Vergopia v. Shaker

922 A.2d 1238, 191 N.J. 217, 2007 N.J. LEXIS 687

Opinions

PER CURIAM.

At issue in this appeal is indemnification. Stephen A. Zelnick was both a corporate officer of and outside counsel to Hometown Auto Retailers, Inc. (Hometown), a Delaware corporation with its principal place of business in Connecticut. In 2003, he was added as a defendant in a civil action that was brought against Hometown by two of its former senior employees, plaintiffs Salvatore and Edward Vergopia. Plaintiffs claimed that Hometown wrongfully ousted them from the corporation. Hometown asked its insurance carriers to defend and indemnify Zelnick, but its request was denied. Accordingly, Zelnick filed a cross-claim against the carriers and Hometown, demanding that they provide him with a defense and indemnification.

Eventually the Vergopias’ claims against Zelnick were dismissed and, thereafter, so too was Zelnick’s cross-claim. The trial court held that Zelnick was not entitled to indemnification either as an officer or as an agent of Hometown.

The Appellate Division reversed. Vergopia v. Shaker, 383 N.J.Super. 256, 891 A.2d 664 (2006). The panel held, under case law interpreting Delaware’s General Corporation Law, that Zelnick was entitled to indemnification because he was sued by reason of the fact that he was an agent of the corporation. Id. at 269-70, 891 A.2d 664. We granted certification, 187 N.J. 83, 899 A.2d 305 (2006), largely to review the panel’s holding regarding indemnification for agents of a corporation under Delaware law, which could impact our law’s requirements concerning indemnification of a corporation’s agents.¹ We now affirm, but on a different and narrower basis.

Through its certificate of incorporation, Hometown has provided its directors and officers with broad protections against civil liability, thereby encouraging talented individuals to serve as its corporate leaders. We conclude that Zelnick was entitled to indemnification as a corporate officer of Hometown under the terms of that certificate of incorporation. Our holding renders it unnecessary for us to reach the issue of the scope of indemnification required to be provided to corporate agents under Delaware’s General Corporation Law.

I.

Zelnick is an attorney with the New York law firm of Morse, Zelnick, Rose & Lander. In 1997, he became involved in forming Hometown, a corporation composed of several automobile dealerships in the tri-state area.² Zelnick drafted and negotiated docu ments relating to Hometown’s formation and initial public offering and then became active in Hometown’s business operations.

In addition to acting as outside counsel to the corporation, Zelnick held various leadership positions with the company. During Hometown’s formation, Zelnick acted as vice president of the company. In 2001 and 2002, he served as a director. Consistent with his active role in Hometown’s operations, Zelnick has joined in monthly telephonic meetings of Hometown’s board of directors since the company’s inception.

In March 2003, Zelnick was added as a defendant to the Vergopias’ ongoing civil action filed against Hometown in New Jersey. At the time, Zelnick was an assistant secretary of Hometown.³ Salvatore and Edward Vergopia alleged that they had been wrongfully discharged by Hometown. Salvatore’s wife, Janet Vergopia, also was named as a plaintiff in the lawsuit. In their third amended complaint, the Vergopias asserted claims against Zelnick for trade libel and intentional infliction of emotional distress. Those claims arose from the contents of a press release issued by Hometown addressing the Vergopias’ dismissal and their lawsuit against the company, and from a Form 8-K, filed with the Securities and Exchange Commission, that incorporated the press release. The Vergopias averred that Zelnick was directly involved in the preparation and publication of the allegedly defamatory press release and Form 8-K.

When Hometown’s insurance carriers refused to defend or indemnify Zelnick against the lawsuit, Zelnick asserted his cross-claims against Hometown and its insurers and retained his own attorney for interim representation. Ultimately, Zelnick obtained summary judgment dismissing the Vergopias’ complaint against him.

The trial court then addressed the lingering indemnification dispute between Zelnick and Hometown.⁴ The parties submitted a set of stipulated facts and agreed that Delaware law governed whether Hometown was required to incur the cost of Zelnick’s defense. The pertinent provisions of Hometown’s certificate of incorporation and bylaws were set forth among the stipulated facts. Pursuant to Article X of Hometown’s certificate of incorporation,

[e]ach person who was or is made a party or is threatened to be made a party to or [who] is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law.

