Court Opinion

ID: 4152083
Source: CourtListenerOpinion
Date Created: 2017-03-13 17:11:31.039881+00
Date Added: 2024-06-11T14:27:05.909471
License: Public Domain

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

In Re: Application by Nonprofit     :
Corporation Trustees to Compel      :
Inspection of Corporate Information :
                                    :     No. 721 C.D. 2016
Appeal of: Edward B. Brown,         :     Argued: December 15, 2016
III, Barbara L. Doran, Robert C.    :
Jubelirer, Anthony P. Lubrano,      :
Ryan J. McCombie, William F.        :
Oldsey and Alice W. Pope            :

BEFORE:     HONORABLE MARY HANNAH LEAVITT, President Judge
            HONORABLE PATRICIA A. McCULLOUGH, Judge
            HONORABLE JULIA K. HEARTHWAY, Judge

OPINION
BY PRESIDENT JUDGE LEAVITT                                FILED: March 13, 2017

            Edward B. Brown, III, Barbara L. Doran, Robert C. Jubelirer,
Anthony P. Lubrano, Ryan J. McCombie, William F. Oldsey, and Alice W. Pope
(collectively, Trustees) serve on the Board of Trustees of The Pennsylvania State
University (University). They have appealed an order of the Court of Common
Pleas of Centre County (trial court) that denied their request for reimbursement of
the attorneys’ fees and costs they incurred to compel the University to permit their
inspection of corporate records. The trial court denied their request for attorneys’
fees because it concluded that the University did not act in a dilatory, obdurate or
vexatious manner in its defense of Trustees’ petition to compel. The trial court
also concluded that the University’s corporate charter did not authorize
reimbursement of Trustees’ legal expenses. Trustees contend that the trial court
erred because the Pennsylvania Nonprofit Corporation Law of 1988 (Nonprofit
Corporation Law)1 authorizes a fee award where a director is successful in a
petition to compel, as do the University’s charter and bylaws. We reverse the trial
court.
                                     Background
                Trustees have been elected by the alumni to serve on the University’s
Board of Trustees, and they receive no compensation for this service. In July of
2012, Louis Freeh, by Freeh Sporkin & Sullivan, LLP and Freeh Group
International Solutions, LLC, released a “Report of the Special Investigative
Counsel Regarding the Actions of the University Related to the Child Sexual
Abuse Committed by Gerald A. Sandusky” (the Freeh Report). The University’s
Board of Trustees accepted the Freeh Report it had commissioned and announced
that it would implement the recommendations in the report.
                After their election to the Board, Trustees requested access to the
materials that had been collected for and generated during Freeh’s investigation
(Freeh Source Materials).       When the requested materials were not produced,
Trustees sent a letter to Keith E. Masser, Chairman of the Board of Trustees, and to
Eric J. Barron, President of the University, requesting access to the Freeh Source
Materials. By letter of April 17, 2015, the Chairman and President, by their
counsel, responded that Trustees did not have a right or duty to review the Freeh
Source Materials because they were not relevant to any matter pending before the
Board. In support, this letter noted that in October 2014, the Board rejected
Trustees’ proposed resolution to allow all Board members access to the Freeh

1
    15 Pa. C.S. §§5101-5997.

                                           2
Source Materials. Instead, on October 28, 2014, the Board adopted a resolution
that a reevaluation of the Freeh Report was not in the University’s interest.
                  On April 20, 2015, Trustees filed a petition against the University to
compel the production of the Freeh Source Materials. Section 5512(b) of the
Nonprofit Corporation Law, 15 Pa. C.S. §5512(b), authorizes a director of a
corporation to compel the corporation to produce corporate records.2 Trustees’
petition was filed under authority of Section 5512(a) of the Nonprofit Corporation
Law, which states as follows:

                  (a) General rule.--To the extent reasonably related to the
                  performance of the duties of the director, including those
                  arising from service as a member of a committee of the board of
                  directors, a director of a nonprofit corporation is entitled:
                          (1) in person or by any attorney or other agent,
                          at any reasonable time, to inspect and copy
                          corporate books, records and documents and, in
                          addition, to inspect, and receive information
                          regarding, the assets, liabilities and operations of
                          the corporation and any subsidiaries of the
                          corporation incorporated or otherwise organized or
                          created under the laws of this Commonwealth that
                          are controlled directly or indirectly by the
                          corporation; and

                          (2) to demand that the corporation exercise
                          whatever rights it may have to obtain information
                          regarding any other subsidiaries of the corporation.

