No-Burn, Inc. v. Murati , 2011 Ohio 5635 ( 2011 )

[Cite as No-Burn, Inc. v. Murati, 2011-Ohio-5635.]
STATE OF OHIO ) IN THE COURT OF APPEALS
)ss: NINTH JUDICIAL DISTRICT
COUNTY OF SUMMIT )
NO-BURN, INC. C.A. No. 25495
Appellant/Cross-Appellee
v. APPEAL FROM JUDGMENT
ENTERED IN THE
PEDRO MURATI COURT OF COMMON PLEAS
COUNTY OF SUMMIT, OHIO
Appellee/Cross-Appellant CASE No. CV 2008 08 5602
DECISION AND JOURNAL ENTRY
Dated: November 2, 2011
CARR, Presiding Judge.
{¶1} Appellant/cross-appellee, No-Burn, Inc. (“NBI”), appeals the judgment of the
Summit County Court of Common Pleas. Appellee/cross-appellant, Dr. Pedro Murati also
appeals from the same judgment. This Court affirms.
I.
{¶2} NBI is an Ohio corporation with its principal place of business in Wadsworth,
Ohio. Dr. Murati is a resident of Kansas and a shareholder in NBI since May 2007, having
invested $600,000.00 in the company. He invested another $200,000.00 on behalf of his brother
and sister-in-law. After becoming a shareholder, Dr. Murati demanded the right to examine,
copy, or make extracts from eighteen sundry categories of corporate documents and records. On
August 8, 2008, NBI filed a complaint for declaratory judgment “setting forth the rights and
responsibilities of [the parties] as to documents and information which should be produced in
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response to [Dr. Murati’s] demand for information ***.” Attached to the complaint is Dr.
Murati’s written demand delineating eighteen categories of requested documents.
{¶3} Upon Dr. Murati’s request, the case was removed to the federal district court,
which subsequently remanded the case to the state court based on a lack of federal subject matter
jurisdiction.
{¶4} Dr. Murati filed an answer and counterclaim for injunctive relief, requesting an
order requiring NBI to allow him to inspect the company’s books and records pursuant to R.C.
1701.37(C). Dr. Murati also prayed for an award of costs and expenses, including reasonable
attorney fees, although he neither cited any statutory authority for such an award nor alleged any
bad faith by NBI. In conjunction with his complaint, Dr. Murati filed a motion for a mandatory
injunction requiring NBI to allow inspection of corporate records. NBI filed a memorandum in
opposition, and Dr. Murati replied. NBI also filed an answer to Dr. Murati’s counterclaim.
{¶5} The case was tried to the bench on December 19, 2008. The trial court clarified
that it was proceeding to trial on the merits of the case rising out of the complaint and
counterclaim, rather than to hearing on the pending motion. On December 31, 2008, the trial
court issued its judgment, dismissing NBI’s complaint for declaratory judgment and awarding
partial judgment in favor of Dr. Murati on his counterclaim. NBI filed a notice of appeal and Dr.
Murati attempted to cross-appeal. This Court dismissed the appeal and cross-appeal for lack of
jurisdiction because the trial court’s December 31, 2008 judgment failed to contain a full
statement of the relief being afforded to the parties. No-Burn, Inc. v. Murati, 9th Dist. No.
24577, 2009-Ohio-6951.
{¶6} On February 8, 2010, NBI filed a motion in the trial court to amend its judgment
in order to fully declare the rights and responsibilities of the parties. Dr. Murati opposed the
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motion to amend. On June 15, 2010, the trial court issued a protective order, as well as a
judgment declaring the rights and responsibilities of the parties. The trial court expressly
adopted and incorporated its December 31, 2008 judgment as its findings of fact and conclusions
of law. The trial court entered judgment in favor of Dr. Murati on his counterclaim and issued an
injunction requiring NBI to produce documents as described in Dr. Murati’s request numbers 1-
13 and 15-17. Dr. Murati had withdrawn his request number 18 and the trial court found that
NBI had no documents which would satisfy request number 14. The trial court denied Dr.
Murati’s prayer for attorney fees and expenses. NBI filed a timely appeal and Dr. Murati filed a
timely cross-appeal.
II.
NBI’S ASSIGNMENT OF ERROR I
“THE TRIAL COURT ERRED AS A MATTER OF LAW IN GRANTING A
MANDATORY INJUNCTION AND A DECLARATORY JUDGMENT IN
FAVOR OF APPELLEE PEDRO MURATI THAT EXCEED THE MANDATE
OF R.C. 1701.37(C).”
{¶7} NBI argues that the trial court erred by granting an injunction and declaring that
NBI was required to allow Dr. Murati to inspect sixteen categories of corporate documents
because those categories of documents exceed the mandate of R.C. 1701.37(C). This Court
declines to address the argument because NBI forfeited the issue.
{¶8} NBI argues that Dr. Murati’s sixteen categories of requested information do not
fall within the scope of the statutory phrase “books and records of account” as used in R.C.
1701.37(C). However, the corporation failed to raise that issue at any time prior to trial. Instead,
the complaint asked generally for a declaration of NBI’s rights and obligations pursuant to Dr.
Murati’s statutory request to inspect. At trial, NBI presented no evidence and made no argument
that the sixteen categories of information did not constitute “books and records of account.”
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Only after dismissal of the first appeal did NBI address with specificity the meaning of the
phrase “books and records of account” as it believed the legislature intended. Because the court
had already held a trial on the complaint and counterclaim, however, Dr. Murati had no
opportunity to respond and present evidence regarding how his requests comported with the
statutory meaning of that phrase.
{¶9} Based on the above-noted procedural history, the trial court concluded that NBI
had not properly raised the issue of the meaning of the phrase “books and records of account”
and refused to amend the original judgment which noted NBI’s failure to raise the issue.
