PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, a

Delaware Corporation, et al,

Debtors.

LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, etc., et al,

Debtors-Appellants,

RESOLUTION TRUST CORPORATION, a

receiver (formerly conservator) for

Oak Tree Federal Savings Bank,

Creditor-Appellant,

v.

No. 94-2475

D. SCOTT CONE; JOHN WILSON REED,

Respondents-Appellees,

BERNARD G. ILLE, et al,

Claimants-Appellees,

JONES, DAY, REAVIS & POGUE;

MCGLINCHEY, STAFFORD & LANG;

MCNAIR & SANFORD, P.A.,

Parties in Interest-Appellees,

ALPHA NURSERY, INCORPORATED, et

al,

Creditors,

88314 ONTARIO LIMITED, et al,

Claimants,
BUREAU OF INDIAN AFFAIRS, et al,

Respondents,

US TRUSTEE,

Trustee.

In Re: LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, a

Delaware Corporation, et al,

Debtors.

LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, etc., et al,

Debtors-Appellees,

RESOLUTION TRUST CORPORATION, a

receiver (formerly conservator) for

Oak Tree Federal Savings Bank,

Creditor-Appellee,

No. 94-2490

v.

GERALD G. BARTON, et al,

Claimants-Appellants,

JONES, DAY, REAVIS & POGUE;

MCGLINCHEY, STAFFORD & LANG;

MCNAIR & SANFORD, P.A.,

Parties in Interest,

ALPHA NURSERY, INCORPORATED, et

al,

Creditors,

88314 ONTARIO LIMITED, et al,

Claimants,

 2
BUREAU OF INDIAN AFFAIRS, et al,

Respondents,

US TRUSTEE,

Trustee.

In Re: LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, a

Delaware Corporation, et al,

Debtors.

LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, etc., et al,

Debtors-Appellees,

RESOLUTION TRUST CORPORATION, a

receiver (formerly conservator) for

Oak Tree Federal Savings Bank,

Creditor-Appellee,

No. 94-2491

v.

MCNAIR & SANFORD, P.A.,

Party in Interest-Appellant,

JONES, DAY, REAVIS & POGUE;

MCGLINCHEY, STAFFORD & LANG,

Parties in Interest,

ALPHA NURSERY, INCORPORATED, et

al,

Creditors,

88314 ONTARIO LIMITED, et al,

Claimants,

 3
BUREAU OF INDIAN AFFAIRS, et al,

Respondents,

US TRUSTEE,

Trustee.

In Re: LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, a

Delaware Corporation, et al,

Debtors.

LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, etc., et al,

Debtors-Appellees,

RESOLUTION TRUST CORPORATION, a

receiver (formerly conservator) for

Oak Tree Federal Savings Bank,

Creditor-Appellee,

No. 94-2492

v.

MCGLINCHEY, STAFFORD & LANG,

Party in Interest-Appellant,

JONES, DAY, REAVIS & POGUE;

MCNAIR & SANFORD, P.A.,

Parties in Interest,

ALPHA NURSERY, INCORPORATED, et

al,

Creditors,

88314 ONTARIO LIMITED, et al,

Claimants,

 4
BUREAU OF INDIAN AFFAIRS, et al,

Respondents,

US TRUSTEE,

Trustee.

In Re: LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, a

Delaware Corporation, et al,

Debtors.

LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, etc., et al,

Debtors-Appellees,

RESOLUTION TRUST CORPORATION, a

receiver (formerly conservator) for

Oak Tree Federal Savings Bank,

Creditor-Appellee,

No. 94-2493

v.

JONES, DAY, REAVIS & POGUE,

Party in Interest-Appellant,

MCNAIR & SANFORD, P.A.;

MCGLINCHEY, STAFFORD & LANG,

Parties in Interest,

ALPHA NURSERY, INCORPORATED, et

al,

Creditors,

88314 ONTARIO LIMITED, et al,

Claimants,

 5
BUREAU OF INDIAN AFFAIRS, et al,

Respondents,

US TRUSTEE,

Trustee.

In Re: LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, a

Delaware Corporation, et al,

Debtors.

LANDMARK LAND COMPANY OF

CAROLINA, INCORPORATED, etc., et al,

Debtors-Appellants,

RESOLUTION TRUST CORPORATION, a

receiver (formerly conservator) for

Oak Tree Federal Savings Bank,

No. 94-2550

Creditor-Appellant,

v.

D. SCOTT CONE; JOHN WILSON REED,

Respondents-Appellees,

BERNARD G. ILLE, et al,

Claimants-Appellees,

JONES, DAY, REAVIS & POGUE;

MCGLINCHEY, STAFFORD & LANG;

MCNAIR & SANFORD, P.A.,

Parties in Interest-Appellees,

 6
ALPHA NURSERY, INCORPORATED, et

al,

Creditors,

88314 ONTARIO LIMITED, et al,

Claimants,

BUREAU OF INDIAN AFFAIRS, et al,

Respondents,

US TRUSTEE,

Trustee.

Appeals from the United States District Court

for the District of South Carolina, at Charleston.

Falcon B. Hawkins, Chief District Judge.

(CA-91-5287-2-1, CA-91-3287-2-1, BK-91-5814, CA-91-5386-2-1,

CA-91-3286-2-1, BK-91-5815, CA-91-5291-2-1, CA-91-3291-2-1,

BK-91-5816, CA-91-5290-2-1, CA-91-3290-2-1, BK-91-5817,

CA-91-5289-2-1, CA-91-3289-2-1, BK-91-5819, CA-91-5288-2-1,

CA-91-3288-2-1, BK-91-5818, CA-92-3548-2-1, BK-92-77109)

Argued: June 8, 1995

Decided: February 15, 1996

Before RUSSELL, NIEMEYER, and MICHAEL, Circuit Judges.