15 Pa. C.S. §5512(a) (emphasis added). Noting that the Freeh Report prompted
sanctions by the National Collegiate Athletic Association and was the subject of
several ongoing litigation matters, the petition to compel asserted that the

2
    The text of Section 5512(b) is set forth in this opinion, infra.

                                                     3
requested materials were “reasonably related” to the performance of Trustees’
ongoing duties.
               The University opposed the petition to compel. It asserted that the
Freeh Source Materials were not reasonably related to the performance of
Trustees’ duties. The University also alleged that Trustees were likely to use the
Freeh Source Materials in a way that would violate their fiduciary duty to the
University. Answer to Petition, ¶2. Finally, the University alleged that it had
“promised the interviewees that their identities would be kept confidential and their
statements would be shielded by the University’s attorney-client privilege.”
Answer to Petition, ¶32.
               Seven months later, on November 19, 2015, the trial court granted
Trustees’ petition to compel. The trial court based its ruling, in significant part,
upon our Supreme Court’s decision in Machen v. Machen & Mayer Electrical
Manufacturing Company, 85 A. 100 (Pa. 1912), which held that the majority of a
board of directors cannot deprive minority directors access to corporate
information.    The trial court observed that “the right of a director to inspect
corporate information [is] unqualified.” Trial Court op., 11/19/2015, at 3. The
trial court also relied on Strassburger v. Philadelphia Record Company, 6 A.2d
922 (Pa. 1939). In Strassburger, the Supreme Court concluded that it is the
judgment of the director that determines whether corporate information would
“enable him to perform his duties to the corporation.” Id. at 924. The trial court
construed Section 5512(a) of the Nonprofit Corporation Law to embody the
principles of Machen and Strassburger and, thus, placed the burden upon the
corporation to demonstrate that the access demanded by a corporation’s director is

                                         4
not “reasonably related” to the director’s duties. The trial court concluded that the
University did not meet this burden.
             First, the trial court rejected the University’s argument that the two
resolutions considered in October 2014 proved that the requested documents were
not reasonably related to ongoing University business. Rather, the vote on the two
resolutions demonstrated only that the Board did not agree on how to handle the
matters generated by the Freeh Report. Under Machen, however, the majority
cannot deny minority directors the right to decide what corporate records they need
to fulfill their duties. Likewise, the trial court rejected the University’s argument
that a director does not have a right and duty to oversee litigation matters; litigation
falls within the category of the “assets, liabilities and operations of the
corporation” that a director is charged to manage.          15 Pa. C.S. §5512(a)(1).
Finally, the trial court rejected the University’s argument that Trustees were likely
to misuse the records. The trial court found no evidence to support this claim,
noting that Trustees had agreed to maintain confidentiality. Nor did the evidence
support the University’s claim that the individuals who had been interviewed by
Freeh had been promised confidentiality prior to their interview by the Freeh
investigators.
             The trial court’s November 19, 2015, order granted Trustees’ petition
to compel the University to give them access to the Freeh Source Materials. Its
order included a provision that Trustees could discuss information marked
confidential or privileged only in executive sessions of the Board or in
communications with the University’s legal counsel.           The trial court denied
Trustees’ request for attorneys’ fees and ordered the parties to pay their own
counsel fees and costs.

