Baker v. Health Mgmt. Systems Inc., DEFENDANTS-APPELLEES
| Decision Date | 01 August 2000 |
| Docket Number | DEFENDANTS-APPELLEES,Docket No. 00-7736,DEFENDANT-APPELLANT |
| Citation | 264 F.3d 144 |
| Parties | (2nd Cir. 2001) THOMAS BAKER, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, KAREN J. CONNELL, GLENN DIAMOND, MOANA DIAMOND, SCOTT FISHER, DANA FISHER, GEORGE SEIDEN, ANAND SHETTY, AHMAD FILLABI, ELIZABETH RONIS, THOMAS CAPS, EVELYN DIAMOND, TIM DAVIS, HERMAN FLEET, MICHAEL GOLDMAN, RAYMOND KIRSCHBAUM, PHIL LAWITZ, IRVING PUTTER, MIRIAM PUTTER, DONALD T. ROBERTS, VIRENDRA SHANGHAVI, AUGUST VRANCKEN, AYODELE ABIONA, ALI BADREDDINE, JOSEPH SCOGNAMILIO AND EDUARD KORSINSKY, PLAINTIFFS, v. HEALTH MANAGEMENT SYSTEMS, INC., PAUL KERZ, LAURENCE B. SIMON, RICHARD H. STOWE, JOHN W. MCINTYRE, DONALD J. STAFFA, RUSSELL L. CARSON AND ROBERT M. HOLSTER,, v. PHILLIP SIEGEL, |
| Court | U.S. Court of Appeals — Second Circuit |
Defendant-appellant Phillip Siegel appeals from an order entered on May 12, 2000 in the United States District Court for the Southern District of New York (Richard M. Berman, Judge), granting in part his application for indemnification from defendant-appellee Health Management Systems, Inc., but denying his application for reimbursement for attorneys' fees and costs incurred in bringing the application for indemnification. Siegel made his application pursuant to, inter alia, New York Business Corporation Law § 724, which allows a court to order indemnification to a corporate officer who is forced to defend against litigation by virtue of his position as a corporate officer.
Question Certified.
Dennis J. Block, Cadwalader, Wickersham & Taft, New York, New York, (Michelle L. Roth, Jasmine Khalili on the brief) for Appellant.
Howard I. Rhine, Coleman Rhine & Goodwin, Llp, New York, New York, for Appellee.
Before: Jacobs, Parker, Katzmann Circuit Judges.
Defendant-appellant Phillip Siegel appeals from an order entered on May 12, 2000 in the United States District Court for the Southern District of New York (Richard M. Berman, Judge), granting in part his application for indemnification from defendant-appellee Health Management Systems, Inc. ("HMS") (and other individual defendants), but denying his application for reimbursement for attorneys' fees and costs incurred in bringing the application for indemnification (also known as "fees on fees"). Siegel made his application pursuant to, inter alia, New York Business Corporation Law § 724 (McKinney 1986 & Supp. 2000), which allows the court to order indemnification to a corporate officer who is forced to defend against litigation by virtue of his position as a corporate officer. In total, Siegel claimed $84,825.15 in fees and costs.
The district court awarded Siegel indemnification against HMS for $60,959.50 in attorneys' fees and $6,677.23 in expenses and disallowed $17,147.64 on the grounds that these fees and costs were incurred in attempting to secure indemnification. See In re Health Mgmt. Sys., Inc. Secs. Litig. ("HMS Litig."), 82 F. Supp. 2d 227, 232 (S.D.N.Y. 2000). On appeal, Siegel argues that (1) the district court should have ordered reimbursement for all fees and expenses incurred in connection with his application for indemnification, because they were incurred in connection with his successful defense of the action and (2) the district court should have ordered reimbursement for all fees and expenses incurred in seeking indemnification because these fees were the result of HMS's bad faith conduct. We affirm all of the district court's factual findings, including its finding of no bad faith on the part of HMS. Therefore, we reject Siegel's second contention and affirm the district court's decision to deny Siegel's reimbursement based on HMS's bad faith. Despite finding no bad faith on the part of HMS, Siegel's claim pursuant to New York Business Corporation Law §§ 722-24 for "fees on fees" remains. Because of an absence of New York Court of Appeals case law interpreting New York Business Corporation Law §§ 722- 724 (McKinney 1986 & Supp. 2000), we certify the following question to the New York Court of Appeals: Where a corporate officer is "successful" in the defense of an underlying action, within the meaning of New York Business Corporation Law § 723(a), where the corporation unsuccessfully contests the duty to indemnify and contests with partial success the amount of indemnification, and where there is no bad faith on the part of the corporation, does the phrase "attorneys' fees actually and necessarily incurred as a result of such action or proceeding," as used in New York Business Corporation Law § 722(a), provide for recovery of reasonable fees incurred by a corporate officer in making an application for fees before a court (as authorized by New York Business Corporation Law § 724(a))?