Because NBI did not properly raise the issue before the trial court prior to trial, NBI forfeited the
issue on appeal and this Court declines to address it. Accordingly, NBI’s first assignment of
error is overruled.
NBI’S ASSIGNMENT OF ERROR II
“THE TRIAL COURT ABUSED ITS DISCRETION BY GRANTING A
MANDATORY INJUNCTION AND A DECLARATORY JUDGMENT THAT
ARE ENTIRELY OVERLY BROAD AND UNDULY BURDENSOME.”
{¶10} NBI argues that the trial court abused its discretion by declaring rights and
obligations and issuing a mandatory injunction which are over broad and unduly burdensome.
This Court disagrees.
{¶11} The Ohio Supreme Court has held that “‘[t]he granting or denying of declaratory
relief is a matter for judicial discretion[.]’” Mid-American Fire & Cas. Co. v. Heasley, 113 Ohio
St.3d 133, 2007-Ohio-1248, at ¶12, quoting Bilyeu v. Motorists Mut. Ins. Co. (1973), 36 Ohio
St.2d 35, syllabus. Moreover, the decision to grant a mandatory injunction rests largely within
the trial court’s discretion. Old Mill Village Homeowners Assn. v. Bacik (Feb. 3, 1993), 9th Dist.
No. 2118. An abuse of discretion is more than an error of judgment; it means that the trial court
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was unreasonable, arbitrary, or unconscionable in its ruling. Blakemore v. Blakemore (1983), 5
Ohio St. 3d 217, 219. An abuse of discretion demonstrates “perversity of will, passion, prejudice,
partiality, or moral delinquency.” Pons v. Ohio State Med. Bd. (1993), 66 Ohio St. 3d 619, 621.
When applying the abuse of discretion standard, this Court may not substitute its judgment for
that of the trial court. Id.
{¶12} Dr. Murati, pursuant to R.C. 1701.37(C), issued a written demand by a
shareholder to NBI to inspect eighteen categories of corporate records. He later withdrew one
category and the trial court refused to allow inspection of one category.
{¶13} R.C. 1701.37(C) states, in relevant part:
“Any shareholder of the corporation, upon written demand stating the specific
purpose thereof, shall have the right to examine in person or by agent or attorney
at any reasonable time and for any reasonable and proper purpose, the articles of
the corporation, its regulations, its books and records of account, minutes, and
records of shareholders aforesaid, and voting trust agreements, if any, on file with
the corporation, and to make copies or extracts thereof.”
{¶14} NBI appended a copy of Dr. Murati’s demand letter to its complaint. The demand
letter states, in relevant part:
“The undersigned is a shareholder of record in [NBI]. Pursuant to the provisions
of [R.C.] 1701.37(C), I hereby demand that you allow me to examine, copy, or
make extracts from the following books and records of account of [NBI],
covering the period from January 1, 2005 to the present.
“1. General ledger, all subsidiary ledgers and journals, including payroll ledger,
and all books of original entry;
“2. Bank statements, with reconciliations;
“3. Copies of any contracts to which [NBI] is a party, including employment
contracts and consulting contracts;
“4. Financial statements and reports, and memoranda and/or reports to
management concerning internal procedures and/or financial conditions prepared
by [NBI’s] accountants and/or anyone else on behalf of [NBI];
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“5. Contracts and other documents pertaining to transactions to which [NBI] is a
party;
“6. Copies of any leases and/or agreements to lease to which [NBI] is a party;
“7. Records pertaining to any securities or other investments held by or on behalf
of [NBI];
“8. Copies of any guarantees by [NBI] of the obligation of others;
“9. Records, expense reports and other documents pertaining to expense
reimbursements and advances and all supporting documents related thereto,
including without limitation documents pertaining to the payment of sales
commissions, incurrence or payment of research and development expenses,
communications and information technology expenses, legal, accounting and
other professional expenses, and expenses related to the purchase or servicing of
insurance policies;
“10. Records and other documents pertaining to salaries or other personnel
expenses for employees or independent contractors, including without limitation
payroll records;
“11. Records and other documents pertaining to all inter-company transfers,
transactions, loans and advances, including without limitation transactions
between [NBI], No-Burn North America, Inc. and No-Burn Investments, LLC, or
between any subsidiaries of these entities;
“12. Records and other documents pertaining to any and all expenses paid by
[NBI] on behalf of or for the benefit of any owner, officer, employee, or related
entity;
“13. Copies of any and all bank loan applications and all supporting documents
related thereto;
“***
“15. Records and other documents pertaining to travel and/or travel expenses of
any owner, officer, or employee for which reimbursement was requested;
“16. Records and other documents related to any and all items, goods and/or
services purchased by any owner, officer, or employee for which reimbursement
was requested;
“17. Copies of all cellular phone service statements for which reimbursement was
requested and all correspondence with cellular phone service providers related
thereto[.]
“***
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“Such inspection is to take place during normal business hours and shall continue
for such time as is reasonably necessary to complete the inspection.
“This demand for inspection is sought for the proper purpose of ascertaining
[NBI’s] general condition and state of affairs so that I can exercise my rights as a
shareholder and ascertain the status of my investment intelligently and on an
informed basis.”
{¶15} The issues presented in NBI’s challenge are whether inspection of all these
categories of information is necessary to satisfy Dr. Murati’s enunciated purpose, particularly in
light of his routine receipt of quarterly and annual financial statements; and whether the
production of all requested information is unduly burdensome so that it was error to order such.
Information necessary to satisfy Dr. Murati’s purpose
{¶16} NBI argues that the trial court abused its discretion by ordering the corporation to
allow Dr. Murati to inspect books and records of the types delineated in all sixteen categories
requested because such information was outside the scope of Dr. Murati’s stated purpose. This
Court disagrees.
