House v. Estate of Edmondson

IN THE SUPREME COURT OF TENNESSEE

AT MEMPHIS

November 13, 2007 Session

J. O. HOUSE v. ESTATE OF J. K. EDMONDSON

Appeal by permission from the Court of Appeals, Western Section

Chancery Court for Shelby County

No. 99-0326-02 Arnold B. Goldin, Chancellor

No. W2005-00092-SC-R11-CV - Filed January 25, 2008

A minority shareholder in a closely held Tennessee corporation filed a derivative suit claiming that

the company’s majority shareholder, who also served as the corporation’s president and chairman

of its board of directors, misappropriated corporate funds. The minority shareholder also filed an

individual claim against the majority shareholder alleging that he breached a pre-incorporation

agreement in which the majority shareholder agreed to offer available stock to the corporation and

other shareholders before purchasing the stock himself. A litigation committee appointed by the

corporation to investigate the allegations against the majority shareholder found merit to the charges.

The litigation committee recommended to the corporation that the company either settle the

derivative claim or proceed with the litigation if the majority shareholder was unwilling to resolve

the lawsuit in accordance with terms proposed by the committee. The trial court found that the

litigation committee’s findings and recommendations were in the corporation’s best interests and

that, once a settlement was reached, the derivative suit would be dismissed. The trial court also

granted summary judgment to the majority shareholder on the individual breach of contract claim

and denied the minority shareholder’s request for attorney’s fees. The Court of Appeals affirmed

the trial court’s acceptance of the litigation committee’s report and the denial of attorney’s fees to

the minority shareholder, but reversed the trial court’s grant of summary judgment to the majority

shareholder on the breach of contract claim. We accepted review to determine: (1) whether a

plaintiff in a shareholder’s derivative suit brought on behalf of a for-profit corporation may recover

attorney’s fees; and (2) whether the trial court was correct in adopting the findings of the litigation

committee’s report. We hold that Tennessee law does not authorize an award of attorney’s fees to

a plaintiff in a shareholder’s derivative suit brought on behalf of a for-profit corporation. We also

hold that the trial court did not err in approving the sufficiently independent, thoroughly researched

report of the litigation committee. Accordingly, the judgment of the Court of Appeals as to those

issues is affirmed.

Tenn. R. App. P. 11; Judgment of the Court of Appeals Affirmed

CORNELIA A. CLARK, J., delivered the opinion of the court, in which WILLIAM M. BARKER, C.J.,

and JANICE M. HOLDER and WILLIAM C. KOCH , JR., JJ., joined. GARY R. WADE, J., dissenting.

Tim Edwards, Memphis, Tennessee, and Kent J. Rubens, West Memphis, Arkansas, for the

appellant, J. O. House.

Jef Feibelman, Memphis, Tennessee, for the appellee, Estate of J. K. Edmondson.

John McQuiston, II, Memphis, Tennessee, for the intervenor, Ram-Tenn, Inc.

James G. Stranch, III, Michael J. Wall, and Joe P. Leniski, Nashville, Tennessee, for the Amicus

Curiae, The Plumbers and Pipefitters Local 572 Pension Fund.

OPINION

Factual and Procedural Background

This appeal arises out of a derivative action initiated in the Chancery Court for Shelby

County on behalf of Ram-Tenn, Inc. (“Ram-Tenn”), a closely held Tennessee corporation, by J. O.

House, a minority shareholder of Ram-Tenn. The suit was filed against the corporation’s majority

shareholder, J. K. Edmondson, alleging that Edmondson had misappropriated corporate funds for

his personal use. The plaintiff sought monetary damages and injunctive relief against Edmondson

on behalf of Ram-Tenn. Ram-Tenn intervened in the lawsuit.

In 1968, the plaintiff and Edmondson, along with seven other individuals, formed Ram-Tenn

for the purpose of building, buying, and managing hotels and restaurants. At the time Ram-Tenn was

formed, Edmondson owned 25% of the company’s stock. By 1988, Edmondson was the majority

shareholder, owning 62% of the company’s stock. He was also the president of Ram-Tenn and

chairman of its board of directors. The plaintiff, a minority shareholder of Ram-Tenn since its

inception, owned 5% of the company’s stock. There is no dispute that Ram-Tenn has been

controlled by Edmondson throughout its corporate existence.

In 1997, the plaintiff examined Ram-Tenn’s financial records and discovered that

Edmondson had been misusing corporate funds. The plaintiff discovered, for example, that

Edmondson had used corporate money to pay insurance premiums for another business that he

owned, tuition for an individual attending college, and various personal expenses. The plaintiff also

discovered that Edmondson had used Ram-Tenn funds to make contributions to a church and had

used another corporation in which he had an ownership interest to bill Ram-Tenn for products and

services at inflated prices.

