Title: Salvatore Vergopia, et al. v. Corey E. Shaker, et al., andHometown Auto Retailers, Inc., v. Stephen A. Zelnick
Citation: N/A
Docket Number: a-10-06
State: new-jersey
Issuer: new-jersey Supreme Court
Date: June 11, 2007

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). Hometown's insurance carriers refused to defend or indemnify Zelnick. He retained counsel and actively litigated the matter, ultimately securing a grant of summary judgment dismissing the complaint against him. With that portion of the litigation resolved, the trial court addressed Zelnick's cross-claim for indemnification against Hometown. The parties agreed to stipulated facts and that Delaware law governed the matter. Finding that Zelnick was not sued because he was an officer or agent of Hometown, the trial court held that Hometown and its insurers were not required to pay for Zelnick's defense. On appeal, the Appellate Division reversed. Although that court agreed in part with the trial court, it determined that Zelnick was in fact sued as an agent of Hometown and was therefore entitled to indemnification. The Appellate Division's holding did not specify whether Zelnick's right to indemnification arose out of the Delaware General Corporation Law, Hometown's certificate of incorporation, or Hometown's bylaws. The Court granted Hometown's petition for certification. HELD: Under the broad indemnification provision contained in appellant's Delaware certificate of incorporation, under the facts of this matter respondent is entitled to indemnification as a corporate officer. 1. The parties agreed that Delaware law governs this dispute. Relevant portions of the Delaware statute provide for both permissive and mandatory indemnification under specified circumstances. The Court notes that because of the remedial nature of the indemnification statute, Delaware's courts have interpreted it broadly. (pp. 10-13) 2. The Court concludes that it needs to look no further than Hometown's certificate of incorporation to resolve the issue before it. Clearly, the relevant language provides broad protection for Hometown's officers and directors who are sued for their actions, taken in any capacity, relating to the corporation. When Zelnick was added to the Vergopia litigation in 2003, he was serving as an assistant secretary of Hometown. Although the suit did not relate directly to Zelnick's official duties, he was sued for actions he took in furtherance of the corporation's business interests. (pp. 13-16) 3. By statute, Delaware provides that bylaws may contain "any provision, not inconsistent with the certificate of incorporation, relating to the business of the corporation ." To the extent that Hometown's bylaws seemingly diminish the scope of protection provided by the certificate of incorporation, they must yield. (p. 16) 4. Because the Court's resolution of the matter results in an affirmance of the Appellate Division's judgment, it does not need to address that court's alternative basis for the same holding. (p. 17) The judgment of the Appellate Division is AFFIRMED, as MODIFIED. JUSTICE RIVERA-SOTO has filed a separate DISSENTING opinion. It his view that because the issues before the Court unequivocally and exclusively involve the construction of Delaware law, the better result would be to certify the case to the Supreme Court of Delaware, which has constitutional authority to hear and determine questions such as that presented in the within matter. Absent that referral, he concludes that the majority's failure to consider Hometown's bylaws in conjunction with its certificate of incorporation renders its analysis unsupportable. CHIEF JUSTICE ZAZZALI and JUSTICES LONG, LaVECCHIA, ALBIN, WALLACE, and HOENS join in the Court's opinion. JUSTICE RIVERA-SOTO has filed a separate dissenting opinion. SUPREME COURT OF NEW JERSEY A- 10 September Term 2006 SALVATORE A. VERGOPIA, JANET VERGOPIA and EDWARD A. VERGOPIA, Plaintiffs, v. COREY E. SHAKER, WILLIAM C. MULLER, JR., JOSEPH SHAKER, JAMES CHRIST, DOMENIC COLASACCO, C. MICHAEL JACOBI, LOUIS I. MARGOLIS, all individually and/or as Directors of HOMETOWN AUTO RETAILERS, INC., JOHN DOES, WESTWOOD LINCOLN MERCURY SALES, INC., STEVEN SHAKER, EDWARD D. SHAKER, JOSEPH SHAKER, as Trustee of RICHARD SHAKER, Voting Trust, SADIE NEJAIME, JANET SHAKER, EDWARD SHAKER, PAUL SHAKER, ROSE SHAKER and WILLIAM C. MULLER, SR., Defendants, and HOMETOWN AUTO RETAILERS, INC., Defendant-Appellant, and STEPHEN A. ZELNICK, Defendant-Cross- Claimant-Respondent. UNIVERSAL UNDERWRITERS GROUP, Plaintiff, v. THE CHUBB GROUP OF INSURANCE COMPANIES; FEDERAL INSURANCE COMPANY; SALVATORE A. VERGOPIA; JANET VERGOPIA; EDWARD A. VERGOPIA; COREY E. SHAKER; WILLIAM C. MULLER, JR.; JOSEPH SHAKER; JAMES CHRIST; DOMENIC COLASACCO; C. MICHAEL JACOBI; LOUIS I. MARGOLIS; individually and/or as Directors of HOMETOWN AUTO RETAILERS, INC.; WESTWOOD LINCOLN MERCURY SALES, INC.; STEVEN SHAKER; EDWARD D. SHAKER; JOSEPH SHAKER, as Trustee of RICHARD SHAKER Voting Trust; SADIE NEJAIME; JANET SHAKER; PAUL SHAKER; ROSE SHAKER and WILLIAM C. MULLER, SR., Defendants. Argued November 29, 2006 Decided June 11, 2007 On certification to the Superior Court, Appellate Division, whose opinion is reported at 383 N.J. Super. 