{¶17} A corporation must allow inspection “for any reasonable and proper purpose.”
R.C. 1701.37(C). The Ohio Supreme Court wrote that, in order for a shareholder to exercise his
right of inspection, “[n]othing more is required than that, acting in good faith for the protection
of the interests of the corporation and his own interests, he desires to ascertain the condition of
the corporation’s business.” (Emphasis in original.) Lake v. Buckeye Steel Castings Co. (1965),
2 Ohio St. 2d 101, 104. The committee note to the statute states that there is a presumption that a
shareholder’s written statement of purpose has been made in good faith and the corporation has
the burden of rebutting the presumption by proving that the shareholder’s actual purpose is
improper or unreasonable. Only where the shareholder’s stated purpose is unreasonable or
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improper on its face may the corporation justifiably refuse the request to inspect. Lake, 2 Ohio
St.2d at 105-106.
{¶18} Dr. Murati made his request for the stated purpose of “ascertaining [NBI’s]
general condition and state of affairs so that I can exercise my rights as a shareholder and
ascertain the status of my investment intelligently and on an informed basis.” NBI does not
dispute that this is a reasonable and proper purpose. Dr. Murati’s purpose serves to protect his
own interests as an investor. See Lake, 2 Ohio St. 2d at 104; see, also, Grossman v. Cleveland
Cartage Co. (1959), 83 Ohio Law. Abs. 101, 157 N.E.2d 154, 157 (“The detection of latent
improprieties in management is therefore the chief purpose for such investigations.”).
{¶19} Dr. Murati testified at trial that he maintains the purpose enunciated in his written
demand as his sole purpose for inspection. He testified that his biggest concern is that the
financial statements provided quarterly and annually by NBI are mere compilations by
corporation management that mean nothing because they have never been audited or reviewed
by independent and uninterested entities or persons. Dr. Murati testified that he was alarmed by
a letter from NBI’s accountant appended to financial statements provided at the March 2008
shareholder’s meeting in which the accountant asserted that he could not vouch for the accuracy
of the information because it consisted of a mere compilation from management which did not
meet the minimum standards for accounting principles. Dr. Murati read from the accountant’s
letter in part: “The effects of this departure from generally accepted accounting principles on the
financial position, results of operations, and cash flows have not been determined.” He further
testified that, based on the financial statements he has seen, he suspects “hanky-panky” in the
management of corporate affairs.
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{¶20} NBI argues that the information Dr. Murati requested “goes way beyond
ascertaining [the corporation’s] ‘general condition,’ and instead seeks unfettered access to nearly
all of [NBI’s] documents.” This Court disagrees. Each category of information relates precisely
to Dr. Murati’s understanding of the overall condition of the company in which he has invested a
significant sum of money. General and payroll ledgers, bank statements, financial statements
and supporting memoranda from accountants, corporate investments, general expense reports,
personnel expense records, owner/officer/related entity expense records, travel expense records,
and owner/officer/employee reimbursement reports all provide a picture of the general financial
condition of the corporation, specifically, sources and amounts of money coming into the
corporation and how it is being dispersed. Contracts (employment, consulting, transactional,
leases, guarantees, loans) and offers to contract (loan applications) provide a picture of
management’s utilization of corporate resources and willingness to assume risks. Such
information is highly relevant to the ascertaining of a corporation’s general condition and state of
affairs.
{¶21} NBI further argues that it provided information to Dr. Murati in response to
twenty-four other questions designed to elicit substantially similar information. William Kish,
president and chief executive officer of NBI, testified that the corporation’s attorney answered
twenty-four “very, very detailed questions” regarding line items in financial statements, but that
Dr. Murati was not satisfied and subsequently made his written demand including the sixteen
categories of information set forth above.
{¶22} The initial twenty-four “detailed questions” which NBI answered were admitted
into evidence as NBI’s “Exhibit 3,” however, the record contains no exhibits. All exhibits for
this case were requested from the Summit County Clerk of Court pursuant to the established
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exhibit request protocol. This Court was informed in an email from the clerk’s director of
administration/evidence that “[t]here are no exhibits on this case[.]” This Court has repeatedly
held that “[i]t is the duty of the appellant to ensure that the record on appeal is complete.” State
v. Daniels, 9th Dist. No. 08CA009488, 2009-Ohio-1712, at ¶22, quoting Lunato v. Stevens
Painton Corp., 9th Dist. No. 08CA009318, 2008-Ohio-3206, at ¶11. “Where the record is
incomplete because of appellant’s failure to meet his burden of providing the necessary record,
this Court must presume regularity of the proceedings and affirm the decision of the trial court.”
State v. Jones, 9th Dist. No. 22701, 2006-Ohio-2278, at ¶39, citing State v. Vonnjordsson (July
5, 2001), 9th Dist. No. 20368. To the extent that the twenty-four “very, very detailed questions”
and their responses are necessary to this Court’s determination of whether NBI had previously
satisfied Dr. Murati’s stated purpose for inspection of additional information, this Court must
presume regularity in the trial court’s proceedings and affirm the judgment of the trial court. See
Jones at ¶39.
{¶23} There are several documents appended to Dr. Murati’s motion for a mandatory
injunction. One document purports to be a list of twenty-four questions from a law firm
representing Dr. Murati which is addressed to Mr. Kish. Another document purports to be a
letter from NBI’s then-attorney to Dr. Murati’s attorney, briefly answering the twenty-four
questions. Assuming that those documents accurately represent the twenty-four “very, very
detailed questions” about which Mr. Kish testified, the brief responses do not give a complete
picture of the “general condition and state of affairs” of the corporation which would allow Dr.
Murati to intelligently ascertain the status of his investment. Moreover, those initial requests for
information do not negate Dr. Murati’s right as a shareholder to inspect pursuant to a proper
written request made under R.C. 1701.37(C).
