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Current Developments in the Commercial Divisions of the
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Posted: August 5, 2014

Corporate Officer Awarded Advancement of Fees

On July 24, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in General Plumbing Corp. v. Parklot Holding Co., 2014 NY Slip Op. 31961(U), awarding a corporate officer indemnification and advancement of legal expenses in an action against him by the corporation.

In General Plumbing Corp., a commercial landlord-tenant dispute, the defendant moved to dismiss and also moved “pursuant to BCL § 724(c), for an order directing [the plaintiff] to reimburse him for the attorney’s fees and costs he has already incurred defending himself in this action, and to advance him any attorney’s fees and costs he incurs for such defense in the future.” The court granted the indemnification motion, explaining:

[The defendant] moves for reimbursement and the advancement of attorney’s fees and costs in defending this action, pursuant to BCL §724(c), on the grounds that he is entitled to indemnification as a former officer and director of [the plaintiff]. Business Corporation Law § 724 states:

(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. Application 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 . . .
(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.

It is important to note that if the action is not of the kind covered under section 722, then neither Business Corporation Law § 723 nor § 724 are applicable, and the court has no statutory basis to order such indemnification. Business Corporation’Law § 722(c) states:

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, or is or was serving at the request of the corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys’ fees, actually and necessarily incurred by him in connection with, the defense or settlement of such action, or in connection with an appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation, except that no indemnification under this paragraph shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper.

[The defendant] argues that, through his pleadings and submissions to the court, he has denied any wrongdoing and raised issues of fact regarding whether his actions as president of [the plaintiff] were in good faith pursuant to BCL 724(c). Plaintiff argues that [the defendant] is not entitled to indemnification and advanced legal fees because [the defendnat] admitted that his actions were not in the best interest of [the plaintiff] and that he was balancing the interests of [others] pursuant to his personal asset allocation plan. Accordingly, plaintiff argues that pursuant to BCL 722(c), his actions were not in good faith or in the best interests of the corporation.

Where there are issues of fact in a dispute over whether a director participated in alleged wrongful conduct and acted in good faith on behalf of the corporation, courts have generally permitted the relief of advanced litigation expenses, including attorney’s fees, subject to reallocation at the end of the action pursuant to BCL 725(a). [The defendant] has successfully defended this action and properly moved for the advancement of legal fees pursuant to BCL 724 as the action was pending against him at the time the motion was filed. Accordingly, [the defendant’s] motion for the advancement of attorney’s fees pursuant to BCL 724(C) is granted. Further, as [the defendant’s] motion to dismiss the causes of action against him has been granted, [the defendant] is entitled to indemnification, in the present action only, for reasonable legal fees, pursuant to BCL §723(a).

However, the first and second causes of action do not include allegations with respect to [the defendant] and the third and fourth causes of action only involve acts allegedly taken by [the defendant] in 2013. As none of the allegations in the original complaint included actions taken by [the defendant] while he was a director or officer of [the plaintiff], for the benefit of [the plaintiff], [the defendant] is not entitled to indemnification with respect to the costs and expenses of defending this case prior to October 17, 2013 when the plaintiff amended the complaint to include causes of action against [the defendant] for his breach of duty while president of [the plaintiff].

(Internal quotations and citations omitted) (emphasis added).

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