Judge Robinson boldly went where no North Carolina Judge writing published Opinions had gone before last month in the case of Wheeler v. Wheeler, 2018NCBC117. The subject was a corporate officer’s right to the advancement of legal fees incurred in defending against a lawsuit.
Judge Robinson noted that there was only “one case in which our appellate courts have dealt with the issue of advancement.” Op. ¶1 & n.1. That case was inapplicable to the Wheeler decision.
Advancement (the right for an officer, director, agent or employee of a corporation to be reimbursed for expenses incurred in litigation) is governed by G.S. §55-8-53. The right to be indemnified for a liability resulting from such litigation is governed by G.S. §55-8-51.
The corporation of which Plaintiff (Gray Wheeler) was an officer, director, and shareholder had provided for advancement and indemnification rights in its Bylaws. It was the Gray Wheeler who was seeking advancement. The corporation refused to advance his legal fees and expenses, and Wheeler moved for a preliminary injunction forcing the Defendant corporation to pay his fees and expenses.
Why Was A Plaintiff Seeking Advancement?
Plaintiff Wheeler initiated the lawsuit before the Business Court, alleging a breach of fiduciary duty by one of his co-directors and shareholders, and also seeking dissolution of the corporation. There was no advancement due for those claims.
Instead, Plaintiff sought advancement for counterclaims brought against him as well as a separate arbitration filed against him.
The corporation took the position that counterclaims are not “an action, suit or proceeding” for which advancement is allowed.
Judge Robinson didn’t waste much time in rejecting that argument, holding that the language in the Bylaws “contained no language excluding counterclaims . . . .” Op. ¶80.
The Relationship Between Advancement And Indemnification
The General Statutes prohibit indemnification:
(1) In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or
(2) In connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him.
N.C. Gen. Stat. §55-8-51(d). Also, a corporation may not provide indemnification to a person for “activities which were at the time taken known or believed by him to be clearly in conflict with the bests interests of the corporation.” N.C. Gen. Stat. §58-8-57(a).
The Defendant corporation argued that it was not obligated to advance Wheeler’s litigation expenses and fees. It said it would not be permitted to indemnify him because Wheeler had to have known that the conduct at issue was in conflict with the best interests of the corporation. In other words, its position was that the right to advancement is dependent on the right to indemnification.
Not so, said Judge Robinson, looking to the more well-developed Delaware law on this subject. He held:
The Delaware Supreme Court has held that “[a]lthough the right[s] to indemnification and advancement are correlative, they are separate and distinct legal actions.” Generally, “[t]he right to advancement is not dependent on the right to indemnification.
Op. ¶58 (citations omitted).
Can A Corporate Officer Or Director Ever Obtain An Injunction To Force Advancement?
So after finding that Plaintiff Wheeler had shown a clear likelihood that he was likely to succeed on the merits on his claim for advancement, why didn’t Judge Robinson enter an injunction requiring the corporation to advance his legal fees?
The short answer is that Gray Wheeler hadn’t shown that he would be irreparably harmed if he did not receive an injunction. On this point, there was no guidance from the Delaware courts because advancement claims in that State “are decided in separate, stand-alone proceedings and/or on summary judgment, not by means of a preliminary injunction” Op. ¶87. That is a function of the Delaware statute governing advancement. Del. Code Ann. tit. 8, § 145(k).
Wheeler’s pursuit of an injunction to assure his advancement rights was an issue of first impression in North Carolina. Op. ¶86.
The injunction sought by the Plaintiff was a mandatory injunction as opposed to the more common prohibitory injunction. If you missed learning about that distinction (maybe it was in first year Civil Procedure), here is the difference:
‘A prohibitory injunction seeks to preserve the status quo, until the rights of the parties can be determined, by restraining the party enjoined from doing particular acts.’. . . In contrast, ‘[a] mandatory injunction is intended to restore a status quo and to that end requires a party to perform a positive act.’
The burden for obtaining a mandatory injunction is greater than that for a prohibitory injunction. Op. ¶101. Thus, Wheeler was required to” show that the injury was “immediate, pressing, irreparable, and clearly established.” Op. ¶84.
Wheeler ran into the well-established principle that “where an injury may be compensated by the payment of monetary damages, the injury is not irreparable, and an injunction should not issue.” Op. ¶92.
Judge Robinson did not rule out the possibility that a person denied advancement might suffer irreparable harm warranting an injunction.
But the Plaintiff’s contention that he lacked the funds to “continue effectively defending himself” were not enough. Wheeler said that his lawyers had already billed him more than half a million dollars for his defense.
Judge Robinson observed that Wheeler had “submitted no evidence showing that he has been unable to pay these fees as they became and become due.” Op. ¶96. Wheeler’s only effort in establishing his inability to pay his lawyers was to say that his net worth was “concentrated in illiquid assets. That “illiquidity” was said to be tied up in an apartment he owned in New York City, a house in Asheville, NC, and his and his wife’s 401(k) accounts.
Judge Robinson was unimpressed by this claimed illiquidity, and said that he was “unable to obtain loans or borrow against any of his illiquid assets to pay his legal fees as they become due.”
The Judge also brushed aside the argument that Wheeler’s litigation strategy had been affected because he could not afford to “take a more aggressive approach with expert witnesses.” Op. ¶100. Assuming that “more aggressive” meant “more expensive,” Wheeler hadn’t identified
who the “more costly expert witnesses” are, the claims on which they would testify, and how this testimony might improve Gray’s chances of ultimate success in defense of the . . . claims against him. Op. ¶100.
Wheeler Was Not Entitled To Advancement For Some Of The Claims Made Against Him.
The corporate Bylaws provided that Wheeler was entitled to indemnification for claims brought “by reason of the fact” that he was acting as an officer or a director. The “by reason of the fact” language is contained in the Delaware indemnification statute (Del. Code. Ann. tit. 8, §145(a)-(b)), so Judge Robinson looked to Delaware law for interpretation of this phrase.
“[I]n order for one to be deemed a party to a proceeding ‘by
reason of the fact’ of one’s corporate position, there must be a ‘causal connection or nexus’ between the underlying proceedings and ‘the corporate function or “official [corporate] capacity. . . . ‘The requisite connection is established ‘if the corporate powers were used or necessary for the commission of the alleged misconduct.’
Op. ¶72 (citations omitted).
The claim in question involved Wheeler’s breach of his obligation to tender his shares of the corporation per a Buy-Sell Agreement. It therefore lacked any causal relationship to his status as a corporate officer or director.