Court OKs Attorney Fees for PSU Trustees in Battle Over Freeh Docs
Seven Penn State trustees are entitled to attorney fees and costs after a nearly two-year-long battle over access to the materials that formed the basis of the Freeh report, the Commonwealth Court has ruled.
Reversing a Centre County trial judge's ruling, a three-judge panel unanimously ruled in In re Application by Nonprofit Corporation Trustees to Compel Inspection of Corporate Information that the alumni-elected trustees are due counsel fees and costs under an indemnification provision of the university's bylaws.
The court was split 2-1, however, in finding that Penn State's corporate charter also requires the university to foot the bill for litigation involving a trustee—even if it's litigation brought by the trustee against the school.
"Here, the applicable bylaw states that a trustee 'shall be entitled as of right to be indemnified by the university against expenses ... paid or incurred by such person ... in connection with any other action,'" President Judge Mary Hannah Leavitt wrote for the majority. "An 'action' is defined in the bylaws as any proceeding to which a trustee is a party. Indemnification is not limited, as the university contends, to those 'actions' where the trustee is a defendant."
Leavitt, joined on the panel by Judges Patricia A. McCullough and Julia K. Hearthway, said the trustees are entitled to recoup fees and costs incurred in both the initial litigation over the Freeh source materials and the subsequent appeal of the fee award issue. The appeals court remanded the case to the trial court to calculate the award.
McCullough penned a concurring and dissenting opinion, noting that while she agreed that the trustees were entitled to fees and costs under the bylaws, she believed the university's charter was silent on the issue.
In April 2015, trustees Edward B. Brown III, Barbara L. Doran, Robert C. Jubelirer, Anthony P. Lubrano, Ryan J. McCombie, William F. Oldsey and Alice W. Pope filed their petition to compel Penn State to turn over all documents and materials that Louis Freeh and his firms, Freeh Sporkin & Sullivan and Freeh Group International Solutions, used when investigating and developing the Freeh report. That report, which was issued in July 2012, outlined the findings of Penn State's internal investigations into convicted child molester Jerry Sandusky's conduct and the school's alleged failure to report the abuse.
Along with saying that the source documents were necessary for the trustees to perform their duties, the trustees cited ongoing civil actions against the university in Sandusky-related cases, and the possibility of taking legal action over possible damages caused by the report as reasons for why the documents should be turned over.
According to the petition, which was filed with the Centre County Court of Common Pleas, the information would be necessary to "assess the propriety of instituting legal action on behalf of the university relating to matters addressed in the Freeh report or circumstances surrounding issuance of the Freeh report," and "to objectively determine whether the conclusions in the Freeh report mischaracterized and misrepresented an alleged institutional failure by the university and its administration and, if so, whether the [Special Investigations Task Force], the chairman or any other trustee knew or should have known that the Freeh report was inaccurate."
The university opposed the petition, arguing that the Freeh source materials were not reasonably related to the trustees' duties and alleging that the trustees were likely to use the information in a way that would violate their fiduciary duty to the university, according to Leavitt. The school also contended that the interviewees had been promised that their identities would remain confidential and that their statements would be protected by attorney-client privilege.
In November 2015, however, Centre County Court of Common Pleas Senior Judge Daniel L. Howsare granted the trustees' petition to compel, citing the state Supreme Court's 1912 decision in Machen v. Machen & Mayer Electrical Manufacturing, which held that "'the right of a director to inspect corporate information [is] unqualified.'"
But Howsare declined to award attorney fees and costs to the trustees, finding that while the university's defense was ultimately unsuccessful, it was not lodged "'for the purpose of causing annoyance'" and therefore did not constitute a dilatory, obdurate or vexatious act, according to Leavitt.
In addition, the corporate charter states that "trustees may be reimbursed upon request for transportation and other direct expenses while engaged in the discharge of their official duties, in accordance with the university's travel reimbursement policies in effect from time to time." Howsare reasoned that because the corporate charter specifies that reimbursement will be made in accordance with the travel reimbursement policies, it does not authorize reimbursement for a trustee's litigation expenses.
But Leavitt rejected that interpretation.
"If the corporate charter limits a trustee's reimbursement to travel expenses alone, then the phrase 'other direct expenses while engaged in the discharge of their official duties' is surplusage and has no meaning," Leavitt said, adding, "Trustees are volunteers, but they are not expected to personally fund their expenses in providing their services. Otherwise, only persons of financial means would be able to serve as trustees."
As for the applicability of the bylaws' indemnification provision, Leavitt said the appeals court was not swayed by Penn State's reliance on a statement by university President Eric J. Barron that "'the bylaws do not require the university to pay for lawsuits against it, including frivolous and damaging lawsuits.'"
"President Barron's opinion cannot trump the words of the bylaws," Leavitt said. "In any case, the president's statement has no application because trustees' petition to compel was not frivolous. Indeed, they prevailed."
Counsel for the trustees, Daniel T. Brier of Myers Brier & Kelly in Scranton, said the ruling "fully vindicates" his clients' requests for the Freeh report source documents, as well as attorney fees and costs.
"More than a year ago, the trial court found that Penn State improperly blocked our clients' access to the Freeh source materials," Brier said. "Penn State proudly talks the talk when it comes to corporate governance, now we will see if Penn State walks the walk and stops its punitive treatment of the alumni-elected independent trustees and finally pays their attorney fees."
Penn State was represented by Joseph F. O'Dea Jr. of Saul Ewing in Philadelphia. A spokesperson for the university could not be reached for comment.
Zack Needles can be contacted at 215-557-2373 or zneedles@alm.com. Follow him on Twitter @ZackNeedlesTLI.
(Copies of the 16-page opinion in In re Application by Nonprofit Corporation Trustees to Compel Inspection of Corporate Information, PICS No. 17-0418, are available at http://at.law.com/PICS.) •
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