Summary
interpreting Roven and allowing indemnitees, for the purpose of establishing the reasonableness of their own fees, discovery regarding the corporation's attorneys' billing information in the same action but protecting the corporation's attorney-client privilege by allowing it to "redact anything it considers protected by this privilege" and agreeing to review in camera any redactions that the indemnitees thought were unfair
Summary of this case from Zaman v. Amedeo HoldingsOpinion
Civil Action No. 17048.
Date Submitted: June 18, 1999.
Date Decided: June 23, 1999. Date Revised: July 9, 1999.
Donald J. Wolfe, Jr., and Kevin R. Shannon, of POTTER ANDERSON CORROON LLP, Wilmington, Delaware; Attorneys for Plaintiffs.
Thomas J. Allingham, II, and Robert S. Saunders, of SKADDEN ARPS SLATE MEAGHER FLOM LLP, Wilmington, Delaware; Attorneys for Defendant.
MEMORANDUM OPINION
This case, which was tried before me on June 15 and 16, 1999, involves a discrete legal issue: whether defendant Sunbeam Corporation ("Sunbeam" or the "Company") is obligated to advance legal fees and other expenses incurred by Albert J. Dunlap ("Dunlap") and Russell A. Kersh ("Kersh," and together with Dunlap, "Plaintiffs") following their tenure at Sunbeam. For the reasons that follow, I conclude that Sunbeam must advance these fees.
I. BACKGROUND
In 1996 Sunbeam hired Dunlap to be its Chief Executive Officer and Chairman of its Board of Directors, and shortly thereafter Dunlap hired Kersh as the Executive Vice President for Finance and Administration. Kersh was also made Vice-Chairman of the Board. Dunlap hired Coopers Lybrand ("Coopers") for a consulting engagement to examine Sunbeam's functions and operations to help him implement an improvement plan at the company. In April 1998, Sunbeam announced a first quarter drop in sales and a net loss. That same month, the first in a series of lawsuits was filed against Sunbeam.
In June 1998, Sunbeam fired Dunlap and Kersh and announced that Arthur Andersen ("Andersen"), Sunbeam's long-time auditors, would not consent to include its opinion on Sunbeam's 1997 financial statements. The Company's audit committee began a review of those financial statements. In August 1998, Sunbeam entered into a Forbearance Agreement with Dunlap and Kersh, mutually freezing any litigation against each other for 180 days and addressing the issue of advancement of fees and expenses.
Dunlap and Kersh's lead defense firm, Pryor Cashman Sherman Flynn LLP ("Pryor Cashman") hired Price Waterhouse Coopers ("PWC"), the entity that resulted from the merger of Coopers and Price Waterhouse, to provide Dunlap and Kersh with forensic accounting advice. Sunbeam's counsel objected, based on the involvement Coopers had had with Sunbeam during its 1996 engagement with the Company.
In October 1998, Sunbeam announced restated financial statements for 1996 to 1998, as reviewed by Andersen and Deloitte Touche ("Deloitte"), the newly hired auditor. Sunbeam's shares dropped precipitously in value, from $53 during the restated period to under $8 at the time of the restatement. In December 1998, Sunbeam paid Pryor Cashman $123,548 for services rendered to Dunlap and Kersh. In February 1999, however, Sunbeam's Board voted to refuse further advancement requests of Dunlap and Kersh. Plaintiffs filed this lawsuit in an attempt to force Sunbeam to pay those fees.
II. ANALYSIS
A. Contractual Clauses and the Law
Three different written sources are implicated in my analysis: § 8.1 of Sunbeam's bylaws, ¶ 3 of the Forbearance Agreement, and § 145(c) of the Delaware General Corporation Law. All three provisions work in combination with each other to some extent in the formulation of my decision. Although the written provisions are lengthy, it is important to set out the operative language in full.