[ (Emphasis added).]

Section 10.1 of Hometown’s bylaws further provides that

[t]he Corporation shall indemnify its directors and officers, and may indemnify its employees and agents, in accordance with and to the full extent permitted by the laws of the State of Delaware as in effect from time to time, if any such person (and the heirs and legal representatives of such person) is made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was, as the case may be, a director, officer, employee or agent of the Corporation or any constituent corporation absorbed in a consolidation or merger or serves or served as such with another corporation, partnership, joint venture, trust or other enterprise at the request of the Corporation or any such constituent corporation.

[ (Emphasis added).]

The trial court found that Zelnick was not sued “by reason of the fact” that he was an officer of Hometown because, it concluded, the Vergopias’ claims were unrelated to Zelnick’s duties as an assistant secretary of the corporation. The court also found that Zelnick was not sued “by reason of the fact” that he was an agent of Hometown. Relying on the opinion of the Delaware Court of Chancery in Fasciana v. Electronic Data Systems Corp., 829 A.2d 160 (Del.Ch.2003), the court reasoned that, in reviewing the press release and Form 8-K, Zelnick was not an agent of Hometown because he was not acting on the corporation’s behalf in transactions with third parties. Therefore, the trial court held that Hometown and its insurers were not required to bear the cost of Zelnick’s defense.

In reversing, the Appellate Division agreed that Zelnick was not sued “by reason of the fact” that he was an officer of Hometown. Vergopia, supra, 383 N.J.Super. at 263-64, 891 A.2d 664. However, the panel parted ways with the trial court in respect of whether Zelnick was sued “by reason of the fact” that he was an agent of the corporation. Id. at 264, 891 A.2d 664. Concluding that the trial court had interpreted the term “agent” too restrictively under Delaware law, id. at 265, 891 A.2d 664, the panel determined that Zelnick was acting as an agent because, “by reviewing and commenting upon the proposed press release, which was intended for the widest possible dissemination, [Zelnick] gave advice that was intended to be used with third-parties.” Id. at 268, 891 A.2d 664. The panel’s holding did not specify whether Zelnick’s right to indemnification derived from the Delaware General Corporation Law, Hometown’s certificate of incorporation, or Hometown’s bylaws.

We granted Hometown’s petition for certification, 187 N.J. 83, 899 A.2d 305, and requested supplemental briefing from the parties on the following two issues:

1. Whether, under the certificate of incorporation of Hometown Auto Retailers, Inc. (Hometown), Stephen A. Zelnick “was a director or officer ... of the Corporation or ... was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise” when the acts giving rise to the claim for indemnity arose; and

2. Whether, under Hometown’s corporate by-laws, Zelnick is entitled to mandatory (“officers and directors”) or discretionary (“employees and agents”) indemnity and, if the latter, whether Hometown Auto Retailers, Inc., abused its discretion in denying Zelnick’s request for indemnification.

II.

As noted, the parties agree that Delaware law governs this dispute. We begin then with a brief summary of the indemnification provisions of the Delaware General Corporation Law.

Delaware’s corporate indemnification requirements are set forth in section 145 of its General Corporation Law. Del. Code. Ann. tit. 8, § 145. Section 145 “afford[s] significant protections to” directors, officers, employees, and agents of a corporation. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 66 (Del.2006). Subsection (a) permits corporations to indemnify corporate actors in connection with lawsuits brought by third parties:

A corporation shall have power to 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, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. 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 the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.

[Del.Code. Ann. tit. 8, § 145(a).]

In essentially parallel language, subsection (b) of section 145 permits corporations to indemnify corporate actors in connection with lawsuits “by or in the right of’ the corporation. Del.Code. Ann. tit. 8, § 145(b).

In addition to the permissive authority granted to corporations to provide indemnification under subsections (a) and (b), subsection (c) of section 145 requires corporations to indemnify directors and officers who successfully defend against a lawsuit:

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.

[Del.Code. Ann. tit. 8, § 145(c).]

