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Willem Ridder, Lyndon C. Merkle, John T. Hurst, Gregory Devany v. Cityfed Financial Corporation, a Delaware Corporation
Citation: 47 F.3d 85Docket: 94-5343
Court: Court of Appeals for the Third Circuit; March 21, 1995; Federal Appellate Court
The case involves appellants Willem Ridder, Lyndon C. Merkle, John T. Hurst, and Gregory DeVany, former employees of City Collateral and Financial Services, Inc., a subsidiary of CityFed Financial Corporation, which is currently in receivership under the Resolution Trust Corporation (RTC). The RTC has sued the appellants for committing fraud and breaching their fiduciary duties by exceeding their authority with loans, concealing defaults, misrepresenting loan statuses, and other misconduct. The appellants requested CityFed to advance their attorney fees for defending against this lawsuit, but CityFed refused. Subsequently, the appellants sought a preliminary injunction and summary judgment to compel CityFed to cover their legal expenses. The district court denied their motions, reasoning that the RTC had a strong case against them and that granting the injunction would adversely affect other creditors of CityFed, which is in receivership. The court highlighted the need for equal treatment of creditors over the appellants' claims. However, the court's rationale for denying the injunction was found insufficient as it did not align with the indemnification provisions outlined in CityFed's by-laws and Delaware corporation law, which mandate advance payment of defense expenses unless the employee is ultimately deemed not entitled to indemnification. The district court's primary issue was whether appellants were entitled to have CityFed advance their defense costs, independent of the likelihood of success in the RTC litigation. Under Delaware law, the right to advance defense costs is distinct from any right to indemnification and does not depend on the merits of the underlying claims. The provisions in CityFed's by-laws and Delaware law condition advancement on a repayment agreement if indemnification is not later established. CityFed's attempt to invoke a precedent from Fidelity Federal Savings and Loan Assn v. Felicetti was rejected, as the court emphasized the need to adhere to Delaware appellate court decisions regarding Delaware law. The statutory framework aims to encourage qualified individuals to serve as directors by mitigating fears of personal liability. Appellants convincingly argued that failing to advance their defense costs would irreparably harm their ability to defend against the RTC action. The district court, however, mistakenly weighed this harm against potential harm to CityFed's creditors, which was not the relevant issue. The court determined that appellants were entitled to the advancement of their defense costs as a matter of law, leading to the reversal of the district court's order and the issuance of an injunction for CityFed to advance reasonable defense costs. The petition for rehearing by CityFed was denied, with no judges requesting a rehearing.