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RIDDER v. CITYFED FIN. CORP.

May 19, 1994

WILLEM RIDDER, LYNDON C. MERKLE, JOHN T. HURST and GREGORY DEVANY, Plaintiffs,
v.
CITYFED FINANCIAL CORPORATION, a Delaware Corporation, Defendant.



The opinion of the court was delivered by: H. LEE SAROKIN

 Sarokin, District Judge

 Before the court is plaintiff's motion for a preliminary injunction or, in the alternative, for summary judgment.

 Introduction

 The rash of savings and loan failures throughout the country has prompted a number of suits against officers and directors of those institutions alleging their responsibility for such failures and the concomitant losses sustained by depositors and other claimants. In many instances, as in this case, officers and directors have been promised indemnification and the advancement of defense costs if named in lawsuits arising from the performance of their duties. In those instances where the institutions have been placed in receivership or are threatened with insolvency, conflicting public policy considerations have arisen.

 If agreements or by-laws to provide defense costs are not honored, the immediate effect may be to pauperize those who have been sued, even though ultimately they may not be found liable. Also, they may be denied the right to reimbursement even if they are entitled, if the institution's limited assets in the interim are dissipated to pay other claims. Furthermore, the ultimate effect of such disavowals may be the discouragement of those who would otherwise serve in these positions in the future. Knowledge that officers and directors may be required to advance their own defense costs in such actions and run the risk that they may not be reimbursed, may well have a chilling effect on the acceptance of such positions by otherwise qualified persons.

 The competing considerations, however, may be even more persuasive. Most of the allegations in these matters seek to fasten blame on the officers and directors predicated upon claims of mismanagement and fraud. Insolvency by its very nature envisions a limited fund to meet the claims of creditors. Creditors could properly contend that the limited assets should not be dissipated in defending those who are or may be responsible for the losses and ultimate insolvency. Indeed, current directors argue that the advancement of such defense costs would constitute a breach of their fiduciary duties -- that priority should not be given to defending those who are charged with wrongdoing in preference to the multitude of totally innocent claimants.

 Thus, even in the face of a clear and unambiguous legal obligation, it may not be appropriate to enforce it. Receiverships and insolvency contemplate and allow for the rejection of valid legal obligations. In this court's view, the equitable considerations which apply in considering applications for preliminary injunctive relief should apply here. The court should consider:

 1) Whether the underlying claim against the officer or director is frivolous or likely to succeed;

 2) Whether requiring the individual to advance defense costs constitutes irreparable injury because of that individual's inability to provide or raise the necessary funds;

 3. Whether advancing defense costs causes irreparable injury to the institution or its creditors because of the depletion of the limited fund and assets available;

 4) Whether if funds are advanced, their reimbursement, if required, can be guaranteed or secured;

 5) What role the competing public policy considerations outlined above should play in determining whether to direct or deny the advancement of such costs.

 Background

 This suit is an action by four former officers and employees of a subsidiary of defendant CityFed Financial Services Corporation ("CityFed") to compel CityFed to advance to plaintiffs their reasonable attorneys' fees and defense costs incurred in a related action also before this court, Resolution Trust Corp. v. Fidelity & Deposit Co. of Maryland, et al., 92-1003(HLS) (the "RTC action"). Plaintiffs claim that CityFed's Bylaws require it to advance to them their reasonable defense costs in the RTC action as those costs are incurred. They move for an injunction requiring CityFed to advance those fees and costs or, in the alternative, for summary judgment on the issue of CityFed's duty to advance the fees and costs.

 CityFed argues in opposition that plaintiffs are not presently entitled to advancement of their attorneys' fees and defense costs because there is evidence that plaintiffs have engaged in misconduct that would vitiate their right to indemnification under CityFed's bylaws. CityFed further argues that because it is currently a defendant in numerous suits involving damage claims far exceeding the value of its total assets, and in light of the evidence that plaintiffs may have engaged in misconduct, the fiduciary duty its directors owe to shareholders and creditors allows or requires them to refrain from advancing plaintiff's attorneys' fees and defense costs at this time. *fn1" Having set forth this basic explanation of the motion, the court will describe the relevant portions of the complex factual history underlying this action and the related RTC action.

 The Parties

 Defendant CityFed, a Delaware corporation, was from November 1984 to December 1989 a savings and loan holding company and was sole owner of City Federal Savings Bank ("City Federal"), the largest savings and loan association in New Jersey in 1988. In December 1988, City Federal was seized by the Office of Thrift Supervision ("OTS"). Declaration of John W. Atherton, Jr., President of CityFed, P 2 (hereinafter "Atherton Dec."). The Resolution Trust Corporation ("RTC") was appointed receiver of City Federal. Affidavit of Willem Ridder, P 12 (hereinafter "Ridder Aff."). Since the OTS seized City Federal, CityFed's activities have been focused on "marshalling its assets and resolving its liabilities." Def. Mem. at 3. It maintains only one ...


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