256 (2006). Eric M. Grant, a member of the Connecticut bar, argued the cause for appellant (Rogut McCarthy Troy, attorneys; Mr. Grant and Diane U. Dabulas, of counsel and on the briefs). Dennis T. Smith argued the cause for cross- claimant-respondent (Pashman Stein, attorneys). PER CURIAM At issue in this appeal is indemnification. Stephen A. Zelnick was both a corporate officer of and outside counsel to Hometown Auto Retailers, Inc. (Hometown), a Delaware corporation with its principal place of business in Connecticut. In 2003, he was added as a defendant in a civil action that was brought against Hometown by two of its former senior employees, plaintiffs Salvatore and Edward Vergopia. Plaintiffs claimed that Hometown wrongfully ousted them from the corporation. Hometown asked its insurance carriers to defend and indemnify Zelnick, but its request was denied. Accordingly, Zelnick filed a cross-claim against the carriers and Hometown, demanding that they provide him with a defense and indemnification. Eventually the Vergopias claims against Zelnick were dismissed and, thereafter, so too was Zelnick s cross-claim. The trial court held that Zelnick was not entitled to indemnification either as an officer or as an agent of Hometown. The Appellate Division reversed. Vergopia v. Shaker, 383 N.J. Super. 256 (2006). The panel held, under case law interpreting Delaware s General Corporation Law, that Zelnick was entitled to indemnification because he was sued by reason of the fact that he was an agent of the corporation. Id. at 269-70. We granted certification, 187 N.J. 83 (2006), largely to review the panel s holding regarding indemnification for agents of a corporation under Delaware law, which could impact our law s requirements concerning indemnification of a corporation s agents. See footnote 1 We now affirm, but on a different and narrower basis. Through its certificate of incorporation, Hometown has provided its directors and officers with broad protections against civil liability, thereby encouraging talented individuals to serve as its corporate leaders. We conclude that Zelnick was entitled to indemnification as a corporate officer of Hometown under the terms of that certificate of incorporation. Our holding renders it unnecessary for us to reach the issue of the scope of indemnification required to be provided to corporate agents under Delaware s General Corporation Law. [(Emphasis added).] Section 10.1 of Hometown s bylaws further provides that [t]he Corporation shall indemnify its directors and officers, and may indemnify its employees and agents, in accordance with and to the full extent permitted by the laws of the State of Delaware as in effect from time to time, if any such person (and the heirs and legal representatives of such person) is made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was, as the case may be, a director, officer, employee or agent of the Corporation or any constituent corporation absorbed in a consolidation or merger or serves or served as such with another corporation, partnership, joint venture, trust or other enterprise at the request of the Corporation or any such constituent corporation. [(Emphasis added).] The trial court found that Zelnick was not sued by reason of the fact that he was an officer of Hometown because, it concluded, the Vergopias claims were unrelated to Zelnick s duties as an assistant secretary of the corporation. The court also found that Zelnick was not sued by reason of the fact that he was an agent of Hometown. Relying on the opinion of the Delaware Court of Chancery in Fasciana v. Electronic Data Systems Corp., 829 A.2d 160 (Del. Ch. 2003), the court reasoned that, in reviewing the press release and Form 8 K, Zelnick was not an agent of Hometown because he was not acting on the corporation s behalf in transactions with third parties. Therefore, the trial court held that Hometown and its insurers were not required to bear the cost of Zelnick s defense. In reversing, the Appellate Division agreed that Zelnick was not sued by reason of the fact that he was an officer of Hometown. Vergopia, supra, 383 N.J. Super. at 263-64. However, the panel parted ways with the trial court in respect of whether Zelnick was sued by reason of the fact that he was an agent of the corporation. Id. at 264. Concluding