Source: https://www.nybusinessdivorce.com/2014/06/articles/advancement-and-indemnificatio/schlossberg/
Timestamp: 2020-05-27 05:48:24
Document Index: 632725510

Matched Legal Cases: ['§ 724', '§ 724', '§ 722', '§ 722', '§ 722', '§ 722', '§ 724']

Court Upholds Former Officer's Right to Seek Indemnity and Advancement in Intra-Company Dispute | New York Business Divorce
Home » Court Upholds Former Officer’s Right to Seek Indemnity and Advancement in Intra-Company Dispute
for its numerous citations to decisions of the Delaware Chancery Court, which rightfully boasts an advanced jurisprudence in the area of indemnification and advancement.
The plaintiff in Schlossberg is a 10% shareholder and director of Steuben Foods, Inc., a manufacturer of aseptic beverages and food products, and served as its President from 1982 until 2011 when the company terminated his employment. He then brought suit against the controlling shareholder, and against the company as a nominal defendant, asserting individual and derivative claims alleging that the controlling shareholder diverted business opportunities to his other companies, withheld compensation due plaintiff, and terminated plaintiff’s employment in violation of age discrimination laws. Plaintiff’s complaint also seeks common law dissolution of the company. In an April 2013 decision (read here), which was subsequently modified (read here), Justice DeStefano for the most part denied the defendants’ motion to dismiss the amended complaint.
The defendants served an answer with ten counterclaims brought in the name and right of the company, seeking damages and other, equitable remedies primarily for the plaintiff’s alleged misuse of confidential information and breach of fiduciary duty.
Plaintiff subsequently moved for an order pursuant to BCL § 724(c) directing the company to advance payment of legal fees incurred by plaintiff in defending the counterclaims, totaling over $54,000 at the time of the motion. Section 724(c) provides:
Plaintiff contended that Section 8.1 of the company’s bylaws provides for mandatory indemnification to corporate officers and directors, thereby entitling him to advancement under BCL § 724(c). Section 8.1 states in pertinent part:
The Corporation shall indemnify any person made, or threatened to be made, a party to any action, suit or proceeding by reason of the fact that he, . . . is or was a director or officer of the Corporation, . . . Such right of indemnification shall not be deemed exclusive of any other rights to which such director or officer may be entitled apart from the foregoing provisions. The forgoing provisions of this Section 8.1 shall be deemed to be a contract between the Corporation and each director and officer . . .. [Emphasis added.]
Plaintiff argued that the scope of indemnification provided by Section 8.1 essentially mirrors the broad, statutory provisions for judicial indemnification in BCL § 722, which provides in subsections “(a)” and “(c)” in pertinent part:
(a) A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by or in the right of the corporation to procure a judgment in its favor) whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, . . . [Emphasis added.]
(c) A corporation may indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the corporation . . .
In opposition, defendants argued that the language of bylaw Section 8.1 affirmatively precludes indemnification in actions brought by the company (and, by extension, precludes the advancement of expenses) because it lacks an express reference to “an action by or in the right of the corporation” as found in BCL § 722(c). According to the defendants, Section 8.1 only authorizes indemnification and advancement in an action against an officer or director brought by third parties.
Justice DeStefano sharply rejected defendants’ argument as “contrary to the plain language of section 8.1,” and he labeled their comparison of section 8.1 to BCL § 722(c) as “incorrect and misleading,” adding:
Interestingly, Steuben inaptly and misleadingly fails to note that section 8.1 of the bylaws actually more closely mirrors Business Corporation Law 722(a) than section 722(c). The reason for Steuben’s failure to note the similarity in this regard, no doubt, is the language contained in the parenthetical of section 722(a), the omission of which from section 8.1 of the bylaws would lead to the very opposite inference which Steuben seeks the court to draw in connection with its comparison to section 722(c).
Justice DeStefano confirms his analysis with an extensive discussion of the history of the relevant BCL provisions and their predecessor statutes in the General Corporation Law, including lengthy quotes from a 1971 Fordham Law Review article examining the right of directors to indemnification in actions brought directly by the corporation. The history reveals that, prior to BCL § 722’s amendment in 1986, an inconsistency between the statute’s language and the official Reviser’s Notes caused confusion whether the statute applied only to derivative actions. The 1986 amendment, creating separate subsection (a), providing for indemnification in any lawsuit except for an action “by or in the right of the corporation,” and subsection (c), providing specifically for indemnification in “an action by or in the right of the corporation,” was intended to clarify the statute’s application both to intra-company and third party claims against officers and directors.
The balance of Justice DeStefano’s opinion addresses whether, as required by BCL § 724(c), there exist “genuine issues of fact or law” that the counterclaims against plaintiff are made “by reason of the fact that . . . he is or was a director or officer of the corporation.” Justice DeStefano notes that “there is little case law or commentary on the subject, although the Delaware courts have addressed it on occasion” and have applied “a broad interpretation of that phrase, which would include a wide array of claims that might be asserted against a director or officer . . ..” Under Delaware law, he writes:
“‘a claim against a director or officer for matters relating to the corporation will typically fall within . . . [the statutory section of the Delaware Code authorizing advancement], even if the individual was a party to an employment agreement.'” [Quoting Paolino v Mace Sec. Int’l, Inc., 985 A2d 392 [Del Ch 2009].]
Applying this broad standard, and acknowledging the beneficial purposes behind advancement, i.e, to attract capable individuals to serve as officers and directors, Justice DeStefano concludes that the counterclaims in Schlossberg,
all of which involve conduct alleged to have been based on Plaintiff’s status as an officer or director of Steuben, . . . involve issues and claims made by reason of the fact that Plaintiff was an officer or director of Steuben. That some of the counterclaims might have been asserted differently—and more specifically, in a manner that did not invoke the Plaintiff’s status as director or officer, or, that evidence could have been presented in opposition to the motion conclusively establishing the absence of any nexus between the counterclaims and the Plaintiff’s “official corporate capacity”, is speculative and cannot defeat the instant application. As such, Plaintiff may be entitled to indemnification for the defense of such counterclaims and may seek an advancement in connection with them. That the advancement is sought in connection with the defense of counterclaims (as opposed to the defense of claims asserted by a plaintiff) is relevant only insofar as the proper apportionment of expenses is concerned. Moreover, the fact that there may be some overlap between the claims being prosecuted by the Plaintiff and the defense of counterclaims being asserted against him does not warrant a different result. [Citations omitted.]
Justice DeStefano accordingly orders the company to pay plaintiff’s interim expenses of approximately $54,000, which he finds to be reasonable, and he sets forth a procedure for submission and determination of future advancement requests.
The “playing field” in suits between minority and controlling shareholders often is tilted in the latter’s favor because of their access to company funds to pay attorney’s fees — effectively requiring the minority shareholder to subsidize the controller’s litigation costs. Schlossberg should give tactical pause to controllers before they decide to “fire back” with counterclaims, or commence a lawsuit against a current or former officer or director, whose legal fees may have to be advanced by the company and effectively borne by the controlling shareholders.
Tags: bylaws, counterclaim, DeStefano, Director, intra-company, officer, Schlossberg, Schwartz, Steuben Foods