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{¶24} This Court concludes that the trial court did not err by finding that Dr. Murati’s
request to inspect the sixteen categories of corporate information was not overly broad in regards
to his enunciated purpose. The trial court found that Dr. Murati’s request was candid and
evidenced “his purely financially-motivated concerns.” The trial court further found that NBI
presented no evidence to demonstrate that Dr. Murati intended to pass on confidential corporate
information to others outside the company. The evidence presented at trial indicates that all of
the sixteen categories would reasonably allow a shareholder to ascertain the general condition
and state of affairs of the business in a manner calculated to allow him to intelligently ascertain
the status of his investment. NBI did not present any evidence at trial of any nefarious purpose
by Dr. Murati. Accordingly, the trial court did not abuse its discretion in concluding that Dr.
Murati has a right to inspect such information.
Burden on corporation to produce information
{¶25} NBI further argues that the trial court abused its discretion by ordering that Dr.
Murati may inspect information, the production of which will cause an undue burden on the
corporation. This Court disagrees.
{¶26} Dr. Murati requested to inspect the corporate records only during normal business
hours, which would not place an undue burden on corporate resources.
{¶27} The trial court found that sixteen categories of documents requested could be
provided “without unreasonable difficulty, most without any difficulty at all.” At trial, Mr. Kish
testified that it would take a “tremendous amount of work” and an “extreme amount of time” to
produce the information in Dr. Murati’s sixteen categories. However, upon discussing each
category individually, Mr. Kish admitted that much of the information is stored both on
QuickBooks in the company’s internal network and in hard copy format, that the information
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requested could be identified easily, and that there is very limited information pertaining to
certain categories. Accordingly, the evidence indicated that NBI did not demonstrate that
complying with Dr. Murati’s request would place an undue burden on corporate resources. Mr.
Kish also expressed a concern that much of the information is proprietary. Dr. Murati at all
times, however, agreed to enter into a confidentiality agreement regarding the use and
dissemination of any proprietary information, and the trial court, in fact, issued a confidentiality
agreement placing limitations on Dr. Murati’s use of the information he would be allowed to
inspect.
{¶28} Based on Mr. Kish’s concession that the requested categories of information were
readily identifiable and could be produced, the trial court’s order directing the production of
sixteen categories of information was not unreasonable. Accordingly, the trial court did not
abuse its discretion by ordering NBI to produce for inspection documents satisfying sixteen
categories of information requested by Dr. Murati upon finding that such production was not
overly burdensome. NBI’s second assignment of error is overruled.
DR. MURATI’S ASSIGNMENT OF ERROR
“THE TRIAL COURT ERRED IN DECLINING TO AWARD CROSS-
APPELLANT PEDRO MURATI HIS ATTORNEY FEES WHEN CROSS-
APPELLEE NO-BURN, INC. HAS ACTED IN BAD FAITH.”
{¶29} Dr. Murati argues that the trial court erred by refusing to award him attorney fees
because NBI acted in bad faith in refusing to produce the requested corporate records for
inspection. This Court disagrees.
{¶30} Under Ohio law, an award of attorney fees ordinarily requires either explicit
statutory authorization or a finding of bad faith on the part of the party who did not prevail. Hall
v. Frantz (May 24, 2000), 9th Dist. No. 19630, citing State ex rel. Pennington v. Gundler (1996),
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75 Ohio St. 3d 171, 173. In regard to declaratory judgment proceedings, R.C. 2721.09 provides
that a trial court may provide further relief in the nature of an award of attorney fees if the
prevailing party files an application by way of a complaint for such. Dr. Murati has not pursued
further relief in this manner. Instead, Dr. Murati alleges that he is entitled to an award of
attorney fees solely on the basis of NBI’s bad faith.
{¶31} This Court reviews a trial court’s determination on a request for attorney fees for
an abuse of discretion. Hall, supra. An abuse of discretion is more than an error of judgment; it
means that the trial court was unreasonable, arbitrary, or unconscionable in its ruling.
Blakemore, 5 Ohio St. 3d at 219. An abuse of discretion demonstrates “perversity of will,
passion, prejudice, partiality, or moral delinquency.” Pons, 66 Ohio St. 3d at 621. When
applying the abuse of discretion standard, this Court may not substitute its judgment for that of
the trial court. Id.
{¶32} Dr. Murati requested an award of attorney fees in his counterclaim for a
mandatory injunction based solely on allegations that he “has suffered additional and
unnecessary expense on account of the actions of [NBI] in bringing this litigation[.]” Dr. Murati
did not make any express allegations of bad faith in his counterclaim. At trial, Dr. Murati did not
testify as to any express incidents of bad faith on the part of NBI. In fact, he admitted that NBI
responded to his initial twenty-four questions regarding line items on company financial
statements. He simply did not find the responses to be as complete as he wished. Dr. Murati
also conceded that NBI had provided him with all the information he requested prior to his
investing in the company and that that information consisted of unaudited financial statements.
The only testimony by Dr. Murati that might have risen to an allegation of bad faith was that
NBI responded to his request pursuant to R.C. 1701.37(C) by filing its complaint and that he was
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concerned that the company was spending his invested money to fight his access to corporate
records.
{¶33} The trial court denied Dr. Murati’s request for attorney fees after finding that Mr.
Kish was forthright in his testimony, that the parties did not attack one another, that Mr. Kish had
an understandable concern for maintaining control of the small company “in the face of an
aggressively unhappy investor,” and that NBI was “entitled to be wrong” in its interpretation of
the inspection statute. A thorough review of the evidence and circumstances underlying this case
compels us to agree that an award of attorney fees was not warranted.
