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Posted: December 15, 2015

Right To Corporate Indemnification Must Be “Unmistakably Clear”

On December 2, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in Comer v. Krolick, 2015 NY Slip Op. 32274(U), resolving, inter alia, an application for advancement of attorney fees and a cross-motion to dismiss an indemnification claim.

The relevant section of the opinion concerned two individual defendants’ application for advancement of attorneys’ fees, and the corporate defendant’s cross-motion to dismiss their claim for indemnification. The complicating factor was that, although the individuals were being sued based upon their role as directors in a company, that company, FNBNY Delaware, was no longer in existence—it had merged with FNBNY New York, which had in turn merged with BBI. The individuals had only ever been directors of FNBNY Delaware, but were demanding advancement and asserting a right to indemnification from BBI, alleging that in each of the two merger agreements, the surviving party had assumed the duties and obligations of the other party. In other words, their claim was that FNBNY New York had assumed the duties and obligations of FNBNY Delaware, and that BBI had then assumed the duties and obligations of FNBNY New York (which necessarily included the duties and obligations of FNBNY Delaware).

The advancement claim was swiftly disposed of—even the FNBNY Delaware bylaws and its certificate of incorporation provided that, although indemnification was mandatory, advancement of legal expenses was at the company’s option. The court found that the particular language “The Corporation may pay in advance any expenses (including attorneys’ fees) . . . if the person receiving the payment undertakes in writing to repay the same . . .” was insufficient to create a duty of mandatory repayment, even if the directors signed the necessary undertaking, because any contractual duty of advancement must be “strictly construed” and “unmistakably clear.”

However, the indemnification question was more complicated. BBI moved to dismiss the indemnification claim, on the grounds that the FNBNY New York/BBI merger agreement only provided that indemnification would only be provided to current or former directors “of FNBNY [New York] . . . to the fullest extent as would have been permitted by FNBNY [New York] under the [NY BCL],” and that this language was not “unmistakably clear” that former directors of FNBNY Delaware were entitled to indemnification. BBI also noted that the FNBNY New York bylaws did not provide for indemnification of FNBNY Delaware’s former directors.

The court was unpersuaded, holding that BBI’s argument was not “dispositive,” and that “it is unclear if former FNBNY Delaware directors are considered former FNBNY New York directors,” and that it was also unclear whether BBI’s assumption of FNBNY Delaware’s liabilities included its indemnification obligations. The court stated that none of the cases cited by the parties addressed the specific question presented, viz. whether the parties to the FNBNY New York/BBI merger “intend[ed] to disclaim [the FNBNY directors’] rights to indemnification?” Because the record was insufficient to answer this question, the motion to dismiss the indemnification claim was denied.

Despite the fact that this indemnification claim survived a motion to dismiss, this decision—which did not find that a right to indemnification existed—shows how vulnerable such rights are after a merger, even if the merger agreement includes an assumption of all duties and obligations, if such indemnification rights are not specifically provided for in the merger agreement.

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