| |
STIFEL FINANCIAL
CORPORATION, DEFENDANT BELOW,
APPELLANT-CROSS APPELLEE,
v.
ROBERT M. COCHRAN, PLAINTIFF BELOW,
APPELLEE-CROSS APPELLANT.
|
Nos. 548 and 549,
2001 
|
IN THE SUPREME COURT
OF THE STATE OF DELAWARE
|
Consolidated Court
Below: Court of Chancery of the
State of Delaware in and for New
Castle County C.A. No. 1735
|
June 13, 2002
|
| Before Walsh, Holland, and
Steele, Justices. |
| Edward P. Welch, Esquire,
Skadden, Arps, Slate, Meagher & Flom
Llp, Wilmington, Delaware; Dennis M.
Kelleher, Esquire (argued) and Kara
E. Fay, Esquire, Skadden, Arps,
Slate, Meagher & Flom Llp, Boston,
Massachusetts, for Appellant-Cross
Appellee Stifel Financial
Corporation. |
| Thomas P. McGonigle, Esquire,
Duane Morris Llp, Wilmington,
Delaware; Matthew A. Taylor, Esquire
(argued), Duane Morris Llp,
Philadelphia, Pennsylvania, and
Robert J. Valihura, Jr., Esquire,
Robert J. Valihura, Jr., P.A.,
Wilmington, Delaware, for
Appellee-Cross Appellant Robert M.
Cochran. |
| The opinion of the court was
delivered by: Walsh, Justice |
| Submitted: April 17, 2002 |
| Appeal from Court of Chancery.
AFFIRMED IN PART. REVERSED and
REMANDED IN PART. |
| In this appeal from the Court of
Chancery, we once again address the
scope of officer/director
indemnification under Delaware law.
The Court of Chancery ruled that the
claim of a former corporate officer,
who was also a director, for
indemnification was not time barred
and extended to the cost and expense
of defending himself in criminal
proceedings, but that the officer
was not entitled to be indemnified
for the bulk of the expense of an
arbitration action resulting from
the termination of his employment.
The corporation appeals from the
allowance of any indemnification
while the officer/director
cross-appeals from the Court of
Chancery's refusal to award him the
expense of bringing the
indemnification action. |
| Upon review of the record, we
conclude that the Court of Chancery
correctly granted summary judgment
in favor of the officer with respect
to the statute of limitations
defense. We further conclude that
the trial court properly determined
the scope of indemnification in the
criminal proceeding and the
arbitration matter. We disagree with
the Court of Chancery's denial of
"fees on fees" and accordingly
reverse as to that portion of the
cross-appeal. |
| I. |
| Robert Cochran ("Cochran"), the
plaintiff in the proceeding in the
Court of Chancery, had been an
officer and director of Stifel,
Nicolaus & Co., a wholly owned
subsidiary of Stifel Financial
Corporation ("Stifel").
*fn1
Stifel is a mid-west regional
investment banking carrier. Cochran,
an investment banker, was in charge
of Stifel Nicolaus' municipal bond
underwriting department. In 1993,
apparently prompted by a newspaper
article, the Securities Exchange
Commission ("SEC") began an
investigation of Stifel Nicolaus'
underwriting department to probe
charges that Stifel Nicolaus had
engaged in undue political influence
and garnered improper fees in
connection with certain municipal
bond issues. The SEC investigation
eventually centered on Cochran and
resulted in the filing of a civil
action against him alleging
violations of federal securities
laws.
*fn2 In the midst of this
investigation, Stifel Nicolaus
terminated Cochran for cause on
August 23, 1994. |
| Following his termination,
Cochran refused to repay excess
compensation and the balance of a
promissory note, as required by his
employment agreement. To recover
these amounts, Stifel Nicolaus
commenced an arbitration action
against Cochran. In the arbitration
action, Stifel Nicolaus alleged that
Cochran breached the express terms
of his employment agreement by (1)
refusing to repay excess
compensation (the "Compensation
Claim"); (2) failing to repay the
amount of a promissory note that
became due upon his termination for
cause (the "Promissory Note Claim");
(3) breaching his fiduciary duties
(the "Breach of Duty Claim"); and
(4) violating the non-compete
provision of his employment
agreement (the "Non-Compete Claim").