_________________________________________________________________

Affirmed in part and reversed in part by published opinion. Judge

Russell wrote the opinion, in which Judge Niemeyer and Judge

Michael joined.

_________________________________________________________________

COUNSEL

ARGUED: Henry Robbins Lord, PIPER & MARBURY, Baltimore,

Maryland, for Appellants. John Wilson Reed, New Orleans, Louisi-

 7
ana; Patrick Michael Duffy, MCNAIR & SANFORD, P.A., Charleston, South Carolina, for Appellees. ON BRIEF: Stephen H.

Kaufman, PIPER & MARBURY, Baltimore, Maryland; Nathan B.

Feinstein, Daniel J. Carrigan, Timothy P. Branigan, Kimberly E.

Wolod, PIPER & MARBURY, Washington, D.C.; Kevyn D. Orr,

RESOLUTION TRUST CORPORATION, Washington, D.C., for

Appellants. Richard L. Tapp, Jr., MCNAIR & SANFORD, P.A.,

Charleston, South Carolina; M. Dawes Cooke, Jr., Robert Gritton,

BARNWELL, WHALEY & STEVENSON, Charleston, South Carolina; Craig Caesar, Timothy Scott, MCGLINCHEY, STAFFORD &

LANG, New Orleans, Louisiana; Paul O'Hearn, R. Matthew Martin,

JONES, DAY, REAVIS & POGUE, Atlanta, Georgia; Evan Park

Howell, III, Metairie, Louisiana, for Appellees.

_________________________________________________________________

OPINION

RUSSELL, Circuit Judge:

This case comes before this Court at the twilight of the Debtors'

bankruptcy proceedings. The Resolution Trust Corporation ("RTC")

has already taken control of the Debtors and has liquidated their

assets. The bankruptcy proceedings have proven to be successful,

with the debtors-in-possession paying each claim in full. On this

appeal, the second to this Court, we consider only whether the debtors' estates must indemnify several of the Debtors' former directors,

officers, and employees for their costs in defending themselves

against civil proceedings brought by the Office of Thrift Supervision

("OTS") in connection with the bankruptcy filings. The district court

found that the Debtors' estates must indemnify these directors, officers, and employees for their defense costs. We affirm in part and

reverse in part.

I.

A. The OTS Charges

On October 11, 1991, the Debtors (with one exception) filed for

bankruptcy.1 The Debtors were first- and second-tier subsidiaries of

_________________________________________________________________

1 The Debtors are Landmark Land Company of Carolina, Inc.

("Landmark Carolina"), Landmark Land Company of Oklahoma, Inc.

 8
Oak Tree Savings Bank, S.S.B. ("Bank"). At the top of the corporate

structure was Landmark Land Company, Inc. ("Landmark Land"), a

publicly traded company. It was a holding company and whole owner

of the Bank, which was the whole owner of Clock Tower, which in

turn was the holding company and whole owner of Landmark Carolina, Landmark Oklahoma, Landmark Florida, Landmark Louisiana,

and Landmark California.

Gerald G. Barton and William W. Vaughan, III, were prominent

figures in the Landmark corporations. Barton was the chairman of the

board of directors of Landmark Land, the Bank, and all of the subsidiaries. He was also the chief executive officer of Landmark Land

and the Bank, and a 29% shareholder of Landmark Land. Vaughan,

Barton's son-in-law, was a director and officer of the Bank and most

of the subsidiaries. An attorney, he was the general counsel to the

subsidiaries. Joe W. Walser played a less prominent role in the Landmark hierarchy, but he served as a director of the Bank and some of

the subsidiaries. Bernard G. Ille served as a director of only the Bank,

but he did not participate actively in the management of the Bank or

the subsidiaries. He was employed by First Life Assurance Company,

a subsidiary of Landmark Oklahoma.

Prior to the bankruptcy filings, the subsidiary companies invested

profitably in real estate using the Bank's funds to finance their operations. They developed, owned, and managed residential resort communities, complete with golf courses, tennis courts, and polo

facilities. During this time, the Bank loaned the subsidiaries more

than $986 million.

The financial position of the Landmark organization eventually

deteriorated. An OTS investigation on June 4, 1990 revealed that the

Bank was undercapitalized and had demonstrated a pattern of consis-

_________________________________________________________________

("Landmark Oklahoma"), Landmark Land Company of Florida, Inc.

("Landmark Florida"), Landmark Land Company of Louisiana, Inc.

("Landmark Louisiana"), Landmark Land Company of California, Inc.

("Landmark California"), and Clock Tower Place Investments Ltd.

("Clock Tower"). Carmel Valley Ranch did not file for bankruptcy at this

time and is not involved in this indemnification dispute.

 9
tent losses. Despite several attempts, the Bank was unable to submit

to the OTS an acceptable plan for meeting the minimum capital

requirements. On January 15, 1991, the directors of the Bank signed

a Consent Agreement with the OTS in which they agreed that the

Bank's subsidiaries would not enter into any material transaction

without prior approval from the OTS. The Consent Agreement indicated that the Bank was near failure and that an OTS takeover was

imminent.

Despite the terms of the Consent Agreement, the subsidiaries filed

for bankruptcy. Anticipating that the OTS would act quickly to take

control of the Bank, the Debtors immediately sought and obtained

from the bankruptcy court a temporary restraining order preventing

the Bank from exercising its shareholder rights to remove and replace

the management of the Debtors.

The bankruptcy filings did not receive a pleasant reception from

the OTS. On October 13, 1991, as expected, the OTS took control of

the Bank and appointed the Resolution Trust Corporation ("RTC") to

act as receiver for the Bank.2See Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No.

