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Cohen v. Southbridge Park

May 05, 2004


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, BER-L-3959-99.

Before Judges Pressler, Alley and Parker.

The opinion of the court was delivered by: Alley, J.A.D.


Argued March 2, 2004

An independent outside attorney prevailed in defending a suit brought against him on behalf of a corporation that claimed he committed malpractice as attorney for the corporation in another matter. The lawyer asserted that the corporation was required to indemnify him for the expenses of the suit on the basis that he is a"corporate agent," as that term is used in the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 to 16-1, specifically N.J.S.A. 14A:3-5(1)(a).

The requirement that a corporation indemnify a"corporate agent" is set forth in N.J.S.A. 14A:3-5(4), which essentially provides that a New Jersey corporation"shall indemnify a corporate agent against expenses to the extent that such corporate agent has been successful on the merits or otherwise in any proceeding referred to in subsections 14A:3-5(2) and 14A:3-5(3) or in defense of any claim, issue or matter therein." The trial judge ruled that the attorney was"a corporate agent" and thus entitled to such statutory indemnification. We reverse.


The attorney in this case is Stephen C. Muhlstock and his law firm is Gittleman, Muhlstock, Chewcaskie & Kim, to whom we collectively refer, unless the context otherwise requires, as"Muhlstock." Muhlstock was outside counsel for Southbridge Park, Inc. (Southbridge), a New Jersey business corporation whose purpose is to provide residences for shareholders at a 174 unit cooperative apartment building in Fort Lee known as The Plaza.

Beginning in 1988, C&R Realty and Management, Co., Inc. ("C&R") became The Plaza's managing agent. The property manager that C&R assigned to work at The Plaza was Anthony Pellosie, who had begun with C&R in 1987. In 1995, the property management agreement between Southbridge and C&R was in its last year, with a September 1 expiration date. A few months before that date, Southbridge's board of directors looked into alternate management arrangements for The Plaza. It decided in the end to hire Pellosie and another C&R employee as its property managers and the agreement between Southbridge and C&R came to an end.

About two years earlier, Muhlstock had been hired by Southbridge's board of directors as their attorney. Muhlstock and his firm had a number of other clients and engaged in a general practice that included litigation, real estate, matrimonial, and other legal work. The firm represented five to eight condominium and cooperative boards.

Pellosie left C&R and was in fact hired by Southbridge effective September 8, 1995. C&R then sued him for alleged breach of agreement, and Southbridge entered into an indemnification agreement with Pellosie. Muhlstock prepared that agreement, and he also prepared board resolutions and a conflict of interest waiver. When C&R asserted new claims in the litigation in October 1997, Muhlstock was replaced as counsel for Pellosie in that litigation because it appeared he would be a witness with respect to those new claims.

On May 3, 1999, plaintiffs brought a derivative action on behalf of Southbridge alleging conspiracy and fraud in the hiring of a property manager. In that action, plaintiffs claimed that Muhlstock committed legal malpractice in representing the corporation in the hiring of a manager. Among other things, that suit sought a declaration that the indemnification agreement with Pellosie had been unlawfully entered into by Southbridge. The sixth count of the complaint contained a claim for damages against Muhlstock for counsel fees that Muhlstock received for representing Pellosie in the other litigation. Plaintiffs amended their complaint a second and third time on May 11, 1999, and January 31, 2000. The trial court consolidated the derivative action with the C&R action, against which Southbridge had provided indemnification to Pellosie for his legal expenses.

At the trial of the claims in the derivative action, the court dismissed the claims against Muhlstock. When Muhlstock moved to have Southbridge indemnify it for the counsel fees and disbursements incurred in defending the malpractice claim, his motion was granted on the basis that he was the"corporate agent" of Southbridge as that term is used in N.J.S.A. 14A:3-5(1)(a).

In granting Muhlstock's indemnification motion, the trial court noted that N.J.S.A. 14A:3-5(4)"provides for the indemnification of a corporate agent." The court then rejected Southbridge's contention that Muhlstock was"merely an independent contractor and not an agent," reasoning instead that,"[b]oth intuitively and as a matter of law, a corporate attorney advising a corporate client on matters relating to the employment of other corporate employees and other corporate agents is clearly a corporate agent within the meaning of the statute."

Muhlstock asserts that the trial court reached the correct result when it concluded that he was Southbridge's"corporate agent" for purposes of N.J.S.A. 14A:3-5(4). He argues that an"attorney-client relationship is always considered that of principal-agent pursuant to New Jersey and other persuasive law," and thus that he unquestionably is entitled to the statutory indemnification that is available to"corporate agents" under N.J.S.A. 14A:3-5(4).


In Witco Corp. v. Beekhuis, 38 F.3d 682, 691 (3d Cir. 1994), the Third Circuit noted that modern corporate indemnification legislation is designed 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 they have served if they are vindicated." Beyond that, its larger 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."

[quoting Merritt-Chapman & Scott Corp. v. Wolfson, 321 A.2d 138, 141 (Del. Super. 1974) (quoting Folk, The Delaware General Corporation Law 98 (1972)) (citations omitted).]

Here, of course, the issue is not whether indemnification for corporate officials should be approved, because our Legislature has already approved it. Rather, our inquiry is whether Muhlstock comes within that class of persons the Legislature has deemed entitled to indemnification. Specifically, the focal point of our analysis is the statutory language"corporate agent," since if Muhlstock, though serving as an outside attorney, was acting as a corporate agent within the statute's meaning, he was entitled to indemnification pursuant to its terms, and otherwise he was not.

It is firmly established that"[t]he first step in determining the Legislature's intent is to look at the plain language of the statute." Hubbard v. Reed, 168 N.J. 387, 392 (2001). Furthermore,"when the language of a statute is clear on its face,'the sole function of the courts is to enforce it according to its terms.'" Ibid. (quoting Sheeran v. Nationwide Mut. Ins. Co., 80 N.J. 548, 556 (1979)) (internal citations omitted).

In our view, however, this is not a"plain language" case, and Muhlstock's argument oversimplifies the lawyer-client relationship. While"[i]t is clear that an attorney acts as an agent for his client," Hewitt v. Allen Canning Co., 321 N.J. Super. 178, 184 (App. Div.), certif. denied, 161 N.J. 335 (1999), it is also true that a"lawyer, although required to work for the client's benefit, has considerable independence in doing so." Restatement (Third) of The Law Governing Lawyers, Introductory Note to Chapter 2, The Client-Lawyer Relationship (2000). Thus,"attorneys are also independent contractors as well as agents." McCarthy v. Recordex Serv., Inc., 80 F.3d 842, 853 (3d Cir.), cert. denied, 519 U.S. 825, 117 S. Ct. 86, 136 L. Ed. 2d 42 (1996); see Restatement (Second) ...

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