Opinion ID: 1672024
Heading Depth: 1
Heading Rank: 5

Heading: itd

Text: After he was first indicted, Murphree made demand on ITD for an advancement of attorney's fees pursuant to the charter of the corporation in Article X(e). Subsection (i) under Article X provides that all the rights in said article shall be deemed a contract between the corporation and the Indemnified Representative pursuant to which the corporation and each Indemnified Representative intend to be legally bound. Upon receiving this demand from Murphree, ITD refused to honor the advancement request. ITD relied on the advice of two attorneys' interpretation of Miss. Code Ann. § 79-11-281(2), (3) and (5). Heretofore, there has been no interpretation of this code section by this Court, which prompted ITD's argument for good faith in denying the indemnification of Murphree. This is the basis of ITD's response on appeal. ITD states that the issue should not be whether its interpretation of the statute was correct (because Murphree has been indemnified by ITD for attorney's fees and expenses), but rather whether the trial court decided correctly, as a matter of law, ITD did not act with bad faith. Murphree relied on subsection (g) of Article X in making his argument that payment was not timely made (within 30 days) after his demand on ITD. [3] ITD would not grant indemnification because it interpreted the statute to preclude such a grant. ITD admits that Miss.Code Ann § 79-11-281(2) and (5) allow for advancement of fees and expenses under some circumstances. But, ITD interprets § 79-11-281(3) to preclude indemnification where the officer or director was adjudged liable on the basis that personal benefit was improperly received by him. (emphasis added). Notwithstanding this correct statement of the statute, there is a major flaw in ITD's analysis. Murphree was not convicted. Therefore, he was not adjudged liable, and § 79-11-281(3) has no application to preclude indemnification in this case. ITD read § 79-11-281(5)(c) to prohibit an advancement of payments to Murphree unless [a] determination is made that the facts then known to those making the determination would not preclude indemnification under § 79-11-101 et seq. At the time the request for advance payment was made Murphree had been indicted by a federal grand jury for allegedly embezzling funds while serving as an officer and director of ITD. The federal investigators notified Leonard Vernamonti, president and CEO of ITD, of documents that led the investigators to believe that Murphree had misappropriated funds to his personal benefit. A plain reading of the statute clearly states that if the facts were valid and Murphree was convicted, then indemnification could not be made. However, upon consultation with its attorneys, ITD concluded that the mere indictment of Murphree precluded indemnification under § 79-11-281(5)(c). ITD's interpretation of § 79-11-281 presupposes that an indictment is equal to being adjudged liable (i.e. a conviction). ITD denied Murphree's request for indemnification merely because he had been indicted. The statute clearly calls for the director to be adjudged liable before indemnification can be denied. Miss. Code Ann. § 79-11-281(3). This cursory analysis shows a blatant disregard for clear legislative intent which prompted ITD to deny indemnification prior to any adjudication of Murphree's guilt or innocence. To use the advice of counsel as justification for denying a claim by Murphree which was clearly within the statute and the charter of the corporation cannot be a valid excuse. The Fifth Circuit held in Szumigala, 853 F.2d at 282, the following: [G]ood-faith reliance upon advice of counsel may prevent imposition of punitive damages. See Henderson v. United States Fidelity & Guar. Co., 695 F.2d 109, 113 (5th Cir.1983). But it is simply not enough for the carrier to say it relied on advice of counsel, however unfounded, and then expect that valid claims for coverage can be denied with impunity pursuant to such advice. The advice of counsel is but one factor to be considered in deciding whether the carrier's reason for denying a claim was arguably reasonable. We believe that where, through verbal sleight of hand, the advising attorney concocts an imagined loophole in a policy whose plain language extends coverage, such advice is heeded at the carrier's risk.       