Section 8.1 of Sunbeam's bylaws reads:
To the extent permitted by law, as the same exists or may hereafter be amended (but, in the case of such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted to the Corporation prior to such amendment) the Corporation shall indemnify any person against any and all judgments, fines, amounts paid in settling or otherwise disposing of threatened, pending or completed actions, suits or proceedings , whether by reason of the fact that he, his testator or intestate representative, is or was a director or officer of (or a plan fiduciary or plan administrator of any employee benefit plan sponsored by) the Corporation or of (or by) any other corporation of any type or kind, domestic or foreign, which he served in any capacity at the request of the corporation. Expenses so incurred by any such person in defending or investigating a threatened or pending civil or criminal action or proceedings shall at his request be paid by the Corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall be ultimately determined that such person is not entitled to be indemnified by the Corporation as authorized by this Article VIII. The foregoing right of indemnification shall in no way be exclusive of any other rights or indemnification to which any such person may be entitled, under any By-law, agreement, vote of shareholders or disinterested directors or otherwise, and shall inure to the benefit of the heirs, executors and administrators of such person.
Paragraph 3 of the Forbearance Agreement states:
Sunbeam agrees to advance to the Individuals [Dunlap and Kershi their out-of-pocket expenses, costs and legal fees incurred by them in connection with: (i) certain litigations in which they are named as defendants by reason of the fact that they were officers and/or directors of Sunbeam, which litigations are identified in Schedule A to this Agreement and any future litigations in which they are named as defendants by reason of the fact that they were officers and/or directors of Sunbeam or The Coleman Company, Inc. ("Coleman"), and (ii) the investigation of Sunbeam currently being carried out by the Division of Enforcement of the Securities and Exchange Commission ("SEC") and any future investigation relating in any way to the Individuals' performance of their duties at Sunbeam which may be carried out by the SEC or any other governmental agency in accordance with and subject to limitations of reasonableness contained in any employment agreements entered into between the Individuals and Sunbeam, Sunbeam's by-laws, and Delaware law . Such advancement shall be subject to the receipt by Sunbeam of an appropriate undertaking by each of the Individuals to repay any amounts so advanced if it shall be ultimately determined that the Individual is not entitled to be indemnified by Sunbeam for such expenses, costs or fees (the "Undertaking"). Nothing in this Agreement shall constitute a waiver by Sunbeam of any claim for recoupment or repayment of any amounts so advanced, nor shall anything in this Agreement constitute a waiver by the Individuals or a limitation on the individuals with respect to any right to be indemnified by Sunbeam in accordance with applicable law, the By Laws of Sunbeam, or the Individuals' respective Employment Agreements or to have continued coverage under Sunbeam's Directors' and Officers' Liability Insurance Policy. Sunbeam hereby acknowledges that it has received the Undertaking from the Individuals.
Section 145(c) of the General Corporation Law states:
(c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith .
B. The Bylaw
Now I turn to apply the law to the present facts, starting with Sunbeam's bylaws. Sunbeam claims that the following two sentences in bylaw § 8.1 should be interpreted to mean that Sunbeam need not advance Plaintiffs' expenses.
[T]he Corporation shall indemnify [Plaintiffs] against any and all judgments, fines, amounts paid in settling or otherwise disposing of threatened, pending or completed actions, suits or proceedings. . . . Expenses so incurred by any such person in defending or investigating a threatened or pending civil or criminal action or proceedings shall at his request be paid by the Corporation in advance of the final disposition of such action. . . .
Sunbeam urges me to read the first sentence as requiring indemnification of only the actual amounts owed pursuant to a judgment, fine, or settlement and the second sentence as referring again to advancement only for those amounts ultimately owed and not to legal fees or other expenses. The Company insists that the phrase "[e]xpenses so incurred" means only "judgments, fines, amounts paid in settling or otherwise disposing of threatened, pending or completed actions, suits or proceedings" ( i.e., those "expenses" enumerated in the immediately preceding sentence) and not expenses incurred in connection with those ultimate payments. Sunbeam also contended at trial that the absence of the phrase "attorneys' fees," commonly inserted in advancement and indemnification bylaws, indicates that attorneys' fees (and other professional fees, such as the amounts owed to PWC) were not intended to be covered among those mandatory advancement items.
Sunbeam also argues that the result of making advancement mandatory under this bylaw would lead to the "strange result" or "absurdity" of a director being entitled to advancement of attorneys' fees and then immediately having to return them. See Def.'s Pre-Tr. Br. at 12-14. But I think Sunbeam's argument overlooks 8 Del. C. § 145(c), which I discuss later at pages 11-14 supra.