{¶34} Dr. Murati investigated NBI prior to investing and made his decision to do so
based on the same type of financial information he now claims is unsatisfactory to allow him to
monitor his investment. He admitted that the corporation provided all the information he
requested prior to his investment. NBI responded to all of the questions regarding financial
statement line items which Dr. Murati submitted to the company informally, i.e., not pursuant to
a demand under the statute. Mr. Kish was concerned that the corporation would be subjected to
a never-ending series of requests for inspection by Dr. Murati. At trial, Dr. Murati admitted that,
even if he were allowed to inspect all the corporate records enumerated in his statutory demand,
he might need to demand the inspection of additional records to satisfy his purpose. Mr. Kish
testified that, prior to making a statutory demand to inspect, Dr. Murati sent him a series of
emails asking to see “[p]retty much everything in the accounting department[.]” He testified that
Dr. Murati further recommended that the corporation secure “at least two gophers” to bring
documents to him if the corporation insisted on holding its annual shareholders’ meeting off-site.
At the shareholders’ meeting, Dr. Murati asked further questions about the corporation’s
financial matters, even though Mr. Kish testified that he suggested to Dr. Murati that they discuss
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those matters at a later time. NBI had valid concerns over the copying, use, and potential
dissemination of its proprietary information and the trial court issued a detailed protection order
by which Dr. Murati must abide. Accordingly, he was not awarded unfettered access to the
requested records. At the conclusion of trial, Dr. Murati withdrew one of the categories of
records from his inspection demand in recognition of the fact that “there may be in some
circumstances reasons not to provide information,” and “in that regard,” category eighteen was
withdrawn. Finally, and significantly, Dr. Murati does not dispute that the interpretation of the
scope of the phrase “books and records of account” as used in R.C. 1701.37(C) is a matter of
first impression in Ohio.
{¶35} Based on NBI’s interaction with Dr. Murati prior to his investment, the
company’s provision of information arising out of the doctor’s informal request, the numerous
categories of information sought pursuant to a statutory request, Dr. Murati’s behavior before
and during the shareholder’s meeting, Dr. Murati’s recognition of the impropriety of one of his
requests, the corporation’s reasonable concerns for the improper use and dissemination of
proprietary information, and the lack of any decision by the courts of Ohio defining the terms
“books and records of account,” NBI did not proceed in bad faith in seeking a declaration of its
rights and obligations pursuant to R.C. 1701.37(C). Accordingly, the trial court did not abuse its
discretion by refusing to award attorney fees to Dr. Murati. Dr. Murati’s assignment of error is
overruled.
III.
{¶36} NBI’s assignments of error are overruled. Dr. Murati’s sole assignment of error is
overruled. The judgment of the Summit County Court of Common Pleas is affirmed.
Judgment affirmed.
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There were reasonable grounds for this appeal.
We order that a special mandate issue out of this Court, directing the Court of Common
Pleas, County of Summit, State of Ohio, to carry this judgment into execution. A certified copy
of this journal entry shall constitute the mandate, pursuant to App.R. 27.
Immediately upon the filing hereof, this document shall constitute the journal entry of
judgment, and it shall be file stamped by the Clerk of the Court of Appeals at which time the
period for review shall begin to run. App.R. 22(E). The Clerk of the Court of Appeals is
instructed to mail a notice of entry of this judgment to the parties and to make a notation of the
mailing in the docket, pursuant to App.R. 30.
Costs taxed to Appellant/Cross-Appellee.
DONNA J. CARR
FOR THE COURT
WHITMORE, J.
CONCURS
DICKINSON, J.
CONCURS, SAYING:
INTRODUCTION
{¶37} Concerned about his investment in No-Burn Inc., an Ohio corporation, Dr. Pedro
Murati asked the company for additional information about its finances and business
transactions. Dissatisfied with the answers he received, Dr. Murati demanded to inspect the
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company’s books and records of account under Section 1701.37(C) of the Ohio Revised Code.
No-Burn filed a complaint for declaratory judgment, requesting that the trial court define its
obligations under the statute. Dr. Murati counterclaimed, seeking injunctive relief and his
attorney fees. The trial court determined that No-Burn had to allow Dr. Murati to inspect 16 of
the 18 categories of documents he requested, but denied his claim for attorney fees. No-Burn has
appealed, and Dr. Murati has cross-appealed. I agree that the judgment of the trial court should
be affirmed because No-Burn forfeited its argument that the documents Dr. Murati requested are
not books and records of account under Section 1701.37(C), the documents Dr. Murati requested
are reasonably related to his stated purpose, and Dr. Murati failed to establish that No-Burn acted
in bad faith.
BACKGROUND
{¶38} According to Dr. Murati, in 2007, he invested $600,000 in No-Burn, obtaining a
four-percent interest in the corporation. In 2008, he received the company’s annual report,
which indicated that it had not been prepared in accordance with generally accepted accounting
principles. He attended a shareholder meeting to ask questions about the report and was told that
he would have to make a written request if he wanted to see any documents. Dr. Murati made a
written request, but No-Burn still denied him access to some of the documents he wanted. He,
therefore, made a written demand to examine No-Burn’s books and records of account under
Section 1701.37(C). Four days later, No-Burn requested a declaratory judgment from the trial
court to determine which documents it had to produce. Dr. Murati counterclaimed, seeking
injunctive relief and attorney fees. Although the trial court determined that No-Burn had to
provide Dr. Murati access to most of the documents he requested, it denied his claim for attorney
fees.
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BOOKS AND RECORDS OF ACCOUNT
{¶39} No-Burn’s first assignment of error is that the trial court incorrectly ordered it to
produce records to which Dr. Murati is not entitled under Section 1701.37(C) of the Ohio
Revised Code. Under Section 1701.37(C), a shareholder of a corporation has the “right to
examine . . . the articles of the corporation, its regulations, its books and records of account,
minutes, and records of shareholders aforesaid, and voting trust agreements, if any, on file with
the corporation, and to make copies or extracts thereof.” No-Burn has argued that some of the
documents Dr. Murati requested do not fall into any of those categories and, therefore, should
not have to be produced.