                                           5
             Trustees filed a motion for reconsideration of that part of the trial
court’s order denying their request for attorney’s fees.        Trustees argued that
Section 5512(b) and (c) of the Nonprofit Corporation Law entitled them to
attorneys’ fees. Section 5512 states, in relevant part, as follows:

             (b) Proceedings for the enforcement of inspection by a
             director.--If the corporation, or an officer or agent thereof,
             refuses to permit an inspection or obtain or provide information
             sought by a director or attorney or other agent acting for the
             director pursuant to subsection (a) or does not reply to the
             request within two business days after the request has been
             made, the director may apply to the court for an order to
             compel the inspection or the obtaining or providing of the
             information. The court shall summarily order the corporation
             to permit the requested inspection or to obtain the information
             unless the corporation establishes that the information to be
             obtained by the exercise of the right is not reasonably related to
             the performance of the duties of the director or that the director
             or the attorney or agent of the director is likely to use the
             information in a manner that would violate the duty of the
             director to the corporation. The order of the court may contain
             provisions protecting the corporation from undue burden or
             expense and prohibiting the director from using the information
             in a manner that would violate the duty of the director to the
             corporation.

             (c) Cross references.--See sections 107 (relating to form of
             records), 5508 (relating to corporate records; inspection by
             members) and 42 Pa.C.S. §2503(7) (relating to right of
             participants to receive counsel fees).

15 Pa. C.S. §5512(b), (c) (emphasis added).         Trustees argued that the cross-
reference to counsel fees authorized by Section 2503(7) of the Judicial Code, 42
Pa. C.S. §2503(7), signals that a corporation should expect to shoulder the
director’s cost of having to pursue a petition to compel the production of
documents.    Trustees also argued that the University’s vigorous, and losing,
                                          6
defense turned a simple summary proceeding over the production of corporate
records into an unnecessarily protracted proceeding. This dilatory and obdurate
conduct, Trustees contended, entitled them to be reimbursed for their attorneys’
fees, as did the University’s charter and bylaws.
               The University responded that its defense was not dilatory, obdurate
or vexatious. It noted that Trustees refused the University’s offer to provide them
the Freeh Source Materials in redacted form, and they refused the terms of the
University’s proposed confidentiality agreement.3 Because the trial court restricted
Trustees’ use of the Freeh Source Materials, the University argued that the trial
court found the University’s concerns about Trustees’ use of the materials to be
legitimate.
               On December 21, 2015, the trial court granted Trustees’ request for
reconsideration. Thereafter, on April 4, 2016, the trial court again denied Trustees’
request for attorneys’ fees. It held that although the University’s defenses were
unsuccessful, the University did not lodge these defenses “for the purpose of
causing annoyance.” Trial Court op., 4/4/2016, at 3. Trustees have appealed the
trial court’s denial of their request for attorneys’ fees and costs.
               On appeal,4 Trustees raise three issues, which have been reordered for
purposes of our disposition.          First, Trustees contend that they are entitled to
attorneys’ fees under the University’s corporate charter and bylaws. Second, they

3
   Trustees responded that the University’s proposal was unacceptable because it required
Trustees to travel to the Philadelphia office of the University’s law firm and did not permit them
to copy certain documents or even to make notes on the content of the documents.
4
   “The standard of review when the trial court refuses to grant counsel fees is that the
reasonableness of the refusal is a matter which rests within the sound discretion of the trial court
and will be reversed only when there is a clear abuse of discretion.” Township of Lower Merion
v. QED, Inc., 762 A.2d 779, 781 (Pa. Cmwlth. 2000).

                                                 7
assert that they are entitled to attorneys’ fees under Section 5512(c) of the
Nonprofit Corporation Law, 15 Pa. C.S. §5512(c).5 Third, they contend that they
are entitled to attorneys’ fees under Section 2503(7) of the Judicial Code6 because
the University unnecessarily prolonged what should have been a brief and
summary proceeding. The gravamen of Trustees’ appeal is that they should not
have been required to file litigation to obtain corporate records to which they were
entitled as corporate directors, let alone required to shoulder the expenses of that
litigation.
               We address, first, Trustees’ contention that the University’s charter
and bylaws require that they be reimbursed for the expenses they incurred in their
petition to compel.           The University responds that the charter provides
reimbursement to trustees for travel, not for initiating a lawsuit against the