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Following the discovery of Edmondson’s misuse of corporate funds, the plaintiff, on

April 12, 1999, filed this shareholder derivative action against Edmondson alleging that he had

violated his fiduciary obligations to Ram-Tenn. The complaint, which sought monetary damages

as well as injunctive relief, claimed that Edmondson’s actions caused minority stockholders to suffer

a decrease in the value of their investments. In addition to the derivative suit, the plaintiff filed a

claim against Edmondson for breaching a pre-incorporation agreement in which Edmondson agreed

to offer available shares of stock to the corporation and other shareholders before buying the stock

himself. See Hall v. Tenn. Dressed Beef Co., 957 S.W.2d 536, 540 (Tenn. 1997) (holding that

shareholders may bring derivative and individual claims simultaneously). Ram-Tenn subsequently

intervened in the lawsuit and became a party.

In response to the plaintiff’s suit, Ram-Tenn’s board of directors appointed a Memphis

lawyer, Michael McLaren, to serve as a one-person litigation committee to investigate the plaintiff’s

allegations against Edmondson. The board charged McLaren, who had no affiliation with Ram-Tenn

or any of the parties, with the responsibility of determining how the corporation should respond to

the suit. Ram-Tenn’s specific charge to McLaren was to use his “independent business judgment

to determine whether, in the best interest of the corporation, the litigation should be continued,

dismissed, or settled.”

After conducting an investigation with the assistance of an accounting firm, McLaren issued

an initial report and then a supplemental report concluding that Edmondson had misappropriated

$552,501 from Ram-Tenn for his personal use. McLaren recommended to the corporation that the

parties settle the lawsuit for that amount to avoid the expense of further litigation. Specifically,

McLaren recommended that Edmondson pay Ram-Tenn $552,501, which the corporation would

distribute to shareholders according to their ownership interests, less any amounts that shareholders

chose to waive.1 McLaren further recommended that if the parties were unwilling to settle, Ram-

Tenn should pursue the derivative claim against Edmondson. Ram-Tenn moved the trial court to

accept McLaren’s report. See Tenn. Code Ann. § 48-17-401(c) (2002) (a derivative suit “may not

be discontinued or settled without the court’s approval”).2

Following multiple hearings in which the plaintiff, McLaren, and others testified, the trial

court, on January 16, 2004, approved McLaren’s report recommending that the case be settled by

Edmondson paying Ram-Tenn $552,501. The trial court found that McLaren’s findings and

recommendations were in the corporation’s best interests and that, once a settlement was reached,

1

Ninety percent of such payments were eventually waived by Ram-Tenn’s shareholders. It should also be noted

that Ram-Tenn’s principal asset, a hotel in Nashville, was sold for $3,400,000 before McLaren’s reports were issued.

McLaren described the company in his reports as “nonfunctioning.” The company is apparently in wind-up mode

pending the conclusion of this litigation.

2

Because the language of the cited statutes has not changed from the version in effect in 1998, the year this suit

commenced, we cite to the most recent edition.

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the derivative suit would be dismissed.3 The trial court also directed that any funds paid by

Edmondson as part of the settlement be placed in escrow pending any appeal. Finally, the trial court

granted summary judgment to Edmondson on the plaintiff’s individual claim that Edmondson had

breached a pre-incorporation agreement. Accordingly, the trial court found that Edmondson properly

owned 62% of Ram-Tenn’s stock.

While the case was pending in the trial court, the plaintiff requested that attorney’s fees be

awarded to him on the theory that the derivative suit against Edmondson had benefitted the

corporation. The trial court and the Court of Appeals declined to award attorney’s fees based on the

principle that litigants must pay their own attorney’s fees absent a statute or an agreement providing

otherwise. The courts below reasoned that the statutes governing for-profit corporations such as

Ram-Tenn do not provide for an award of attorney’s fees to a shareholder bringing a derivative

action. The Court of Appeals further concluded that the trial court properly approved McLaren’s

report. However, the Court of Appeals, in a divided decision, reversed the grant of summary

judgment to Edmondson on the plaintiff’s individual breach of contract claim. With respect to this

claim, the intermediate court found that there were disputed issues of fact concerning the plaintiff’s

knowledge of Edmondson’s acquisition of additional stock for statute of limitations purposes. This

part of the intermediate court’s decision–which remanded the case for a determination of whether

the plaintiff’s breach of contract claim was timely–has not been challenged in this Court. Thus, the

plaintiff’s individual claim against Edmondson is not before us.4

Analysis

I. Attorney’s Fees

The primary issue before us is whether a plaintiff in a shareholder’s derivative suit brought

on behalf of a for-profit corporation may recover attorney’s fees. The trial court found that

Tennessee law does not provide for an award of attorney’s fees to a plaintiff in a derivative suit

involving a for-profit company. The Court of Appeals agreed, holding that the statutes governing

for-profit corporations do not contemplate an award of attorney’s fees to a plaintiff. The

intermediate court further concluded that attorney’s fees were not available under the common fund

doctrine. We agree.