101-73, 103 Stat. 183 (1989) (codified in scattered sections of 12

U.S.C.). More importantly, the OTS filed civil administrative charges

against Barton, Vaughan, Walser, and Ille (collectively, the "Directors"). The OTS alleged that the Directors breached their fiduciary

duties to the Bank because they knew that the bankruptcy filings

would have a substantially adverse effect on the Bank's ability to collect on the secured and unsecured lines of credit to the Debtors. The

OTS also charged the Directors with violating the terms of the Consent Agreement by having the Debtors enter into a material

transaction--the filing for bankruptcy--without receiving OTS

approval. The OTS assessed a fine of one million dollars against the

Directors, and it fined Landmark Land $500,000 for each day it failed

_________________________________________________________________

2 The RTC then organized, and the OTS chartered, Oak Tree Federal

Savings Bank, F.S.B. ("New Oak Tree"). Pursuant to a purchase and

assumption agreement, New Oak Tree purchased all of the RTC's right,

title and interest in Oak Tree's assets, including its wholly owned subsidiaries. The OTS then appointed the RTC as conservator for New Oak

Tree.

 10
to seek dismissal of the bankruptcy proceedings. On November 18,

1991, the OTS amended its charges to add allegations that the Directors had mishandled certain large loans. The Directors hired attorneys

to defend themselves against the OTS charges.

As the OTS continued its investigation into the Bank's affairs, several members of the Bank's accounting department became subjects

of investigation. D. Scott Cone,3 although he was an officer and director of Landmark Louisiana, headed the Bank's accounting department. Mohamed Motahari was a vice-president and the comptroller of

the Bank. Gina Trapani was a vice-president, assistant comptroller,

and tax manager of the Bank. Gary Braun was an accountant for the

Bank. Motahari, Trapani, and Braun became employees of Landmark

Louisiana soon after the Debtors' filed for bankruptcy.

By March or April 1992, Cone, Motahari, Trapani, and Braun (collectively, the "Employees"), believing that the OTS might take action

against them, retained counsel. On April 21, 1992, the OTS filed civil

administrative charges against Cone and Motahari. The OTS alleged

that, in monthly reports to federal regulators, they had misrepresented

that the Debtors' debt to the Bank was secured, even though it was

actually unsecured. The OTS never brought charges against Trapani

or Braun.

B. The Reimbursement Motion

Although the RTC took control of the Bank, the original boards of

directors remained in control of the Debtors until September 1992.

Once the RTC was appointed conservator of the Bank, it immediately

moved the district court to lift the temporary restraining order so that

it could call a shareholders meeting and exercise its ownership rights

over the Debtors. However, the district court, acting as the bankruptcy

court, denied the RTC's motion and converted the temporary restraining order into a preliminary injunction. See Landmark Land Co. of

Carolina v. Resolution Trust Corp. (In re Landmark Land Co. of

Okla.), 134 B.R. 557 (D.S.C. 1991), rev'd 973 F.2d 283 (4th Cir.

1992). The RTC was not able to take control of the subsidiaries until

_________________________________________________________________

3 Cone died during the course of this litigation and is represented by his

estate.

 11
this Court lifted the injunction on August 18, 1992. See In re Landmark Land Co. of Okla., 973 F.2d 283 (4th Cir. 1992). On September

12, 1992, the RTC took control of the Debtors, terminated the original

boards of directors, and fired the Debtors' attorneys.

During the eleven-month interim when the original board controlled the Debtors, the Directors arranged for the Debtors to pay for

the fees and costs of defending themselves against the OTS charges.

On March 26, 1992, the Debtors filed a Reimbursement Motion

requesting permission to fund the Directors' indemnification. After

making the motion, several of the Debtors' boards of directors met to

approve the indemnification.

On April 8, 1992, the board of directors for Landmark Oklahoma

met to discuss and vote on indemnification for Walser and Ille. Landmark Oklahoma's board consisted of three members: Barton, Lowery

Bea Roselle, and Bill D. Thompson. Only Roselle and Thompson

were present, but the two constituted a quorum. They found that Walser and Ille "had acted in good faith and in a manner they reasonably

believed to be in, or not opposed to, the best interests of [Landmark

Oklahoma]." Accordingly, the board voted in favor of indemnification.

On April 21, 1992, the board of directors for Clock Tower met to

discuss and vote on indemnification for Barton and Vaughan. Clock

Tower's board consisted of five members: Barton, Vaughan, Roselle,

Thompson, and a fifth director. At the time of the meeting, the fifth

director had resigned and had not yet been replaced. The other four

members of the board were present, constituting a quorum. The board

found that Barton and Vaughan "had acted in good faith and in a manner they reasonably believed to be in, or not opposed to, the best

interests of [Clock Tower]." Roselle and Thompson voted in favor of

indemnification, and Barton and Vaughan abstained from the vote.

Although the Employees were not included in the Reimbursement

Motion, the board of directors for Landmark Louisiana met on April

21, 1992 to discuss and vote on indemnification for the Employees.

Landmark Louisiana's board consisted of five members: Barton,

Vaughan, Cone, Roselle, and Thompson. Cone was not present, but

the other four directors constituted a quorum. The board found that

 12
the Employees had acted in good faith and in the best interests of

Landmark Louisiana, and they voted unanimously to indemnify the

Employees for their expenses. Barton and Vaughan participated in the

vote.

On June 3, 1992, the district court held a hearing on the Reimbursement Motion. The court did not rule on the motion at the time,

and the motion remained dormant for almost two years.

On August 27, 1992, the Debtors amended their Reimbursement

Motion to include the Employees' legal expenses. Even before this

formal application, however, the Debtors had already begun indemnifying the Employees. In March 1992, Clock Tower paid $21,825

toward Motahari's legal expenses, and Landmark Louisiana paid

$1,000 toward Braun's expenses. In June 1992, Clock Tower paid

$35,398.48 toward Cone's, Motahari's, and Trapani's legal expenses.

Thus, Clock Tower paid more than $57,000 toward the Employees'

legal expenses, even though its board never voted to indemnify them.