First, I find it incongruous to use an "advance" to pay "judgments, fines, amounts paid in settling or otherwise disposing of threatened, pending or completed actions, suits or proceedings," since those items are final and not something for which an advance is appropriate (or even possible). Therefore, interpretation of the second sentence as Sunbeam proposes leads to conflict with the first sentence. Interpretation of the second sentence, however, as saying "Expenses . . . incurred by any person [who qualifies for indemnification] . . . shall at his request be paid by the Corporation in advance" (leaving out the word "so" before the word "incurred" for purposes of seeing the sentence without its connotation of such a limit) puts this sentence in harmony with the first. It makes more sense to me that the word "so" is not intended to limit expenses to the final amounts owed to hypothetical plaintiffs but rather is meant to modify the word "[e]xpenses" to mean those expenses incurred in connection with "judgments, fines, amounts paid in settling or otherwise disposing of threatened, pending or completed actions, suits or proceedings."
Second, it is a strain to define the word "[e]xpenses" in the second sentence to mean only "judgments, fines, amounts paid in settling or otherwise disposing of threatened, pending or completed actions, suits or proceedings" (or perhaps to define it that way at all). Webster defines expense" as "something expended to secure a benefit or bring about a result" or as "financial burden or outlay." So while a judgment, fine, or settlement payment may qualify under the second definition of "expense," legal and other professional fees paid to bring about that judgment certainly qualify under the first definition.
Merriam Webster's Collegiate Dictionary 408 (10th ed. 1996).
I conclude that the "[e]xpenses" referred to in the second sentence above include legal fees and other professional charges. As a result, Sunbeam's bylaw § 8.1 requires the advancement of expenses and fees to Dunlap and Kersh. C. The Forbearance Agreement
Sunbeam also argues that where a bylaw contains an ambiguity, such ambiguity must be interpreted in favor of the statutory discretion that is accorded directors under 8 Del. C. § 145(e). See Havens v. Attar, Del.Ch, C.A. No. 15134, Chandler, V.C. (Jan. 30, 1997), Mem.Op. at 34 ("Simply put, a board's decision to accept an undertaking and to advance expenses is left to the business judgment of the board in the absence of a by-law specifically providing for mandatory advancement." (emphasis in original)); Advanced Mining Sys., Inc. v. Fricke, Del.Ch., 623 A.2d 82, 84 ("I cannot conclude that the language of this by-law, which requires AMS `to indemnify,' was intended to deprive the board of its function under Section 145(e) to evaluate the corporation's interest with respect to advancement of expenses."). But the ambiguity to which Sunbeam refers is a product of its own hypertechnical reading of § 8.1. The natural and commonsensical reading I have given the bylaw does not result in ambiguity or internal inconsistency.
Having concluded that bylaw § 8.1 requires advancement of the requested fees, I need not go further. I will, however, consider the Forbearance Agreement as a possible alternative basis on which to find that advancement of Plaintiffs' legal and other professional fees is required. The Forbearance Agreement provides that Sunbeam will advance to Plaintiffs "their out-of-pocket expenses, costs and legal fees incurred by them . . . in accordance with and subject to limitations of reasonableness contained in any employment agreements . . ., Sunbeam's by-laws, and Delaware law." Furthermore, this advancement shall be "subject to the receipt by Sunbeam of an appropriate undertaking by each of the [Plaintiffs] to repay any amounts so advanced if it shall be ultimately determined that the [Plaintiff] is not entitled to be indemnified by Sunbeam for such expenses, costs or fees."
Sunbeam has acknowledged receipt of an appropriate undertaking by Dunlap and Kersh.
Sunbeam believes this language does not require it to make advances to Plaintiffs for two reasons. First, Sunbeam argues, the language "in accordance with . . . Sunbeam's by-laws, and Delaware law," calls into the analysis the bylaw requirement that the Company "indemnify any person against any and all judgments, fines, amounts paid in settling or otherwise disposing of threatened, pending or completed actions, suits or proceedings" but not against interim expenses incurred in connection therewith. Therefore, if the Company need not indemnify against expenses, any advancement is not "in accordance with . . . Sunbeam's by-laws."