that the trial court had interpreted the term agent too restrictively under Delaware law, id. at 265, the panel determined that Zelnick was acting as an agent because, by reviewing and commenting upon the proposed press release, which was intended for the widest possible dissemination, [Zelnick] gave advice that was intended to be used with third parties. Id. at 268. The panel s holding did not specify whether Zelnick s right to indemnification derived from the Delaware General Corporation Law, Hometown s certificate of incorporation, or Hometown s bylaws. We granted Hometown s petition for certification, 187 N.J. 83, and requested supplemental briefing from the parties on the following two issues: 1. Whether, under the certificate of incorporation of Hometown Auto Retailers, Inc. (Hometown), Stephen A. Zelnick was a director or officer . . . of the Corporation or . . . was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise when the acts giving rise to the claim for indemnity arose; and 2. Whether, under Hometown s corporate by-laws, Zelnick is entitled to mandatory ( officers and directors ) or discretionary ( employees and agents ) indemnity and, if the latter, whether Hometown Auto Retailers, Inc., abused its discretion in denying Zelnick s request for indemnification. [Del. Code. Ann. tit. 8, 145(a).] In essentially parallel language, subsection (b) of section 145 permits corporations to indemnify corporate actors in connection with lawsuits by or in the right of the corporation. Del. Code. Ann. tit. 8, 145(b). In addition to the permissive authority granted to corporations to provide indemnification under subsections (a) and (b), subsection (c) of section 145 requires corporations to indemnify directors and officers who successfully defend against a lawsuit: To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection therewith. [Del. Code. Ann. tit. 8, 145(c).] Delaware enacted section 145 to permit corporate actors to resist unjustified lawsuits, secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation; and [to] encourag[e] capable women and men to serve as corporate directors and officers, secure in the knowledge that the corporation will absorb the costs of defending their honesty and integrity. VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 84 (Del. 1998). Because of the indemnification statute s remedial purpose, the Supreme Court of Delaware consistently has instructed that section 145 is to be interpreted broadly. See, e.g., Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002) ( [T]he indemnification statute should be broadly interpreted to further the goals it was enacted to achieve. ); VonFeldt, supra, 714 A.2d at 84 ( We eschew narrow construction of the statute . . . . ). Courts have noted that, in addition to including suits against directors or officers in their official capacity, Delaware s by reason of the fact statutory language encompasses suits against directors and officers that arise indirectly from their status, position, or role as a director or officer. E.g., Heffernan v. Pac. Dunlop GNB Corp., 965 F.2d 369, 375 (7th Cir. 1992); In re Adelphia Commc ns. Corp., 323 B.R. 345, 378 (Bankr. S.D.N.Y. 2005). With those principles in mind, we turn now to whether Zelnick was entitled to indemnification from Hometown under the corporate instruments implementing the above statutory policies. [(Emphasis added).] Clearly, Hometown provides broad protection to its directors and officers sued for their actions, taken in any capacity, relating to the corporation. Given the breadth of the contractual right of indemnity conferred by Hometown, there is no need to address the scope of a statutory right. Hometown indemnifies its directors and officers when they act in their official capacity or in any other capacity while serving as a director, officer, employee or agent. (Emphasis added). Thus, Hometown encourages highly qualified individuals to serve as leaders of the corporation without fear of liability for acts performed in furtherance of Hometown s interest. See VonFeldt, supra, 714 A.2d at 84. Because Zelnick is one of those individuals, denying him coverage on these facts would frustrate the salutary purpose underlying the broad sweep of the contractual indemnification provision included in the certificate of incorporation. See footnote 5 When Zelnick was added as a party to the Vergopias suit against Hometown in 2003, he was serving as an assistant secretary of the corporation. Although the Vergopias claims against Zelnick were not related directly to his official duties as an assistant secretary of Hometown, as defined by Hometown s bylaws, he nevertheless was sued while serving as an officer of Hometown for actions he took in furtherance of the corporation s