Delaware enacted section 145 to permit corporate actors “to resist unjustified lawsuits, secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation; and [to] eneourag[e] capable women and men to serve as corporate directors and officers, secure in the knowledge that the corporation will absorb the costs of defending their honesty and integrity.” VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 84 (Del.1998). Because of the indemnification statute’s remedial purpose, the Supreme Court of Delaware consistently has instructed that section 145 is to be interpreted broadly. See, e.g., Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del.2002) (“[T]he indemnification statute should be broadly interpreted to further the goals it was enacted to achieve.”); VonFeldt, supra, 714 A.2d at 84 (‘We eschew narrow construction of the statute____”). Courts have noted that, in addition to including suits against directors or officers in their official capacity, Delaware’s “by reason of the fact” statutory language encompasses suits against directors and officers that arise indirectly from their status, position, or role as a director or officer. E.g., Heffernan v. Pac. Dunlop GNB Corp., 965 F.2d 369, 375 (7th Cir.1992); In re Adelphia Commc’ns. Corp., 323 B.R. 345, 378 (Bankr.S.D.N.Y.2005).

With those principles in mind, we turn now to whether Zelnick was entitled to indemnification from Hometown under the corporate instruments implementing the above statutory policies.

III.

To resolve the issue before us, we need look no further than Hometown’s certificate of incorporation. That document provides, in pertinent part, that

[e]ach person who was or is made a party or is threatened to be made a party to or [who] is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she ... is or was a director or ofSeer[ ] of the Corporation ..., whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law.

[ (Emphasis added).]

Clearly, Hometown provides broad protection to its directors and officers sued for their actions, taken in any capacity, relating to the corporation. Given the breadth of the contractual right of indemnity conferred by Hometown, there is no need to address the scope of a statutory right. Hometown indemnifies its directors and officers when they act in their official capacity “or in any other capacity while serving as a director, officer, employee or agent.” (Emphasis added). Thus, Hometown encourages highly qualified individuals to serve as leaders of the corporation without fear of liability for acts performed in furtherance of Hometown’s interest. See VonFeldt, supra, 714 A.2d at 84. Because Zelnick is one of those individuals, denying him coverage on these facts would frustrate the salutary purpose underlying the broad sweep of the contractual indemnification provision included in the certificate of incorporation.⁵

When Zelnick was added as a party to the Vergopias’ suit against Hometown in 2003, he was serving as an assistant secretary of the corporation. Although the Vergopias’ claims against Zelnick were not related directly to Ms official duties as an assistant secretary of Hometown, as defined by Hometown’s bylaws, he nevertheless was sued while serving as an officer of Hometown for actions he took in furtherance of the corporation’s business interests. As such, Zelnick was entitled to indemnification under the terms of Hometown’s certificate of incorporation.

Both the trial court and the Appellate Division concluded that Zelmck was not sued “by reason of the fact” that he was an officer of Hometown because neither court could find a direct nexus between Zelmck’s corporate duties as an assistant secretary and Ms specific preparation of the press release and Form 8-K. That reasoning is contrary, though, to the language and spirit of Hometown’s certificate of incorporation. Moreover, focusing on the lack of synchromcity between Zelnick’s official duties as assistant secretary and the conduct underlying the Vergopias’ claims agamst Zelmck ignores the reality of Ms robust participation in Hometown’s busmess operations while serving as an officer of the corporation. Zelnick was actively involved in Hometown’s pursuits since the company’s incorporation. According to Salvatore Vergopia, Zelmck joined with Hometown’s directors in early 2001 in their effort to oust the Vergopias from their senior positions with the company. Hometown’s assertions that Zelmck was a corporate outsider who is not entitled to indemnification therefore simply do not pass muster.

In sum, we conclude that the certificate of incorporation’s broad indemnification of corporate officers encompasses Zelnick’s circumstances in respect of the Vergopias’ lawsuit.⁶

IV.

The appellate panel based its holding on a different basis, namely that Zelnick was entitled to indemnification as an agent of Hometown. See Vergopia, supra, 388 N.J.Super. at 264-70, 891 A.2d 664. However, neither section 145 of the Delaware General Corporation Law nor Hometown’s corporate documents requires Hometown to indemnify its agents. Rather, section 145 merely permits a corporation to indemnify its agents. DelCode. Ann. tit. 8, § 145(a)-(e).⁷ Similarly, Hometown’s bylaws provide that Hometown “may” indemnify its agents. It does not necessarily follow that Zelnick, as an attorney and agent of Hometown, has a right to indemnification by the corporation whenever he acts on Hometown’s behalf. Because our conclusion that Zelnick is entitled to indemnification as a corporate officer results in affirmance of the Appellate Division’s judgment, we do not address the correctness of the Appellate Division’s alternative basis for holding in Zelnick’s favor.