{¶40} In his written demand, Dr. Murati requested 18 categories of documents, 16 of
which are still at issue. The remaining 16 categories are: “1. [g]eneral ledger, all subsidiary
ledgers and journals, including payroll ledger, and all books of original entry; 2. [b]ank
statements, with reconciliations; 3. [c]opies of any contracts to which No-Burn is a party,
including employment contracts and consulting contracts; 4. [f]inancial statements and reports,
and memoranda and/or reports to management concerning internal procedures and/or financial
conditions prepared by No-Burn’s accountants and/or anyone else on behalf of No-Burn; 5.
[c]ontracts and other documents pertaining to transactions to which No-Burn is a party; 6.
[c]opies of any leases and/or agreements to lease to which No-Burn is a party; 7. [r]ecords
pertaining to any securities or other investments held by or on behalf of No-Burn; 8. [c]opies of
any guarantees by No-Burn of the obligation of others; 9. [r]ecords, expense reports and other
documents pertaining to expense reimbursements and advances and all supporting documents
related thereto, including without limitation documents pertaining to the payment of sales
commissions, incurrence or payment of research and development expenses, communications
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and information technology expenses, legal, accounting and other professional expenses, and
expenses related to the purchase or servicing of insurance policies; 10. [r]ecords and other
documents pertaining to salaries or other personnel expenses for employees or independent
contractors, including without limitation payroll records; 11. [r]ecords and other documents
pertaining to all inter-company transfers, transactions, loans and advances, including without
limitation transactions between No-Burn, Inc. No-Burn North America, Inc. and No-Burn
Investments, LLC, or between any subsidiaries of these entities; 12. [r]ecords and other
documents pertaining to any and all expenses paid by No-Burn on behalf of or for the benefit of
any owner, officer, employee, or related entity; 13. [c]opies of any and all bank loan
applications and all supporting documents related thereto; . . . 15. [r]ecords and other documents
pertaining to travel and/or travel expenses of any owner, officer, or employee for which
reimbursement was requested; 16. [r]ecords and other documents related to any and all items,
goods and/or services purchased by any owner, officer, or employee for which reimbursement
was requested; [and] 17. [c]opies of all cellular phone service statements for which
reimbursement was requested and all correspondence with cellular phone service providers
related thereto[.]”
{¶41} In his written demand, Dr. Murati asserted that he was entitled to inspect the
documents because they are “books and records of account.” R.C. 1701.37(C). No-Burn has
argued that the meaning of “books and records of account” is limited to “a corporation’s
accounting books that centrally memorialize in a debit/credit format the economic consequences
of business agreements and transactions entered into by a corporation.” According to it, the term
does not include the underlying agreements that gave rise to the entries in its central accounting
books. Accordingly, to the extent Dr. Murati requested copies of contracts and internal
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memoranda, No-Burn has argued the trial court incorrectly ordered it to provide those
documents.
{¶42} The trial court concluded that No-Burn forfeited its books and records of account
argument because it waited until after trial to make it. Whether No-Burn forfeited its argument,
however, depends on whether No-Burn or Dr. Murati had the burden of proof on that argument.
If Dr. Murati had to establish that the categories of documents he requested are books and
records of account and failed to present sufficient evidence on that issue, the fact that No-Burn
did not make its argument at trial did not forfeit it for purposes of appeal. See Mancino v.
Capital Nat’l Bank, 8th Dist. No. 43061, 1981 WL 4927 at *6 (May 7, 1981) (“When findings of
fact are made in actions tried by the Court without a jury, the question of the sufficiency of the
evidence to support the findings may thereafter be raised whether or not the party raising the
question has made in the trial court an objection to such findings or has made a motion to amend
or a motion for judgment.”).
{¶43} “At common law, the right of a shareholder to inspect the books and records of a
corporation was a fundamental ‘incident to ownership of stock.’” Danziger v. Luse, 103 Ohio St.
3d 337, 2004-Ohio-5227, at ¶6 (quoting Cincinnati Volksblatt Co. v. Hoffmeister, 62 Ohio St.
189, 199 (1900)). The right was based on the principle that “[t]he real owners of all the net
assets of any corporation are the stockholders” and “[c]an anything be plainer than the fact that
the owner of property has a clear right to inspect his own property?” William Coale Dev. Co. v.
Kennedy, 121 Ohio St. 582, 585-86 (1930); see Danziger, 2004-Ohio-5227, at ¶6.
{¶44} Ohio codified a shareholder’s right to inspect in 1884. Celina Mut. Ins. Co. v.
Am. Druggists Ins. Co., 52 Ohio App. 2d 304, 307 (1977). Under Revised Statute 3254, “the
books and records of [a] corporation shall at all reasonable times be open to the inspection of
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every stockholder.” Interpreting that provision, the Ohio Supreme Court reasoned that, whatever
conditions may have qualified the common law rule, the statute imposed only one condition,
“that the right can be exercised only at reasonable times.” Cincinnati Volksblatt Co. v.
Hoffmeister, 62 Ohio St. 189, 198 (1900). It concluded that “[t]he right to inspect does not
depend upon the motive or purpose of the stockholder in demanding such inspection, and a
petition which shows that the plaintiff is a stockholder, that he has requested the defendant to
allow him to inspect the books and records of the corporation, and fix a reasonable time for the
same, which request has been refused, states a cause of action.” Id. at paragraph two of the
syllabus.
{¶45} In 1929, the legislature amended the statutory language to provide that “[t]he
books of account . . . shall be open to the inspection of every shareholder at all reasonable times
save and except for unreasonable or improper purposes.” Ohio Gen. Code. 8623-63 (1929).