In total, the Debtors have paid $122,493.20 of the Employees' legal

expenses.

C. The RTC-controlled Debtors

The RTC took control of the Debtors on September 12, 1992, and

replaced the boards of directors. On November 5, 1992, the RTCcontrolled Debtors sought, by means of a consent order, to withdraw

the Reimbursement Motion. The district court denied the withdrawal

because it had already heard argument on the motion and had taken

the motion under advisement. The district court also recognized that

the beneficiaries of the Reimbursement Motion--namely, the Directors and the Employees--were not represented in the proposed consent order.

The RTC, once it took control of the Debtors, decided that it was

advantageous to operate the Debtors in bankruptcy and chose not to

withdraw the Debtors from the bankruptcy proceedings. The RTC

even decided to place another Bank subsidiary, Carmel Valley Ranch,

in bankruptcy. The RTC filed a reorganization plan for the Debtors

that was approved by the district court.

 13
Meanwhile, the OTS settled its civil administrative actions against

some of the Directors and Employees. On October 30, 1992, the OTS

dropped its charges against Cone and Motahari in exchange for their

consent to orders (1) prohibiting them from participating in the affairs

of any insured depository institution and (2) debarring them from

practicing before the OTS. Although Cone and Motahari accepted

prohibition and debarment, neither admitted, and both specifically

disputed, the OTS charges.

On April 1, 1993, the OTS dropped the charges against Ille with

only the mildest rebuke: Ille had to sign a cease and desist order, prohibiting him from engaging in unsafe and unsound banking practices

and from breaching fiduciary duties to a federally insured depository

institution. In other words, Ille agreed to follow diligently in the

future the standard of conduct already required of him. Ille received

this lenient treatment because he did not participate in the bankruptcy

filings. He learned of the decision to place the Debtors in bankruptcy

during a telephone call from Barton on the evening of October 10,

1991, the day before the bankruptcy filings; that same evening, he

resigned from his position as a director of the Bank. At most, Ille

failed only to follow the affairs of the Bank more diligently.

As of the date of this opinion, the OTS proceedings against Barton,

Vaughan, and Walser remain unresolved.

D. The District Court's Orders

On May 27, 1994, more than two years after the filing of the

motion, the district court granted the Reimbursement Motion. The

district court found that "the evidence demonstrates that the officers

and directors of the Debtor companies sought the protection of the

bankruptcy court in good faith." In re Landmark Land Co. of Okla.,

Civ. Action No. 2:91-5286-1, order at 12 (D.S.C. May 27, 1994) (J.A.

1278). It also concluded that the RTC-controlled Debtors "ratified the

decision to reorganize under the protection of the bankruptcy court,

demonstrating that the placement of the Debtors into bankruptcy is

reasonably viewed as being in the best interests of the Debtors." Id.

Thus, the district court ordered the Debtors' estates to indemnify the

Directors and Employees for their defense costs, and it granted the

applications for payment from the Employees' attorneys.

 14
The RTC-controlled Debtors filed a motion for reconsideration on

June 6, 1994. When the Debtors filed this motion, the following parties moved to intervene:

1. the Directors;

2. McNair & Sanford, P.A. ("McNair"), the attorneys for

the Debtors before the RTC took control;

3. Jones, Day, Reavis & Pogue ("Jones Day") and

McGlinchey, Stafford & Lang ("McGlinchey"), the

Directors' former OTS defense attorneys;

4. John W. Reed (of Glass & Reed), attorney for Cone;

David Popper (of Popper & Popper), attorney for Motahari; Herbert V. Larson, Jr., attorney for Motahari; Robert H. Habans, attorney for Trapani; and William R.

Campbell, Jr., attorney for Braun.

The district court granted their motions to intervene on August 31,

1994. The Employees themselves did not move to intervene.

On October 5, 1994, the district court denied the Debtors' motion

for reconsideration with respect to the indemnification of the Directors. The district court did, however, grant the motion for reconsideration with respect to the applications of the Employees' attorneys. In

a separate order on November 9, 1994, the district court approved the

applications for payment from the Employees' attorneys.

The RTC and the RTC-controlled Debtors appeal from the district

court's orders.

II.

The RTC and the RTC-controlled Debtors raise a host of arguments challenging the district court's granting of the Reimbursement

Motion. Rather than addressing all of their arguments, we address the

issue most troubling to us about the district court's decision: the district court's finding that the Directors acted in good faith and in the

 15
best interests of the Debtors. We conclude that the district court

clearly erred in finding that the Directors, with the exception of Ille,

acted in good faith.4

A.

California, Oklahoma, and Louisiana have similar statutes regarding the indemnification of officers and directors for the costs and

expenses of legal proceedings.5 Under the California statute (as well

as the other statutes), indemnification is mandatory if a corporate

agent successfully defends himself in any proceeding. In such a case,

the corporation has a duty to indemnify the agent for his costs and

expenses, and the agent can sue the corporation if it fails to do so.

Even where the litigation does not result in a complete vindication

for the agent, "[a] corporation shall have the power to indemnify any

person who was or is a party or is threatened to be made a party to

any proceeding . . . if that person acted in good faith and in a manner

the person reasonably believed to be in the best interests of the corporation . . . ." Cal. Corp. Code § 317(b). Thus, the statute allows for

indemnification even where the agent was negligent or committed

some error, as long as the agent acted in good faith and in the best

_________________________________________________________________

4 At least one court has held that the good faith determination is a question of fact reviewed under a clearly erroneous standard. Plate v. SunDiamond Growers of Calif., 275 Cal. Rptr. 667, 672 (Cal. Ct. App. 1990)

(holding that the "question of whether a corporate agent . . . acted in

good faith and for the best interests of the corporation[ ] appears to be

an essentially factual question for the trial court"). The good faith determination strikes us as a question of law, or at least a mixed question of

law and fact; although the facts supporting the good faith determination

should be reviewed for clear error, an appellate court should review de

novo whether or not those facts lead to the conclusion that the agent

acted in good faith. Nonetheless, we need not at this time decide the

appropriate standard of review for the good faith determination because

our reasoning applies under either standard.