We believe the difficulties inherent in temporarily denying coverage on this basis creates a jury issue as to whether such denial was arguably reasonable, notwithstanding advice of counsel. (emphasis added). The attorneys misread the plain language of the statute and wrongly instructed ITD as to whether it should grant Murphree's claim. Reading Szumigala together with the facts presented by Murphree on appeal, it is apparent that ITD heeded the attorneys' advice at its own risk. Therefore, there was an issue as to whether ITD acted in bad faith in denying the claim under Miss. Code Ann. § 79-11-281. The question becomes whether ITD's determination, under § 79-11-281(5)(c) [that the facts known to it at the time of Murphree's request precluded indemnification under § 79-11-101 et seq.], was made in good faith. The determination was made because ITD viewed Murphree's indictment as the equivalent to his being adjudged liable. Clearly, this presents an genuine issue of material fact sufficient to withstand a motion for summary judgment. Because the statute did not preclude payment, the charter of the corporation was the governing law. Accordingly, ITD breached its contractual obligations to Murphree under its charter and by-laws by denying indemnification. Article X(e) [4] , (g) [5] , and (i) [6] , provided Murphree with rights that ITD either ignored or refused to acknowledge when he made his demand for indemnification. The request by Murphree for advancement of attorney's fees prior to this acquittal was refused by ITD. This decision consequently precluded any payment by Federal. Further, when ITD decided to grant indemnification, payment was made fourteen days after the time period enumerated in subsection (g) of Article X. The foregoing facts constitute a breach of contractual rights as granted by subsection (i) of Article X. The materiality of such a breach is a question in which reasonable minds could differ. This is an issue of material fact that should have survived a motion for summary judgment. ITD argues that this is a case of first impression because prior to this case there has been no judicial interpretation of Miss. Code Ann. § 79-11-281. The Mississippi Supreme Court, in cases of first impression, has refused to award punitive damages even though its ultimate decision was against the insurer. Gorman v. Southeastern Fidelity Ins. Co., 775 F.2d 655, 659 (5th Cir.1985); See Gulf Guar. Life Ins. Co. v. Kelley, 389 So.2d 920, 922-23 (Miss. 1980). While the conclusion reached by ITD and its attorneys was not contrary to any case law (there was none), it is not consistent with the plain language of § 79-11-281(3)(a). Murphree was never adjudged liable. Yet ITD denied his request from its erroneous reading of an unambiguous statutory clause. Certainly ITD's motives for reading the statute could cause reasonable minds to differ concerning the issue of bad faith. Thus, an issue of material fact did exist. Murphree argues to this Court that § 79-11-281(11) [7] allowed ITD to grant greater indemnification rights than other subsections of § 79-11-281. ITD in an attempt to rebut this argument stated that there is no such provision in its bylaws, articles of incorporation, or any other resolution by which ITD could have made advance payments to Murphree based on the facts known to it at the time of Murphree's requests. However, this rebuttal is without merit. The Article X(C)(3) and (4) exclusions, set forth in the minutes of an August 1987 meeting, prohibit ITD from making any payment to a director or officer if liability is based upon improper personal profit or where the indemnification would be unlawful. [8] In order to be liable or incur liability, Murphree would have to have been adjudged liable, not merely indicted. He was not convicted. The charges were dismissed. The indemnification would have been unlawful only if Murphree had been adjudged liable prior to a grant of indemnification by ITD. Miss. Code Ann. § 79-11-281(3)(a). ITD simply missed the plain meaning of liability and adjudged liable in its reading of the statute and its own articles of incorporation. ITD states if it had erroneously given advance payments to Murphree, there may have been a breach of fiduciary duties by the directors. ITD directs the Court's attention to Petty v. Bank of New Mexico Holding Co., 109 N.M. 524, 787 P.2d 443 (1990), where the court refused to dismiss a shareholder action brought against directors of a corporation for allowing advance payments to be made to directors to defend a suit where they were accused of improperly using corporate assets for their personal benefit. ITD fails to note that its articles of incorporation provide for situations where advancements are made and later it is determined that payment should not have been made. Article X subsection (e) provides for advancements where the indemnified party undertakes to repay such amount if it is ultimately determined that such person is not entitled to be indemnified by the corporation. By its own articles of incorporation, ITD had provided a method of making advancements without having to fear an action by shareholders. Again, ITD's failure to make a plain reading of the statute and its own articles of incorporation could lead reasonable minds to differ as to what its motivation was in denying payment to Murphree. Murphree, as he did with Federal, brings ITD's request for a release from all claims into question as a basis for bad faith on the part of ITD. This argument was fully discussed in the above section regarding Federal. Again, a request for a release, upon which payment was not conditional, was reasonable in light of the correspondence from Murphree's attorneys threatening litigation if payment was not timely made.