Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
2-9-1995
Ridder vs. CityFed Financial
Precedential or Non-Precedential:
Docket 94-5343
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Recommended Citation
"Ridder vs. CityFed Financial" (1995). 1995 Decisions. Paper 36.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/36
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-5343
WILLEM RIDDER, LYNDON C. MERKLE,
JOHN T. HURST, GREGORY DEVANY,
Appellants
v.
CITYFED FINANCIAL CORPORATION, a
Delaware Corporation
On Appeal from the United States District Court
for the District of New Jersey
(D. C. Civil No. 93-1676)
Argued September 2l, l994
BEFORE: GREENBERG and ROTH, Circuit Judges, and FULLAM*
District Judge
(Filed: February 9, l995)
* Honorable John P. Fullam, senior district judge for the
Eastern District of Pennsylvania, sitting by designation.
Richard Harrington (argued)
Chandler Wood, Harrington & Maffly
lll Sutter Street, Suite l900
San Francisco, CA 94l04
Michael A. Saffer
Chapman, Henkoff, Kessler, Peduto & Saffer
425 Eagle Rock Avenue
P.O. Box F
Roselind, NJ 07068
Attorneys for Appellant
Ronald W. Stevens (argued)
Matthew D. Anhut
Kirkpatrick & Lockhart
l800 M Street
South Lobby, 9th Floor
Washington D.C. 20036
William C. Cagney
Lane & Mittendorf
499 Thornall Street
Edison, N.J. 08837
Attorneys for Appellee
OPINION OF THE COURT
FULLAM, District Judge
The appellants, Willem Ridder, Lyndon C. Merkle, John
T. Hurst and Gregory DeVany, were employed by City Collateral and
Financial Services, Inc. a wholly owned subsidiary of City
Federal Savings Bank, which in turn was the wholly owned
subsidiary of appellee CityFed Financial Corporation ("CityFed"),
a Delaware corporation now in receivership. Resolution Trust
Corporation ("RTC"), as receiver for CityFed, has sued the
appellants in a companion case in the United States District
Court for the District of New Jersey, Resolution Trust Corp. v.
Fidelity & Deposit Co. of Maryland, et al., case No. 92-
l003(D.N.J.), asserting that the appellants committed various
frauds and breaches of their fiduciary duty to their employer.
Specifically, the RTC asserts that appellants (l) exceeded their
authority by approving loans to Northwest Mortgage Co., Inc., (2)
concealed Northwest's default from CityFed's credit committee,
(3) misrepresented to the credit committee the status of the
Northwest line of credit, (4) misstated to the committee the
risks associated with the Northwest loan, (5) concealed
Northwest's criminal activity from CityFed, (6) falsified City
Collateral records, and (7) improperly divulged confidential
information for personal gain.
Upon being served with the complaint in the RTC action,
appellants made demand upon CityFed to advance funds for
attorneys fees they would incur in defending the RTC litigation.
CityFed refused, whereupon appellants brought this action to
compel CityFed to advance attorneys fees to them. Plaintiff
sought a preliminary injunction to obtain immediate payment, and
also filed a motion for summary judgment. After a hearing, the
district court denied both motions, and appellants timely filed
this appeal.
Article XI of CityFed's by-laws requires CityFed to
indemnify and hold harmless all employees sued or threatened to
be sued by reason of such employment by CityFed or any of its
subsidiaries, "to the fullest extent authorized by the Delaware
corporation law", and specifically provides that the right to
indemnity "shall include the right to be paid the expenses
incurred in defending any such proceeding in advance of its final
disposition; provided, however that, if the Delaware Corporation
Law so requires [it does] the payment of such expenses ... shall
be made only upon delivery to the corporation of an undertaking
... to repay all amounts so advanced if it shall ultimately be
determined that such employee is not entitled to be indemnified."
[Emphasis added.] These by-law provisions are substantially
identical to the provisions of the Delaware Corporation Law on
the subject.
