Case Name: The CHATLOS FOUNDATION, INC., et al, Appellants, v. Joy Chatios D'ARATA, etc., Appellee
Court: Florida District Court of Appeal
Jurisdiction: Florida
Decision Date: 2004-08-06
Citations: 882 So. 2d 1021
Docket Number: Nos. 5D02-3330, 5D02-3590
Parties: The CHATLOS FOUNDATION, INC., et al, Appellants, v. Joy Chatios D’ARATA, etc., Appellee.
Judges: TORPY, J., concurs.
Reporter: Southern Reporter, Second Series
Volume: 882
Pages: 1021–1027

Head Matter:
The CHATLOS FOUNDATION, INC., et al, Appellants, v. Joy Chatios D’ARATA, etc., Appellee.
Nos. 5D02-3330, 5D02-3590.
District Court of Appeal of Florida, Fifth District.
Aug. 6, 2004.
Rehearing Denied Oct. 1, 2004.
I. William Spivey, II, and Dawn Giebler Millner, of Greenberg Traurig, P.A., Orlando, and Elliot H. Scherker and Paul C. Savage, of Greenberg Traurig, P.A., Miami, for Appellants.
Wendell R. Bird, P.C., of Bird & Loechl, LLC, Atlanta, GA, and Frederick H. Nelson, of Law Offices of Frederick H. Nelson, P.A., Altamonte Springs, for Appellee.

Opinion:
PETERSON, J.
The Chatios Foundation, Inc., ("the Foundation"), appeals an order granting the right to indemnification and advancement of legal fees and costs to plaintiff below, Joy Chatios D'Arata, ("D'Arata").
The facts of this case and the order appealed are set forth in the following excerpts from the lower court's order:
1.D'Arata was a director or trustee of the Chatios Foundation (and D'Arata contends that she was wrongfully terminated from that position).... It appears to be an undisputed fact that D'Arata was also an officer and employee of the Foundation (and D'Arata contends that she was wrongfully terminated from those positions), and that D'Arata was a member at least through early 2001 (though the parties differ as to whether the Board of Trustees validly eliminated the position of members then).
5. The nature of the proceeding is D'Arata's action as a director, vice president, and member ., which is in substantial part derivative ., alleging various illegal acts by the Foundation and [Chatios] in his official and individual capacities.
6. The Foundation is using Foundation funds to pay its own legal fees and costs, and to pay those of [Chatios] as an individual defendant.
The court then found the following "relevant circumstances:"
1. Without addressing the merits of the causes of action, the facts alleged and the causes of action pled in the Amended Complaint raise serious issues under federal and/or Florida law that need to be adjudicated....
2. The Chatios Foundation is a nonprofit organization under federal law, and is a New York corporation that is qualified to do business in Florida, and that warrants certain judicial and administrative oversight over nonprofit organizations.
3. It would not be fair, and would allow the larger party to smother the smaller party, if the Foundation did not indemnify and advance D'Arata's legal fees and costs in seeking, from her viewpoint, to protect the Foundation and its assets against these activities.
6. D'Arata is entitled to indemnification, based upon all the relevant evidence contained in the record before the Court, and the evidence of significant litigation which has gone on to date, which includes innumerable hearings, extraordinarily detailed and competent memoranda, and the outstanding arguments of counsel.
The court then addressed both Florida law and New York law, and the application of each to the undisputed facts and relevant circumstances, finding entitlement to in demnification under both. The court concluded:
1. Pursuant to F.S.A. § 607.0850(8) and (9), "indemnification and advancement of expenses, including expenses incurred in seeking court-ordered 'indemnification or advancement of expenses," are awarded to D'Arata from The Chat-ios Foundation. Expenses are defined as legal fees and costs of this action. Alternatively, this award is entered pursuant to New York Nob-for-Profit Corporation Law § 724, 720.
2. The amount of legal fees to be indemnified by The Chatios Foundation to D'Arata is the reasonable amount to be determined by this Court in a separate hearing.
At a subsequent hearing, the court awarded $132,181.50 attorney's fees and $11,636.44 expenses to one of D'Arata's attorneys and $20,796.00 attorney's • fees and $1,098.84 expenses to another.
STANDARD OF REVIEW
Review of the lower court's order requires ús to consider the standard of review of that order, whether Florida or New York law applies and the requirements of the law of the appropriate state. In awarding D'Arata attorney's fees, the lower court stated in its order that it examined the affidavits, documents and pleadings filed by both parties. We are asked to review these same documents. Accordingly, since this court is in the same position as the lower court to review these documents, as well as interpret the various statutes, we find that the lower court made a decision of law renewable by this court de novo. See Philip J. Padovano, Florida Appellate Practice, § 9.4-9.5 (2003); see also Racetrac Petroleum, Inc. v. Delco Oil, Inc., 721 So.2d 376, 377 (Fla. 5th DCA 1998) (holding that judicial interpretation of state statutes is a purely legal matter and therefore subject to de novo review).