business interests. As such, Zelnick was entitled to indemnification under the terms of Hometown s certificate of incorporation. Both the trial court and the Appellate Division concluded that Zelnick was not sued by reason of the fact that he was an officer of Hometown because neither court could find a direct nexus between Zelnick s corporate duties as an assistant secretary and his specific preparation of the press release and Form 8-K. That reasoning is contrary, though, to the language and spirit of Hometown s certificate of incorporation. Moreover, focusing on the lack of synchronicity between Zelnick s official duties as assistant secretary and the conduct underlying the Vergopias claims against Zelnick ignores the reality of his robust participation in Hometown s business operations while serving as an officer of the corporation. Zelnick was actively involved in Hometown s pursuits since the company s incorporation. According to Salvatore Vergopia, Zelnick joined with Hometown s directors in early 2001 in their effort to oust the Vergopias from their senior positions with the company. Hometown s assertions that Zelnick was a corporate outsider who is not entitled to indemnification therefore simply do not pass muster. In sum, we conclude that the certificate of incorporation s broad indemnification of corporate officers encompasses Zelnick s circumstances in respect of the Vergopias lawsuit. 6 Plaintiffs, v. COREY E. SHAKER, WILLIAM C. MULLER, JR., JOSEPH SHAKER, JAMES CHRIST, DOMENIC COLASACCO, C. MICHAEL JACOBI, LOUIS I. MARGOLIS, all individually and/or as Directors of HOMETOWN AUTO RETAILERS, INC., JOHN DOES, WESTWOOD LINCOLN MERCURY SALES, INC., STEVEN SHAKER, EDWARD D. SHAKER, JOSEPH SHAKER, as Trustee of RICHARD SHAKER, Voting Trust, SADIE NEJAIME, JANET SHAKER, EDWARD SHAKER, PAUL SHAKER, ROSE SHAKER and WILLIAM C. MULLER, SR., Defendants, and HOMETOWN AUTO RETAILERS, INC., Defendant-Appellant, and STEPHEN A. ZELNICK, Defendant-Cross-Claimant-Respondent. UNIVERSAL UNDERWRITERS GROUP, Plaintiff, v. THE CHUBB GROUP OF INSURANCE COMPANIES; FEDERAL INSURANCE COMPANY; SALVATORE A. VERGOPIA; JANET VERGOPIA; EDWARD A. VERGOPIA; COREY E. SHAKER; WILLIAM C. MULLER, JR.; JOSEPH SHAKER; JAMES CHRIST; DOMENIC COLASACCO; C. MICHAEL JACOBI; LOUIS I. MARGOLIS; individually and/or as Directors of HOMETOWN AUTO RETAILERS, INC.; WESTWOOD LINCOLN MERCURY SALES, INC.; STEVEN SHAKER; EDWARD D. SHAKER; JOSEPH SHAKER, as Trustee of RICHARD SHAKER Voting Trust; SADIE NEJAIME; JANET SHAKER; PAUL SHAKER; ROSE SHAKER and WILLIAM C. MULLER, SR., Defendants. JUSTICE RIVERA-SOTO, dissenting. Like most, if not all, corporations organized under Delaware law, Hometown Auto Retailers, Inc. (Hometown) indemnifies its directors, officers, employees, and agents under the terms of its certificate of incorporation and bylaws to the fullest extent authorized by the Delaware General Corporation Law. The Delaware General Corporation Law specifically authorizes corporations to indemnify their directors, officers, employees, and agents who are sued by reason of the fact that they are a director, officer, employee, or agent of the corporation. Del. Code Ann. tit. 8, 145. In the majority s view, Stephen A. Zelnick (Zelnick) - an independent lawyer who represents Hometown and who, as assistant secretary of the corporation, incidentally performs nothing more than ministerial services for it -- is entitled to indemnification as a corporate officer of Hometown under the terms of [its] certificate of incorporation. Ante, __ N.J. __ (2007) (slip op. at 5). Noting that Hometown has provided its directors and officers with broad protections against civil liability, the majority finds it unnecessary . . . to reach the issue of the scope of indemnification required to be provided to corporate agents under Delaware s General Corporation Law. Ibid. A better result in this instance requires the invocation of comity followed by a certification of the issues presented to the Supreme Court of Delaware. Absent that disposition, the majority s failure to consider Hometown s bylaws in conjunction with its certification of incorporation renders its analysis unsupportable. For those reasons, I respectfully dissent. In contrast, Delaware also requires its corporations to indemnify present and former directors and officers [t]o the extent that [that] director or officer . . . has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section[.] Del. Code Ann. tit. 8, 145(c). Subsection (c) also incorporates the requirement that the action be any threatened, pending or completed action, suit or proceeding . . . [brought] by reason of the fact that the person is or was a director[ or] officer[.] Del. Code Ann. tit. 8, 145(a) (emphasis supplied). Therefore, under either the permissive or mandatory provisions of the Delaware General Corporation Law, a director or officer becomes entitled to indemnification only if the underlying action was brought by reason of the fact that the litigant served as a corporate director or officer. Green v. Westcap Corp., 492 A.2d 260, 264 (Del. Super. Ct. 1985). In addition to the statutory indemnification provisions, Delaware corporations may provide contractual indemnification to its directors and officers, and may grant indemnification rights beyond those provided by the statute. Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 344 (Del. 1983) (citing Del. Code Ann. tit. 8, 145(f)). Section 145(f) provides that [t]he indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person s official capacity and as to action in another capacity while holding such office. [Del. Code Ann. tit. 8, 145(f).] Thus, a corporation, through a contractual agreement such as its bylaws, may extend the reach of its indemnification. In accordance with the Delaware General Corporation Law and pursuant to its certificate of incorporation and bylaws, Hometown provides a contractual right to indemnification to its directors, officers, employees, and agents. Specifically, Hometown s certificate of incorporation provides that [e]ach person who was or is made a party . . . in any action, suit or proceeding . . . by reason of the fact that he or she . . . is or was a director or officer, of the Corporation . . ., whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law. [(Emphasis supplied).] Hometown s bylaws further define those indemnification rights. Commonsensically, they reject a blanket grant of indemnity and require a nexus between the acts charged and the actor s status in respect of Hometown. Thus, the bylaws require that Hometown indemnify its directors, officers, employees, and agents, in accordance with and to the full extent permitted by the laws of the State of Delaware as in effect from time to time, if any such person . . . is made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, . . . by reason of the fact that such person is or was, as the case may be, a director, officer, employee or agent of the Corporation . . . . [(Emphasis supplied).] Based on these provisions, the trial court found that, in order to seek indemnification as an officer, Zelnick had to show that the Vergopia lawsuit was brought by reason of the fact that he served as Hometown s assistant secretary. The trial court concluded as follows: The gravamen of Vergopia[s ] claims . . . related to the defamation related to the press release and the [Form] 8-K. No fair inference, in my opinion as the trier of fact, can be raised to suggest that Vergopia[s ] remedies against Zelnick were anything other than those which were engendered by his review of the press release, his advice to his . . . client, or his client s representative, vis-a-vis the press release, and the concomitant [Form] 8-K work. This was ordinary conventional lawyering that did not implicate, except by happenstance and coincidence, his status as assistant secretary. In other words, for example, he didn t have to be assistant secretary in order to do that which he did and upon which the Vergopia claims against him were founded. . . . . Zelnick s conduct has nothing to do with [h]is corporate office. It was a distinct role and function that does not trigger indemnification under the statute, or under the bylaws, or under the certificate of incorporation. [(Emphasis supplied).] [Del. Sup. Ct. R. 41(a)(ii).] Because this case presents important issues arising exclusively under the laws of a sister state, they are best resolved by that state s highest court. See Rales v. Blasband, 626 A.2d 1364, 1366 (Del. 1993) (accepting certification from federal district court because [t]he question certified is one involving the corporation law of the State of Delaware[; t]he issue presented is apparently one of first impression[; and, t]hus, there appear to exist important and urgent reasons for an immediate determination by this Court of the substantive rights implicated by the question certified ). For that reason, certifying the questions of law arising in this instance to that Court affords the most prudent course for resolution. However, as the majority nonetheless addresses the merits of Zelnick s claim for indemnification, it is to that issue that I now turn. SUPREME COURT OF NEW JERSEY NO. A-10 SEPTEMBER TERM 2006 ON CERTIFICATION TO Appellate Division, Superior Court SALVATORE A. VERGOPIA, JANET VERGOPIA and EDWARD A. VERGOPIA, Plaintiffs, v. COREY E. SHAKER, et al., Defendants. DECIDED June 11, 2007 Chief Justice Zazzali PRESIDING OPINION BY Per Curiam CONCURRING/DISSENTING OPINIONS BY DISSENTING OPINION BY Justice Rivera-Soto