By: Thomas S. Tripodianos Published: November 2014

Advance of Litigation Expenses for Corporation Director

Question.        Where there are issues of fact in a dispute over whether a director participated in alleged wrongful conduct, and acted in good faith on the corporation's behalf, is he entitled to advance of litigation expenses, including attorney fees?

Answer. Yes.

The Director founded the Corporation in 1964 and continued to be the president until 2009.  The Director also owned two adjacent commercial properties, Property A and Property B, where the Corporation operated its business.  It is alleged that The Director, as president of The Corporation, signed two leases for The Corporation's continued use of Property A and Property B. In both lease agreements, the Director signed the Lease as both the President of The Corporation, the tenant, and as a co-landlord.  The co-owners of the properties and current president of the Corporation are the Director’s children.

The Leases give the Corporation the exclusive and irrevocable option to buy the properties during the terms of the Leases, and the right of first refusal in the event of a bona fide offer to purchase by a third party.  Disputes have arisen amongst the tenant and the property owners as to rental payments, and the right of first refusal in a bid by the Corporation to purchase the property.  Allegations have been made against the Director involving breach of fiduciary duty.

The Director has requested reimbursement and the advancement of attorney's fees and costs in defending this action, pursuant to BCL §724(c), on the grounds that he is entitled to indemnification as a former officer and director of The Corporation.

The Director argues that he has denied any wrongdoing and raised issues of fact regarding whether his actions as president of The Corporation were in good faith pursuant to BCL 724(c). The Corporation argues that The Director is not entitled to indemnification and advanced legal fees because The Director admitted that his actions were not in the best interest of The Corporation and that he was balancing the interests of his son and his daughters pursuant to his personal "asset allocation" plan. Accordingly, plaintiff argues that pursuant to BCL 722(c), his actions were not in good faith or in the best interests of the Corporation.

Where there are issues of fact in a dispute over whether a director participated in alleged wrongful conduct and acted in good faith on behalf of the corporation, courts have generally permitted the relief of advanced litigation expenses, including attorney's fees, subject to reallocation at the end of the action pursuant to BCL 725(a).

The Director has defended this action and is requesting the advancement of legal fees pursuant to BCL 724. Accordingly, the Director is entitled to the advancement of attorney's fees pursuant to BCL 724(c).

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