Case Name: In the Matter of Ernst Schwarz, Appellant, against General Aniline & Film Corporation, Respondent
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1953-06-04
Citations: 305 N.Y. 395
Docket Number: 
Parties: In the Matter of Ernst Schwarz, Appellant, against General Aniline & Film Corporation, Respondent.
Judges: 
Reporter: New York Reports
Volume: 305
Pages: 395–414

Head Matter:
In the Matter of Ernst Schwarz, Appellant, against General Aniline & Film Corporation, Respondent.
Argued March 4, 1953; reargued June 2, 1953;
decided June 4, 1953.
Rudolf B. Schlesinger, Joseph Kaskell and Beate Bloch for appellant.
I. The court has jurisdiction of the subject matter of the proceeding. (Cohen v. Beneficial Loan Corp., 337 U. S. 541.) II. The petition states facts sufficient to constitute a cause of action for assessment of expenses under article 6-A of the General Corporation Law. (Hudson v. United States, 9 F. 2d 825, 272 U. S. 451; State v. La Rose, 71 N. H. 435; United States v. Socony-Vacuum Oil Co., 23 F. Supp. 531; United States v. Winslow, 195 F. 578, 227 U. S. 202; Dick Co. v. Marr, 95 F. Supp. 83; Alden-Rochelle v. American Soc. of Composers, Authors & Publishers, 3 F. R. D. 157; Barnsdall Refining Corp. v. Birnamwood Oil Co., 32 F. Supp. 308; Twin Ports Oil Co. v. Pure Oil Co., 26 F. Supp. 366; United States v. Patten, 226 U. S. 525; United States v. Standard Oil Co., 23 F. Supp. 937.)
Herbert L. Abrons, Donald O. Lincoln, Eugene L. Stewart and Kathryn V. Crean for respondent. I.
The court lacks jurisdiction of the subject matter of the proceeding. (Abrams v. Allen, 297 N. Y. 52; Koral v. Savory, Inc., 276 N. Y. 215; Isaac v. Marcus, 258 N. Y. 257; Continental Securities Co. v. Belmont, 206 N. Y. 7; Bosworth v. Allen, 168 N. Y. 157; Ansonia Brass & Copper Co. v. Yew Lamp-chimney Co., 53 N. Y. 123; Matter of Kaplan v. Peyser, 273 N. Y. 147; City Bank Farmers Trust Co. v. Hewitt Realty Co., 257 N. Y. 62; Kavanaugh v. Kavanaugh Knitting Co., 226 N. Y. 185; Yew York Dock Co. v. McCollum, 173 Misc. 106.) II. The petition is legally insufficient because it shows on its face that the conditions required by article 6-A of the General Corporation Law for reimbursement have not been satisfied. (Simon v. Socony-Vacuum Oil Co., 179 Misc. 202; Doman v. Humphrey, 278 App. Div. 1010; United States v. Frankfort Distilleries, 324 U. S. 293; People v. Daiboch, 265 N. Y. 125; Spaulding v. Mutual Life Ins. Co. of N. Y., 96 Yt. 67; United States v. Norris, 281 U. S. 619; Singleton v. Glemmer, 166 F. 2d 963; Harris v. United States, 190 F. 2d 503; Hudson v. United States, 272 U. S. 451; Fisher v. Schilder, 131 F. 2d 522.) III. The petition does not state a cause of action. (Twin Ports Oil Co. v. Pure Oil Co., 26 F. Supp. 366; Barnsdall Refining Corp. v. Birnamwood Oil Co., 32 F. Supp. 308; Commonwealth v. Ingersoll, 145 Mass. 381; Kravis v. Hock, 136 N. J. L. 161; Caminetti v. Imperial Mut. Life Ins. Co., 59 Cal. App. 2d 476; Fidelity-Phenix Fire Ins. Co. of N. Y. v. Murphy, 231 Ala. 680; State ex rel. McElliott v. Fousek, 81 Mont. 457; Doughty v. De Amor eel, 22 R. 1.158. )

Opinion:
Desmond, J.