5 California law applies to Barton and Vaughan, Oklahoma law to Walser and Ille, and Louisiana law to the Employees. Because the indemnification statutes are substantially similar, compare Cal. Corp. Code § 317

with Okla. Stat. tit. 32, § 1031 and La. Rev. Stat. Ann. § 12:83, we focus

on the California statute for purposes of this discussion.

 16
interests of the corporation. Plate v. Sun-Diamond Growers of Calif.,

275 Cal. Rptr. 667, 672 (Cal. Ct. App. 1990). In such circumstances,

indemnification is only permissive: the corporation does not have a

duty to indemnify the agent but simply has the option to indemnify

as long as the good faith requirement is satisfied.

Indemnification is never allowed where the agent acted in bad faith

and against the best interests of the corporation. As one California

court has stated:

Indemnification, if permitted too broadly, may violate . . .

basic tenets of public policy. It is inappropriate to permit

management to use corporate funds to avoid the consequences of wrongful conduct or conduct involving bad faith.

A director, officer, or employee who acted wrongfully or in

bad faith should not expect to receive assistance from the

corporation for legal or other expenses and should be

required to satisfy not only any judgment entered against

him but also expenses incurred in connection with the proceeding from his personal assets. Any other rule would tend

to encourage socially undesirable conduct.

Plate, 275 Cal. Rptr. at 672 (citing 2 American Bar Assoc., Model

Business Corp. Act Ann., introductory cmt. to chapter 8, at 1082 (3d

ed. 1987 supp.)).6

Thus, there are two requirements for permissive indemnification

under § 317(b): (1) the corporation must authorize the indemnification, and (2) the agent must have acted in good faith and in the best

interests of the corporation. It is not clear, however, whether the good

faith determination should be made by a court or by the corporation

itself. Section 317(e) provides that, before a corporation can authorize

indemnification, the corporation must determine that the agent has

acted in good faith and in the best interests of the corporation. The

corporation can make this determination in any of the following ways:

_________________________________________________________________

6 The most recent supplement to the Model Business Corporation Act

Annotated contains similar but slightly different language. See 2 American Bar Assoc., Model Business Corp. Act Ann., introductory cmt. to

subchapter E of chapter 8, at 8-289 to 8-290 (3d ed. 1995 supp.).

 17
(1) A majority vote of a quorum consisting of directors

who are not parties to such proceeding.

(2) If such a quorum of directors is not obtainable, by

independent legal counsel in a written opinion.

(3) Approval of the shareholders . . . , with the shares

owned by the person to be indemnified not being entitled to

vote thereon.7

Cal. Corp. Code § 317(e). At first glance,§ 317(e) suggests that the

corporation's finding of good faith settles the matter, and that the

court's role is limited to ensuring that the corporation made its finding

of good faith by proper procedures.

We do not agree that the court's role is so narrow. Although a corporation has to find that the agent acted in good faith before authorizing indemnification, nothing in § 317(e) restricts a court's authority

under § 317(b) to make an independent assessment of the agent's

good faith. Section 317(b) allows permissive indemnification where

the agent has acted in good faith, not where the corporation finds that

the agent has acted in good faith. Reading § 317(b) together with

§ 317(e), we conclude that the issue of an agent's good faith is a question for the courts to decide.

_________________________________________________________________

7 The California Code also provides a fourth way in which a corporation can determine that an agent has acted in good faith and in the best

interests of the corporation:

(4) The court in which the proceeding is or was pending

upon application made by the corporation or the agent or the

attorney or other person rendering services in connection with

the defense, whether or not the application by the agent, attorney

or other person is opposed by the corporation.

Cal. Corp. Code § 317(e)(4). This fourth option, which is not found in

the Oklahoma or Louisiana statutes, is actually an exception. It provides

that an agent can receive indemnification over the corporation's opposition if the court in the proceedings for which the agent seeks indemnification found that the agent acted in good faith and in the best interests

of the corporation.

 18
In making the good faith determination, however, a court cannot

ignore the factual findings made during the underlying proceeding for

which the agent seeks indemnification. If the court or administrative

panel in the underlying litigation made factual findings relevant to the

determination of the agent's good faith, the indemnification court cannot reevaluate the evidence and reach the opposite conclusion. Even

the findings of an administrative agency have collateral estoppel

effect on the indemnification court. As the Supreme Court has stated:

When an administrative agency is acting in a judicial capacity and resolves disputed issues of fact properly before it

which the parties have had an adequate opportunity to litigate, the courts have not hesitated to apply res judicata to

enforce repose.

United States v. Utah Construction & Mining Co. , 384 U.S. 394, 422

(1966).

Furthermore, where a court decides the question of indemnification

before the completion of the underlying proceeding, the court must

tread even more carefully. In determining whether or not the agent

acted in good faith and in the best interests of the corporation, the

indemnification court should not make any factual or legal determinations that are properly before the court or administrative panel in the

underlying proceeding. The indemnification court should not base its

good faith determination on its own conclusions about the merits of

the charges in the underlying proceeding.

The indemnification court, however, does not need to postpone its

determination until after the completion of the underlying proceeding.

The indemnification court should consider whether the agent could

have acted in good faith and in the best interests of the corporation

if the charges against the agent turn out to be true.8 If the indemnifica-

_________________________________________________________________

8 The indemnification court does not need to consider the agent's good

faith if the charges turn out to be false. If the agent succeeds on the merits in the underlying proceeding, he is entitled to mandatory indemnification. See Cal. Corp. Code § 317(d). In such a situation, the issue of

permissive indemnification would be moot, thus rendering the good faith

determination unnecessary.