Stifel Nicolaus withdrew the
Non-Compete Claim at the arbitration
hearing. The arbitrators ruled in
favor of Stifel Nicolaus on the
Compensation Claim and the
Promissory Note Claim, and ordered
Cochran to repay approximately $1.2
million. The arbitrators ruled in
favor of Cochran on the Breach of
Duty Claim, however. The arbitration
award was confirmed by the United
States District Court for the
Eastern District of Missouri. |
| At the same time as the
arbitration action, Cochran had been
indicted by the U.S. Attorney in
Oklahoma City on several counts of
fraud in connection with the
municipal bond dealings. Cochran was
tried and convicted of these
charges. Fortunately for Cochran,
who faced an 87 month prison term,
that conviction was reversed on
appeal to the 10th Circuit, who held
that Cochran had not violated any
law. |
| Section 6.4 of Stifel's bylaws
contains an indemnification
provision, which provides: |
| The Corporation [Stifel
Financial] shall indemnify to the
full extent authorized by law any
person made or threatened to be made
a party to any action, suit, or
proceeding, whether criminal, civil,
administrative or investigative, by
reason of the fact that he ... is or
was a director, officer or employee
of the Corporation or any
predecessor of the Corporation or
serves or served any other
enterprise as a director, officer or
employee at the request of the
Corporation or any predecessor of
the Corporation. |
| Pursuant to this bylaw, Cochran
filed the present action on August
4, 1999, seeking indemnification
from Stifel for (1) the $1.2 million
arbitration judgment; (2) all fees,
costs, and expenses incurred in
connection with the arbitration
action, the criminal proceeding, and
the SEC investigation; and (3) all
fees, costs, and expenses incurred
in bringing the indemnification
action. |
| II. |
| Procedurally, the Court of
Chancery resolved the contentions
before it through denial of Stifel's
motion to dismiss and a later grant
of partial summary judgment in favor
of Stifel. This appeal arises
primarily from the Court of
Chancery's disposition of Stifel's
motion to dismiss. A motion to
dismiss a complaint presents the
trial court with a question of law
and is subject to de novo review by
this Court on appeal.
Malone v. Brincat,
722 A.2d 5, 9
(Del. 1998). Moreover, this case
presents questions of statutory
interpretation, also warranting de
novo review.
Moore v. Wilmington Housing
Authority, 619 A.2d 1166, 1167 (Del.
1993). |
| Stifel contends that Cochran's
indemnification claims are barred by
10 Del. C. § 8111's one year statute
of limitations. It is undisputed
that Cochran's claims would be
untimely if the one year limitation
period were applicable. The Court of
Chancery, however, determined that
Cochran's claims were governed by
the three year limitation contained
in 10 Del. C. § 8106. Because
Cochran's claims were clearly
brought within three years, the
trial court denied Stifel's motion
to dismiss Cochran's complaint as
untimely. We agree that the three
year limitation period prescribed in
10 Del. C. § 8106 applies to
Cochran's indemnification claims. |
| The one year limitation period
contained in 10 Del. C. § 8111 is
applicable to claims for "wages,
salary, or overtime for work, labor
or personal services performed." By
contrast, § 8106's three year
limitation applies to actions "based
on a detailed statement of the
mutual demands in the nature of
debit and credit between parties
arising out of contractual or
fiduciary relations," "based on a
promise," and "based on a statute."
The question posed is whether
Cochran's indemnification claims are
properly characterized as employment
claims or contract/statutory claims. |
| In Sorensen v. Overland Corp.,
the United States District Court for
Delaware held that a corporation's
agreement to indemnify its director
for litigation expenses is a benefit
conferred for officer or director
service rendering an indemnification
claim subject to Delaware's one year
period of limitation, pursuant to 10
Del. C. § 8110. Sorensen, 142 F.
