Merritt-Chapman & Scott Corp. v. Wolfson

Brief Fact Summary.

After Wolfson (Plaintiff) was criminally charged, tried, and sentenced, he sought to be indemnified by Merritt-Chapman & Scott Corp (MCS) (Defendant) for the costs of legal defense.

Synopsis of Rule of Law.

When corporate agents are criminally charged for their conduct in regard to their corporation, they are entitled to indemnification for their legal defense expenses on the successful indictment counts only, even if unsuccessful on another related count.

Facts.

Wolfson (Plaintiff), Gerbert (Plaintiff), Kosow (Plaintiff), and Staub (Plaintiff), agents of Merritt-Chapman & Scott Corporation (MCS) (Defendant), were criminally charged on various counts of violating federal securities laws resulting from a plan to cause Defendant to secretly purchase hundreds of thousands of shares of its own common stock.  Wolfson (Plaintiff) pleaded nolo contendere to a count of filing false annual reports and other charges were dropped upon a $10,000 fine and an 18-month suspended sentence; Gerbert (Plaintiff) agreed not to appeal his conviction of perjury before the Securities and Exchange Commission (SEC) and was fined $2,000 with an 18-month suspended sentence.  All other charges were dropped, including those against Kosow (Plaintiff) and Staub (Plaintiff).  Each sought to be indemnified by MCS (Defendant) for the costs of their legal defense.  Both sides moved for summary judgment, with Defendant arguing that no indemnification should be granted.

Issue.

When corporate agents are criminally charged for their conduct in regard to their corporation, are they entitled to indemnification for their legal defense expenses on the successful indictment counts, even if unsuccessful on another related count?

Held.

(Balick, J.)  Yes.  When corporate agents are criminally charged for their conduct in regard to their corporation, they are entitled to indemnification for their legal defense expenses on the successful indictment counts only, even if unsuccessful on another related count.  Success is vindication and any result other than conviction must be considered success—complete success is not required.  Even though a corporation may pass a by-law making a permissive indemnification mandatory, MCS (Defendant) was empowered to indemnify except in relation to matters that any such director, officer, or person shall be found liable for negligence or misconduct when performing their duty.  If an action does not go to judgment, Defendant could determine whether the agent has been derelict or negligent.  Conviction established Wolfson (Plaintiff) and Gerbert (Plaintiff) to be derelict in those counts that were not dropped.  Therefore, on the other counts, it remained for Defendant to determine whether or not to indemnify.

Discussion.

The set 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 that they have served if they are to be vindicated.â€Â  Other than that, its greater 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.â€Â  Folk, The Delaware General Corporation Law, 98 (1972).