We begin our analysis of this issue by noting that Tennessee, like most jurisdictions, adheres

to the “American rule.” John Kohl & Co. v. Dearborn & Ewing, 977 S.W.2d 528, 534 (Tenn. 1998).

The American rule provides that a party in a civil action may not recover attorney’s fees absent a

3

The parties’ briefs indicate that the derivative suit has in fact been settled subject to the approval of the trial

court and the outcome of this appeal.

4

Edmondson passed away in December 2006 while the case was pending in the Court of Appeals. Upon motion

of the parties, this Court substituted Edmondson’s estate as the proper party.

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specific contractual or statutory provision providing for attorney’s fees as part of the prevailing

party’s damages. Id.

The American rule, which has been described by this Court as “firmly established in this

state,” State v. Brown & Williamson Tobacco Corp., 18 S.W.3d 186, 194 (Tenn. 2000), is based on

several public policy considerations. First, since litigation is inherently uncertain, a party should not

be penalized for merely bringing or defending a lawsuit. Fleischmann Distilling Corp. v. Maier

Brewing Co., 386 U.S. 714, 718 (1967), superseded by statute on other grounds, Act of Jan. 2, 1975,

Pub. L. No. 93-600, 88 Stat. 1955. Second, the poor might be unjustly discouraged from instituting

actions to vindicate their rights if the penalty for losing included paying the fees of their opponent’s

lawyer. Id. Third, requiring each party to be responsible for their own legal fees promotes

settlement. Allstate Ins. Co. v. Huizar, 52 P.3d 816, 818 (Colo. 2002). Fourth, the time, expense,

and difficulty inherent in litigating the appropriate amount of attorney’s fees to award would add

another layer to the litigation and burden the courts and the parties with ancillary proceedings.

Fleischmann, 386 U.S. at 718. Thus, as a general principle, the American rule reflects the idea that

public policy is best served by litigants bearing their own legal fees regardless of the outcome of the

case.

As with most rules, however, there are exceptions to the American rule. One of these

exceptions is the common fund doctrine. The common fund doctrine provides that attorney’s fees

may be awarded when the efforts of a litigant succeeds in “securing, augmenting, or preserving

property or a fund of money in which other people are entitled to share in common.” Travelers Ins.

Co. v. Williams, 541 S.W.2d 587, 589 (Tenn. 1976). In that event, the beneficiaries of the fund or

property may be required to contribute to the litigant’s attorney’s fees by having those fees assessed

against the fund or property itself. Kline v. Eyrich, 69 S.W.3d 197, 204 (Tenn. 2002). Designed to

spread attorney’s fees among the various beneficiaries to the fund or property, the doctrine serves

two important purposes.

First, the doctrine prevents the beneficiaries of legal services from being unjustly

enriched by requiring them to pay for those services according to the benefit received.

Second, the doctrine serves to spread the costs of litigation proportionally among all

of the beneficiaries so that the plaintiff does not bear the entire burden alone.

Id. (citations omitted).

Whether the common fund doctrine applies in a given case is a question of law for the court

to decide. Id. at 203. Accordingly, the appropriate standard of review on appeal is de novo,

according no presumption of correctness to the trial court's decision. Id. However, “upon finding

that the common fund doctrine is applicable, ‘[t]he allowance of attorney’s fees is . . . largely in the

discretion of the trial court.’” Id. (first alteration in original) (quoting Aaron v. Aaron, 909 S.W.2d

408, 411 (Tenn. 1995)). Consequently, a trial court’s award of fees will be upheld unless it has

abused its discretion, “meaning that it either applied an incorrect legal standard or reached a clearly

unreasonable decision” resulting in an injustice. Id. at 203-04.

