In re Aguilar

• Decision Date: 13 April 2011
• Docket Number: No. 08–10–00265–CV.,08–10–00265–CV.
• Citation: 344 S.W.3d 41
• Parties: In re: Lorenzo AGUILAR, Relator.
• Court: Texas Court of Appeals

344 S.W.3d 41

In re: Lorenzo AGUILAR, Relator.

No. 08–10–00265–CV.

Court of Appeals of Texas, El Paso.

April 13, 2011.

Jamie T. Wall, James & Haughland, P.C., El Paso, for Relator.Lane C. Reedman, Guevara, Baumann, Coldwell & Reedman, Steven L. Hughes, Mounce, Green, Myers, Safi, Paxson & Galatzan, Steven C. James, Attorney at Law, Thomas E. Stanton, El Paso, for Real Party in Interest.Before CHEW, C.J., McCLURE, J., and BARAJAS, C.J. (Ret.).

OPINION ON PETITION FOR WRIT OF MANDAMUS

ANN CRAWFORD McCLURE, Justice.

In this original proceeding of first impression, we must determine whether a writ of mandamus should issue because the trial court denied a motion to compel advancement of litigation expenses. We will conditionally grant the writ.

FACTUAL SUMMARY

In 1992, Lorenzo Aguilar and Eugenio Mesta formed Perspectiva Group, Inc., a company that furnishes architectural, construction, and construction management services.¹ Aguilar was an officer and director of Perspectiva. In 2006, Perspectiva allegedly entered into a joint venture agreement with Native Contractors, Inc., whereby the two companies were to split the profits and losses from a contract to refurbish the Bay Pines National Cemetery. Native later sued Perspectiva, Aguilar, and Mesta, claiming that the defendants had breached the joint venture agreement and their fiduciary duties.

Perspectiva settled with Native and received an assignment of Native's claims. It then filed cross-claims against Aguilar and certain Perspectiva employees, including Aguilar's son, for conspiracy and breach of fiduciary duties. Perspectiva alleges that the other employees, with Aguilar's knowledge, formed a company for the purpose of moonlighting on the cemetery project. These same employees “double-dipped” on the project by having their company bill for some of the services that they were performing as employees as Perspectiva. The employees allegedly shared part of their company's revenue from the project with Aguilar.

Perspectiva also filed a separate suit against Aguilar and others. In this suit, Perspectiva accused Aguilar's daughter, who was an employee of Perspectiva, of forming a company that competed with Perspectiva. Aguilar allegedly knew that his daughter's company received subcontracts from Perspectiva and that those subcontracts involved conflicts of interest and moonlighting. The two suits were eventually consolidated into one cause.

Citing Section 12.4 of Perspectiva's bylaws, Aguilar's attorney sent Perspectiva's attorney a letter requesting that Perspectiva advance Aguilar's defense costs, including attorney's fees. Article 12 of Perspectiva's bylaws deals with indemnification of officers and directors who are parties to a legal proceeding. Section 12.1 requires Perspectiva to indemnify these persons against judgments and reasonable expenses under certain circumstances. Section 12.2 sets forth the standard of conduct that must be met to be entitled to indemnification. At a minimum, the person must have acted in good faith and under the reasonable belief that his or her actions were not opposed to Perspectiva's best interests. Section 12.4, which concerns advancement of expenses, reads in its entirety:

SECTION 12.4 Payment of Expenses. Reasonable expenses incurred by a person who was, is, or threatened to be made a named defendant or respondent in a Proceeding shall be paid or reimbursed by the Corporation, in advance of the final disposition of the Proceeding, and without determination of indemnification, after the Corporation receives a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article in a written undertaking by or on behalf of the person to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by law or Section 12.1 hereof. The written undertaking described above must be an unlimited general obligation of the person but need not be secured. The written undertaking may be accepted without reference to financial ability to make repayment.

Counsel's letter states that “Aguilar does not believe he has committed any breach of his fiduciary duty, is in titled [sic] to in indemnification [sic] per Section 12.1 of the bylaws, and in the event of a determination to the contrary, will undertake to repay those sums advanced to him as an unlimited general obligation.” When Perspectiva failed to respond to the letter, Aguilar filed a counterclaim against Perspectiva for indemnification and advancement of defense costs. He also filed a “motion to compel” Perspectiva to reimburse him for attorney's fees already incurred and to advance his future attorney's fees on a monthly basis.²

Thereafter, Perspectiva's board of directors voted not to advance Aguilar's defense costs. Perspectiva also filed a response to Aguilar's motion to compel advancement, objecting to the motion on procedural and substantive grounds.