Supp. 354, 361 (D. Del. 1956),
aff'd, 242 F.2d 70 (3d Cir. 1957).
The District Court explained that
"[t]he word 'benefits' is embracing
and covers all advantages growing
out of the employment," including
indemnification. Id. at 360. Federal
decisions interpreting Delaware
statutory law are, of course, not
binding on this Court or the
Court of Chancery. City Investing
Co. Liquidating Trust v. Continental
Cas. Co., 624 A.2d 1191, 1196 (Del.
1993). |
| Stifel maintains, however, that
this Court approved the Sorensen
holding in Goldman v. Braunstein's,
Inc., 240 A.2d 577 (Del. 1968). We
do not so read Goldman. Goldman held
that an action seeking damages based
on wrongful termination of an
employment contract was governed by
the three year statute of
limitations covering actions based
on a promise. Id. at 578. Goldman
reconciled §§ 8106 and 8110 (the
predecessor to § 8111) by
distinguishing between claims
arising out of services already
performed (subject to 8111), and
claims arising upon or after
termination of the employer-employee
relationship (subject to 8106). Id.
While not approving Sorensen, the
Court in Goldman did note that its
decision was not inconsistent with
Sorensen's determination that § 8111
was intended to bar all claims
arising out of the employer-employee
relationship, because "a claim
arising out of that relationship
would necessarily be one referable
to the period during which the
relationship existed, not after its
termination." Id., distinguishing
Sorensen,
142 F.Supp. 354.
Compass v. American Mirrex Corp., 72
F.Supp. 2d 462 (D. Del. 1999)
(holding that if plaintiff alleges a
breach of a duty to provide benefits
for work already performed, then §
8111 applies, but if plaintiff
alleges employer breached a
different duty arising out of
employment agreement, then § 8106
applies). |
| Even at the federal level there
is some doubt as to Sorensen's
viability.
Rich v. Zeneca, Inc., 845 F.Supp.
162 (D. Del. 1994). In Rich, the
District Court held that Delaware's
general three year statute of
limitations, rather than the one
year statute of limitations for wage
claims, applied to a suit brought by
a former employee under ERISA
alleging wrongful discharge for the
purpose of interfering with the
employee's attainment of rights
under his ERISA plan. Id. at 166.
After reviewing Goldman and its
progeny, the District Court said
"[t]hese cases suggest that 10 Del.
C. § 8111 . . . should not be read
as being so comprehensive as to bar
all claims arising out of the
employer-employee relationship.
Rather 10 Del. C. § 8111 is directed
to claims alleging a breach of a
duty to pay wages, salary or
overtime for work performed." Id. |
| More to the point, the Court of
Chancery has held that, because
indemnification is essentially a
contractual right, the three year
statute of limitations is applicable
to indemnification claims.
Scharf v. Edgcomb Corp., 1997 WL
762656, *5 (Del. Ch. 1997),
appeal denied, 705 A.2d 243 (Del.
1998). We agree with the reasoning
of the Court of Chancery and hold
that, because indemnification is a
right conferred by contract, under
statutory auspice, actions seeking
indemnification are subject to the
three year limitations period that
encompasses both actions "based on a
promise" and those "based on a
statute." 10 Del. C. § 8106. In sum,
Sorensen, to the extent it is still
viable, was never binding state-law
precedent and our decision here
leaves the Goldman dichotomy intact
for all claims seeking wages,
salary, overtime, or other true
"benefits" arising from the
employment relationship. Our
analysis is strengthened by the
general rule that, if there is doubt
as to which of two statutes of
limitations applies, that doubt
should be resolved in favor of the
longer period.