CONFLICT OF LAWS
Section 617.1505(3), Florida Statutes, provides:
(3) This [Florida Not For Profit Corporation] act does not authorize this state to regulate the organization or internal affairs of a foreign corporation authorized to conduct its affairs in this state.
Davis & Cox v. Summa Corp., 751 F.2d 1507 (9th Cir.1985), is helpful in determining what is meant by the internal affairs of a corporation.
Claims involving "internal affairs" of corporations, such as the breach' of fiduciary duties, are subject to the laws of the state of incorporation. See Weiss v. Kay Jewelry Stores, Inc., 470 F.2d 1259, 1268 (D.C.Cir.1972); Wiltshire Oil Co. of Texas v. Riffe, 409 F.2d 1277, 1283 & n. 16 (10th Cir.1969); see generally Restatement (Second) of Conflict of Laws § 302, 309 (1971). Here, corporate indemnification involves issues peculiar to the affairs of a corporation. Indemnification of corporate directors, like the fiduciary obligations of corporate directors, is an "internal affair" of a corporation and is therefore subject to the law of the state of incorporation.
Id. at 1527; see also Gross v. Texas Plastics, Inc., 344 F.Supp. 564, 566 (D.N.J.1972). Because the Foundation was incorporated in New York, we find that based upon section 617.1505(3) and the federal case law interpreting "internal affairs," New York law would apply in the instant case.
NEW YORK LAW
The Foundation contends that D'Arata is entitled to no indemnification under the applicable New York law because section 724(c) of New York Business Corporation Law is limited by its own express terms to indemnification of directors and officers in defense of an action and D'Arata is not defending an action. On the other hand, D'Arata contends that New York law allows for indemnification under the facts of this case.
The governing New York statute as set forth in the lower court's order and parties' briefs, provides:
(a) Notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board or of the shareholders in the specific case under section 723 (Payment of indemnification other than by court award), indemnification shall be awarded by a court to the extent authorized under section 722 (Authorization for indemnification of directors and officers), and paragraph (a) of section 723. Applications therefor may be made, in every case, either:
(1) In the civil action or proceeding in which the expenses were incurred or other amounts were paid, .
(b) The application shall be made in such manner and form as may be required by the applicable rules of court or, in the absence thereof, by direction of a court to which it is made. Such application shall be upon notice to the corporation. The court may also direct that notice be given at the expense of the corporation to the shareholders and such other persons as it may designate in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may allow a person such reasonable expenses, including attorneys' fees, during the pendency of the litigation as are necessary in connection with his defense therein, if the court shall find that the defendant has by his pleadings or during the course of the litigation raised genuine issues of fact or law.
N.Y. Bus. Corp. Law § 724 (McKinney 2002) (emphasis added). The trial court cites Professional Insurance Co. v. Barry, 60 Misc.2d 424, 303 N.Y.S.2d 556 (N.Y.Sup.Ct.1969), affirmed, 32 A.D.2d 898, 302 N.Y.S.2d 722 (1969), in support of finding D'Arata's entitlement to indemnification based on this statute. In that case, Professional Insurance Co. filed a cause of action against Chaut, a former director for accounting for damages arising from alleged breaches of fiduciary duties. In his answer, Chaut set forth a counterclaim for indemnification from Professional Insurance Co. under the above statute. The court found:
The allowance of expenses pendent lite pursuant to section 725, subdivision (c) of the Business Corporation Law is involved only where the corporation has failed to provide indemnification and it makes no difference whether the allowance is sought within the ambit of a derivative (s 722) or non-derivative (s 723) category as long as such allowance is necessary in connection with the defense in the litigation.
(Emphasis added). Due to the statutory requirement of awarding indemnification as necessary in connection with a defense, we find that D'Arata, who has filed a cause of action against the Foundation, is not entitled to indemnification under the law of New York. Simply stated, because D'Arata is not conducting a defense in this cause, the lower court erred in finding entitlement.
Accordingly, the award of fees to fund litigation initiated by D'Arata is vacated and we remand for further proceedings.
ORDER VACATED; REMANDED.
TORPY, J., concurs.
SHARP, W., J., dissents with opinion.
. The Foundation is a not-for-profit New York corporation with a principal place of business in Longwood, Florida. It was formed as a private foundation in 1953 by William F. Chatios, grandfather of D'Arata and her brother William J. Chatios, established "exclusively for charitable, religious, scientific, literary or educational purposes" under section 501(c)(3) of the Internal Revenue Code and subject to sections 4941-4945 of the Code. The complaint alleges that the Foundation had assets of over $146,000,000, which because of the acts of its manager and others, declined to less than $90,000,000 at the time the complaint was filed. Appellants claim that since 1953, the Foundation has donated more than $76 million to causes, with more than $42 million having been donated over the past ten years.
. Section 725 was renumbered section 724.