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Current Developments in the Commercial Divisions of the
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Posted: January 22, 2018

Corporate Officer Failed to Make Factual Showing Required to Receive Indemnification for Defense of Criminal

On January 18, 2018, the Third Department issued a decision in Kaloyeros v. Fort Schuyler Mgt. Corp., 2018 NY Slip Op. 00373, holding that a corporate officer had failed to make the showing required to be entitled to be indemnified for his defense of criminal matter under Nevada law, explaining:

A corporation is authorized to indemnify a director for reasonable expenses arising out of an action or proceeding provided such director or officer acted, in good faith, for a purpose which he or she reasonably believed to be in, or, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his or her conduct was unlawful. A person who is successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in section 722 shall be entitled to indemnification as authorized in such section. Under N-PCL 724(c), a court may direct a corporation to advance legal fees to a director 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 or her pleadings or during the course of the litigation raised genuine issues of fact or law. With respect to the advancement of fees, courts have consistently observed that the governing standard is not a stringent one and is a far less demanding standard than that necessary on a motion for summary judgment. In other words, to establish a basis for the advancement of legal fees, plaintiff was not required to establish as a matter of law that his actions comported with the conduct standard set forth in N-PCL 722, but only to raise a genuine question of fact or law that he so comported himself.

In this regard, Supreme Court determined that plaintiff’s evidentiary showing was inadequate, and we agree. The operative burden here was for plaintiff to raise a genuine issue of fact or law. To that end, plaintiff presented an unverified complaint, the affidavit of counsel reporting that plaintiff publicly denied the allegations of wrongdoing through a statement issued by counsel on September 22, 2016, the very fact that he pleaded not guilty to both the state and federal charges and the unsworn undertaking given to defendants in October 2016. As Supreme Court duly recognized, this documentation is without probative value and thus unavailing. Nor is a not guilty plea the equivalent of the good faith representation defined in N-PCL 722 (a). Glaringly absent is any affirmed statement by plaintiff that he acted in good faith. Given this inadequate showing, we cannot say that Supreme Court abused its discretion in denying plaintiff’s request for the advancement of fees under N-PCL 724(c). Nor, as the court recognized, did plaintiff make any showing whatsoever as to irreparable harm. The record indicates that plaintiff earned over $1 million a year for the preceding six years, indicating his ability to finance an adequate defense. Further, plaintiff’s counsel confirmed at oral argument that defendants’ insurer agreed to finance 50% of the legal expenses, and counsel confirmed that he has no present intention of withdrawing from the representation.

(Internal quotations and citations omitted).

We frequently litigate issues relating to the advancement or indemnification of litigation expenses such as attorneys’ fees to corporate officers, directors and employees. Such litigation involves both statutory law and parsing the terms of employment agreements and corporate documents. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding indemnification for, or advancement of, the costs of litigation.

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