Sonne v. Sacks, 314 A.2d 194, 196
(Del. 1973). |
| III. |
| Stifel also contends that
Cochran's claim for indemnification
of the arbitration action judgment
should have been dismissed pursuant
to §145(b) because the arbitration
action was brought "by or in the
right of the corporation." Cochran
replies that the trial court
correctly concluded that § 145(a)
rather than § 145(b) applied to the
arbitration action because it was
not brought "by or in the right of"
Stifel, the corporation from whom
indemnification was sought. This
issue is moot, however, because the
Court of Chancery granted summary
judgment in Stifel's favor as to the
arbitration action judgment on other
grounds. Although Cochran appeals
that summary judgment decision, as
will be explained later, we affirm
the Court of Chancery's decision
granting Stifel summary judgment.
This Court will not decide an issue
that has become moot, unless the
question posed is of public
importance and its resolution will
have a continuing and significant
impact on the development of the
law.
McDermott Inc. v. Lewis, 531 A.2d
206, 211 (Del. 1987);
Morris v. State,
746 A.2d 277 (Del.
2000). |
| IV. |
| Stifel asserts that Cochran's
indemnification claims should have
been dismissed for his failure to
make a demand on the board prior to
filing suit. Cochran responds that
neither the Indemnification Bylaw
nor § 145(d) requires such a prior
demand. The Court of Chancery held
that, though Stifel's argument was
persuasive from a policy standpoint,
there is no language in § 145 that
imposes a pre-suit demand
requirement. On the contrary, the
court noted, § 145(k) vests
exclusive jurisdiction in the Court
of Chancery "to hear and determine
all actions for . . .
indemnification brought under this
section or under any bylaw . . .."
This authority is not dependant upon
a pre-suit demand, as in 8 Del. C. §
220. |
| Stifel bases its argument on 8
Del. C. § 145(d), which provides
that a corporation may not offer
indemnification without first making
a determination that indemnification
is proper under the circumstances
and that the prospective indemnitee
has met the applicable standard of
conduct set forth in §§ 145 (a) and
(b). Section 145(d) then describes
the procedures a corporation must
apply in reviewing a demand for
indemnification. For this detailed
procedure to be pursued, Stifel
argues, the corporation must be
advised of the indemnification
request before any suit is brought. |
| Specifically, § 145(d) provides
that "[a]ny indemnification under
subsections (a) and (b) of this
section (unless ordered by a court)
shall be made by the corporation
only as authorized in the specific
case . . .." Although Stifel argues
that "unless ordered by a court"
should not be read to "swallow" the
rest of the subsection, this
language clearly allows for the
possibility that the Court of
Chancery will order indemnification,
thus negating the responsibility of
the corporation to determine the
propriety of the request in the
first instance. Further, when read
in conjunction with § 145(k)'s grant
of plenary authority, the meaning is
even more clear. |
| Stifel's policy arguments, based
on respecting the authority of the
board, are not persuasive. The
General Assembly has spoken on the
issue and, in the absence of a
specific legislative restriction, we
cannot engraft a requirement that
creates a further bar to a
statutorily created remedy. Any
attempt to read into the clear
language of a statute will be
rejected. See HMG/Courtland
Properties, Inc. v. Gray, 729 A.2d
300, 306 (Del. Ch. 1999)
(stating "[t]his court should be
chary about reading words into a
statute that the General Assembly
could have easily added itself").
Finally, we note that Stifel was
free to write a demand requirement
into its bylaws, but did not. |
| V. |
| In his cross-appeal, Cochran
argues that the Court of Chancery
erred in dismissing his claim for
indemnification of the expenses he
incurred in bringing the
indemnification suit. Cochran
contends that, because the
Indemnification Bylaw permits
indemnification to the "fullest
extent permitted by law" and there
is no express prohibition in the law
against indemnification of expenses
incurred in prosecuting the
indemnification suit, he is entitled
to pursue this claim. Stifel
counters that indemnification of
"fees on fees" is not clearly
provided for by § 145, and is thus
not available under Delaware law. |
| The Court of Chancery determined
that Cochran could not press this
claim because neither Stifel's
bylaws nor § 145 provide for "fees
on fees," citing
VonFeldt v. Stifel Financial Corp.,
1997 WL 525878, *2 (Del. Ch.
1997) and
Mayer v. Executive Telecard, Ltd.,
705 A.2d 220, 225 (Del. Ch. 1997).
In Mayer, the Court of Chancery held
that neither § 145 nor the
corporation's bylaw mandating
indemnification to the fullest
extent permitted by law allowed
recovery of fees incurred in
enforcing indemnification rights.