This proceeding is brought under sections 64 to 68, found in article 6-A, as enacted in 1945 (L. 1945, ch. 869), of the General Corporation Law, which sections set up a system whereby the New York courts may, in certain situations, order that a corporation reimburse its officials for their previously incurred litigation expenses. With section 63 of the same law we are not concerned here since that part of article 6-A has to do with reimbursements authorized by corporate charter or resolutions. The real question here is as to whether sections 64 to 68, hereinafter dealt with at greater length, cover the present case.
In the petition, which has been dismissed for insufficiency (and the allegations of which we accept as true), it is said, among other things, that in December, 1941, a Grand Jury in the United States District Court, Southern District of New York, indicted General Aniline & Film Corporation and other defendants, including petitioner Schwarz, individually, for alleged violations of the first section of the Sherman Anti-Trust Act (U. S. Code, tit. 15, § 1). Petitioner was at that time a vice-president and director of General Aniline & Film Corporation, but had resigned as officer and director, and retired, at the end of 1941, a few days after the indictment was handed up. The petition goes on to say that Schwarz was not guilty of any violation of the Sherman Act, that he pleaded not guilty to the indictment, and retained attorneys in New York City to whom he agreed to pay a fee of $7,500 to defend him up to but not including the trial if there should be one, these attorneys informing him at the time that, if the case should go to trial the fee for representing him at such a trial would be $1,000 per day; that Schwarz, from his own funds, paid these attorneys a retainer fee of $7,500 plus certain disbursements. The petition further says that, in January, 1950, petitioner's lawyers informed him that the United States was no longer interested in prosecuting the cause, but desired to terminate it and was willing, if the court would consent, to permit all the individual defendants, including Schwarz, to plead nolo contendere (see Federal Buies of Criminal Procedure, rule 11), that petitioner did not wish to do so, but that he was told by his attorneys that he would probably be punished by a small fine only, and that the expense of a trial of the case would be financially crushing to him. He alleges in this petition that, pursuaded by these arguments, he pleaded nolo contendere, was fined $500 by the court, paid the fine and requested General Aniline & Film Corporation to reimburse him but that the corporation notified him that it did not feel authorized to do so without an order of the court. Thereupon, through new attorneys, petitioner applied to the United States District Court for an order directing reimbursement of these expenses, but that proceeding was dis- A missed on the ground that the Federal court had no power to enter such an order in the criminal cause, and that, therefore, petitioner's rights, if any, would, under section 65 (supra), have to be enforced in the State courts. Petitioner thereupon brought this present proceeding in Supreme Court, New York County. Respondent contended, at Special Term, that the proceeding did not lie, for two reasons: first, that the statutes were not intended by the Legislature to apply to expenses incurred in criminal proceedings, but only in stockholders' suits and similar civil causes; and, second, that even if they did apply, petitioner was barred from recovering by the language found at the end of section 64 (supra), which says that there shall be no such reimbursement in relation to matters as to which it shall have been adjudged, in the action, suit or proceeding in which the fees were incurred, that the official, director or employee is liable for " misconduct " in the performance of his duties. The Special Term opinion said, quoting People v. Daiboch (265 N. Y. 125,128, 129), that, while a plea of nolo contendere is not an admission of guilt, it nonetheless is a conviction and has the same consequences, in the criminal cause in which it is entered, as a plea of guilty. The court called attention to section 5 of the Clayton Act (U. S. Code, tit. 15, § 16) to the effect that a judgment entered on a plea of nolo contendere in an antitrust prosecution is not to be treated as an admission in any other action. Nonetheless, the court thought that the imposition of a fine on petitioner amounted to an adjudication that he was »- liable for misconduct in the performance of his duties, and that, therefore, under the express language of section 64, he could not be awarded reimbursement.____
On petitioner's appeal to the Appellate Division, the four Justices who voted for affirmance wrote no opinion, so that we do not know on which ground, or grounds, the majority based its approval of a dismissal of the petition. The dissenting Justice, in that court, was of the opinion that petitioner's conviction did not constitute an adjudication of " misconduct " within the meaning of section 64. He stated that no moral turpitude had been shown in the criminal cause as to this petitioner, and that, accordingly, it would not be against public policy to permit reimbursement. He pointed out that the facts in the antitrust prosecution were not before the court in this petition, and so, he thought, the plea of nolo contendere did not necessarily show any '1 misconduct " as to the corporation, and indeed, might have covered conduct in promotion of the corporation's interests, and that the making of the plea by defendant might well have been a mere settlement in the antitrust suit, not involving any adjudication, or any misconduct at all. Despite the discussion in appellant's brief here as to the absence of moral turpitude in antitrust law crimes, it is the fact, and stated in the petition, that these attorneys' fees were spent by petitioner in defending himself against an indictment for a violation of a Federal criminal statute, that he put-in a plea of nolo contendere, which is unknown except in criminal causes, and that he was ordered to, and did, pay a fine. Thus, whatever be his moral guilt or lack of it, he did incur these expenses while defending himself in a criminal prosecution.