But Sunbeam ignores a crucial part of the language in the Forbearance Agreement. As I noted earlier, the Forbearance Agreement states more fully, "in accordance with and subject to limitations of reasonableness contained in . . . Sunbeam's by-laws, and Delaware law." Sunbeam would have me read this phrase as "(a) in accordance with and (b) subject to limitations of reasonableness contained in . . . (c) Sunbeam's by-laws, and Delaware law." But that is not, in my opinion, the most natural way to read these words. I find that one is less likely to read the phrase that way than to read it as: "(a) in accordance with and (b) subject to (c) limitations of reasonableness contained in . . . (d) Sunbeam's by-laws, and Delaware law." Sunbeam's reading means that all advancements must be "in accordance with . . . Sunbeam's by-laws, and Delaware law," while the latter reading, and the one I find more credible, means that all advancements must be "in accordance with . . . limitations of reasonableness contained in. . . . Sunbeam's by-laws, and Delaware law." Because I find the latter reading more persuasive, Sunbeam's argument that advancement is not "in accordance with . . . Sunbeam's by-laws" fails.
This is a case where the placement of a comma or two would have made all the difference in the world — and would have allowed me to gauge with absolute certainty which of these readings is the correct one.
Sunbeam's second argument as to why the Forbearance Agreement does not require it to make advances to Plaintiffs is that the Company "agrees to advance to [Plaintiffs] their out-of-pocket expenses." (Emphasis added.) Sunbeam correctly points out that neither Dunlap nor Kersh are "out-of-pocket" since they have not yet paid these legal or other professional fees. Because I find that § 8.1 of the bylaws requires advancement, I do not need to consider this argument. As Sunbeam is correct, however, that the Forbearance Agreement requires that Plaintiffs be out-of-pocket, Dunlap and Kersh may well want to make payment for the outstanding fees and then immediately request advancement, under the Forbearance Agreement, so as to foreclose this contention.
Sunbeam has not disputed, however, that Dunlap and Kersh are legally obligated to pay the incurred fees and expenses.
At the close of the trial, I raised the question of how 8 Del. C. § 145(c) affects the parties' interpretation of the bylaw and the Forbearance Agreement. Sunbeam contends that if this Court orders the advancement of legal and professional fees, the result would be the "absurdity" that the Board would never approve the indemnification of these expenses, and since they are not mandatorily indemnifiable expenses, only (perhaps) mandatorily advanceable, Dunlap and Kersh would, without a doubt, be required to repay them to the Company.
The first and most obvious answer to Sunbeam's argument is that 8 Del. C. § 145(c) requires indemnification of these fees in the event the officer or director "has been successful on the merits or otherwise in defense of any action, suit or proceeding." Specifically, the statute provides that "such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with a successful defense on the merits." Therefore, it does not matter whether Sunbeam's board votes to disapprove of indemnification against these expenses — if Dunlap and Kersh prevail "on the merits," indemnification is automatic.
8 Del. C. § 145(c) (emphasis added). Nothing in this decision should be viewed as an expression of opinion on the plaintiffs' ultimate right to indemnification, including whether defendant's obligation to indemnify plaintiffs for fees and expenses is discretionary or mandatory.
Sunbeam might argue in response, however, that the board will definitely vote not to indemnify — perhaps even tomorrow, and so it would be absurd to require advancement today if Dunlap and Klersh must pay it back immediately. But this cannot be the right answer. The Forbearance Agreement provides for advancement of fees and expenses, "subject to the receipt by Sunbeam of an appropriate undertaking . . . to repay any amounts so advanced if it shall be ultimately determined that [Dunlap and Kersh are] not entitled to be indemnified by Sunbeam for such expenses, costs or fees." It is clear that Dunlap and Kersh are entitled to indemnification in either of two circumstances — if Sunbeam's board approves it (which I assume it will not do, for purposes of argument) or if they prevail on the merits. Sunbeam already has received and accepted "an appropriate undertaking" from Dunlap and Kersh which states that they will repay the advances if they are not entitled to indemnification. Assuming then that they have just one remaining opportunity for indemnification — specifically, prevailing on the merits — I do not think one reasonably can read the Forbearance Agreement as giving the Sunbeam board the right to immediately demand repayment of that advance. If Dunlap and Kersh are entitled to the advancement, and I have found that they are, then the possibility of prevailing on the merits combined with the undertaking they have provided leads me to conclude that a board vote to not indemnify them is not sufficient to "call back" the advances. Therefore, repayment of the advance would not be required until after the completion of the lawsuits — and then only if (a) Dunlap and Kersh do not prevail on the merits, and (b) the Sunbeam board votes not to authorize indemnification. Any other result, in my opinion, would be absurd. Finally, in light of the time value of money, a request for advancement is a quite sensible request for interim financing of litigation costs; it is not absurd at all.
