5
the corporation’s decision to follow the recommendation of an independent investigating

committee. Instead, I would apply Cuker and hold that discovery into the underlying

merits of the derivative claim is precluded at the motion to dismiss stage of derivative

litigation.3 Accordingly, the Garner good cause analysis cannot apply in this case, and I

would wait for an appropriate case to decide whether Pennsylvania should recognize the

Garner good cause exception.4

       Further, the Majority frames its analysis as limited to the context of a motion to

dismiss derivative litigation. See Majority Op. at 39. Because the Garner exception

cannot apply in this context, the Majority’s discussion of Garner’s viability in light of

Pennsylvania’s attorney-client privilege jurisprudence is unnecessary. See id. at 40-41

(concluding “the ALI Principles adopted by this Court in Cuker, and specifically Section

7.13(e) addressing attorney-client privilege in regard to motions to dismiss derivative

actions, provide an appropriate framework for derivative litigation, making the subjective

3 While it has no effect on this case, I note that during the pendency of this appeal, the
General Assembly enacted 15 Pa.C.S. § 5783, effective February 21, 2017. Section
5783 “is intended to supersede those provisions of [the ALI Principles] §§ 7.03-7.10 and
7.13 that deal with the same subjects as this section.” 15 Pa.C.S. § 5783 Committee
Cmt. (2016). It provides that on a motion to dismiss a derivative action, “the court shall
determine whether the members of the [independent investigating] committee met the
qualifications required under subsection (c)(1) [disinterested committee members] and
(2) [objectivity] and whether the committee conducted its investigation and made its
recommendation in good faith, independently and with reasonable care.” 15 Pa.C.S.
§ 5783(f)(3). If those criteria are met, “the court shall enforce the determination of the
committee.” This effectively codifies the business judgment rule as set forth in Cuker,
and reaffirms that a court reviewing an investigating committee’s recommendation to
terminate derivative litigation should not inquire into the underlying claims.
4 In addition, this case does not involve the requisite fiduciary relationship that underpins
the Garner exception. The board members of a nonprofit corporation have a fiduciary
duty to the corporation, but the corporation does not have a duty to act in the best interests
of its board members. See 15 Pa.C.S. §§ 5712, 5717. Because the concerns justifying
the Garner exception do not apply in this case, I would avoid making any broad
proclamations adopting or rejecting Garner.

                     [J-26A-2018 and J-26B-2018] [MO: Baer, J.] - 6
Garner factors unnecessary.”) (footnote omitted). Therefore, I distance myself from the

Majority’s discussion of Pennsylvania’s attorney-client privilege and its conclusion that

Garner is inconsistent with our jurisprudence. See id. at 37-40.

       Accordingly, I would reverse the portion of the Commonwealth Court opinion

adopting the Garner good cause inquiry, but for reasons other than those expressed by

the Majority.5    Further, I join part V.D. of the Majority Opinion, affirming the

Commonwealth Court’s conclusion that the fiduciary duty and co-client exceptions to the

attorney-client privilege do not apply to derivative actions.

       Therefore, I join part V.D. of the Majority Opinion but dissent in all other respects.

       Justice Todd joins this concurring and dissenting opinion.

5 The Commonwealth Court also opined that the trial court’s discovery order was
overbroad, as it permitted discovery of all legal opinions submitted to the investigating
committee. Pittsburgh History & Landmarks Found., 161 A.3d 394, 410-11 (Pa. Cmwlth.
2017). The Commonwealth Court correctly noted that only the legal opinions submitted
to the trial court to support the motion to dismiss must be disclosed. Id. at 411. Neither
party to this appeal has sought review of that portion of the Commonwealth Court’s
opinion. Therefore, I would affirm that portion of the Commonwealth Court opinion and
vacate the trial court’s order to the contrary.

                     [J-26A-2018 and J-26B-2018] [MO: Baer, J.] - 7