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A. Statutory Law

Guided by these principles, we turn to the precise issue before us–whether Tennessee law

authorizes an award of attorney’s fees to a plaintiff in a derivative suit brought on behalf of a for-

profit corporation. At one time, Tennessee law clearly permitted such an award. In 1968, the

legislature enacted Tennessee Code Annotated section 48-718, which provided for an award of

attorney’s fees to both plaintiffs and defendants. Under section 48-718(4), “[i]f the suit [brought on

behalf of the corporation for profit] is successful, . . . the court may award the [plaintiff] reasonable

expenses and reasonable attorneys’ fees.” This section went even further and provided that the court

“shall declare a lien upon the recovery made by the corporation to secure the payment to the

[plaintiff] and [the plaintiff’s] attorneys of the amount thus awarded.”5 Tenn. Code Ann. § 48-

718(4). Additionally, under section 48-718(5), if there was a finding “that the suit was brought

without reasonable cause,” the court “may require the [plaintiff] to pay to the party or parties named

as defendant or defendants the reasonable expenses, including fees of attorneys, incurred by them

in the defense of such suit.”

In 1986, the General Assembly updated Tennessee’s corporation statutes. In the process of

doing so, the General Assembly considered the revised Model Business Corporation Act of 1984

(MBCA). See Kradel v. Piper Industries, Inc., 60 S.W.3d 744, 749 (Tenn. 2001). Like the already-

existing Tennessee statute, section 48-718, the MBCA specifically provided for the recovery of

attorney fees by both successful plaintiffs and defendants. See Model Bus. Corp. Act § 7.46(1) (“On

termination of the derivative proceeding the court may . . . order the corporation to pay the plaintiff’s

reasonable expenses (including counsel fees) incurred in the proceeding . . . .”); Model Bus. Corp.

Act § 7.46(2) (“On termination of the derivative proceeding the court may . . . order the plaintiff to

pay any defendant’s reasonable expenses (including counsel fees) incurred in defending the

proceeding . . . .”). Thus, the General Assembly, in revising Tennessee’s corporation statutes, had

before it two clear methods to allow successful plaintiffs to continue to have the ability to receive

attorney’s fees in shareholder derivative suits; the legislature could either have (1) adopted the

language of section 7.46(1) of the MBCA or (2) reincorporated existing section 48-718 into the

updated legislation.

However, the Tennessee Business Corporation Act of 1986 (TBCA), as adopted by the

legislature and codified at Tennessee Code Annotated sections 48-11-101 to -27-103 (2002 & Supp.

2006), does not include language similar to that found in either Tennessee Code Annotated section

48-718(4) or section 7.46(1) of the MBCA. Instead, in enacting the TBCA, the legislature repealed

5

Although by its terms section 48-718 applied to for-profit corporations, it was construed by the Court of

Appeals to apply to not-for-profit corporations as well. See Hannewald v. Fairfield Cmtys., Inc., 651 S.W .2d 222 (Tenn.

Ct. App. 1983). In Hannewald, the intermediate court, in awarding attorney’s fees to a derivative plaintiff, reasoned that

attorney’s fees were necessary in shareholder derivative suits “to encourage and assist shareholders . . . in pursuing

justified claims for the benefit of corporations in which they have a valid interest.” Id. at 230.

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section 48-7186 in its entirety and chose not to include all of the suggested language found in the

MBCA. As the TBCA was written in 1986 and as it reads today, there is no corresponding provision

to either 48-718(4) or 7.46(1) in the act allowing a successful plaintiff to recover attorney’s fees.

Instead, the legislature adopted what is now Tennessee Code Annotated section 48-17-401(d), which

limits the recovery of attorney’s fees in derivative actions to only successful defendants. Thus,

section 48-718 was expressly repealed and replaced with a provision that contemplates an award of

attorney’s fees to a defendant if the derivative suit has no factual or legal basis, but no provision

entitling plaintiffs to attorney’s fees, as the former statute did. For whatever reason, the General

Assembly specifically chose not to include such a provision.

Accordingly, it is apparent to us that the legislature affirmatively considered and determined

the circumstances in which attorney’s fees may be awarded in a shareholder derivative suit.

Moreover, the General Assembly’s decision not to include plaintiffs in section 48-17-401(d) may

not be interpreted as silence on the issue. That body replaced a statute that permitted successful

plaintiffs and defendants to recover attorney’s fees in a derivative action with a statute permitting

only successful defendants to recover attorney’s fees. While the dissent views this course of action

as “legislative silence,” we do not. This Court has stated that a change in the law by statute raises

a presumption that a departure from the old law was intended, State v. Turner, 193 S.W.3d522, 527

(Tenn. 2006), and not merely an omission or mistake on the part of the legislature. While we, like

the drafters of the MBCA, might see merit in permitting successful plaintiffs in a derivative action

to recover attorney’s fees, it is not for this Court to question the wisdom of this statutory scheme.

