Gaines West v. Balfour Beatty Const

• Court: Court of Appeals for the Fifth Circuit
• Decided: May 10, 2002
• Docket: 00-51328
• Status: Published

Opinion

Revised April 29, 2002

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _______________________

No. 00-51328 _______________________

In The Matter Of: WILLIAM L. MILLER,

Debtor.

____________________

GAINES WEST, Chapter 7 Trustee,

Appellant,

versus

BALFOUR BEATTY CONSTRUCTION, INC.; BALFOUR BEATTY, INC.,

Appellees. _________________________________________________________________

Appeal from the United States District Court for the Western District of Texas _________________________________________________________________

April 24, 2002

Before JONES and DeMOSS, Circuit Judges, and FELDMAN, District Judge:*

EDITH H. JONES, Circuit Judge:

The issue in this case is whether a corporate officer is

entitled to indemnification under Delaware law for acts committed

for his own benefit before he was employed by the corporation.

* District Judge of the Eastern District of Louisisna, sitting by designation. Affirming the decisions of the bankruptcy and district courts in

the narrow circumstances presented, we hold that he is not so

entitled, because he was not sued “by reason of the fact” that he

was a officer of the potential indemnitor. See Del. Code Ann. tit.

8, § 145(a).

This case has been appealed by the Trustee of the estate

of William L. Miller, who sought bankruptcy relief after being

pursued to judgment by his former employer for misappropriation of

proprietary information or improper use of trade secrets. Miller

had worked for Abrams, Inc., a large Texas road construction

contractor, unhappily for several years. He plotted his escape

over a period of time, finally deciding to attract another major

construction company, Balfour Beatty,1 into the Texas market with

him as its leader. While negotiating with Balfour Beatty in the

autumn of 1993, and still an employee of Abrams, Miller took three

boxes of Abrams documents and apparently used them to persuade

Balfour Beatty of the attractiveness of competing in Texas. Miller

then jumped ship to become Balfour Beatty’s chief operating officer

in Texas in February 1994.

Abrams immediately retaliated with a lawsuit against

Miller and Balfour Beatty. In the state trial court, Abrams

achieved a judgment for $1 million against Miller individually, but

1 This opinion will refer to Balfour Beatty as shorthand for both corporate defendants.

2 the jury did not accept Abrams’s claims that Balfour Beatty

actually conspired with, participated in or profited from Miller’s

actions.

Miller sought Chapter 7 bankruptcy relief to avoid paying

the Abrams judgment, and Abrams then sued for non-dischargeability

of the debt. The bankruptcy court entered judgment against Miller.

The Fifth Circuit, however, disagreeing with both the bankruptcy

court and district court in its appellate capacity, reversed one

ground of liability but remanded with respect to another ground.

See Miller v. J.D. Abrams, Inc., 156 F.3d 598 (5th Cir. 1998).

Before trial on the remand to bankruptcy court, Miller settled with

Abrams for only $75,000.

Abrams did not give up. It continued to press the long-

simmering issue of Balfour Beatty’s obligation to indemnify Miller

for the Abrams judgment under company bylaws and Delaware

corporation law. As a result, Miller’s Chapter 7 Trustee demanded

indemnification be paid to Miller’s estate, prompting an adversary

proceeding by Balfour Beatty against Miller, the Trustee and Abrams

for declaratory relief against indemnification. The Trustee

counterclaimed in favor of indemnification.

“And now continues the saga”, Bankruptcy Judge Frank

Monroe wrote, indicating his frustration with six years of costly

and vindictive litigation by both parties. In a carefully detailed

opinion after trial, the court found, among other things, that

3 Miller returned the documents to Abrams when asked, and it was

undisputed that Miller never affirmatively used Abrams documents

while an employee of Balfour Beatty at all, much less to compete

unfairly against his former employer. The bankruptcy court also

found that most of Miller’s actions concerning Abrams documents

were taken before Miller was employed by Balfour Beatty. The court

concluded that “Miller was sued predominately because of activity

he undertook to obtain employment, which was for his own personal

benefit and not in furtherance of [Balfour Beatty’s] policies or

objectives.” Consequently, Miller’s conduct did not fall within

the scope of any corporate duties and responsibilities for which

Balfour Beatty is required to indemnify Miller.