Following the amendment, the Ohio Supreme Court determined that, despite the added
“improper purposes” language, “[a] presumption of good faith and honesty of purpose attends a
request by a stockholder for permission to inspect the books, records, and property of a
corporation . . . until the contrary is made to appear by evidence produced by the officer or agent
of the corporation objecting to the inspection.” William Coale Dev. Co. v. Kennedy, 121 Ohio
St. 582, syllabus (1930). It specifically determined that “[t]he burden of proof on [whether the
shareholder’s purpose was proper] should not be borne by the stockholder, but should be borne
by the agents or officers objecting to the inspection.” Id. at 587.
{¶46} Following the 1929 amendment, the Ohio Supreme Court also explained that the
fact that the legislature codified the right to inspect did not change the fundamental nature of the
right. “[B]y reason of his ownership of a share of stock, a shareholder is the owner of intangible
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property and that property may be said to be comprised of various relationships which are
determined by the terms of the stock certificate, the articles and regulations of the corporation
and the statutes and common law of the state of incorporation.” Millar v. Mountcastle, 161 Ohio
St. 409, 418 (1954). It identified “[t]he right to inspect the corporate books” as one of those
intangible property rights. Id. at 419.
{¶47} In 1955, the legislature amended the statutory language to its present form, which
is at Section 1701.37(C) of the Ohio Revised Code. Under Section 1701.37(C), a shareholder
must “make a prima facie case . . . show[ing] that 1) there was a demand for access to the
documents, 2) the demand was in writing and 3) there was a specific purpose stated in the
writing.” Hotchkiss v. GenBanc Inc., 6th Dist. No. 93-OT-016, 1994 WL 39065 at *2 (Feb. 11,
1994). While the shareholder’s request must be for a “proper purpose,” he remains entitled to a
presumption of good faith. See Lake v. Buckeye Steel Castings Co., 2 Ohio St. 2d 101, 105
(1965). Corporations still bear the burden of demonstrating that a shareholder’s purpose is
improper. Id. at 104-05 (“[W]e do not interpret [the statutory amendment] as shifting the burden
of unreasonableness or impropriety from the corporation to the shareholder so as to require him
to assume the burden of proving the negative, that is, that his request is free from the taint of
illegality, unreasonability and impropriety.”); see also Frank D. Emerson, The New Ohio
General Corporation Law: Some Comments and Some Comparisons, 24 Cin. L. Rev. 463, 493
(1955) (noting that Ohio’s statutory right to inspect is more favorable to shareholders than in
other states).
{¶48} Although the Ohio Supreme Court has clarified parts of Section 1701.37(C), there
have not been any Ohio appellate decisions regarding which party has the burden to show that a
company document is or is not a book or record of account. The case law, however, does
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establish some guiding principles, foremost, that the property of a corporation is the property of
the shareholders by virtue of their ownership of the business. Accordingly, their right to access
corporate information is broad, unless specifically limited by statute. I therefore, conclude that,
although a shareholder has the minimal burden of making a written demand under Section
1701.37(C) in which he states a reasonable and proper purpose for his demand, the burden then
shifts to the corporation to establish that the shareholder’s purported purpose is improper or that
the documents requested are not covered by statute.
{¶49} Because No-Burn had the burden of establishing that the documents Dr. Murati
requested were not “books and records of account” and did not present any evidence at trial
tending to prove that they were not, they forfeited any argument in that regard. Even if No-Burn
had properly raised the issue, Ohio Supreme Court case law suggests that the definition of
“books and records of account” includes more than a corporation’s central accounting books. In
William Coale Development Co. v. Kennedy, 121 Ohio St. 582, syllabus (1930), the Supreme
Court interpreted the 1929 version of the inspection statute. Although the statute only explicitly
provided access to “[t]he books of account, lists of shareholders, voting trust agreements, if any,
and the minutes of meetings of every corporation,” the Supreme Court wrote that what was at
issue was “the right of stockholders to inspect, and take copies thereof, all books, records,
papers, contracts, and other written documents, and to inspect all assets of every kind belonging
to the corporation.” Id. at 583. Concluding that the shareholders were entitled to those
documents under the statute, the Supreme Court explained that “stockholders [are] not obliged to
accept as 100 per cent correct statements prepared by the agents of the corporation. The
stockholder may suspect mismanagement by reason of lack of dividends, or by reason of many
other acts of omission or commission which he observes on the part of the agents of the
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corporation. . . . The stockholder may want to check up the cash and securities represented by the
books as on hand, in order to see for himself that what the books show as being on hand is in fact
on hand.” Id. at 586-87. The syllabus in William Coale was that a shareholder is presumed to
act in good faith when seeking to inspect “the books, records, and property of a corporation,”
suggesting that a shareholder’s right to inspect includes access to documents underlying the
central accounting books from which a shareholder can make his own calculations to determine
whether the corporation is being managed efficiently. Id. at syllabus. I, therefore, agree that No-
Burn’s first assignment of error should be overruled.
OVERBROAD AND UNDULY BURDENSOME
{¶50} No-Burn’s second assignment of error is that the trial court incorrectly issued a
declaratory judgment that is overly broad and unduly burdensome. It has argued that the
documents Dr. Murati requested go far beyond what is necessary to ascertain its “general
condition and state of affairs,” which was his declared purpose. No-Burn has argued that Dr.
Murati does not need nearly every document produced by the company to determine its
condition. It has also argued that it will have to expend significant time and resources to comply
with his request.
