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Director’s Right To Inspect Corporate Records Was Not Curtailed By Litigation Between Director And Corporation
Bancorp was a bank holding company conducting business through its wholly owned subsidiary, Golden Pacific Bank, N.A. Rick Fowler was a member of Bancorp’s board of directors and its largest individual shareholder. Fowler was also the CEO of a law firm called Kronick, Moskovitz, Tiedemann & Girard (KMTG).
In July 2018, Bancorp filed suit against KMTG for malpractice regarding its representation in a suit against Bancorp. The complaint also alleged claims against Fowler for negligence, breach of fiduciary duty, concealment, and fraud based on Fowler’s actions as a Bancorp director. Specifically, the suit alleged Fowler breached his fiduciary duty by persuading Bancorp to hire KMTG for the suit against Bancorp.
In September 2018, two months after Bancorp filed the malpractice suit, Fowler sent Bancorp a written demand to inspect and copy various books and records pursuant to Corporations Code Section 1600, including a breakdown of expenses, payment of legal fees, loan files, and accounting books and records. Fowler asserted that as a director, he had an “absolute right” to inspect the records. Bancorp refused to permit the inspection, citing a conflict of interest and concerns that Fowler was seeking the records to undermine Bancorp’s claims in the malpractice lawsuit.
Bancorp refused to produce the requested documents and Fowler filed a motion to compel. The trial court agreed with Bancorp, reasoning that the requests were overbroad, irrelevant to the malpractice lawsuit, and invaded third-party privacy rights. Fowler filed a writ of mandate to enforce his right to inspect Bancorp’s books and records, and the trial court granted the writ petition. In its ruling, the court ruled that a director’s inspection rights can be curtailed only in “extreme circumstances” in which a corporation establishes that the director intends to commit a tort against the corporation with the requested records. The trial court held that Bancorp did not produce sufficient evidence to curtail Fowler’s absolute right to inspection. Bancorp appealed.
The Court of Appeal agreed with the trial court. The Court explained that Section 1602 grants broad rights to inspection, but is not necessarily an absolute right. The Court identified other court opinions that identified circumstances in which inspection rights may be curtailed. For example, courts limit inspection rights when a director intends to misuse those rights to harm the corporation when there is evidence that the director intends to use the documents to commit a tort against the corporations, and to protect attorney-client privileged documents when the director requests inspection intends to misuse the privileged documents in a suit against the corporation.
The Court of Appeal also agreed with the trial court that exceptions to the general rule allowing unfettered access should only be applied in “extreme” cases where enforcing the absolute right of inspection would produce an “absurd” result. The Court reasoned that the mere possibility that requested information could be used to harm a corporation is not enough to curtail a director’s inspection rights. Moreover, a director’s right to inspection cannot be denied solely because the director has a conflict of interest or is in litigation with the corporation.
The Court of Appeal then considered the trial court’s finding that Bancorp failed to produce sufficient evidence to curtail Fowler’s absolute right to inspection and that Fowler’s inspection was motivated by an improper purpose or that Fowler intended to breach his fiduciary duty or commit a tort against the corporation.
Bancorp primarily relied on evidence that Fowler previously breached his fiduciary duties in connection with the malpractice lawsuit. The Court of Appeal held that this evidence consisted of largely unsupported allegations and had little persuasive value on the question of whether Fowler was likely to use the requested corporate records to breach his fiduciary duties or commit a tort against the corporation. Bancorp also argued that Fowler’s attempts to obtain the corporate records as part of discovery in the malpractice lawsuit proved Fowler’s intent to harm the corporation. The Court of Appeal rejected this argument because the trial court in the malpractice lawsuit ruled that the corporate records Fowler sought were irrelevant to the litigation; therefore, there was no support for Bancorp’s vague assertion that allowing Fowler access to the records would “severely undermine” Bancorp’s position in the lawsuit. The Court of Appeal also noted that the trial court credited Fowler’s declaration that the purpose of the inspection was related to his continuing duties as a member of Bancorp’s board of directors and that it deferred to the trial court’s determinations of credibility.
Fowler v. Golden Pacific Bancorp (2022) 80 Cal.App.5th 205.
Corporations Code Section 1600 governs for-profit corporations. Sections 6330-6338 and 9510-9514 have substantially similar provisions that give directors of nonprofits a broad right to inspection. This case demonstrates California’s strong policy of allowing a director broad access to records unless there are “extreme” circumstances that warrant a limitation of this right, such as attorney-client privileged documents, documents that intrude on privacy rights, or when a director intends to use the records to commit a tort against the nonprofit or commit a breach of their fiduciary duty.