The district court affirmed the judgment, and the Trustee

has appealed.

DISCUSSION2

In the absence of any express indemnity agreement between

Miller and Balfour Beatty, the Trustee’s right to recover turns on

the Company’s bylaws, which adopt Delaware corporation law.

Article VIII of the corporate bylaws provides:

To the extent permitted by § 145 of the General Corporation Law of the State of Delaware . . . [Balfour Beatty] shall indemnify any person who was or is a party . . . to any threatened, pending or completed action,

2 In appeals from bankruptcy court, we review conclusions of law de novo and findings of fact for clear error. Matter of El Paso Refining, L.P., 171 F.3d 249, 253 (5th Cir. 1999).

4 suit or proceeding . . . by reason of the fact that he is or was a director, officer, employee or agent of the corporation.

The pertinent portion of the Delaware General Corporation

Law provides:

(a) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding . . . by reason of the fact that he is or was a director, officer, employee or agent of the corporation . . . if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation . . . . The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation . . . .

Delaware Code Ann. tit. 8, § 145(a). Read together, these

provisions require Balfour Beatty to indemnify Miller if he was

sued “by reason of the fact” that he is an officer and employee of

the corporation, and if Miller “acted in good faith and in a manner

he reasonably believed to be in or not opposed” to Balfour Beatty’s

best interests. It will be unnecessary to reach the good faith

prong of this test, since we conclude, like the bankruptcy and

district courts, that Miller was not sued “by reason of the fact”

that he was an officer and employee of Balfour Beatty.

Thirty-five years after its revision, this

indemnification provision of Delaware law has seldom been

5 interpreted in court. The lack of caselaw may seem detrimental to

analysis of a close case, but on the other hand, it suggests that

the law has admirably fulfilled the purpose of guiding public

conduct without need to resort to the courts. In any event, the

available decisions establish a clear framework for analysis. They

proceed from the proposition that Delaware intended to encourage

capable people to serve as corporate employees, officers and

directors by permitting corporations to shield them from liability

for their official activities. Indemnification also ensures that

corporate officials will and can defend themselves against

unjustified suits and claims. VonFeldt v. Stifel Fin. Corp., 714

A.2d 79, 87 (Del. 1998). The cases thus broadly interpret “by

reason of the fact” to require no more than a nexus between the

corporate officers’ or directors’ official activity and the matter

for which indemnification is sought. See Witco Corp. v. Beekhuis,

38 F.3d 682, 693 (3d Cir. 1994); Heffernan v. Pacific Dunlop GMB

Corp., 965 F.2d 369, 374 (7th Cir. 1992). Further, whether a nexus

exists is a question of fact to be determined by the trial court

considering all the circumstances surrounding the proposed

indemnification. See Heffernan, supra; Plate v. Sun-Diamond

Growers of California, 225 Cal. App. 3d 1115, 1124 (Cal. App. 1990)

(interpreting “by reason of” language in California Corporations

Code indemnification provision).

6 The parties agree on these general principles, but the

Trustee asserts that Miller’s status as a corporate officer,

together with Abrams’s motivation to sue him because he had jumped

ship to work for a competitor, is sufficient to establish the

requisite nexus as a matter of law. The Trustee contends, in other

words, that Balfour Beatty’s indemnity obligation covers any

individual “who is sued because he is an employee - but not because

of his actions as an employee.” We reject this position. There is

no caselaw support for interpreting “by reason of the fact” to

allow indemnification for the mere status of being a corporate

officer, director, employee or agent; indeed, the language seems to

demand a causal connection.3

The Trustee also fears that if he does not prevail,

corporations will be unable to offer indemnification against

claimed misappropriation of trade secrets or violation of non-

compete clauses as an inducement to employees they wish to hire

from a competitor. Likewise, employers would not be able to

indemnify their new recruits against suits from vindictive former

employers.

3 The decision in Essential Enterprises Corp. v. Automatic Steel Prod., Inc., 164 A.2d 437 (Del. Ch. 1960), is not to the contrary. While that decision interprets “by reason of” in an earlier corporate indemnification statute to apply “solely because of the offices [the directors who were sued] held,” 164 A.2d at 441, the lawsuit sought to oust those who were then serving as directors. There was no question of a nexus between their current official positions and the lawsuit’s allegations.