5
  Trustees argue that Section 5512 of the Nonprofit Corporation Law entitles a director to legal
fees if he is forced to bring a legal proceeding to obtain access to corporate records to which he
has a statutory right. Section 1512 of the Business Corporation Law of 1988, 15 Pa. C.S. §1512,
which applies to “domestic” corporations, is identical to Section 5512. The comment to Section
1512 states:
        The cross reference in subsection (c) to 42 Pa. C.S. §2503(7) is a reminder that
        denial by a corporation of a director’s right to information may justify awarding
        counsel fees to the director if it is necessary to seek an order of court compelling
        inspection.
15 Pa. C.S. §1512, Committee Comment (2001) (emphasis added).
6
  Section 2503(7) states:
        The following participants shall be entitled to a reasonable counsel fee as part of
        the taxable costs of the matter:
                                                  ***
                (7) Any participant who is awarded counsel fees as a sanction
                against another participant for dilatory, obdurate or vexatious
                conduct during the pendency of a matter.
42 Pa. C.S. §2503(7).

                                                8
corporation they serve. The University contends, likewise, that the bylaws provide
for indemnification only where the trustees are defendants in litigation arising from
their service on the Board.
              The Corporate Charter of The Pennsylvania State University
(Corporate Charter) sets forth the terms of service by all University trustees.7
Regarding compensation of trustees, it states, in relevant part, as follows:

              Members of the Board of Trustees serve as volunteers and shall
              not be compensated for their services. Trustees may be
              reimbursed upon request for transportation and other direct
              expenses while engaged in the discharge of their official duties,
              in accordance with the University’s travel reimbursement
              policies in effect from time to time.

CORPORATE CHARTER at C-6 (emphasis added). The trial court concluded that
because the Corporate Charter specifies that reimbursement will be made in
accordance with the University’s travel reimbursement policies, the Corporate
Charter does not authorize reimbursement for litigation expenses incurred by a
trustee.
              Trustees argue that they incurred legal expenses “while engaged in the
discharge of their official duties.” These legal expenses constitute a type of “other
direct expense” that “may be reimbursed,” in addition to “transportation expenses.”
Id.    Reimbursement is done “in accordance with the University’s travel
reimbursement policies,” which the University may change “from time to time.”
Id. Trustees argue that this reference simply identifies the process to be used when
seeking reimbursement and is not intended to have substantive import.                       The

7
 The Corporate Charter is available online at https://trustees.psu.edu/charter.html (last visited
March 9, 2017).

                                               9
University responds that the phrase “travel reimbursement policy” limits the type
of “other direct expenses” that may be reimbursed under the Corporate Charter.
                 We reject the trial court’s reading of the Corporate Charter. If the
Corporate Charter limits a trustee’s reimbursement to travel expenses alone, then
the phrase “other direct expenses while engaged in the discharge of their official
duties” is surplusage and has no meaning. The travel policy, which changes from
time to time at the pleasure of the University’s management, is not dispositive.
Indeed, a policy adopted by the corporation’s management cannot be used to defeat
the terms of a corporate charter. Trustees are volunteers, but they are not expected
to personally fund their expenses in providing their services. Otherwise, only
persons of financial means would be able to serve as trustees. In short, the
reference to the University’s travel policies does not limit the substantive right of a
trustee to reimbursement for expenses incurred “while engaged in the discharge of
[his] official duties.” CORPORATE CHARTER at C-6.
                 The Corporate Charter authorizes the Board to adopt bylaws “as the
good government of the institution shall require.”8 CORPORATE CHARTER at C-7.
The Board adopted a bylaw to provide for reimbursement of a trustee’s litigation
expenses. Article IV of the Amended and Restated Bylaws of the Pennsylvania
State University (University Bylaws) states, in relevant part, as follows:

8
    The Corporate Charter states as follows:
     The Board shall have power to pass all such bylaws, ordinances, and rules as the
     good government of the institution shall require, and therein to prescribe what
     shall be taught to the pupils, and generally to do and perform all such
     administrative acts as are usually performed by and within the appropriate duty of
     a Board of Trustees, and shall, by a Secretary of their appointment, keep a minute
     of the proceedings and action of the Board.
CORPORATE CHARTER at C-7.