Neither court below discussed the question as to whether article 6-A was intended to apply to expenses incurred by an officer or director in his defense against a criminal indictment. For ourselves, however, we cannot believe that the Legislature, in enacting article 6-A, ever intended to provide reimbursement to anyone for his attorneys' fees in a criminal cause against himself. As we know, these provisions for reimbursement came into the statute law after, and because of, the famous opinion of Judge Crouch, sitting as an Official Referee, in 1939, in New York Dock Co. v. McCollum (173 Misc. 106). (See Bailey v. Bush Term. Co., 293 N. Y. 735.) There it had been decided, in effect, that the corporation in whose behalf a stockholder's suit is brought, was not obligated, at common law, to pay legal fees incurred by its directors in defending themselves as individual defendants in such an action. That left corporate directors (and officers) in an unsatisfactory position since, when sued and although successful in a stockholder's suit, they would find themselves exonerated from fault but subject to the heavy attorneys ' fees characteristic of the defense of such actions. To ameliorate their condition, article 6-A was put into the General Corporation Law, and it is noteworthy that it follows after, and is an obvious supplement to, article 6 of that law. Article 6, in its sections 60 and 61, describes certain civil actions which may be brought by or on behalf of a corporation against its officers or agents for misconduct toward the corporation. Sections 27-a and 61-a of the General Corporation Law were passed in 1941 (L. 1941, chs. 209, 350) to overcome the effect of the New York Bock Co. case (supra), as to fees of corporate officials, sued in such cases. Those two sections provided, respectively, for indemnity either by provision therefor in a certificate of incorporation or by-laws "(§ 27-a), or for an award by the court of such litigation expenses as special costs (§ 61-a). Neither of those 1941 enactments had any discernible relation to a criminal case. Obviously, the Legislature was talking about the financial difficulties that had befallen certain corporate directors, officers and agents when they were sued, individually, in stockholders' suits, and had to pay their own lawyers.
Section 27-a (supra) was quite restricted in that it had to do with repayment of litigation expenses, when permitted by certificate of incorporation or by-laws of a corporation only. Section 61-a (supra) contained another kind of limitation — or, at least, another kind of limitation was read into it by the courts — the courts holding that litigation expenses could not be assessed as special costs against a corporation in favor of its officers or directors, unless there was a showing that the corporation itself benefited by the defense of the individuals to the suit. In 1945, pursuant to recommendations by the Law Revision Commission, section 27-a became section 63 in a new article 6-A, and the remaining sections of article 6-A (§§ 64, 65, 66, 67, 68) were added. Sections 65, 66, 67 and 68 describe procedure only, whereas section 64, as pointed out above, contains broadened provisions for assessment against a corporation, of the expenses of any person who is made a party to " any action, suit or proceeding " because of his being an officer, director or employee, unless it shall have been adjudged that he was liable for neglect or misconduct in the performance of his duties. While it cannot, of course, be proven mathematically, it seems clear that there never was any intention to apply any of this to defense costs in a criminal case. There just is no evidence whatever that the Legislature was talking about criminal cases. Appellant gets some comfort from a brief, equivocal footnote in a study, made by an attorney employed by the Law Revision Commission, and attached to the 1945 Report of the Law Revision Commission. The writer of that study said in the footnote that it had been urged that the language of section 64 (" any action, suit or proceeding ") might cover a criminal proceeding for violation of the antitrust law. But that was a mere comment by the writer of a study made for the commission, referring to a contention made, or which might be made, by somebody else that the section might be applicable in a criminal cause. There is nothing to indicate that the Legislature, or, indeed, the Law Revision Commission, ever had any such thing in mind.