7 These concerns, while not insubstantial, are not realized

in the case before us. The right to corporate indemnification is

necessarily judged case-by-case. Even the Trustee agrees that

“conduct that occurs prior to employment cannot, by definition, be

related to an employee’s corporate duties and therefore cannot be

a basis for indemnity.” Trustee’s brief at 25. See Sorensen v.

The Overland Corp., 242 F.2d 70 (3d Cir. 1957) (no indemnification

for suit arising out of employment contract that plaintiff

negotiated with company before he became an officer or director).

Yet that is exactly the finding that the bankruptcy court

made and the district court affirmed: Miller was sued in his

personal, not official, capacity for actions before he was employed

by Balfour Beatty that benefitted only himself. There is abundant

support for this finding in the record. Abrams’s state court

petition did not sue Miller in his capacity as an officer or

employee of Balfour Beatty. Indeed, very little of the complaint

alleged facts occurring after Miller was employed by Balfour

Beatty. The petition alleged various causes of action against

Miller and Balfour Beatty, but only the claims for Miller’s breach

of fiduciary duty toward Abrams, misappropriation of Abrams’s

proprietary information and trade secrets, and civil conspiracy

were submitted to the jury. On each count, the jury was instructed

that Balfour Beatty was liable for the acts of its employees or

agents. The jury verdict exonerated Balfour Beatty and rejected the

8 fiduciary duty breach and civil conspiracy claims, but they held

Miller personally liable because he “misappropriated proprietary

information or made an improper use of trade secrets belonging to

Abrams.” The bankruptcy court, finding Miller a credible witness,

accepted Miller’s uncontradicted explanation in his testimony

before the bankruptcy court that he had taken three sets of

documents. He used two sets solely for the purpose of getting a

job with Balfour, and the other set remained boxed up when he left

Abrams but was never used after he became employed with Balfour.

He returned the documents to Abrams when asked.

The most likely inferences from these facts and

circumstances are that (a) Abrams sued Miller primarily for

Miller’s individual actions; (b) Miller was held liable for actions

that he took for his personal benefit before he was employed by

Balfour; (c) Balfour did not participate in or profit from those

actions. In sum, Miller was not sued “by reason of the fact” that

he was employed by Balfour.4 The Trustee has not proved these

findings to be clearly erroneous.

This is not a case in which the gravamen of the complaint

was against Miller’s conduct as an officer or employee of Balfour.

Compare Heffernan, 965 F.2d at 373, 374 (“the gravamen of Pacific’s

complaint is that Heffernan, at least in part because he was a

4 That Balfour defended both itself and Miller jointly does not bear on the propriety of indemnification.

9 director . . . either knew or should have known that [the

companies] may be subject to environmental and other liabilities .

. .”). Instead, we hold that no nexus existed because, as the

state court judgment revealed, the lawsuit related to conduct that

occurred when Miller was not employed by the indemnifying company,

and Miller’s personal motives, rather than Balfour Beatty’s

corporate functions, were the primary reason for the conduct giving

rise to the lawsuit. The scope of corporate indemnification under

Delaware law, while justly broad, cannot cover individual conduct

by a person that is wholly outside and indeed prior to his

corporate employment.

The Trustee argued as a fallback position that Balfour

Beatty must indemnify Miller for the Abrams lawsuit under a theory

of estoppel. This theory would apply to corporate indemnification

the concept from insurance law that when the insurer defends its

insured without a reservation of rights, it is later estopped to

deny coverage. See e.g., Farmers Texas County Ins. Co. v.

Wilkenson, 601 S.W.2d 520, 521-22 (Tex. App. 1980). The Trustee

cites no cases suggesting that the reservation of rights theory in

insurance law should be transferred to corporate indemnification

law. Under Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817

(1938), there is no basis for us to hold, much less “guess,” that

Delaware would so interpret its corporate indemnification

provision. This point is meritless.

10 For the foregoing reasons, the judgments of the

bankruptcy and district courts denying relief to the Trustee are

AFFIRMED.