In early 1997, plaintiffs filed several securities fraud class actions against the defendants, Health Management Systems, Inc. and certain officers and directors of HMS, including appellant Phillip Siegel. The complaints alleged that defendants disseminated false and misleading statements designed unlawfully to inflate the price of HMS stock. Eventually, these actions were consolidated.
HMS hired Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden") as its counsel for defending this action, with the firm of Coleman & Rhine ("Coleman") to act as co-counsel. Skadden and Coleman represented the individual defendants as well, except for Siegel, who hired Dennis Block, then of the firm Weil, Gotshal & Manges LLP.1 Siegel felt that there were certain unique facts that set his situation apart from the other individual defendants. First, Siegel joined HMS in May 1996, which was approximately three months after the beginning date of the class period. See In re Health Mgmt. Sys., Inc. Secs. Litig., No. 97 CIV. 1865(HB), 1998 WL 283286, at *1 (S.D.N.Y. June 1, 1998). Second, Siegel actually purchased shares of HMS stock during the class period whereas others did not.
Skadden prepared and filed a motion to dismiss the complaint on behalf of HMS and the individual defendants, while Block filed a memorandum of law on Siegel's behalf highlighting the unique circumstances pertaining to him.2 On June 1 1998, Judge Baer3 granted the defendants' motion to dismiss, with leave to replead. See In re HMS, 1998 WL 283286, at *1. On August 6, 1998, plaintiffs and Siegel entered into a stipulation of dismissal with prejudice as to all claims against Siegel. Judge Baer signed the order granting dismissal on August 10, 1998. The action continued against the other defendants and was eventually settled for in excess of four million dollars.
On June 2, 1998, Block, on behalf of Siegel, wrote to Coleman & Rhine to seek indemnification under New York Business Corporation Law section 723 for legal services provided to Phillip Siegel in defense of the dismissed action. Receiving no response, Block reiterated this request in a letter dated August 6, 1998, the same day as the stipulated dismissal was ordered with prejudice. On August 13, 1998, Coleman & Rhine responded to this request, and declined to forward any fees, stating that "considerations of necessity and reasonableness have bearing on the issue of indemnification for legal fees."
In November 1998, Siegel moved for indemnification for legal fees incurred defending the action, pursuant to New York Business Corporation Law ("NYBCL") § 724(a) and HMS By-Law VIII.5. See HMS Litig., 82 F. Supp. 2d at 229. Siegel claimed $84,825.15 in fees and costs.
In October 1998, HMS, through Coleman & Rhine, opposed the motion for indemnification, claiming that these claimed fees were unreasonably excessive and unnecessary because HMS had retained Skadden as counsel for all defendants. HMS contended that the work of Siegel's counsel was duplicative of Skadden's work, and that $5,000 should be enough to cover any reasonable fees. HMS also argued that the stipulation of dismissal entered into by Siegel and the plaintiffs, which included a provision that Siegel would not seek sanctions against the plaintiffs, provided a defense to Siegel's claim for indemnification.
The district court scheduled argument on the motion for June 11, 1999, but in response to a letter written by Coleman on June 10, 1999, the district court referred Siegel's motion to United States Magistrate Judge James C. Francis. Oral argument was held before Judge Francis on September 9, 1999. In the meantime, Cadwalader had sought discovery from Skadden, specifically seeking production of witnesses and documents. Coleman objected to this discovery and indicated to Magistrate Judge Francis that HMS sought no evidentiary hearing before the magistrate and that oral argument would be sufficient. According to Cadwalader, the Magistrate, in a teleconference, found that because HMS continued to contest the necessity and reasonableness of Siegel's separate counsel, HMS was required to produce certain documents. However, the discovery disputes between Cadwalader and Coleman continued. Additionally, Coleman, in correspondence with Cadwalader on August 10, 1999, stated that "HMS will not claim that it was not `necessary' for individual defendants to retain counsel."
During oral argument before Magistrate Judge Francis, HMS conceded that Siegel was "probably" entitled to more than the $5,000 cap set by HMS for indemnification to its corporate officers for individual representation. HMS continued to argue that Siegel's stipulation of dismissal waived his right to indemnification because the stipulation forfeited Siegel's right to seek sanctions against the plaintiffs for including him as a defendant.
On October 25, 1999, Magistrate Judge Francis issued a report and recommendation, granting in part Siegel's request for indemnification. Magistrate Judge...
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