Instead, we are to construe and apply the law as written. See Carson Creek Vacation Resorts, Inc.

v. Dept. of Revenue, 865 S.W.2d 1, 2 (Tenn. 1993). Therefore, we conclude that the controlling

statutes simply do not provide for an award of attorney’s fees to derivative plaintiffs in actions

involving for-profit corporations. Although the dissent essentially urges us to do so, we decline to

resurrect judicially a repealed statute, no matter how equitable it might seem to do so. See McBrayer

v. Dixie Mercerizing Co., 144 S.W.2d 764, 768 (Tenn. 1940) (holding that courts “cannot, of course,

under the guise of construction amend or alter [statutes]”).

B. Case Law

The plaintiff and the amicus curiae maintain, and the dissent agrees, that even in the absence

of statutory authority for an award of attorney’s fees, such fees should be recoverable under the

common fund doctrine because successful derivative suits confer a benefit upon the corporation.

They rely upon Grant v. Lookout Mountain Co., 28 S.W. 90 (Tenn. 1894), which held that attorney’s

fees may be awarded to a plaintiff in a shareholder derivative action. Id. at 93. The problem with

the plaintiff’s reliance upon Grant, however, is that the case was decided nearly a century before the

adoption of the Tennessee Business Corporation Act, which plainly sets out the type of cases in

which attorney’s fees may be awarded. See Tenn. Code Ann. § 48-17-401(d). Cases such as the

present one are not among those included in the statutes governing for-profit corporations. Thus,

6

In 1984, section 48-718 was renumbered as section 48-1-718. Sections 48-1-701 to -721 were repealed by the

TBCA. See Tenn. Code Ann. §§ 48-1-701 to -721, repealed (2002).

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Grant has been abrogated by subsequent changes in the law and, as such, does not compel the result

urged by the plaintiff and the amicus.7

The plaintiff and the amicus also rely upon an unreported case, McRedmond v. Estate of

Marianelli, No. M2004-01496-COA-R3-CV, 2006 WL 2805158 (Tenn. Ct. App. Sept. 29, 2006).

In that case, the trial court in a shareholder’s derivative action awarded attorney’s fees against a

Kentucky company pursuant to Kentucky’s common fund doctrine. The issue in McRedmond, as

framed by the parties, was whether the trial court “erred in its application of the Kentucky common

fund doctrine in ordering [the Kentucky corporation] to pay the attorneys’ fees and expenses of the

[] derivative plaintiffs.” Id. at *7. In affirming the trial court’s award of fees, the Court of Appeals

noted that “[t]he applicable law in this case is Kentucky law.” Id. at *4. Despite the intermediate

court’s declaration that Kentucky law governed, however, the court went on to state that the question

before it was “whether the common fund doctrine (either under Tennessee or Kentucky law) applies

under the facts of this case. We find that it does.” Id. at *20. Regardless of which state’s law was

actually applied in McRedmond, that case is not dispositive of the present case. To the extent that

McRedmond may be construed to conflict with our decision today, it is overruled.

Finally, the plaintiff and the amicus rely upon Hannewald where, as noted, the Court of

Appeals, in awarding attorney’s fees to a plaintiff in a shareholder derivative suit, reasoned that

attorney’s fees were necessary “to encourage and assist shareholders . . . in pursuing justified claims

for the benefit of corporations in which they have a valid interest.” Hannewald, 651 S.W.2d at 230.

Citing Hannewald, the plaintiff and amicus argue that disallowing attorney’s fees to plaintiffs will

chill shareholder derivative litigation because minority shareholders lack the practical means to hold

corporate fiduciaries accountable for their actions. They assert that contingency fee arrangements

would serve no beneficial purpose because the corporation itself, not the client, would receive any

proceeds of the litigation, and that few clients would have the financial means to pay an hourly fee.

It seems to us that while these arguments are not unreasonable given the complex nature of

derivative litigation, their merits should be addressed by the legislature, for that body has made a

policy choice to depart from former law providing for attorney’s fees in cases involving for-profit

7

The dissent argues that Grant remains viable despite the repeal of section 48-718. Relying on Tucson Gas &

Electric Co. v. Schantz, 428 P.2d 686, 690 (Ariz. Ct. App. 1967), and Lavin v. Jordan, 16 S.W .3d 362, 368 (Tenn.