 19
tion court finds that the agent could have acted in good faith even if

the charges were true, it should grant indemnification because the

indemnification determination is not contingent on the result of the

underlying proceeding. On the other hand, if the indemnification

court finds that the agent's alleged misconduct, if true, demonstrates

that the agent acted in bad faith, the indemnification court should

deny permissive indemnification; it should hold its indemnification

decision in abeyance until the completion of the underlying proceedings and then grant indemnification only if the agent succeeds on the

merits. For instance, an agent defending himself against charges of

negligent conduct should receive indemnification if the indemnification court finds that the agent, even if he were negligent, acted in

good faith. However, an agent defending himself against charges of

intentionally wrongful conduct should receive indemnification only if

he succeeds on the merits.

In the instant case, it is not clear whether the district court--the

indemnification court in this case--recognized the proper scope of its

"good faith" determination. In finding that the Directors acted in good

faith and in the best interest of the Debtors when they filed the petitions for bankruptcy, the district court offered little explanation on

how it reached its finding. In its May 27, 1994 order, it simply stated:

[T]his court finds that the evidence demonstrates that the

officers and directors of the Debtor companies sought the

protection of the bankruptcy court in good faith. Further this

court finds that the Debtors' new management ratified the

decision to reorganize under the protection of the bankruptcy court, demonstrating that the placement of the Debtors into bankruptcy is reasonably viewed as being in the best

interest of the Debtors.

In re Landmark Land Co. of Okla., Civ. Action No. 2:91-5286-1,

order at 12 (D.S.C. May 27, 1994) (J.A. 1278). Neither in this order

nor in any of its subsequent orders did the district court articulate how

the evidence demonstrated the Directors' good faith. More importantly, the district court did not explain how the Directors could have

acted in good faith if the OTS charges filed against them were true.

Apparently, the district court's finding of the Directors' good faith

stems from its belief that the OTS charges had no merit. From the

 20
very beginning of the bankruptcy proceedings, the district court found

that the Directors "possesse[d] the requisite expertise to continue

managing the debtors' estates in a manner most profitable for the

preservation of corporate assets." Landmark Land Co. of Carolina v.

Resolution Trust Corp. (In re Landmark Land Co. of Okla., 134 B.R.

557, 560 (D.S.C. 1991), rev'd 973 F.2d 283 (4th Cir. 1992). It found

that "the RTC ha[d] acted with complete disregard of the efforts of

management to keep the debtor companies afloat." Id. It seems that

the district court believed that federal regulators were hampering the

Directors' legitimate efforts to reorganize the companies, and that the

Directors sought the protection of the bankruptcy code to protect

themselves from an overrun bureaucracy. The district court thought

little of the OTS charges, referring to them as an attempt by the OTS

to "seek[ ] atonement from the named Debtor officers for placing the

Debtor companies in bankruptcy." In re Landmark Land Co. of Okla.,

Civ. Action No. 2:91-5286-1, order at 8 (D.S.C. Oct. 5, 1994) (J.A.

2452). Furthermore, it found that the Directors had the best interests

of the Debtors in mind when they filed for bankruptcy because the

RTC ratified the Directors' action by keeping the Debtors in bankruptcy once it obtained control over them.

Even if the district court was correct that the OTS was inept and

overbearing, the Directors' action to file for bankruptcy was a deliberate attempt to circumvent the regulatory authority that Congress had

clearly given to the OTS. Congress created the OTS in 1989 in

response to the crisis in the savings and loan industry, which occurred

when the insolvency of a large number of savings and loans bankrupted the Federal Savings and Loan Insurance Corporation.

Although the majority of savings and loans were healthy financial

institutions, Congress found that the thrift crisis was concentrated in

the roughly twenty-five percent of the industry having capital, measured under generally accepted accounting principles, of less than

three percent. H.R. Rep. No. 101-54(I), 101st Cong., 1st Sess. 303

(1989), reprinted in 1989 U.S.C.C.A.N. 86, 99. Congress found that,

"[t]o a considerable extent, the size of the thrift crisis resulted from

the utilization of capital gimmicks that masked the inadequate capitalization of thrifts. . . . [I]f a crisis of this nature is to be prevented from

happening again, thrifts must be adequately capitalized against

losses." H.R. Rep. No. 101-54(I), 101st Cong., 1st Sess. 310 (1989),

reprinted in 1989 U.S.C.C.A.N. 86, 106. Congress invested the OTS

 21
with broad regulatory powers to oversee financial institutions and

ensure that they were adequately capitalized.

By placing the Debtors in bankruptcy, the Directors intended to

prevent the OTS from enforcing the minimum capitalization requirement against the Bank. According to the OTS charges, the OTS investigated the Bank on June 4, 1990 and found that the Bank was

inadequately capitalized and had demonstrated a pattern of repeated

losses. The OTS directed the Bank to infuse sufficient capital to meet

the minimum capitalization requirement, but the Bank did not submit

an acceptable plan. Because of the Bank's inability to meet the

requirement, the OTS forced the Bank directors to sign a Consent

Agreement on January 15, 1991, signalling to the Directors that an

OTS takeover was imminent. Instead of working with the OTS to correct the Bank's capitalization problem, the Directors filed the bankruptcy petitions to prevent the OTS from exercising control of the

Bank's subsidiaries.

We cannot conclude that the Directors' action was taken in good

faith. If the OTS charges are accurate, the Director's action to place

the Debtors in bankruptcy was a deliberate attempt to prevent the

OTS from exercising control over the Bank's assets, thus hindering

the OTS's ability to deal effectively with a failing savings and loan.