Mayer, 705 A.2d at 221-24; but see
Model Bus. Corp. Act Ann. § 8.54(b)
(granting courts discretion to
determine whether to also award
"reasonable expenses to obtain
court-ordered indemnification"). |
| Although this Court has not
passed on the availability of "fees
on fees" in the context of
indemnification suits, we have held,
in a claim for workers'
compensation, that it is appropriate
to award attorneys' fees for time
spent on a fee application pursuant
to 19 Del. C. §§ 2127(a), 2350(f).
DiGiacomo v. Board of Public Educ.
in Wilmington, 507 A.2d 542, 547
(Del. 1986). The reasoning of
DiGiacomo is equally applicable
here. Both the workers' compensation
and the indemnification statutes are
intended to be remedial in nature.
An attorney representing a former
director who is being denied
statutorily authorized
indemnification must seek
compensation from his client or
remain uncompensated, a result
"inimical to the interests" of the
former director and contrary to the
express purpose of § 145 to protect
directors from personal liability
for corporate expenses. Id;
Bagby v. Beal, 606 F.2d 411, 415-16
(3d. Cir. 1979) (holding that in
statutory fee award cases,
plaintiff's attorneys are entitled
to compensation for time spent
preparing the fee petition and
successfully appealing the fee
award). |
| Section 145(a) defines the
circumstances under which a Delaware
corporation is permitted to
indemnify its officers or directors.
As even the Mayer court conceded,
the language of § 145(a) permitting
indemnification to a party "in any
action" can be read literally to
encompass the indemnification action
itself. Mayer, 705 A.2d at 224. This
Court has emphasized that the
indemnification statute should be
broadly interpreted to further the
goals it was enacted to achieve. See
generally,
Hibbert v. Hollywood Park, Inc., 457
A.2d 339, 344 (Del. 1983);
VonFeldt v. Stifel Financial Corp.,
714 A.2d 79, 84 (Del. 1998). The
invariant policy of Delaware
legislation on indemnification is to
"promote the desirable end that
corporate officials will resist what
they consider unjustified suits and
claims, secure in the knowledge that
their reasonable expenses will be
borne by the corporation they have
served if they are vindicated."
Folk, on Delaware General
Corporation Law sec. 145 (2001).
Beyond that, its larger purpose is
"to encourage capable men to serve
as corporate directors, secure in
the knowledge that expenses incurred
by them in upholding their honesty
and integrity as directors will be
borne by the corporation they
serve." Id. |
| As we stated in VonFeldt, we
will "eschew narrow construction of
the statute (section 145) where an
over literal reading would disserve"
these policies. VonFeldt, 714 A.2d
at 84-85 (also noting the Court's
aversion to "undue formalism" and
refusing to engage in a
"hyper-technical exercise").
Additionally, without an award of
attorneys' fees for the
indemnification suit itself,
indemnification would be incomplete.
There is no compelling reason to
deprive claimants of full
indemnification, in accordance with
the policy of § 145.
Merritt-Chapman & Scott Corporation
v. Wolfson, 321 A.2d 138, 144 (Del.
Super. 1974); see also Josiah O.
Hatch, Policing the Limits of
Indemnification: Is Delaware
Changing its Public Policy on
Director and Officer Protection?, 12
No. 1 Insights 9, *11 (1998)
("Articulate and analytical as it
is, Mayer seems a "glass half-empty"
view of the Delaware statute and a
departure from the spirit and
reasoning of earlier cases
construing it."). |
| We hold that indemnification for
expenses incurred in successfully
prosecuting an indemnification suit
are permissible under § 145(a), and
therefore "authorized by law."