                                               10
(a) Right to Indemnification.

      (i) As used herein, the word “Action” shall mean
      any action, suit or proceeding, administrative,
      investigative or other, (i) to which such person is a
      party (other than an action by the University) or
      (ii) in connection with which such person is not a
      party but is a witness, subject to investigation or
      otherwise involved, in either case by reason of
      such person being or having been a Trustee or
      officer of the University or by reason of such
      person serving or having served at the request of
      the University as a director, officer, employee,
      fiduciary or other representative of another
      corporation, partnership, joint venture, trust,
      employee benefit plan or other entity.

      (ii) Except as prohibited by law, each Trustee and
      officer of the University shall be entitled as of
      right to be indemnified by the University against
      expenses and any liability paid or incurred by such
      person (i) in the defense of any Action to which
      such person is a party or (ii) in connection with
      any other Action.

                             ***

      (iv) As used in this Section, “indemnitee” shall
      include each Trustee and each officer of the
      University and each other person designated by the
      Board of Trustees as entitled to the benefits of this
      Section; “liability” shall include amounts of
      judgments, excise taxes, fines, penalties and
      amounts paid in settlement; and “expenses” shall
      include fees and expenses of counsel incurred by
      the indemnitee only (i) if the University has not at
      its expense assumed the defense of the Action on
      behalf of the indemnitee with reputable and
      experienced counsel selected by the University, or
      (ii) if it shall have been determined pursuant to
      Section (c) hereof that the indemnitee was entitled
                           11
                     to indemnification for expenses in respect of an
                     Action brought under that Section.

UNIVERSITY BYLAWS, Section 4.02(a) (emphasis added).9 Trustees contend that
this bylaw also entitles them to reimbursement of their “fees and expenses of
counsel.” We agree.
              The bylaws of “a non-profit corporation, establish rules of internal
governance that are construed according to their plain meaning within the context
of the document as a whole.”              Purcell v. Milton Hershey School Alumni
Association, 884 A.2d 372, 379 n.10 (Pa. Cmwlth. 2005). We have explained that

              [w]hen construing corporate ... bylaws, this Court must use the
              same rules applicable to the interpretation of statutes, contracts
              and other written instruments ... (Citation omitted.)[.] If the
              bylaw is unambiguous, then [it] is to be construed as it is
              written and the language is given the force and effect required
              since the Court does need to interpret it or look to the parties’
              intent.

Id. (citation omitted).
              Here, the applicable bylaw states that a trustee “shall be entitled as of
right to be indemnified by the University against expenses … paid or incurred by
such person … in connection with any other Action.”                  UNIVERSITY BYLAWS,
Section 4.02(a)(ii). An “action” is defined in the bylaws as any proceeding to
which a trustee is a party. Id. at Section 4.02(a)(i). Indemnification is not limited,
as the University contends, to those “actions” where the trustee is a defendant.
              Pennsylvania law authorizes a corporate director to inspect and copy
“corporate books, records and documents and, in addition, to inspect, and receive

9
  A copy of the University Bylaws can be viewed at: https://trustees.psu.edu/charter.html (last
visited March 9, 2017).

