Opinions of the United 1995 Decisions States Court of Appeals for the Third Circuit

2-9-1995

Ridder vs. CityFed Financial Precedential or Non-Precedential:

Docket 94-5343

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Recommended Citation "Ridder vs. CityFed Financial" (1995). 1995 Decisions. Paper 36. http://digitalcommons.law.villanova.edu/thirdcircuit_1995/36

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact [email protected]. UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 94-5343

WILLEM RIDDER, LYNDON C. MERKLE, JOHN T. HURST, GREGORY DEVANY, Appellants

v.

CITYFED FINANCIAL CORPORATION, a Delaware Corporation

On Appeal from the United States District Court for the District of New Jersey (D. C. Civil No. 93-1676)

Argued September 2l, l994

BEFORE: GREENBERG and ROTH, Circuit Judges, and FULLAM* District Judge

(Filed: February 9, l995)

* Honorable John P. Fullam, senior district judge for the Eastern District of Pennsylvania, sitting by designation. Richard Harrington (argued) Chandler Wood, Harrington & Maffly lll Sutter Street, Suite l900 San Francisco, CA 94l04

Michael A. Saffer Chapman, Henkoff, Kessler, Peduto & Saffer 425 Eagle Rock Avenue P.O. Box F Roselind, NJ 07068

Attorneys for Appellant

Ronald W. Stevens (argued) Matthew D. Anhut Kirkpatrick & Lockhart l800 M Street South Lobby, 9th Floor Washington D.C. 20036

William C. Cagney Lane & Mittendorf 499 Thornall Street Edison, N.J. 08837

Attorneys for Appellee OPINION OF THE COURT

FULLAM, District Judge

The appellants, Willem Ridder, Lyndon C. Merkle, John

T. Hurst and Gregory DeVany, were employed by City Collateral and

Financial Services, Inc. a wholly owned subsidiary of City

Federal Savings Bank, which in turn was the wholly owned

subsidiary of appellee CityFed Financial Corporation ("CityFed"),

a Delaware corporation now in receivership. Resolution Trust

Corporation ("RTC"), as receiver for CityFed, has sued the

appellants in a companion case in the United States District

Court for the District of New Jersey, Resolution Trust Corp. v.

Fidelity & Deposit Co. of Maryland, et al., case No. 92-

l003(D.N.J.), asserting that the appellants committed various

frauds and breaches of their fiduciary duty to their employer.

Specifically, the RTC asserts that appellants (l) exceeded their

authority by approving loans to Northwest Mortgage Co., Inc., (2)

concealed Northwest's default from CityFed's credit committee,

(3) misrepresented to the credit committee the status of the

Northwest line of credit, (4) misstated to the committee the

risks associated with the Northwest loan, (5) concealed

Northwest's criminal activity from CityFed, (6) falsified City

Collateral records, and (7) improperly divulged confidential

information for personal gain. Upon being served with the complaint in the RTC action,

appellants made demand upon CityFed to advance funds for

attorneys fees they would incur in defending the RTC litigation.

CityFed refused, whereupon appellants brought this action to

compel CityFed to advance attorneys fees to them. Plaintiff

sought a preliminary injunction to obtain immediate payment, and

also filed a motion for summary judgment. After a hearing, the

district court denied both motions, and appellants timely filed

this appeal.

Article XI of CityFed's by-laws requires CityFed to

indemnify and hold harmless all employees sued or threatened to

be sued by reason of such employment by CityFed or any of its

subsidiaries, "to the fullest extent authorized by the Delaware

corporation law", and specifically provides that the right to indemnity "shall include the right to be paid the expenses incurred in defending any such proceeding in advance of its final

disposition; provided, however that, if the Delaware Corporation

Law so requires [it does] the payment of such expenses ... shall be made only upon delivery to the corporation of an undertaking

... to repay all amounts so advanced if it shall ultimately be

determined that such employee is not entitled to be indemnified."

