Jarold Shops, Inc. v. Unknown
307 NY 263, 120 NE 2d 819 (1954)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A corporate director is not entitled to indemnification for legal expenses under a statute precluding payment for directors "adjudged" liable for misconduct, even if the suit is dismissed, when the court makes explicit findings of fact that the director engaged in such misconduct.
Facts:
- Plaintiff and defendant were the sole stockholders of Jarold Shops, Inc.
- Both stockholders participated in and carried out a conspiracy to take money and property from the corporation.
- The secret withdrawals of corporate funds were primarily intended to evade corporate and individual income taxes.
- Each stockholder was a guilty participant in the scheme, had full knowledge of it, and shared in the proceeds of the wrongdoing.
Procedural Posture:
- The plaintiff, a stockholder, initiated a derivative action against the defendant, the only other stockholder and a director, on behalf of Jarold Shops, Inc.
- The New York trial court (Special Term) found that both parties had engaged in misconduct against the corporation.
- Consequently, the trial court dismissed the plaintiff's complaint under the theory of estoppel, since the plaintiff had participated in the wrongdoing.
- Despite dismissing the complaint, the trial court ordered the corporation to pay $30,000 to the defendant for her attorneys' fees and expenses pursuant to section 64 of the General Corporation Law.
- The plaintiff appealed the award of attorneys' fees, and the intermediate appellate court (the Appellate Division) affirmed the trial court's judgment.
- The plaintiff then appealed to the Court of Appeals of New York, the state's highest court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a trial court's finding of fact that a corporate director engaged in misconduct, in a case that is ultimately dismissed on equitable grounds, constitute an adjudication of liability for misconduct sufficient to preclude mandatory corporate indemnification for that director's legal fees under section 64 of the General Corporation Law?
Opinions:
Majority - Desmond, J.
Yes. A judicial finding of fact that a director engaged in misconduct constitutes being 'adjudged... liable for... misconduct' under the indemnification statute, even if no formal money judgment is entered against them. The term 'adjudged' is not a technical word of art limited to the entry of a final judgment. To interpret it otherwise would create an unconscionable result by rewarding a faithless director, which contravenes the legislative intent of the statute. The trial court's affirmed findings that the defendant participated in a conspiracy to 'mulct the corporation' is, in all reason and common sense, an adjudication of misconduct, barring her from having the corporation pay her legal fees.
Dissenting - Lewis, Ch. J., Conway and Van Voorhis, JJ.
No. The determination of whether a director has been 'adjudged' liable for misconduct must be found within the four corners of the final judgment itself. In this case, the judgment contains no determination that the defendant was guilty of negligence or misconduct; it merely dismisses the suit based on the doctrine of unanimous stockholder ratification. A dismissal based on consent or ratification, as established in cases like Kent v. Quicksilver Min. Co., is not an adjudication of 'misconduct' within the meaning of the statute, so the defendant is entitled to the allowance for expenses.
Analysis:
This decision significantly clarifies the interpretation of corporate indemnification statutes by broadening the meaning of 'adjudged liable.' It prevents corporate officers and directors from using procedural or equitable defenses, like the plaintiff's own misconduct (estoppel), to secure a dismissal and then force the corporation to pay their legal fees despite clear judicial findings of their wrongdoing. The ruling ensures that indemnification serves its intended purpose—to protect innocent directors—rather than creating a loophole for culpable fiduciaries to escape the financial consequences of defending their misconduct. It prioritizes substance (findings of misconduct) over form (the final judgment entry).