The district court denied the injunction sought by
appellants for two reasons. Because of the perceived strength of
the RTC's case against the appellants in the related litigation,
the court concluded that appellants had failed to demonstrate a
likelihood of success on the merits. And, in view of the fact
that CityFed is in receivership and the rights of other creditors
are implicated, the court felt that the harm to appellants from
denial of the injunction was outweighed by the public interest in
assuring equal treatment to all of CityFed's creditors, and that
appellants' claim should not be accorded priority by the issuance
of a preliminary injunction. We conclude that neither reason
suffices to justify denial of the relief plainly mandated by the
by-laws and the Delaware statute.
The issue before the district court was not whether
appellants were likely to prevail in the RTC litigation, but
whether they were likely to prevail in their assertion that
CityFed should advance the costs of defense. Under Delaware law,
appellants' right to receive the costs of defense in advance does
not depend upon the merits of the claims asserted against them,
and is separate and distinct from any right of indemnification
they may later be able to establish. Citadel Holding Corp. v.
Roven, 603 A.2d 8l8 (Del. l992); Salaman v. National Media Corp.,
No. C.A. 92C-0l-l6l, l994 WL465534 (Del. Super. July 22, l994).
See Joseph Warren Bishop, Jr., Law of Corporate Officers and
Directors Indemnification and Insurance, ¶6.27 (l98l & Supp.
l993). Indeed, the provisions in both Article XI of CityFed's
by-laws and §l45(e) of the Delaware corporation law, conditioning
the obligation to advance defense costs upon an undertaking "to
repay such amount if it shall ultimately be determined that [the
officer] is not entitled to be indemnified by the corporation"
leaves no room for argument on that score.
CityFed urges us to adopt the approach taken by the
district court in Fidelity Federal Savings & Loan Assn v.
Felicetti, 830 F.Supp. 262 (E.D. Pa. l993), and rule that,
notwithstanding the by-law provision, CityFed was justified in
refusing to advance defense costs because of "the overriding duty
of the directors to act in the best interests of the
corporation". Id., at 269. We respectfully disagree. Given a
choice between decisions of the appellate courts of Delaware and
courts of other jurisdictions, on issues of Delaware law, this
court is plainly required to follow the decisions of the Delaware
courts. Moreover, we find the reasoning in Felicetti
unpersuasive. Rarely, if ever, could it be a breach of fiduciary
duty on the part of corporate directors to comply with the
requirements of the corporation's by-laws, as expressly
authorized by statute.
The statutory provisions authorizing the advancement of
defense costs, conditioned upon an agreement to repay if a right
of indemnification is not later established, plainly reflect a
legislative determination to avoid deterring qualified persons
from accepting responsible positions with financial institutions
for fear of incurring liabilities greatly in excess of their
means, and to enhance the reliability of litigation-outcomes
involving directors and officers of corporations by assuring a
level playing field. It is not the province of judges to second-
guess these policy determinations.
Appellants made a strong showing that, unless defense
costs were advanced to them, their ability to defend the RTC
action would be irreparably harmed. Appellee made no contrary
showing, and the district court did not base its holding upon the
absence of irreparable harm, but rather upon a comparison between
the harm to appellants and the perceived harm to other creditors
of CityFed. Here again, however, we conclude that the district
court addressed the wrong issue. The only issue before the
district court was whether appellants were entitled to advance
payment of the cost of defense of the RTC action. The
insolvency proceeding itself was not before the district court,
and the impact, if any, of a grant of injunctive relief was not
only a matter for other tribunals to decide, but, on this record,
purely speculative.
We conclude that the appellants are entitled to have
their costs of defense advanced to them, as a matter of law. The
order appealed from will therefore be reversed, with instructions
to issue an injunction requiring appellee to advance such defense
costs as the parties by agreement, or the district court upon
further proceedings, determines to be reasonable.