Merritt-Chapman & Scott Corporation v. Wolfson
321 A.2d 138, 1974 Del. Super. LEXIS 149 (1974)
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Rule of Law:
Delaware law mandates indemnification for corporate agents who are "successful on the merits or otherwise" in defending any claim, issue, or matter in a legal action, considering any result other than conviction as success, and allows for partial indemnification. However, corporate by-laws defining "derelict in duty" can validly preclude indemnification for convictions, including those resulting from a nolo contendere plea, while reasonably incurred expenses and interest thereon are subject to judicial review considering all circumstances.
Facts:
- Louis Wolfson, Elkin Gerbert, Joseph Kosow, and Marshal Staub (claimants) were directors, officers, or agents of Merritt-Chapman & Scott Corporation (MCS) or its wholly-owned subsidiary.
- The claimants were charged by indictment with participation in a plan to cause MCS to secretly purchase hundreds of thousands of shares of its own common stock, including conspiracy to violate federal securities laws, perjury before the SEC (Wolfson and Gerbert), and filing false annual reports (Wolfson, Gerbert, and Staub).
- Joseph Kosow served as chairman of the board and president of Industrial Finance Corporation, a wholly-owned subsidiary of MCS, under an employment agreement with MCS to manage its financing activities subject to MCS's control and direction.
- Following several legal proceedings, the criminal charges against Kosow and Staub were ultimately dropped entirely.
- Wolfson entered a plea of nolo contendere to one count (filing a false annual report for 1963) and was fined $10,000 and given a suspended sentence of eighteen months, with all other charges against him dropped.
- Gerbert was found guilty by a jury on one count (perjury before the SEC) and agreed not to appeal; he was fined $2,000 and given a suspended sentence of eighteen months, with all other charges against him dropped.
- Wolfson incurred substantial legal expenses, including retaining a prominent law firm for his defense after his initial conviction, with their fees amounting to $250,000 per trial.
Procedural Posture:
- Louis Wolfson, Elkin Gerbert, Joseph Kosow, and Marshal Staub were charged by indictment in a federal criminal action with multiple counts related to securities law violations, perjury, and filing false reports.
- At the first trial, the court dismissed part of the conspiracy count, but the jury returned guilty verdicts on all remaining charges against all claimants.
- The Delaware Superior Court previously held that Wolfson, Gerbert, and Kosow were not entitled to partial indemnification at that stage (Merritt-Chapman & Scott v. Wolfson, 264 A.2d 358 (Del.Super.1970)).
- The convictions of all claimants were subsequently reversed by the Second Circuit Court of Appeals (United States v. Wolfson, 437 F.2d 862 (2nd Cir. 1970)).
- Two retrials were held for the perjury and false annual report charges against Wolfson and Gerbert.
- At the first retrial, the court entered a judgment of acquittal on count four for Wolfson and Gerbert, and the jury could not agree on the other counts.
- At the second retrial, the jury returned a guilty verdict on count three against Gerbert, but could not agree further on other charges.
- The remaining criminal charges were settled: Wolfson entered a plea of nolo contendere to count five, and other charges against him were dropped; Gerbert agreed not to appeal his conviction on count three, and other charges against him were dropped; and all charges against Kosow and Staub were dropped.
- Following these outcomes, the claimants sought indemnification from Merritt-Chapman & Scott Corporation (MCS) for expenses incurred in the criminal action.
- All parties (claimants and MCS) filed motions for summary judgment in the Delaware Superior Court regarding the claims for indemnification.
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Issue:
Does Delaware General Corporation Law § 145(c) mandate indemnification for corporate agents to the extent they are "successful on the merits or otherwise" in defending any claim, issue, or matter in a criminal proceeding, considering any result other than conviction as success, and does a conviction following a plea of nolo contendere or a guilty verdict constitute being "adjudged derelict in the performance of duty" under a corporate by-law precluding indemnification?
Opinions:
Majority - BALICK, Judge
Yes, Delaware General Corporation Law § 145(c) mandates indemnification for corporate agents to the extent they are "successful on the merits or otherwise" in defending any claim, issue, or matter in a criminal proceeding. The court reasoned that "success is vindication," and in a criminal action, any result other than conviction must be considered success, without requiring a deeper inquiry into the reasons for the result, which would be inconsistent with the presumption of innocence. The statute allows for partial indemnification for success on specific counts, issues, or matters within an action. Thus, Kosow and Staub were entitled to full indemnification for charges that were dropped. Wolfson and Gerbert were entitled to indemnification for counts that were acquitted or dropped. The court also determined that Kosow, as an officer of a wholly-owned subsidiary serving under an MCS employment agreement, qualified as an "employee or agent" of MCS for indemnification purposes as his prosecution arose directly from his relationship with MCS. However, no, a conviction following a guilty verdict or a plea of nolo contendere does constitute being "adjudged derelict in the performance of duty" under the MCS corporate by-law, thereby precluding indemnification for those specific counts. The court distinguished the by-law from the statutory provision in § 145(a), which states a nolo contendere plea does not itself create a presumption of bad faith. The by-law's language, requiring the director to be "finally adjudged... to have been derelict in the performance of his duty," applies to a judgment of conviction, which occurs upon acceptance of a nolo contendere plea and imposition of sentence, or a guilty verdict. Therefore, Wolfson (for count five) and Gerbert (for count three) were not entitled to indemnification for expenses related to those specific convictions. Finally, Wolfson's attorneys' fees were deemed "reasonably incurred" given the complexity and high stakes of the criminal case, his position facing potential prison time, and his decision to retain highly reputable and skilled counsel. Claimants were also entitled to interest on their indemnified expenses, as indemnification would be incomplete without it, and interest compensates for the time MCS had the use of the funds.
Analysis:
This case offers crucial clarity on the interpretation and application of Delaware's indemnification statute, § 145, particularly for criminal proceedings. It establishes a broad definition of "success on the merits or otherwise" that includes any non-conviction outcome, emphasizing the presumption of innocence and allowing for partial indemnification. The ruling also highlights the distinction between the statute and corporate by-laws, permitting by-laws to establish stricter conditions (e.g., preclusion for nolo contendere pleas) than the statute for non-mandatory indemnification. Furthermore, it provides valuable guidance on assessing the reasonableness of attorney fees, advising courts to consider factors beyond simple hourly rates, and affirms that interest must be paid on indemnified expenses for full compensation.
