Opinion
No. 2011–367428/A.
06-26-2014
Matter of PROCEEDING TO DETERMINE THE VALIDITY OF CLAIM (SCPA 1809) AGAINST THE ESTATE OF REIJANE HUAI, Deceased.
Opinion
In this proceeding to determine the validity of several claims (SCPA 1809 ), respondent moves to dismiss those claims pertaining to recoupment of attorney's fees (CPLR 3211[a][1] and [a][7] ).
This is a claim by FalconStor Software, Inc., incorporated in the State of Delaware, against the estate of Reijane Huai, for reimbursement of attorneys' fees advanced to the decedent.
The last will and testament of Reijane Huai was admitted to probate by a decree of this court, dated November 10, 2011. Letters testamentary issued to ShuWen Huai, respondent in this proceeding.
Reijane Huai was the President and Chief Executive Officer of FalconStor. It is undisputed that in 2012, the United States Department of Justice and the Securities and Exchange Commission, commenced civil and criminal investigations into a possible bribery scheme undertaken by officers of the corporation. The decedent committed suicide before the date scheduled for his plea of guilty. Decedent was also a defendant in a derivative action on behalf of the shareholders of the corporation. The corporation now seeks the return of funds advanced to the decedent to enable him to defend the actions. The executor moves to dismiss the claims for recoupment the grounds that the estate is entitled to indemnification of attorneys' fees.
Issues related to the internal affairs of a corporation are governed by the law of the state of incorporation (O'Donnell v. Ferro, 303 A.D.2d 567 [2d Dept 2003] ). The statute pertaining to indemnification is § 145 of the Delaware General Corporation Law (Del Code Ann Tit 8). It is noted that § 145(k) confers exclusive jurisdiction upon the Delaware Chancery Court. However, this provision addresses the division of courts intra-state and does not preclude adjudication of the issue of indemnification in another jurisdiction (Confederate Motors, Inc. v. Terny, 859 F Supp 2d 181 [D Mass 2012] ).
Section 145 has both mandatory and permissive provisions. Section 145[c] provides that the corporation must indemnify attorneys' fees incurred by an officer of the corporation who is “successful on the merits or otherwise,” in defending an action. As to the criminal action, the corporation contends that the decedent was not successful on the merits, as he was about to enter a plea of guilty. The estate argues that the decedent must be deemed to be successful in the absence of a conviction.
A guilty plea on all charges is not a successful outcome (Hermelin v. K–V Pharmaceutical Co., 54 A3d 1093 [Del Ch 2012] ). A corporate officer may be entitled to partial indemnification where some of the charges are avoided as part of a plea agreement (Merritt–Chapman & Scott Corp. v. Wolfson, 321 A.2d 138 [Del Super Ct 1974] ). The estate does not allege nor has it produced any evidence that some of the charges were to have been dismissed under a plea agreement.
Section 145[c] mandates indemnification where an action is dismissed on technical grounds, such as the statute of limitations (Constantini v. Swiss Farm Acquisition, LLC, 2013 WL 475 8228 [Del Ch Ct 2013] ). The executor argues that the decedent's death was a technical basis for withdrawal of the criminal action. However, it is a condition for reimbursement, even in the case of a dismissal on technical grounds, that the officer has “prevailed” in the action. Here, the decedent did not prevail during his lifetime. The action was terminated without any resolution.
The right to indemnification should be determined by the terms of the prospective plea agreement. The express purpose of § 145 is to “promote the desirable end that corporate officers and directors will resist what they consider unjustified suits and claims,” with the knowledge that their reasonable expenses will be borne by the corporation “if they are vindicated” (Tafeen v. Homestore, Inc., 2005 WL 1314782 [Del Ch Ct 2005] ).
Had the decedent pled guilty to all charges, there would be no right to indemnification under § 145[c]. The decedent would have been liable for the payment of his own attorneys' fees. Subsequently, the decedent's estate would have assumed the liability. The rule in Delaware, which is the universal rule, is that an executor is responsible for the administration of the estate, including the payment of debts (Kojro v. Sikorski, 267 A.2d 603 [Del Super Ct 1970];In re Spicer's Estate, 120 A 90 [Del Orphans' Ct 1923] ). Responsibility for the payment of attorneys' fees can only be transferred from the estate to the corporation if § 145 overrides the Delaware mandate and imposes a statutory requirement of indemnification to an estate under these circumstances. Section 145 contains no such provision.
A court cannot add a provision to § 145, which the General Assembly could have easily added itself (Stifel Financial Corp.v Cochran, 809 A.2d 555 [Del Supr Ct 2002] ).
In addition to mandatory indemnification, § 145(a), (b) contain permissive provisions which allow a corporation to indemnify an officer where there is a lack of success on the merits, if there is a determination that the officer acted in good faith. In the case of a criminal action, the officer must reasonably believe that he was not violating the law. The procedures for the determination of good faith, by the corporation, are set forth in § 145[d]. A corporation can convert the statute's permissive provisions into mandatory indemnification through its articles of incorporation, by-laws or an indemnification agreement. The corporation and the decedent executed an indemnification agreement. The parties to this proceeding have not defined their positions concerning the construction and effect of the agreement. The agreement is not the subject of this motion.
As to the criminal action, the estate failed to demonstrate that the corporation has no cause of action (CPLR 3211[a][7] ; Bokhour v. GTI Retail Holdings, Inc., 94 AD3d 682 [2d Dept 2012] ) nor has the estate established that the documentary evidence conclusively establishes a defense to the corporation's claim for reimbursement, as a matter of law (CPLR 3211[a] [1] ; Kappa Dev. Corp. v. Queens Coll. Point Holdings, LLC, 95 AD3d 1178 [2d Dept 2012] ).
As to the investigation by the Securities and Exchange Commission, it appears that there is a settlement which has not been finalized. With respect to the derivative action, the court dismissed the action after approval of a settlement but an appeal is pending. Finality of the disposition is a predicate to determining the right to indemnification (Paolino v. Mace Sec. Intern., Inc. 985 A.2d 392 [Del Ch 2009] ).
As a determination of the right to indemnification in the civil actions is premature it follows that the claims for recoupment are premature as well. Therefore, the claims should be dismissed without prejudice (TLS [ USA] Inc., v. OppenheimerFunds, Inc., 113 AD3d 410 [1st Dept.2014] ; Inter Met Fabricator, Inc. v. HRH Const. LLC, 44 AD3d 488 [1st Dept 2007] ).Accordingly, the motion to dismiss the claims for recoupment pertaining to the civil actions is granted and they are dismissed without prejudice. The motion to dismiss the claim pertaining to the criminal action is denied.
Settle order.