Summary Judgment (hereinafter "Plf. Reply").
On March 28, 1993, the court heard oral argument on the motion and instructed the parties to discuss the possibility of settlement including the posting of security for amounts advanced, and to submit supplemental papers if settlement was not reached. Unable to arrive at a settlement, plaintiffs and defendant have filed supplemental papers. Plaintiffs' Supplemental Memorandum of Law in Further Support of Motion for a Summary Judgment and Preliminary Injunction ("Plf. Supp. Mem."); Supplemental Memorandum Ordered by the Court on March 28, 1994 ("Def. Supp. Mem.").
The posture of this motion is problematic. Plaintiffs' right to indemnification for defense costs, or their obligation to repay any sums advanced, will not be clear until the charges against them in the RTC action are resolved. Thus, any decision the court makes on this issue for the purposes of this action would be merely an interim declaration of rights subject to change in the companion suit. However, all parties fear that by the time that suit is resolved, no party will have the financial resources to reimburse any other. The distinction between a right to advancement of costs and a right to indemnification for those costs is, then, in this case, largely fictitious. Since the court cannot resolve the indemnification issue in this action, it deems it more appropriate to consider the present motion as an application for a preliminary injunction.
In order to merit a preliminary injunction, the moving party must show "(1) a reasonable probability of eventual success in the litigation and (2) that the movant will be irreparably injured pendente lite if relief is not granted." In addition, the court should consider the possibility of harm to other interested parties, as well as harm to the public interest, if the requested relief is granted. In re Arthur Treacher's Franchisee Litigation, 689 F.2d 1137, 1143 (3d Cir. 1982); Opticians Ass'n of America v. Indep. Opticians of America, 920 F.2d 187, 191-92 (3d Cir. 1990). The court will address each factor in turn.
A. Likelihood of Success on the Merits
Plaintiffs contend that to show likely success on the merits in this action, they need only show that CityFed's Bylaws require it to advance defense costs even though plaintiffs are charged in the RTC action with breaching their fiduciary duties. However, in light of the fact that defendant faces potential legitimate claims far in excess of its assets, and in light of plaintiffs' refusal or inability to provide security for sums advanced, there is little if any distinction between advancement of defense costs and indemnification for those costs. Thus, to show likely success on the merits of this action, plaintiffs must show that they are likely to be entitled to indemnification at the conclusion of the RTC action.
As noted above, the RTC alleges that the plaintiffs engaged in acts of misconduct and self-dealing. CityFed claims that its counsel, in evaluating plaintiffs' claims for advancement of costs, has found evidence to support these allegations. For example, there is evidence that by late May, 1988, plaintiffs were aware of serious problems with the Northwest loan. See Letter from John T. Hurst to Harry Movroydis, President of Northwest, dated May 25, 1988 (Anhut Dec., Exh. H). Soon thereafter, plaintiffs learned that City Federal's assets would be sold, and they secured their bonus agreements with City Federal. See Agreements, Anhut Dec., Exh. I. There is evidence that plaintiffs did not thereafter inform appropriate personnel at City Federal of the problems with the Northwest line of credit, and indeed, requested extensions of that line of credit. Atherton Dec. at P 7; McTernan Dec. PP 4-8; Memos to City Federal Credit Committee from John Hurst (Anhut Dec., Exh. J).
Moreover, there is evidence that on December 22, 1988, Northwest's president informed plaintiff DeVany that Northwest had been using loan proceeds to cover marketing losses in violation of its loan agreement. DeVany has testified that at Hurst's direction, he dated the entry in the Northwest loan history detailing this conversation "December 29, 1988," the day City Federal's assets -- but not the Northwest loan -- were sold. DeVany Deposition at 105-106 (Anhut Dec., Exh. G). The court cannot discount the possibility that the date of the entry was manipulated to coincide with the termination of plaintiffs' employment with City Collateral, and with their receipt of the bonuses City Federal had promised them upon the sale of City Collateral's assets.
Plaintiffs vigorously dispute the charge that they concealed Northwest's problems from City Federal. They also argue that any failure to communicate these problems is not causally related to the $ 7 million loss City Federal suffered. However, the key issue for this action is not whether plaintiffs' actions caused the loss, but whether those actions might vitiate plaintiffs' right to indemnification for their defense costs. As defendant points out, plaintiffs may have forfeited this right if they breached the duties they owed to City Federal, even if their actions did not cause the $ 7 million loss.
Corporate directors and officers found guilty of breaching their fiduciary duties to the corporation may be required to forfeit the compensation they earned while violating their duties. The Delaware Supreme Court has stated the rationale behind this principle as follows:
If an officer or director of a corporation, in violation of his duty as such, acquires gain or advantage for himself, the law charges the interest so acquired with a trust for the benefit of the corporation, . . . while it denies to the betrayer all benefit and profit. The rule, inveterate and uncompromising in its rigidity, does not rest upon the narrow ground of injury or damage to the corporation resulting from a betrayal of confidence, but upon a broader foundation of a wise public policy that, for the purpose of removing all temptation, extinguishes all possibility of profit flowing from a breach of the confidence imposed by the fiduciary relation.
Guth v. Loft, 23 Del. Ch. 255, 5 A.2d 503, 510 (Del. 1939) (quoted in Borden v. Sinskey, 530 F.2d 478, 498 (3rd Cir. 1976) (emphasis added in Borden).