It would be a very strange public policy, indeed, which would set up legal machinery whereby one charged with, or convicted of, a crime, of whatever kind, could require the corporation by whom he was employed to pay his legal expenses. And, aside from that aid to statutory construction, there are plenty of affirmative indications that the Legislature was thinking of, and legislating about, civil causes only. The Law Revision Commission's report, with which the 1945 statutes originated, made it plain (see bottom p. 139) that the proposed 1945 revision (new article 6-A of the General Corporation Law) had for its purpose the " making consistent " of former sections 27-a and 61-a {supra) and setting up better machinery for enforcing (where charter and by-laws did not authorize) reimbursement by a corporation of litigation expenses of its directors and officers. No one ever suggested that former sections 27-a and 61-a had anything to do with criminal cases. At pages 140 and 141, the commission's 1945 report is talking, obviously, about allowances and attorney's fees and costs of parties in civil proceedings. Of the numerous decisions and writings cited in that report, not one had to do with a criminal case.
When the Legislature came to enact, into law, the 1945 suggestions of the commission, it included them in the very same chapter (L. 1945, ch. 869) which contained the new statutes requiring security from certain plaintiffs in stockholders' suits. In other Words, the Legislature considered that articles 6 and 6-A of the General Corporation Law, as revised, were in pari materia and that everything in both articles referred to civil litigation. Indeed, our court, in another connection, has written (Lapchak v. Baker, 298 N. Y. 89, 93) that section 61-b (the security for costs statute in article 6) is " to be read in connection with article 6-A " (with which we are immediately concerned here). Other reliable material is available to show that the whole of both articles 6 and 6-A, represented legislative and professional thinking as to stockholders' suits, with no connection, however remote, with criminal prosecutions (see Stockholders' Derivative Suits, by Franklin S. Wood, pp. 21, 84-85, 88; 16 New York State Bar Assn. Bulletin, p. 91; 17 New York State Bar Assn. Bulletin, p. 114).
It is suggested that criminal proceedings are covered by the inclusive language of section 64: " any action, suit or proceeding ". Those words could, we suppose, carry that meaning, if they stood alone, and if we had no sure guides to their real significance. That identical phrase was in old sections 27-a and 61-a, and it was never asserted that those statutes applied to criminal cases — indeed, old section 61-a itself provided that the litigation expenses it described could be recovered as " special costs ", plainly a reference to civil litigation. We note, too, that the quite similar New Jersey, Kentucky and Delaware statutes set out in an appendix to the Law Revision Commission's 1945 Report, all include the same verbiage: " action, suit or proceeding ", and it is not claimed that any of those statutes have ever been held to contemplate the reimbursement of lawyer's fees in criminal trials. Our own conclusion is that the draftsman who was responsible for the statutory language: ' ' any action, suit or proceeding ' ' was being overcautious in making sure that the law would apply in an " action" at law, a " suit" in equity, or a special " proceeding
Since we are holding that court-mandated reimbursement, under article 6-A, can never be had as to expenses of one defending himself against criminal charges, it is unnecessary to examine the interesting question of whether a plea of " nolo contendere " in a Federal court is an " adjudication " of " misconduct ". It is instructive, however, to look a little closer at the exception found at the end of section 64, which denies reimbursement to a corporation official who has been adjudged to be " liable for negligence or misconduct in the performance of his duties." We think " negligence or misconduct ", as there used, refers right back to sections 60 and 61, setting up civil actions by or on behalf of corporations against their officers or directors who have injured the corporations by wrongdoing or inattention to duty.
Those who join in this opinion agree, also, with the able concurring opinion of Carswell, J., who sat with us in the rehearing of this appeal.
The order should be affirmed, with costs.