During a hearing on Aguilar's motion, the trial judge concluded that Aguilar's entitlement to advancement turned on whether he had met the standard necessary for indemnification under Perspectiva's bylaws and whether he would have the ability to repay the advanced funds. After Aguilar refused to present any evidence on these issues, the judge denied the motion to compel.

STANDARD OF REVIEW

A writ of mandamus will issue only if the trial court clearly abused its discretion and if the relator has no adequate remedy by appeal. In re Prudential Ins. Co. of America, 148 S.W.3d 124, 135–36 (Tex.2004)(orig. proceeding). A court's erroneous legal conclusion, even on a matter of first impression, is an abuse of discretion. Huie v. DeShazo, 922 S.W.2d 920, 927–28 (Tex.1996)(orig. proceeding). Appeal following a trial is inadequate if the very act of proceeding to trial would defeat the substantive right at stake. In re McAllen Medical Center, Inc., 275 S.W.3d 458, 465 (Tex.2008)(orig. proceeding).

ADVANCEMENT OF LITIGATION EXPENSES

Article 2.02–1 of the Texas Business Corporation Act expressly allows Texas corporations to advance litigation expenses to its directors.³ The statutory language regarding advancement is nearly identical to Section 12.4 of Perspectiva's bylaws:

K. Reasonable expenses incurred by a director who was, is, or is threatened to be made a named defendant or respondent in a proceeding may be paid or reimbursed by the corporation, in advance of the final disposition of the proceeding and without the determination specified in Section F of this article [regarding how a determination of indemnification must be made] or the authorization or determination specified in Section G of this article [regarding authorization of indemnification], after the corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under this article and a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director against expenses incurred by him in connection with that proceeding is prohibited by ... this article....

L. The written undertaking required by Section K of this article must be an unlimited general obligation of the director but need not be secured. It may be accepted without reference to financial ability to make repayment.

Tex. Bus. Corp. Act Ann. art. 2.02–1(K), (L)(West 2003).⁴

There are no Texas cases concerning advancement under the Business Corporation Act or the Business Organizations Code. But the courts of Delaware have addressed advancement on numerous occasions. The Delaware Supreme Court has explained that indemnification encourages corporate service by protecting an official's personal financial resources from depletion by the expenses incurred during litigation that results from the official's service. Homestore, Inc. v. Tafeen, 888 A.2d 204, 211 (Del.Supr.2005). “Advancement is an especially important corollary to indemnification” because it provides corporate officials with immediate interim relief from the burden of paying for a defense. Id. “Although the right to indemnification and advancement are correlative, they are separate and distinct legal actions.” Id. at 212. The right to advancement is not dependent on the right to indemnification. Id. “A now long line of recent cases enforces mandatory advancement provisions. These cases all stand for the proposition that a ... bylaw ... provision mandating advancement in no way renders the right to advances dependent upon the right to indemnity.” Stephen A. Radin, “ Sinners Who Find Religion”: Advancement of Litigation Expenses to Corporate Officials Accused of Wrongdoing, 25 Rev. Litig. 251, 268–69 (2006)(internal quotation marks omitted).

Breach of Fiduciary Duty

In denying Aguilar's request for advancement, Perspectiva's board stated that Aguilar has unclean hands because of his breaches of his fiduciary duties. Perspectiva presented evidence on this issue at the hearing on the motion to compel, and Aguilar refused to submit any opposing evidence.

Under Delaware law, advancement is allowed even when the official seeking advancement is being sued by the corporation that must advance the litigation expenses. “Delaware case law is replete with insider trading cases in which executives' expenses are advanced despite allegations of defrauding the corporation or its stockholders of millions of dollars.” James River Mgmt. Co., Inc. v. Kehoe, 674 F.Supp.2d 745, 750 (E.D.Va.2009). Advancement claims are frequently granted when, as in this case, the corporation is suing an official for breach of fiduciary duty. See id., citing...