Not all courts have interpreted this principle so broadly as to require an officer or director found to have breached his fiduciary duties to forfeit all compensation. The Superior Court of New Castle County in Delaware has held that a corporate director who successfully defended three out of four claims the corporation brought against him was not obliged to forfeit entirely his right to indemnification. See MCI Communications Corp. v. Wanzer, Nos. 89C-MR-216, 89 C-SE-26, 1990 WL 91100 (Del. Super. Jun. 19, 1990). However, in Borden v. Sinskey, the United States Court of Appeals for the Third Circuit upheld the district court's order that a former director who breached his fiduciary duties was required to forfeit all compensation he had received during the time of his breach, even though some of the services he had performed had benefitted his former employer. Borden, 530 F.2d at 498. Thus, it is at least possible that even if plaintiffs are found not to have caused the $ 7 million loss, they may be required to forfeit some or all of their right to indemnification for expenses if they are found to have breached their fiduciary obligations to City Federal.
Failure to disclose to the corporation all relevant information or misrepresentation of relevant information may be considered a breach of the fiduciary duties all directors and officers owe their corporate employers. National Credit Union Administration Board v. Regine, 749 F. Supp. 401, 413-14 (D.R.I. 1990). Indemnification for defense costs may fairly be considered part of compensation, and may therefore be forfeited in the event plaintiffs are found to have breached their fiduciary duties. See In re Baldwin-United Corp., 43 Bankr. 443, 454 (S.D. Ohio 1984). Given the possibility that plaintiffs may have breached their fiduciary duties by failing to disclose knowledge they had about the status of the Northwest loan, and the possibility that if they did breach their duties they may have forfeited their right to indemnification, the court cannot find that plaintiffs have demonstrated they are likely to be entitled to indemnification. Leaving aside the ultimate issue in the RTC action of whether plaintiffs were responsible for the $ 7 million loss, the court finds that plaintiffs have failed to demonstrate likely success in this action.
B. Irreparable Injury
Defendants claim that even if plaintiffs could demonstrate likely success on the merits, they cannot demonstrate irreparable injury solely through allegations of financial hardship or potential financial loss. The Third Circuit has made clear that in the context of an application for injunctive relief, "the injury must be of a peculiar nature, so that compensation in money cannot atone for it." A.O. Smith Corp., 530 F.2d 515, 525 (3rd Cir. 1976) (citations omitted). However, this principle is not to be read so broadly as to preclude a finding that the loss of a monetary recovery cannot constitute irreparable injury. Hoxworth, 903 F.2d at 206. Indeed, this court has the power "to protect a potential future damages remedy with a preliminary injunction" so long as the "traditional requirements for obtaining equitable relief" are met. Hoxworth v. Blinder, Robinson & Co., Inc., 903 F.2d 186, 197 (3rd Cir. 1990).
Plaintiffs argue that because CityFed faces potential liabilities in excess of its assets, they are unlikely to recoup any indemnification costs they are entitled to at the close of the RTC action, and will thereby sustain irreparable injury. Their concern is well-founded. As noted above, defendant explains that it has entered into an agreement with the RTC in yet a third action, RTC v. CityFed, No. 92-5261 (D.N.J.), pursuant to which CityFed agreed to abstain from certain expenditures, including advancement of plaintiffs' defense costs, before giving the RTC notice and an opportunity to object. In that suit alone, the RTC seeks damages in excess of $ 12 million, exceeding CityFed's total assets. In part because of this agreement, CityFed has been unable to reach an interim settlement with plaintiffs. Plaintiffs claim that defendants stated in settlement discussions that they would prefer advancing sums pursuant to a court order rather than under a settlement to avoid facing charges that they breached their fiduciary duties by agreeing to advance plaintiffs' costs. See Certification of Robert Elliott at P 6; Plf. Supp. Mem. at 10.
Nevertheless, the court declines to find that plaintiffs' potentially valid claims should be awarded priority over those of other creditors. Given the uncertainty of plaintiffs' ability to repay amounts advanced if they are ultimately unentitled to those amounts, the relief plaintiffs seek might well have the effect of giving priority to invalid claims, to the detriment of legitimate creditors. This could cause irreparable injury to innocent third parties holding valid claims against CityFed. In contrast, if CityFed is found liable for damages exceeding the value of its assets, plaintiffs may file their claim -- albeit contingent on the outcome of the RTC action -- to be evaluated along with those of other creditors. Although their ability to recover the full amount of their defense costs cannot be guaranteed, plaintiffs would still have the opportunity to seek reimbursement from CityFed when their entitlement becomes clear. In the meantime, CityFed's creditors will have been protected from further depletion of CityFed's assets by potentially unjustified payments to plaintiffs.
The court recognizes the hardship imposed upon plaintiffs by requiring them to bear the costs of their own defense until and unless they are adjudged entitled to indemnification. This hardship, however, in light of the competing risk of injuring innocent creditors and in light of the possibility that plaintiffs may recover on a valid indemnification claim at the conclusion of the RTC action, does not rise to the level of irreparable injury. "Failure to show a likelihood of success or a failure to demonstrate irreparable injury must necessarily result in the denial of a preliminary injunction." In re Arthur Treacher's Franchisee Litigation, 689 F.2d at 1143 (quoted in Morton v. Beyer, 822 F.2d 364, 371 (3rd Cir. 1987)). Because plaintiffs have failed to demonstrate both these elements, and because of the competing public policy considerations the court has noted in its discussion, the court cannot grant plaintiffs' application for injunctive relief.
For the foregoing reasons, plaintiffs' motion for a preliminary injunction or for summary judgment is denied.
H. LEE SAROKIN
U.S. District Judge
Date: May 19, 1994