Allowing indemnification for the
expenses incurred by a director in
pursuing his indemnification rights
gives recognition to the reality
that the corporation itself is
responsible for putting the director
through the process of litigation.
Further, giving full effect to § 145
prevents a corporation from using
its "deep pockets" to wear down a
former director, with a valid claim
to indemnification, through
expensive litigation. Finally,
corporations will not be unduly
punished by this result. They remain
free to tailor their indemnification
bylaws to exclude "fees on fees," if
that is a desirable goal. |
| VI. |
| Cochran further claims in his
cross-appeal that the Court of
Chancery erred in holding that three
of the claims in the arbitration
action (the Compensation Claim, the
Promissory Note Claim, and the
Non-Compete Claim) were brought
against Cochran in his personal
capacity and that § 145 and the
Indemnification Bylaw therefore did
not apply. Stifel contends these
three claims were brought against
Cochran solely for actions he took
in his personal capacity and for his
own personal benefit. The Court of
Chancery agreed with Stifel and
granted summary judgment in its
favor. Our standard and scope of
review of a summary judgment
decision is de novo.
Arnold v. Society for Savings
Bancorp, Inc., 650 A.2d 1270, 1276
(Del. 1994). |
| The arbitration action was
brought against Cochran to enforce
certain provisions of an employment
contract and promissory note, which
Cochran had entered into with Stifel
Nicolaus. The Court of Chancery's
explanation bears repeating: |
| When a corporate officer signs
an employment contract committing to
fill an office, he is acting in a
personal capacity in an adversarial,
arms-length transaction. To the
extent that he binds himself to
certain obligations under that
contract, he owes a personal
obligation to the corporation. When
the corporation brings a claim and
proves its entitlement to relief
because the officer has breached his
individual obligations, it is
problematic to conclude that the
suit has been rendered an "official
capacity" suit subject to
indemnification under § 145 and
implementing bylaws. Such a
conclusion would render the
officer's duty to perform his side
of the contract in many respects
illusory. |
| We agree that the claims
litigated in the arbitration action
were properly characterized as
personal, not directed at Cochran in
his "official capacity" as an
officer and director of Stifel
Nicolaus. See Shearin v. E.F. Hutton
Group, Inc., 652 A.2d 578, 594 (Del.
Ch. 1994) (holding that former
officer was not entitled to
indemnification for claims relating
to breach of her employment contract
because those claims did not involve
the officer's duties to the
corporation and its shareholders).
Stifel Nicolaus based the
Compensation Claim, the Promissory
Note Claim, and the Non-Compete
Claim on the employment contract
Cochran entered into with the
company. Although Cochran's
termination is the event that
triggered the relevant provisions of
the employment contract, Cochran's
decision to breach the contract was
entirely a personal one, pursued for
his sole benefit. Further, the
underlying accusations against
Cochran which gave rise to his
termination for cause were
considered by the arbitrators, but
found to be irrelevant to the simple
dispute before them -- whether
Cochran breached his employment
contract. |
| We affirm the judgments of the
Court of Chancery, except as to its
decision to dismiss Cochran's claim
for "fees on fees." That judgment is
reversed and remanded for
proceedings consistent with this
opinion. |
|
| Opinion Footnotes |
|
| *fn1 In a prior appeal, we ruled
that a director, like Cochran, could
seek indemnification from the parent
corporation of his employer, if he
served as a director of a wholly
owned subsidiary at the request of
the parent.
Von Feldt v. Stifel Financial Corp.,
714 A.2d 79 (Del. 1998). |
| *fn2 At the time of briefing,
this action was still pending, but
Cochran has agreed to dismiss his
claims for indemnification of the
SEC investigation. |
|
|