2000), the dissent asserts that a common law rule is not explicitly abrogated by statute unless the statute clearly reflects

legislative intent to do so. As we see it, however, the abrogation of the common law, as reflected in Grant, was explicit

and intended by the legislature. In 1968, the General Assembly subsumed the common law common fund doctrine into

section 48-718. Subsequently, when the TBCA was passed in 1986, section 48-718 was explicitly rejected by the

legislature when not included into the new Act. “As a general rule of statutory construction, a change in the language

of the statute indicates that a departure from the old language was intended.” Lavin, 16 S.W .3d at 369. Therefore, in

intentionally removing section 48-718, the General Assembly placed the common law rule at odds with the TBCA. And,

as this Court has previously stated, “[w]hen there is a conflict between the common law and a statute, the provision[s]

of the statute must prevail.” Id. at 368 (quoting Graves v. Illinois Cent. R.R. Co., 148 S.W . 239, 242 (Tenn. 1912)).

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corporations. Furthermore, we note that, like Grant, Hannewald predates the adoption of the

Tennessee Business Corporation Act. Thus, Hannewald is of little avail to the plaintiff.

In sum, we hold that Tennessee law does not authorize an award of attorney’s fees to a

plaintiff in a shareholder’s derivative suit involving a for-profit corporation. If the application of the

relevant statute, namely section 48-17-401(d), produces an unfair or unintended result,8 the answer

lies in changing the statute.

II. Litigation Committee’s Report

Following multiple hearings in which the plaintiff, McLaren, and others testified, the trial

court, on January 16, 2004, approved McLaren’s report recommending that the case be settled by

Edmondson paying Ram-Tenn $552,501. See Tenn. Code Ann. § 48-17-401(c) (derivative suits

“may not be discontinued or settled without the court’s approval”). The trial court found that

McLaren’s findings and recommendations were in the corporation’s best interests and that, once a

settlement was reached, the derivative suit would be dismissed. If the case failed to settle, the

derivative action would proceed.

The plaintiff maintains that the trial court erred in approving McLaren’s report. According

to the plaintiff, McLaren improperly limited his investigation of Edmondson’s activities to four years

prior to the filing of the complaint. The plaintiff contends that had the investigation been broadened

by going back further McLaren would have discovered larger sums misappropriated by Edmondson.

The plaintiff also asserts that McLaren’s report should have been rejected by the trial court because

his conclusions and recommendations were the product of an inadequate investigation. Resolving

these issues requires that they be viewed in the context of certain well-established principles.

Generally, “the proper party to bring a claim on behalf of a corporation is the corporation itself

acting through its directors or a majority of its shareholders.” Daily Income Fund, Inc. v. Fox, 464

U.S. 523, 531-32 (1984). However, since at least 1874, the courts of this state have been available

to enforce the rights of corporations and their stockholders through what is called a derivative action.

See Deaderick v. Wilson, 67 Tenn. (1 Heisk.) 108 (1874). A derivative action is a suit brought by

one or more shareholders on behalf of a corporation to redress an injury sustained by, or to enforce

a duty owed to, the corporation. See Bourne v. Williams, 633 S.W.2d 469, 471 (Tenn. Ct. App.

1981). Thus, a derivative action is an exception to the rule that the corporation itself is the proper

party to bring suit on its own behalf.

Tennessee, like other jurisdictions, has approved a corporation’s appointment of an

independent individual or group, called a special litigation committee, as a mechanism for assessing

the merits of a shareholder’s derivative action and for making recommendations to the corporation

concerning its resolution. See Lewis v. Boyd, 838 S.W.2d 215, 222-24 (Tenn. Ct. App. 1992). As

8

Plaintiff’s counsel has suggested to this Court that the omission of attorney’s fees for plaintiffs in section 48-17-

401 was due to “bad drafting.”

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our courts have recognized, these litigation committees “provide a legitimate vehicle for expressing

a corporation’s interest in derivative litigation.” Id. at 223. Given that a shareholder derivative action

cannot be dismissed or settled without court approval, Tenn. Code Ann. § 48-17-401(c), courts

deciding whether to accept a litigation committee’s recommendations consider a number of factors,

including the committee’s independence, good faith, procedural fairness, and the soundness of the

committee’s conclusions and recommendations. Lewis, 838 S.W.2d at 225. Although courts should

critically evaluate the committee’s findings and recommendations to determine whether they were

made in good faith, are supported by the record of the investigation, and are consistent with the

corporation’s best interests, they should not substitute their own business judgment for that of the

committee’s. Id. at 224.

In this case, the plaintiff does not challenge Ram-Tenn’s decision to appoint McLaren to serve

as a one-person litigation committee. Nor does the plaintiff challenge McLaren’s independence or

his good faith.9 Rather, the plaintiff’s arguments for rejecting McLaren’s report center on whether

McLaren acted with procedural fairness and whether his conclusions and recommendations were the

product of an inadequate investigation.