At trial, Sunbeam relied on the fact that these fees must be reasonably incurred for mandatory indemnification. I find today (in the next section of this Opinion) that all fees and expenses through April 30, 1999, that have been submitted into the record of this case, are reasonable. The reasonableness of future fees and expenses is an issue for another day. E. Reasonableness of Legal and Professional Fees
Both sides also made arguments at trial as to the hardship that will visit them if I find in favor of the other side. Hardship, however, is a not a factor that this Court has typically considered in determining whether to provide for the advancement of fees, although that does not foreclose the future possibility of a party making that argument successfully.
Having had the chance to review the fee schedules, I find no evidence that the legal fees are unreasonable in the number of hours or the cost per hour. The liability exposure of Dunlap and Kersh, as well as other Sunbeam directors and officers, is huge. In litigation of this nature, legal fees are bound to be high. Although Plaintiffs' counsel may have billed $268,000 for a joint motion to dismiss and to strike, Defendant has made no specific showing of why this was unreasonably excessive. I am, by nature, skeptical about such bills. But I know of no principled method, given the record before me, by which I could determine that these particular fees were not reasonably incurred. In fact, based on Plaintiffs' evidence at trial and the testimony of Donald S. Zakarin of Pryor Cashman, I am satisfied that these particular fees were reasonable.
Any element of reasonability is derived solely from the overall requirement of reasonableness found in the Delaware General Corporation Law, since Sunbeam's bylaws do not address reasonableness and the Forbearance Agreement only references reasonableness requirements contained elsewhere.
Furthermore, I do not agree that Dunlap and Kersh's actions in hiring PWC to perform forensic accounting on Sunbeam was the equivalent of an attempt to "prove the Earth is flat." Rather, I find that (a) under one-third of PWC's time was spent trying to determine whether the 1998 restatement was necessary, and (b) because Dunlap and Kersh's position in the litigation and investigations may well be different than that of Sunbeam, it was reasonable for them to come to their own conclusions about the financial statement problems that were at the heart of the litigation and investigations.
Sunbeam also argues that the hiring of PWC was unreasonable because (a) PWC is biased as a result of Dunlap's previous hiring of the Coopers accounting firm as a consultant for Sunbeam, and (b) PWC possesses highly sensitive information concerning Sunbeam as a result of its work as a consultant. As to the former charge, even if PWC is biased, the very nature of this litigation, in which Sunbeam has hired two accounting firms to demonstrate that its position is correct, virtually assures that each side's experts are biased; therefore, no harm will come to Sunbeam for having to pay these fees that it is contractually obligated to pay. Dunlap and Kersh's attorneys are also biased, no doubt, for if they were not they could not be effective counsel for their clients, but there is no argument by Sunbeam that this "bias" is grounds for not advancing fees. As for the second charge, concerning the confidential information, I do not believe that a professional firm such as PWC, with similar standards and codes of ethics to those in the legal world, would betray any such confidences in the interest of helping one long-time client.
As a result, with the exception of the amounts both sides agreed to delete from the bills (detailed below), I grant advancement of all legal and professional bills incurred thus far and all that are reasonably incurred during the balance of the litigation and investigations listed in the Forbearance Agreement.
F. "Fees for Fees"
I deny Plaintiffs' request to be awarded fees for this enforcement action. While this Court has on occasion awarded "fees for fees," I do not find Sunbeam's actions in disputing this matter to be so egregious or in such bad faith as to require that special form of discipline. Nothing in Sunbeam's bylaws, or the Forbearance Agreement, require Sunbeam to pay plaintiffs' fees in connection with any action to enforce the right to advancement or indemnification.
See, e.g., Chamison v. Healthtrust, Inc. — The Hospital Co., Del.Ch., C.A. No. 15904, Chandler, C. (Jan. 12, 1999), Mem.Op. at 30-32.
III. CONCLUSION
I award Plaintiffs the advancement of fees they seek for existing Pryor Cashman and other bills in the amount of $1,403,322.21 which I calculate as $1,410,655.46 through April 30, 1999, less $7,337.25 (the amount the parties agreed to delete from the bills). Additionally, Plaintiffs are entitled to advancement on all reasonable legal and professional bills in the matters listed in the Forbearance Agreement going forward. I deny, however, Plaintiffs' request for "fees for fees" relating to the present action.
IT IS SO ORDERED.