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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, RamTenn should pursue the derivative claim against Edmondson. Ram-Tenn moved the trial court to accept McLaren's report. See Tenn. Code Ann.

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