Despite the district court's findings that the federal regulators had

interfered with the Directors' efforts to keep the Debtors afloat, the

fact remains that the Bank could not comply with the minimum capitalization requirement, and the OTS therefore had a statutory duty to

force the Bank's management to comply with the capitalization

requirement. The Directors acknowledged the OTS's regulatory

authority when they signed the Consent Agreement and agreed that

the Bank's subsidiaries would not enter into any material transaction

without prior approval from the OTS. When the OTS threatened to

take control of the Bank, however, the Directors' used the bankruptcy

code to stymie the OTS, even though their action breached the Consent Agreement with the OTS and violated their fiduciary duties to

the Bank. We cannot condone the Directors' blatant attempt to circumvent the OTS's regulatory authority by holding that they acted in

good faith.

Even if the bankruptcy filings benefitted the Debtors, we still could

not conclude that the Directors acted in good faith. An agent who has

 22
intentionally participated in illegal activity or wrongful conduct

against third persons cannot be said to have acted in good faith, even

if the conduct benefits the corporation. Plate , 275 Cal. Rptr. at 672.

"For example, corporate executives who participate in a deliberate

price-fixing conspiracy with competing firms could not be found to

have acted in good faith, even though they may have reasonably

believed that a deliberate flouting of the antitrust laws would increase

the profits of the corporation." 1 Harold Marsh, Jr. and R. Roy Finkle,

Marsh's California Corporation Law (3d ed.) § 10.43, at 751; see

Plate, 275 Cal. Rptr. at 672 (citing same language from second edition). We recognize that the Directors did not break any law by filing

the bankruptcy petitions, and that the OTS has not filed criminal

charges against the Directors. Nonetheless, we find that a deliberate

attempt to undermine the regulatory authority of a government agency

cannot constitute good faith conduct, even if such actions benefit the

corporation.

The Directors intentionally breached their fiduciary duties to the

Bank and their Consent Agreement with the OTS in order to prevent

the OTS from exercising the powers granted to it under FIRREA. The

Directors knew the impropriety of their actions, and one of the

Directors--Ille--resigned his position when he learned of the

scheme. We therefore conclude that the Directors did not act in good

faith when they placed the Debtors in bankruptcy.

B.

We do not reach the same conclusion with respect to Ille. Because

the OTS and Ille entered into a settlement and the OTS has dropped

its charges against Ille, we have the benefit of the factual admissions

contained in the settlement agreement. That agreement confirms that

Ille had no part in the filing of the bankruptcy petitions. He learned

of the decision to place the Debtors in bankruptcy on the evening of

October 10, 1991, the day before the bankruptcy filings. Ille resigned

his directorship later that same evening. In the settlement agreement,

Ille admitted knowing of numerous serious underwriting deficiencies

on loans approved by the Bank, and that he relied on representations

by the Bank's management that these deficiencies were being

addressed instead of his independently investigating the deficiencies

known to him. At most, Ille failed only in his duties to follow the

 23
affairs of the Bank more diligently. The OTS, recognizing Ille's minimal participation, dropped the charges against him with only a mild

punishment: it required Ille to sign a cease and desist order prohibiting him, in effect, from his breaching fiduciary duties in the future.

The terms of Ille's settlement agreement informs our decision

regarding whether Ille acted in good faith and in the best interests of

the corporation. The settlement agreement confirms that Ille committed no intentional wrongful act. Most importantly, upon realizing that

the other Directors had schemed to circumvent the OTS's authority

by placing the Debtors into bankruptcy, he immediately resigned from

his position as a Bank director. We find that Ille acted in good faith

and in the best interests of the Debtors.

We conclude, however, that Ille cannot receive indemnification

from Landmark Oklahoma because he was not an agent of that corporation. Ille was not a member of the boards of directors of Landmark

Oklahoma or any of the Bank's other subsidiaries. He was a director

only of the Bank, and as the settlement agreement shows, he was not

an active participant in the management of either the Bank or the subsidiaries. Ille's only connection to Landmark Oklahoma is that he was

employed by First Life Assurance Company ("First Life"), a subsidiary of Landmark Oklahoma. His employment status, however, does

not make him an agent of Landmark Oklahoma, especially because

First Life has no involvement whatsoever in the bankruptcy filings or

this litigation. Because Ille was not an agent of Landmark Oklahoma,

he would have to seek indemnification from the Bank. Hence, Ille is

not entitled to indemnification from Landmark Oklahoma.

Although Ille has not sought indemnification from the Bank, we

note that, under Louisiana law, Ille would likely be entitled to mandatory indemnification from the Bank.9 The Louisiana indemnification

statute provides for mandatory indemnification of an agent to the

extent that he "has been successful on the merits or otherwise in

defense" of the OTS charges. La. Rev. Stat. Ann.§ 12:83(B). Ille

never received an adjudication on the merits, but courts in other jurisdictions have interpreted similar language to require indemnification

_________________________________________________________________

9 The Louisiana indemnification statute would apply to the Bank

because it was chartered under Louisiana law.

 24
when a settlement agreement demonstrates that the agent succeeded

on the merits. See Wisener v. Air Express Int'l Corp., 583 F.2d 579,

583 (2d Cir. 1978) (holding, under Illinois law, that the phrase "on the

merits or otherwise" is "surely . . . broad enough to cover a termination of claims by agreement without any payment or assumption of

liability."); Waltuch v. Conticommidity Servs. Inc., 833 F. Supp. 302,

310-11 (S.D.N.Y. 1993) (following Wisener in interpreting Delaware

law, although ultimately concluding that plaintiff was not successful

on merits); B & B Investment Club v. Kleinert's, Inc., 472 F. Supp.

