Special Fee Shifting Provisions: Denial Of Fees To Corporate Shareholder Under Corporations Code Section 1604 Was Proper

Court Of Appeal Applied Civil Discovery Act Definition Of “Substantial Justification” In Construing Section 1604.

            In Farnum v. Iris Biotechnologies, Inc., Case No. H047850 (6^th Dist. Dec. 19, 2022) (published), the appellate court confronted the issue of how to construe “without justification” in Corporations Code section 1604, which has a discretionary fee-shifting provision in favor of a shareholder of a California corporation where a corporation has withheld from shareholder inspection documents “without justification.”  There were no published cases interpreting this section, so the Sixth District borrowed the “substantial justification” test under the Civil Discovery Act—whether the corporation’s denial was “well grounded in both law and fact.”  Through earlier proceedings, it was established that the corporation’s denial was proper on 23 out of 31 document categories and the remaining 8 categories were narrowed to one year.  It was no abuse of discretion for the lower court to deny fees to the shareholder under these circumstances.