As to the procedure employed by McLaren, the plaintiff argues that McLaren improperly

restricted the scope of his review of Ram-Tenn’s records to 1994–four years prior to the filing of the

complaint. In deciding to limit his inquiry to the period 1994 forward, McLaren applied the three-

year statute of repose found at Tennessee Code Annotated section 48-18-601, which governs actions

alleging a breach of fiduciary duty by a director or officer of a corporation. That statute adopts a one-

year statute of limitations for such claims, but provides that “[i]n no event shall any such action be

brought more than three (3) years after the date on which the breach or violation occurred, except

when there is fraudulent concealment on the part of the defendant, in which case the action shall be

commenced within one (1) year” after the breach is or should have been discovered. Tenn. Code

Ann. § 48-18-601 (2002). McLaren, relying upon section 48-18-601 in framing the scope of his

investigation, applied a three-year statute of repose and added an additional year for any fraudulent

concealment that may have occurred.10 The plaintiff maintains that McLaren should have broadened

9

In evaluating the independence of a litigation committee, courts consider factors such as the size of the

committee, the committee members’ relationship with the corporation’s officers and directors, their qualifications and

experience, the scope of the committee’s authority, and the committee’s autonomy from the officers and directors. Lewis,

838 S.W .2d at 224. It is undisputed in this case that McLaren had no affiliation with Ram-Tenn or any of the parties

when Ram-Tenn appointed him. Further, it is undisputed that McLaren has been a licensed attorney for 26 years,

focusing his practice in the area of commercial litigation.

10

W hen questioned at trial as to why he added only one additional year for any fraudulent concealment that may

have occurred, McLaren testified that he made a judgment call to limit the time period of the investigation to four years

prior to the filing of the complaint because of the cost and practical difficulty of getting Ram-Tenn’s records prior to that

time. As he stated, Ram-Tenn had few records for the period prior to 1994, and it would have taken longer and been

more costly to keep digging beyond four years. The evidence does not preponderate against these findings. Moreover,

in the litigation committee report, McLaren stated:

(continued...)

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the scope of his investigation even further by covering a ten-year period under Tennessee Code

Annotated section 28-3-110 (2000), which provides that “cases not expressly provided for” must be

commenced within ten years after the cause of action accrues. Alternatively, the plaintiff argues that

McLaren should have broadened the scope of his investigation by covering a six-year period under

Tennessee Code Annotated section 28-3-109 (2000), the limitations period applicable to breach of

contract actions.

The plaintiff’s argument that McLaren improperly limited the scope of his investigation into

Edmondson’s activities is unpersuasive. The legislature has clearly provided a limitations period

applicable to cases of this type in section 48-18-601. Under its own terms, that statute applies to

“[a]ny action alleging a breach of fiduciary duties by directors or officers” of a corporation. The

present case falls squarely within the ambit of section 48-18-601. Therefore, the limitations periods

set forth in sections 28-3-109 (six years for breach of contract) and 28-3-110 (ten years for cases “not

expressly provided for”) do not apply. Thus, we conclude, as the Court of Appeals did, that McLaren

did not improperly limit the scope of his investigation.

The plaintiff also argues that McLaren’s conclusions and recommendations are the product

of an inadequate investigation and are inconsistent with the corporation’s best interests. In

considering this issue, we note that courts take into account several factors in determining the

adequacy of a litigation committee’s investigation. These factors include the length and scope of the

investigation, the committee’s use of independent experts, the corporation’s or the defendant’s

involvement in the investigation, and the adequacy and reliability of the information supplied to the

committee. Lewis, 838 S.W.2d at 224. Moreover, in assessing whether the committee has reached

a decision that is in the corporation's best interests, courts consider the likelihood that the plaintiff will

succeed on the merits, the financial burden on the corporation of litigating the case, the extent to

which dismissal will permit the defendant to retain improper benefits, and the effect continuing the

litigation will have on the corporation's reputation. Id.

10

(...continued)

After a great deal of work on this matter, some definite conclusions can be drawn:

....

3. That little or no effort was made [by Edmondson] to conceal the misappropriations, and the sums

misappropriated would have been apparent to anyone reviewing the books, accounts, and records . .

..

....

6. That little or no effort was made by any shareholder to monitor or even inquire as to the affairs of

Ram-Tenn, Inc. . . . .

....

10. That [the plaintiff] (or any other shareholder) in the exercise of any due diligence, [sic] could have

ascertained the nature and extent of Edmondson’s misappropriations at any time.

Given McLaren’s findings and the language found within section 48-18-601 requiring fraudulent concealment on the part

of the defendant in order to extend the statute of limitations beyond one year, see Tenn. Code Ann. § 48-18-601,

McLaren’s decision to extend the scope of review of his report to as many as four years prior to the filing of the lawsuit

appears to be generous to the plaintiff.