[Emphasis added.] These by-law provisions are substantially

identical to the provisions of the Delaware Corporation Law on

the subject. The district court denied the injunction sought by

appellants for two reasons. Because of the perceived strength of

the RTC's case against the appellants in the related litigation,

the court concluded that appellants had failed to demonstrate a

likelihood of success on the merits. And, in view of the fact

that CityFed is in receivership and the rights of other creditors

are implicated, the court felt that the harm to appellants from

denial of the injunction was outweighed by the public interest in

assuring equal treatment to all of CityFed's creditors, and that

appellants' claim should not be accorded priority by the issuance

of a preliminary injunction. We conclude that neither reason

suffices to justify denial of the relief plainly mandated by the

by-laws and the Delaware statute.

The issue before the district court was not whether

appellants were likely to prevail in the RTC litigation, but

whether they were likely to prevail in their assertion that

CityFed should advance the costs of defense. Under Delaware law,

appellants' right to receive the costs of defense in advance does

not depend upon the merits of the claims asserted against them,

and is separate and distinct from any right of indemnification

they may later be able to establish. Citadel Holding Corp. v.

Roven, 603 A.2d 8l8 (Del. l992); Salaman v. National Media Corp.,

No. C.A. 92C-0l-l6l, l994 WL465534 (Del. Super. July 22, l994).

See Joseph Warren Bishop, Jr., Law of Corporate Officers and

Directors Indemnification and Insurance, ¶6.27 (l98l & Supp. l993). Indeed, the provisions in both Article XI of CityFed's

by-laws and §l45(e) of the Delaware corporation law, conditioning

the obligation to advance defense costs upon an undertaking "to

repay such amount if it shall ultimately be determined that [the

officer] is not entitled to be indemnified by the corporation"

leaves no room for argument on that score.

CityFed urges us to adopt the approach taken by the

district court in Fidelity Federal Savings & Loan Assn v.

Felicetti,

(E.D. Pa. l993), and rule that,

notwithstanding the by-law provision, CityFed was justified in

refusing to advance defense costs because of "the overriding duty

of the directors to act in the best interests of the

corporation". Id., at 269. We respectfully disagree. Given a

choice between decisions of the appellate courts of Delaware and

courts of other jurisdictions, on issues of Delaware law, this

court is plainly required to follow the decisions of the Delaware

courts. Moreover, we find the reasoning in Felicetti

unpersuasive. Rarely, if ever, could it be a breach of fiduciary

duty on the part of corporate directors to comply with the

requirements of the corporation's by-laws, as expressly

authorized by statute.

The statutory provisions authorizing the advancement of

defense costs, conditioned upon an agreement to repay if a right

of indemnification is not later established, plainly reflect a

legislative determination to avoid deterring qualified persons from accepting responsible positions with financial institutions

for fear of incurring liabilities greatly in excess of their

means, and to enhance the reliability of litigation-outcomes

involving directors and officers of corporations by assuring a

level playing field. It is not the province of judges to second-

guess these policy determinations.

Appellants made a strong showing that, unless defense

costs were advanced to them, their ability to defend the RTC

action would be irreparably harmed. Appellee made no contrary

showing, and the district court did not base its holding upon the

absence of irreparable harm, but rather upon a comparison between

the harm to appellants and the perceived harm to other creditors

of CityFed. Here again, however, we conclude that the district

court addressed the wrong issue. The only issue before the

district court was whether appellants were entitled to advance

payment of the cost of defense of the RTC action. The

insolvency proceeding itself was not before the district court,

and the impact, if any, of a grant of injunctive relief was not

only a matter for other tribunals to decide, but, on this record,

purely speculative.

We conclude that the appellants are entitled to have

their costs of defense advanced to them, as a matter of law. The

order appealed from will therefore be reversed, with instructions

to issue an injunction requiring appellee to advance such defense costs as the parties by agreement, or the district court upon

further proceedings, determines to be reasonable.