GERALD WILCHER v. INTERNATIONAL ENVIRONMENTAL TECHNOLOGIES, INC.; and INTERNATIONAL WATER TECHNOLOGY, INC.
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RENDERED:
July 8, 2005; 10:00 a.m.
TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-000828-MR
GERALD WILCHER
v.
APPELLANT
APPEAL FROM BOYLE CIRCUIT COURT
HONORABLE DARREN W. PECKLER, JUDGE
ACTION NO. 02-CI-00234
INTERNATIONAL ENVIRONMENTAL
TECHNOLOGIES, INC.; and INTERNATIONAL
WATER TECHNOLOGY, INC.
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
TACKETT AND VANMETER, JUDGES; MILLER, SENIOR JUDGE.1
VANMETER, JUDGE:
Under KRS 271B.16-010, et seq., a corporate
shareholder has the right to inspect certain corporate records,
and if a corporation refuses to permit inspection, the circuit
court may summarily order inspection and award costs and
reasonable attorney fees.
The issue we must resolve is whether
the filing of an action for inspection, resulting in the
1
Senior Judge John D. Miller sitting as Special Judge by assignment of the
Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and
KRS 21.580.
issuance of order of inspection, mandates the award of attorney
fees under KRS 271B.16-040(3).
As we hold that it does not, we
affirm the order of the Boyle Circuit Court.
Gerald Wilcher was a shareholder in two corporations,
International Environmental Technologies, Inc. and International
Water Technology, Inc.2
On May 23, 2002, Wilcher made a request
to examine certain corporate records.
Wilcher and the
corporations agreed on a production date of May 28, 2002 for a
portion of the records, and an additional date was set for
approximately a week later.
However, apparently unsatisfied
with the progress of the production, on June 6 Wilcher filed an
action pursuant to KRS 271B.16-040(2) requesting the Boyle
Circuit Court to order an inspection.
On July 12, 2002, the trial court conducted a hearing
at which it attempted to ascertain which records had or had not
been produced.
The parties, through their respective counsel,
agreed that certain records had been produced, that the
financial records of the corporations had been delivered on a
compact disc, and that the only issue remaining to be resolved
by the court was whether the tax form K-1’s for all the
shareholders, as well as the stock subscriptions executed by
shareholders other than Wilcher, were to be produced.
2
The
The record does not disclose the relationship between the two corporations,
but the on-line records of the Kentucky Secretary of State reveal that the
two corporations share the same principal office and have common management.
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corporations’ concern in producing these documents pertained to
the privacy interests of the other shareholders.
The trial
court ultimately ordered that these documents should be made
available to Wilcher.
A written order memorializing this hearing was not
entered until August 14, following an August 8 hearing
necessitated both by Wilcher’s motion for a more definite
statement concerning a counterclaim filed by the corporations,
and by the corporations’ motion for a protective order
concerning duplicative production of documents.
The August 14
order provided in part that “defendants agreed to produce all
remaining items not previously furnished plaintiff, except
shareholder subscriptions.
Following argument the court ordered
defendants to furnish the complete records requested by
plaintiff, which order is now commemorated[.]”
A receipt in the
record indicates that K-1’s, stock ledger books, a compact disc
showing accounting transactions, and shareholder subscription
agreements for both corporations were delivered to Wilcher’s
counsel on August 9, 2002.
No further proceedings were held until the trial court
filed a housekeeping show cause notice for possible dismissal
for lack of prosecution.3
Following the entry of that notice,
Wilcher filed a motion for attorney fees.
3
CR 77.02(2).
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After conducting a
hearing on Wilcher’s motion on March 15, 2004, the trial court
entered an order denying the motion.
Wilcher filed this appeal.
KRS 271B.16-040, pursuant to which Wilcher filed his
complaint, provides in pertinent part:
(2) If a corporation does not within a
reasonable time allow a shareholder to inspect
and copy any other record, the shareholder who
complies with subsections (2) and (3) of KRS
271B.16-020 may apply to the Circuit Court of
the county where the corporation's principal
office (or, if none in this state, its
registered office) is located for an order to
permit inspection and copying of the records
demanded. The court shall dispose of an
application under this subsection on an
expedited basis.
(3) If the court orders inspection and
copying of the records demanded, it shall also
order the corporation to pay the shareholder's
costs (including reasonable counsel fees)
incurred to obtain the order unless the
corporation proves that it refused inspection
in good faith because it had a reasonable
basis for doubt about the right of the
shareholder to inspect the records demanded.