V.

For the foregoing reasons, we affirm, with modification, the judgment of the Appellate Division.

Footnotes

1

We recognize at the outset the similarity between Delaware's and New Jersey’s indemnification statutes. The very genesis of New Jersey’s indemnification statute, N.J.S.A. 14A:3-5, has been traced to Delaware’s indemnification statute, Del.Code. Ann. tit. 8, § 145. See Cohen v. Southbridge Park, Inc., 369 N.J.Super. 156, 162 n. 1, 848 A.2d 781 (App.Div.2004); see also Theodore D. Moskowitz & Walter A. Effross, Turning Back the Tide of Director and Officer Liability, 23 Seton Hall L.Rev. 897, 902-12 (1993) (comparing indemnification statutes of Delaware and New Jersey, as well as various other states). New Jersey’s indemnification statute was derived from section 4A of the Model Business Corporation Act that, in turn, was based on section 145 of the Delaware General Corporation Law. Cohen, supra, 369 N.J.Super. at 162 n. 1, 848 A.2d 781.

2

We draw the facts relating to Zelnick’s involvement with Hometown from the parties’ set of stipulated facts and the exhibits attached thereto. Included among those exhibits was Salvatore Vergopia's certification, which documented Zelnick’s participation in Hometown's operations both as Hometown’s outside counsel and as a corporate official.

3

Pursuant to section 5.9 of Hometown’s bylaws, in the secretary’s absence Zelnick was required to: (1) attend directors' and shareholders’ meetings; (2) record votes; (3) take minutes; (4) retain custody of and use the corporate seal; (5) keep and account for all of the corporation’s books; (6) sign stock certificates; and (7) “generally perform all the duties appertaining to the office of Secretary of a corporation.”

4

Zelnick elected to pursue his cross-claim for indemnification against Hometown only, and not against Hometown’s two insurance carriers.

5

The dissent essentially reads Article X of Hometown's certificate of incorporation as an enabling provision to be implemented through the corporation's bylaws. Post at 237, 922 A.2d at 1250. In our view, the plain language of Article X requires that officers "shall be indemnified” if they meet the requisite conditions set forth in the certificate of incorporation.

6

The dissent concedes that a corporation's bylaws may not conflict with its certificate of incorporation, post at 235-36, 922 A.2d at 1249, but then asserts that the majority disregards Hometown's bylaws. We do not ignore Hometown's bylaws. Rather, we conclude that the broader indemnification provided to directors and officers under Hometown's certificate of incorporation is controlling. To the extent that Hometown's bylaws seemingly diminish the scope of indemnification afforded to directors and officers by omitting the language, "whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent,” which modifies the language "by reason of the fact that” in the certificate of incorporation, the bylaws must yield. See Del.Code. Ann. tit 8, § 109(b) ("The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.”) (emphasis added); Centaur Partners, IV v. Nat’l Intergroup, Inc., 582 A.2d 923, 929 (Del.1990) ("Where a by-law provision is in conflict with a provision of the charter, the by-law provision is a 'nullity.' ") (quoting Burr v. Burr Corp., 291 A.2d 409, 410 (Del.Ch.1972)). The narrower bylaw language could have continued application in the case of the indemnification of employees and agents, however.

7

We note that the Delaware General Corporation Law differs from New Jersey’s indemnification statute in that respect. Prior to 1997, section 145(c) of the Delaware General Corporation Law required corporations to indemnify directors, officers, agents, and employees alike who successfully defended against a lawsuit. In 1997, Delaware amended section 145(c) to prescribe mandatory indemnification for directors and officers only. 71 Del. Laws 120 (1997). New Jersey’s equivalent to section 145(c), NJ.S.A. 14A:3-5(4), still requires corporations to indemnify directors, officers, agents, and employees.