{¶51} At trial, Dr. Murati explained that he requested No-Burn’s records because the
reports he had received were merely compilations and the company had never been audited,
causing him to “not have any faith” in the information provided. He testified that, since the
company’s accountants, themselves, could not vouch for the accuracy of the provided numbers,
he was concerned about their accuracy. He also testified he was concerned because the company
had unidentified long-term obligations, it had not paid taxes for two years, it had an unpaid
equity line, and the Chief Executive Officer had given himself a raise although the company was
25
losing money. He further testified that the fact that No-Burn was spending his investment money
to resist giving him access to its books also concerned him.
{¶52} In William Coale Development Co. v. Kennedy, 121 Ohio St. 582 (1930), the Ohio
Supreme Court identified suspected corporate mismanagement as a proper reason for requesting
a corporation’s books and records. Id. at 587. It acknowledged that, in such circumstances, a
shareholder may want to verify that a company’s books are accurate. See id. It also
acknowledged that “[a] refusal of permission to inspect at reasonable times may itself justly
excite a suspicion of unfaithful or inefficient service on the part of the agent.” Id.
{¶53} No-Burn’s assignment of error does not require this Court to determine whether
Dr. Murati’s corporate mismanagement suspicions were reasonable, but only whether the
documents he requested would be relevant to answering his questions about the condition of the
business. R.C. 1701.37, cmt. (explaining that Section 1701.37(C) “will . . . justify the
corporation in refusing an examination of such of its records as are wholly irrelevant to the stated
purpose.”). Ledgers, financial statements, copies of contracts, internal procedure memoranda,
securities records, copies of guarantees, expense reports, salary information, loan documents, and
purchase invoices each relate to the overall condition of the company and could assist Dr. Murati
in determining whether No-Burn is being properly managed.
{¶54} Regarding whether Dr. Murati’s request would burden No-Burn, there is no
express hardship exception under Section 1701.37(C). Even if there were, No-Burn’s chief
executive officer testified that he could produce all of the documents requested and that it would
not be that difficult to produce them in electronic or hardcopy form. While he said that finding
some of the documents could take a significant amount of time, he made no attempt to quantify
the cost to the business.
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{¶55} No-Burn has also argued that it has already provided Dr. Murati with substantial
information about the company. Under Section 1701.37(C), however, Dr. Murati is entitled to
inspect all of the corporation’s books and records of account, not just those that its officers think
he should. Accordingly, I agree that the trial court correctly ordered No-Burn to produce the
remaining 16 categories of documents Dr. Murati requested and that No-Burn’s second
assignment of error should be overruled.
ATTORNEY FEES
{¶56} Dr. Murati’s cross-assignment of error is that the trial court incorrectly denied his
request for attorney’s fees. “Ohio has long adhered to the ‘American rule’ with respect to
recovery of attorney fees: a prevailing party in a civil action may not recover attorney fees as a
part of the costs of litigation.” Wilborn v. Bank One Corp., 121 Ohio St. 3d 546, 2009-Ohio-306,
at ¶7. “However, there are exceptions to this rule. Attorney fees may be awarded when a statute
or an enforceable contract specifically provides for the losing party to pay the prevailing party’s
attorney fees . . . or when the prevailing party demonstrates bad faith on the part of the
unsuccessful litigant[.]” Id. They may also be awarded as an element of compensatory damages
if punitive damages are awarded. Zoppo v. Homestead Ins. Co., 71 Ohio St. 3d 552, 558 (1994).
{¶57} In this case, there is no statutory or contract provision authorizing attorney fees,
and the trial court did not award Dr. Murati punitive damages. Accordingly, to recover his
attorney fees, Dr. Murati had to establish that No-Burn acted in bad faith. The Ohio Supreme
Court has described bad faith as “a general and somewhat indefinite term. It has no constricted
meaning. It cannot be defined with exactness. It is not simply bad judgment. It is not merely
negligence. It imports a dishonest purpose or some moral obliquity. It implies conscious doing
of wrong. It means a breach of a known duty through some motive of interest or ill will. It
27
partakes of the nature of fraud. . . . It means ‘with actual intent to mislead or deceive another.’”
State ex rel. Bardwell v. Cuyahoga County Bd. of Comm’rs, 127 Ohio St. 3d 202, 2010-Ohio-
5073, at ¶8 (quoting Slater v. Motorists Mut. Ins. Co., 174 Ohio St. 148, 151 (1962), overruled
on other grounds by Zoppo v. Homestead Ins. Co., 71 Ohio St. 3d 552 (1994)).
{¶58} No-Burn timely responded to Dr. Murati’s initial requests for information and
provided some documents, attempting to satisfy his inquiries. Dr. Murati was not satisfied with
the information he received and made a written demand under Section 1701.37(C). Four days
later, No-Burn filed for a declaratory judgment, asking the trial court to declare its
responsibilities under the statute. As previously discussed, No-Burn had the right, under Section
1701.37(C), to attempt to show that Dr. Murati did not have a reasonable or proper purpose or to
show that the documents he was requesting were not related to his purpose. While No-Burn
failed to prove its case, there was some competent, credible evidence in the record to support the
trial court’s finding that it did not act in bad faith. I, therefore, agree that the trial court correctly
denied Dr. Murati’s claim for attorney fees and that his assignment of error should be overruled.
CONCLUSION
{¶59} No-Burn forfeited its argument that the documents Dr. Murati requested were not
“books and records of account.” The documents that the trial court ordered it to produce are
relevant to Dr. Murati’s purpose for requesting corporation information, and No-Burn failed to
establish that producing the documents would unduly burden the company. Because Dr. Murati
did not establish that No-Burn acted in bad faith, he was not entitled to recover his attorney fees.
I agree that the judgment of the Summit County Common Pleas Court should be affirmed.
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APPEARANCES:
RONALD S. KOPP and PAUL W. LOMBARDI, Attorneys at Law, for Appellant/Cross-
Appellee.
FRANCES GOINS and ISAAC J. EDDINGTON, Attorneys at Law, for Appellee/Cross-
Appellant.