Christopher K. Kesling, DDS, MS, Adam Kesling and Emily Kesling v. Andrew C. Kesling, individually and as Trustee of the Andrew C. Kesling Trust
2017 Ind. App. LEXIS 378
| Ind. Ct. App. | 2017Background
- TP Orthodontics, Inc. (TPO) is a closely held family corporation; Andrew Kesling holds 51% voting stock and is president; three sibling minority shareholders (Christopher, Adam, Emily — the Sibling Shareholders) own 11% collectively.
- In 2010 the Sibling Shareholders sued Andrew individually and derivatively alleging breaches (royalty/patent advances, personal use of TPO funds, governance failures, etc.). TPO intervened and the board formed a disinterested Special Litigation Committee (SLC) under Ind. Code § 23-1-32-4.
- The SLC investigated and recommended rejecting most claims but pursuing four claims on behalf of TPO; TPO moved to dismiss the rejected claims and for summary judgment as to the remaining claims, designating a redacted SLC report.
- After prolonged discovery disputes and remand from the Indiana Supreme Court, the trial court found the SLC was disinterested and acted in good faith, dismissed the rejected claims, held the four remaining claims are derivative, and declined in its discretion to permit the siblings to proceed directly under the Barth exception; it clarified that TPO (through its board) may pursue the derivative claims.
- On appeal the Sibling Shareholders limited their challenge to the trial court’s refusal to apply the Barth close-corporation exception (permitting a direct suit) and the court’s determination that TPO’s board is the proper party to prosecute the derivative claims. The appellate court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Barth close-corporation exception permits minority shareholders to sue directly on derivative claims | Sibling Shareholders: as shareholders of a closely held company they should be allowed to proceed directly under Barth | TPO: the claims are derivative; Barth is an exception the shareholders must prove; trial court should deny direct action | Held: trial court did not abuse discretion in declining to apply Barth; direct action denied |
| Who bears the burden in summary judgment to show (non)applicability of the Barth exception | Siblings: movant (TPO) must show Barth does not apply in summary judgment | TPO: shareholders seeking to circumvent derivative rule bear the burden to prove Barth factors | Held: burden is on the shareholders to prove the exception; they failed to do so |
| Whether permitting direct action would implicate Barth factors (multiplicity of actions, creditor prejudice, fair distribution) | Siblings: factors weigh against concern; few shareholders will pursue, creditors unaffected, and they promise to remit recovery | TPO: multiple nonparty shareholders exist; creditor interests and fair distribution concerns remain; pledge unenforceable | Held: appellate court agreed with TPO — siblings did not show the Barth factors were absent; trial court’s discretion affirmed |
| Whether TPO’s board (post‑SLC) is a proper party to prosecute the derivative claims | Siblings: board is controlled by Andrew and lacks independence/motivation; SLC was uniquely disinterested and no longer exists, so siblings should pursue derivatively | TPO: corporation, through its board, controls corporate claims; SLC findings are presumptively conclusive; board may assume prosecution and directors are fiduciary‑bound | Held: trial court did not abuse discretion; TPO’s board is a proper party to pursue claims, with judicial oversight and shareholder remedies available if board shirks duties |
Key Cases Cited
- TP Orthodontics, Inc. v. Kesling, 15 N.E.3d 985 (Ind. 2014) (prior appeal describing SLC process and remand)
- Barth v. Barth, 659 N.E.2d 559 (Ind. 1995) (adopting limited exception allowing direct suits by minority shareholders in closely held corporations under specified safeguards)
- Barth v. Barth, 693 N.E.2d 954 (Ind. Ct. App. 1998) (discussing derivative-direct distinction and close-corporation exception)
- G & N Aircraft, Inc. v. Boehm, 743 N.E.2d 227 (Ind. 2001) (applying Barth exception where Barth factors posed no concern)
- In re Guidant S'holders Derivative Litig., 841 N.E.2d 571 (Ind. 2006) (recognizing statutory preference for board direction and SLC presumptions)
- Massey v. Merrill Lynch & Co., 464 F.3d 642 (7th Cir. 2006) (corporation, not individual shareholders, retains the cause of action when the corporation is injured)