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Mindful of these principles, we note that the record before us establishes that McLaren, an

experienced commercial litigator, began his investigation in December 1999 and rendered his first

report in October 2000 and a supplemental report in July 2001. Thus, McLaren’s investigation

spanned nineteen months. During that time, he employed an accounting firm to assist in the

investigation at a cost of at least $50,000 to Ram-Tenn. The accounting firm spent 275 hours on the

case. McLaren’s law firm spent 313 hours performing the investigation at a cost of $70,000 to Ram-

Tenn. Further, McLaren consulted with an expert in the hotel industry, along with the real estate

appraiser involved in the sale of Ram-Tenn’s hotel in Nashville. Thus, not only did McLaren employ

outside experts to assist in the lengthy investigation, he spent many hours–at least 250–on the case

himself.

Furthermore, we note that McLaren’s reports, along with exhibits to the reports, are detailed

and extensive, encompassing hundreds of pages. The accounting firm’s report by itself is sixty-three

pages in length and details the areas of inquiry. Numerous exhibits to the reports, along with the

testimony of McLaren and the accountant who assisted him, more than adequately reflect their

extensive efforts at uncovering Edmondson’s activities. McLaren testified that none of Ram-Tenn’s

officers or directors attempted to prevent him from receiving any information and that nothing was

concealed from him. McLaren described Edmondson as “open and willing to provide” whatever he

requested. Indeed, it is uncontraverted that McLaren examined all of Ram-Tenn’s records that could

be located.

The record also reflects that McLaren deposed witnesses and reviewed thousands of

documents supplied by the plaintiff and others. He also met several times with individuals who could

provide useful information including, among others, the custodian of Ram-Tenn’s records, corporate

counsel, the plaintiff, Edmondson, and their lawyers. Further, McLaren reviewed the law concerning

stock transfers, statutes of limitations, damages, and the role of special litigation committees. The

record also demonstrates that in arriving at his recommendation that the case be settled, McLaren took

into account a number of relevant factors–“the likelihood of success on the merits, the extraordinary

expense of going forward with the case,11 the delay in wrapping up the affairs of the nonfunctioning

corporation, the age of [Edmondson who was in his eighties and in poor health], the length of time

involved to try the case, and the almost certain appellate process following any trial.” In the event

Edmondson refused to settle in accordance with terms specified in his reports, McLaren

recommended that Ram-Tenn pursue the case against him.

Based upon the extensive record before us, we find unconvincing the plaintiff’s argument that

McLaren’s conclusions and recommendations were the product of an inadequate investigation.

Indeed, it is difficult to pinpoint what more McLaren could have done in the nineteen months that he

conducted the investigation on behalf of Ram-Tenn. Moreover, we have no basis to find that

McLaren failed to exercise sound business judgment in determining that the best interests of Ram-

Tenn–a nonfunctioning, closely held company–would be served if the case were settled, especially

11

McLaren estimated that to continue the litigation would cost “far in excess” of $250,000 in attorneys’s fees

alone.

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given that the company’s primary asset had been sold, the litigation has spanned nearly nine years,

and the company is in wind-up mode pending the conclusion of this suit.12 In short, the record more

than adequately demonstrates that McLaren’s conclusions and recommendations were the product of

much time, effort, and expense. In light of these circumstances, we will not, as we have said,

substitute our business judgment for that of the duly appointed independent litigation committee.13

Conclusion

For the foregoing reasons, we hold that Tennessee law does not authorize an award of

attorney’s fees to a plaintiff in a shareholder’s derivative suit brought on behalf of a for-profit

corporation. We further hold that the trial court did not err in approving the report of the litigation

committee. Accordingly, the judgment of the Court of Appeals is affirmed. The costs in this Court

are taxed to the plaintiff, J. O. House, and his surety, for which execution may issue if necessary.

___________________________________

CORNELIA A. CLARK, JUSTICE

12

It is interesting to note that M cLaren made a judgment call at the outset of his investigation that because Ram-

Tenn’s records were not kept in a “sophisticated fashion,” expenditures that could not be supported with documentation

would be held against Edmondson and placed “in the repayment column.” In other words, any lack of information was

automatically charged against Edmondson. Contrary to the plaintiff’s argument that McLaren’s conclusions and

recommendations were not in Ram-Tenn’s best interests, it seems plausible to us that this approach by McLaren suggests

the possibility that McLaren’s findings may actually be generous in favor of the corporation.

13

The plaintiff makes additional arguments concerning the scope of McLaren’s authority and the method by

which proposed settlement proceeds were to be paid by Edmondson. We have concluded that these alternative arguments

have no merit.

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