787, 790-91 (E.D. Pa. 1979) (interpreting Pennsylvania law). But see

American Nat'l Bank & Trust Co. of Eau Claire, Wis. v. Schigur, 148

Cal. Rptr. 116, 117-18 (Cal. Ct. App. 1978) (holding, under California law, that mandatory indemnification requires a judicial determination of the merits of the agent's defense).10 The settlement agreement

strongly suggests that Ille successfully defended himself against the

OTS charges. Nevertheless, we cannot reach the issue of mandatory

indemnification because the Bank is not a defendant and has not had

an opportunity to argue against mandatory indemnification.11

_________________________________________________________________

10 The reasoning of the California court in American Nat'l Bank &

Trust does not apply to Louisiana law. The mandatory indemnification

provision in most states follows the language of the Model Business Corporations Act, which provides for mandatory indemnification of an agent

who "has been successful on the merits or otherwise in defense" of any

action. 1 Model Business Corporations Act Ann.2d§ 5; see, e.g., La.

Rev. Stat. Ann. § 12:83(B). The California statute, however, does not

include the words "or otherwise," suggesting"a legislative intent that

mandatory indemnification should depend upon a judicial determination

of the actual merits of the agent's defense . . . ." American Nat'l Bank

& Trust, 148 Cal. Rptr. at 118. Therefore, the American Nat'l Bank &

Trust court's interpretation of California law has no bearing on Louisiana

law.

11 We note that Ille has not paid any portion of his defense costs. In his

deposition of April 9, 1992, he testified that the Directors' attorneys represented him in defense of the OTS charges. Because his position was

different from the other three Directors, he hired a personal attorney. He

never received the bills from this attorney, who was paid by Barton. See

J.A. 259-60.

 25
III.

We next consider the district court's finding that the Employees

acted in good faith and in the best interests of the Debtors. The district

court found that:

There is no evidence before this court that the employees

had any reason to believe that their efforts in taking the

company into bankruptcy were opposed to the best interests

of the corporation. While Cone and Motahari were investigated for criminal conduct and the OTS brought administrative charges for breach of fiduciary duty against them, they

were never found guilty of any charge. Braun and Trapani

were never even named in any administrative or criminal

proceeding. They were only questioned concerning actions

taken in the discharge of their duties of employment.

In re Landmark Land Co. of Okla., Civ. Action No. 2:91-5286-1,

order at 5 (D.S.C. Nov. 9, 1994) (J.A. 2518) (footnote omitted). We

find the district court's reasoning to be somewhat illogical. The

Employees had no involvement in the Directors' decision to take the

subsidiaries into bankruptcy. The OTS investigated the Employees to

determine whether, in conducting the business of the Bank, they participated in unsafe and unsound business practices or violated banking

laws and regulations. The charges brought against Cone and Motahari

focused on their representations to federal regulators that the Debtors

owed to the Bank over $950 million in secured debt, when in fact the

debt was unsecured. The government has never alleged that any of the

Employees participated in the decision to place the Debtors into bankruptcy.

We therefore conclude that the district court's holding that the

Employees acted in good faith and in the best interests of the Debtors

was clearly erroneous, at least with respect to Cone and Motahari.

The OTS alleged that Cone and Motahari engaged in unsafe and

unsound business practices by arranging for the Bank to loan over

$950 million to its subsidiaries without securing the debt for the

Bank. The OTS further alleged that they misrepresented to federal

regulators that the loans were secured. Although Cone's and Motahari's settlement agreement stated that they continue to dispute the

 26
OTS charges against them, they accepted prohibition from practicing

in the affairs of any insured depository institution and debarment from

practicing before the OTS. In other words, the OTS kicked them out

of the profession. Unlike the district court, which stated that the settlement agreement should not connote Cone's and Motahari's guilt,

In re Landmark Land Co. of Okla., Civ. Action No. 2:91-5286-1,

order at 5 n.4 (D.S.C. Nov. 9, 1994) (J.A. 2518 n.4), we conclude that

their punishment is strong evidence that they acted in bad faith.12

With respect to Trapani and Braun, we see little evidence in the

record on which to base a "good faith" determination, and therefore

conclude that the district court's finding of good faith was clearly

erroneous. Nonetheless, Trapani and Braun have a right to mandatory

indemnification because they succeeded on the merits. Like Cone and

Motahari, the OTS investigated Trapani and Braun for possible violations of banking statutes and regulations and for any participation in

unsafe or unsound business practices. After this investigation, the

OTS subpoenaed Trapani and Braun and made them give depositions

under circumstances that were clearly adversarial. The OTS never

filed any charges against Trapani and Braun. Under these circumstances, we conclude that they succeeded on the merits in their

defense and are thus entitled to mandatory indemnification under La.

Rev. Stat. Ann. § 12:83(B).

We therefore reverse the district court's granting of the Reimbursement Motion with respect to Cone and Motahari, and we affirm on

different grounds the district court's granting of the motion with

respect to Trapani and Braun.

IV.

We conclude that the district court erred in finding that Barton,

Vaughan, Walser, Cone, and Motahari acted in good faith and in the

best interests of the Debtors. Furthermore, we find that Ille, although

_________________________________________________________________

12 We note that some of the subsidiaries have already indemnified Cone

and Motahari for a substantial portion of their defense costs. The government represented at oral argument that it sought only prospective relief

and that it was not demanding that Cone and Motahari repay the amounts

already received.

 27
he acted in good faith and in the best interests of the Bank, was not

an agent of Landmark Oklahoma and could not receive indemnification from that entity. Therefore, we reverse the district court's granting of the Reimbursement Motion with respect to those parties. We

conclude also that Trapani and Braun succeeded on the merits in their

defense and were entitled to mandatory indemnification from their

employer, Landmark Louisiana. We therefore affirm, on different

grounds, the district court's granting of the Reimbursement Motion

with respect to Trapani and Braun.

Because of the grounds upon which we base our conclusions, we

need not reach the numerous other issues raised by the parties.13

AFFIRMED IN PART AND REVERSED IN PART

_________________________________________________________________

13 We note that the appellees have filed a motion to dismiss this appeal.

Because our decision in this case renders this motion moot, we take no

action on the motion.

 28