Following the hearing to determine Wilcher’s entitlement to
attorney fees, the trial court made a finding that the
corporations were making
a good faith effort to allow reasonable
inspection of records within the time
requested. There is no proof of an ongoing
or continued attempt by the defendant not to
disclose or allow the plaintiff to copy or
inspect the records. Previous orders of
this court do not trigger the requirement
that attorney fees be paid in the instant
case. The lawsuit was prematurely filed.
The defendant made a good faith effort in a
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reasonable time to produce the records
requested by the plaintiff.
Initially, we note that KRS 271B.16-020 creates two
rights of inspection.
The first, under KRS 271B.16-020(1),
pertains to documents which a corporation is required to have
available at its principal office:4 articles of incorporation,
bylaws, resolutions regarding classes of shares, minutes or
records of shareholders actions, communications to shareholders
including three years’ financial statements,5 names and addresses
of current directors and officers, and the most recent annual
verification report.6
The subsection grants a shareholder the
right to inspect on five days’ notice.
An action to compel
production of these records is authorized by KRS 271B.16-040(1).
A separate right of inspection for other documents is
provided under KRS 271B.16-020(2), the subsection which was the
basis of Wilcher’s complaint.
The records subject to inspection
under this subsection are minutes of board of directors’
meetings, records of any action of any committee of the board of
directors, minutes or actions of shareholders or directors taken
without a meeting, accounting records of the corporation, and
the record of shareholders.
4
The action to compel inspection of
See KRS 271B.16-010(5).
5
KRS 271B.16-200. The financial statements required by this section are
those “showing in reasonable detail [the corporation’s] assets and
liabilities and the results of its operations.”
6
KRS 271B.16-220.
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these records is set forth in KRS 271B.16-040(2).
While a
shareholder has a right to give five days’ notice of the date on
which he wishes to inspect these records, the corporation is
given a “reasonable time” within which to allow the shareholder
to inspect and copy such records.7
Presumably the distinction
between the time periods of production exists because the
records under KRS 271B-16.010(5) are required to be kept at the
corporation’s principal office and therefore should be readily
accessible, whereas the records under
KRS 271B.16-020(2) are not required to be kept in any one
particular location and therefore, especially if accounting
records, may require more time to assemble.
In the instant case, Wilcher argues that only through
his filing of this action and the resultant court orders did he
obtain the corporate records sought.
The trial court record,
however, reveals that Wilcher filed the action only nine days
after the corporations produced some of the requested documents,
and while they were in the process of producing others.
In
addition, during the initial hearing on July 12, 2002, the
parties were fairly well in agreement that the majority of the
corporations’ records had been produced, with the only
disagreements being as to whether the corporations should
produce shareholder K-1’s and subscription agreements, and as to
7
KRS 271B.16-040(2).
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the quality of the compact disc upon which the corporations had
disclosed their accounting records.
The August 14, 2002 order
memorializing this hearing reflects the corporations’ agreement
to produce records, and orders the corporations to furnish
shareholder subscriptions.
As found by the trial court, the corporations never
refused Wilcher’s right to inspect and copy records but instead
acted in good faith to produce the records in a reasonable time,
with the result that Wilcher prematurely filed his action.8
Under similar circumstances, the North Carolina Court of
Appeals, interpreting the identical provisions of North
Carolina’s business corporation statute,9 held that a consent
order by which the parties agreed to an ongoing access to
corporate records did not operate to trigger entitlement to
attorney fees.10
Clearly, as recognized by the trial court, the
provisions of subsection (3) of KRS 271B.16-040, giving rise to
the right to attorney fees, must be read in conjunction with
8
The only documents which were actually ordered to be produced were the
shareholder subscription agreements.
9
N.C. Gen. Stat. § 55-16-04.
10
Carswell v. Hendersonville Country Club, Inc., 609 S.E.2d 460, 462 (N.C.
App. 2005).
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subsections (1) and (2).11
In other words, in order for a
shareholder to be entitled to attorney fees, the corporation
must have effectively denied a shareholder’s right to inspect
and copy records, either by outright refusal or by failure to
act within a reasonable time.
To permit otherwise would create
an inequitable situation in which a corporation, although
complying with the statutorily-mandated disclosure requirements
in good faith and in a timely manner, could be forced not only
to defend precipitately filed lawsuits, but also to pay the
shareholder’s attorney fees.
The order of the Boyle Circuit Court is affirmed.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEES:
Richard Clay
Danville, Kentucky
William L. Stevens
Danville, Kentucky
11
See Baker v. White, 251 Ky. 691, 694, 65 S.W.2d 1022, 1024 (1933) (in order
to determine legislative will and meaning, courts may consider not only a
particular section but also the act as a whole).
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