                                              12
information regarding, the assets, liabilities and operations of the corporation and
any subsidiaries of the corporation.”             15 Pa. C.S. §5512(a)(1).           When the
University denied Trustees access to the corporate records they requested, their
only recourse was to file a petition to compel under Section 5512(b) of the
Nonprofit Corporation Law. Trustees prevailed in this proceeding. Given these
circumstances, the University’s bylaws entitle the Trustees to indemnification.
               The University relies upon President Barron’s statement that “the
Bylaws do not require the University to pay for lawsuits against it, including
frivolous and damaging lawsuits.” President Barron’s opinion cannot trump the
words of the bylaws. In any case, the President’s statement has no application
because Trustees’ petition to compel was not frivolous. Indeed, they prevailed.
               For these reasons, we reverse the trial court’s order and remand this
case to the trial court for a calculation of attorneys’ fees and costs Trustees
incurred in litigating the petition to compel and this appeal. Trustees are entitled to
reimbursement of those fees and costs they incurred in litigating this matter.10

                                         ______________________________________
                                         MARY HANNAH LEAVITT, President Judge

Judge Cohn Jubelirer and Judge Covey did not participate in the decision in this
case.

10
   Because this Court has determined that Trustees are entitled to indemnification for their legal
fees and costs under the University’s bylaws, we need not address Trustees’ remaining
arguments.

                                               13
          IN THE COMMONWEALTH COURT OF PENNSYLVANIA

In Re: Application by Nonprofit     :
Corporation Trustees to Compel      :
Inspection of Corporate Information :
                                    :       No. 721 C.D. 2016
Appeal of: Edward B. Brown,         :
III, Barbara L. Doran, Robert C.    :
Jubelirer, Anthony P. Lubrano,      :
Ryan J. McCombie, William F.        :
Oldsey and Alice W. Pope            :

                                      ORDER

               AND NOW, this 13th day of March, 2017, the order of the Court of
Common Pleas of Centre County dated April 4, 2016, in the above-captioned
matter is REVERSED and the case is REMANDED for calculation of an award of
attorneys’ fees and costs Appellants incurred in litigating the underlying matter and
this appeal.
               Jurisdiction relinquished.

                                     _____________________________________
                                     MARY HANNAH LEAVITT, President Judge
                IN THE COMMONWEALTH COURT OF PENNSYLVANIA

In Re: Application by Nonprofit                     :
Corporation Trustees to Compel                      :
Inspection of Corporate Information                 :
                                                    :   No. 721 C.D. 2016
                                                    :
Appeal of: Edward B. Brown, III,                    :   Argued: December 15, 2016
Barbara L. Doran, Robert C. Jubelirer,              :
Anthony P. Lubrano, Ryan J.                         :
McCombie, William F. Oldsey and                     :
Alice W. Pope                                       :

BEFORE:         HONORABLE MARY HANNAH LEAVITT, President Judge
                HONORABLE PATRICIA A. McCULLOUGH, Judge
                HONORABLE JULIA K. HEARTHWAY, Judge

CONCURRING AND DISSENTING
OPINION BY JUDGE McCULLOUGH                                        FILED: March 13, 2017

                I agree with the thoughtful Majority’s conclusion that the Trustees are
to be reimbursed for the counsel fees and costs they incurred in the underlying
litigation, pursuant to Article IV of the Amended and Restated Bylaws of the
Pennsylvania State University (University Bylaws). The provisions of Article IV
are clear on this point. However, because we have disposed of the merits of the
case on this issue, I underscore that we have not reached a determination that the
University engaged in dilatory, obdurate or vexatious conduct so as to support a
claim for counsel fees pursuant to section 2503(7) of the Judicial Code, 42 Pa.C.S.
§2503(7).1

      1
          The Majority does not reach this issue.
             I do not agree, however, and therefore dissent, to the Majority’s
conclusion that section C-6 of the Corporate Charter of The Pennsylvania State
University (Corporate Charter) provides an additional basis for recovery of counsel
fees for the Trustees. To the contrary, I believe that the Charter is silent on this
issue.
             Conversely, Article 4.02(a)(iv) of the University Bylaws expressly
includes counsel fees within the definition of “expenses” that are reimbursable
pursuant to the University Bylaws. Given that the Trustees right to relief is clear
under the University Bylaws, there is no need to read out words of limitation in the
Corporate Charter to provide an additional basis for recovery, and I therefore must
respectfully dissent from that portion of the Majority’s opinion.

                                           ________________________________
                                           PATRICIA A. McCULLOUGH, Judge

                                      PAM - 2