In re Health Management Systems, Inc. Securities

• Decision Date: 04 February 2000
• Docket Number: No. 97 CIV. 1865 RMB JCF.,97 CIV. 1865 RMB JCF.
• Citation: 82 F.Supp.2d 227
• Parties: In re HEALTH MANAGEMENT SYSTEMS, INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

82 F.Supp.2d 227

In re HEALTH MANAGEMENT SYSTEMS, INC. SECURITIES LITIGATION.

No. 97 CIV. 1865 RMB JCF.

United States District Court, S.D. New York.

February 4, 2000.

Neil L. Zola, Wolf Haldenstein Adler Freeman & Herz, New York, NY, Daniel J. Dolcetti, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Mel E. Lifshitz, Bernstein Liebhard & Lifshitz, New York, NY, Michael Jaffe, Wolfe Haldenstein Adler Freeman, & Herz LLP, New York, NY, Sharon Levine Mirsky, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Richard S. Schiffrin, Schiffrin & Craig, Ltd., Bala Cynwyd, PA, Nicholas E. Chimicles, Chimicles, Jacobsen & Tikellis, Haverford, PA, Mark D. Smilow, Weiss & Yourman, New York, NY, Andrew L. Barroway, Schiffrin & Barroway, LLP, Bala Cynwyd, PA, David-Kessler, Schiffrin & Craig Ltd., Bala Cynwyd, PA, for Thomas Baker, Karen J. Connell, Glen Diamond, Moana Diamond, Scott Fisher, George Seiden, Anand Shetty, Ahmad Fillabi, Elizabeth Ronis, Evelyn Diamond, Tim Davis, Herman Fleet, Michael Goldman, Raymond Kirschbaum, Joseph Scognamilio, Eduard Korsinsky.

Neil L. Zola, Wolf Haldenstein Adler Freeman & Herz, New York, NY, Daniel J. Dolcetti, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Andrew L. Barroway, Schiffrin & Barroway, LLP, Bala Cynwyd, PA, David-Kessler, Schiffrin & Craig Ltd., Bala Cynwyd, PA, for Dana Fisher.

Daniel J. Dolcetti, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Mel E. Lifshitz, Bernstein Liebhard & Lifshitz, New York, NY, Michael Jaffe, Wolfe Haldenstein Adler Freeman, & Herz LLP, New York, NY, Sharon Levine Mirsky, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Richard S. Schiffrin, Schiffrin & Craig, Ltd., Bala Cynwyd, PA, Nicholas E. Chimicles, Chimicles, Jacobsen & Tikellis, Haverford, PA, Mark D. Smilow, Weiss & Yourman, New York, NY, Andrew L. Barroway, Schiffrin & Barroway, LLP, Bala Cynwyd, PA, David-Kessler, Schiffrin & Craig Ltd., Bala Cynwyd, PA, for Thomas Caps.

Neil L. Zola, Wolf Haldenstein Adler Freeman & Herz, New York, NY, Daniel J. Dolcetti, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Mel E. Lifshitz, Bernstein Liebhard & Lifshitz, New York, NY, Michael Jaffe, Wolfe Haldenstein Adler Freeman, & Herz LLP, New York, NY, Sharon Levine Mirsky, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Nicholas E. Chimicles, Chimicles, Jacobsen & Tikellis, Haverford, PA, Mark D. Smilow, Weiss & Yourman, New York, NY, Andrew L. Barroway, Schiffrin & Barroway, LLP, Bala Cynwyd, PA, David-Kessler, Schiffrin & Craig Ltd., Bala Cynwyd, PA, for Phil Lawitz, David Ornduff, Irving Putter, Miriam Putter, Donald T. Roberts, Virendra Sanghavi, August Vrancken, David Wright, Ayodele Abiona, Ali Badreddine.

Peter E. Calamari, Hertzog, Calamari & Gleason, New York, NY, Robert L. Sills, Reboul, Macmurray et al., New York, NY, Dennis J. Block, Weil, Gotshal & Manges LLP, New York, NY, David M. Broadsky, Schulte Roth & Zabel, LLP, New York, NY, Howard I. Rhine, Coleman, Rhine & Goodwin LLP, New York, NY, Jonathan J. Lerner, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Health Management Systems, Inc., Paul J. Kerz, Richard H. Stowe, John W. McIntyre, Donald J. Staffa.

Peter E. Calamari, Hertzog, Calamari & Gleason, New York, NY, Robert L. Sills, Reboul, Macmurray et al., New York, NY, Michael I. Bayda, Jacobs, Persinger & Parker, New York, NY, Dennis J. Block, Weil, Gotshal & Manges LLP, New York, NY, David M. Brodsky, Schulte Roth & Zabel, LLP, New York, NY, for Laurence B. Simon.

Robert L. Sills, Reboul, Macmurray et al., New York, NY, Dennis J. Block, Weil, Gotshal & Manges LLP, New York, NY, David M. Broadsky, Schulte Roth & Zabel, LLP, New York, NY, Howard I. Rhine, Coleman, Rhine & Goodwin LLP, New York, NY, Jonathan J. Lerner, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Russell L. Carson, Robert M. Holster.

DECISION AND ORDER

BERMAN, District Judge.

This securities fraud class action was filed on March 17, 1997 (the "Action").¹ Plaintiffs alleged that Defendants, Health Management Systems, Inc. ("HMS")², and certain of its officers and directors including Defendant Philip Siegel ("Siegel"), the former Chief Financial Officer for HMS, disseminated false and misleading statements designed unlawfully to inflate the price of HMS stock.

On August 6, 1998, a stipulation dismissing Siegel from the Action "with prejudice" was executed by Plaintiffs and Siegel.³ Siegel was and is individually represented by Dennis J. Block, Esq. and Michelle Roth, Esq. of Cadwalader, Wickersham & Taft.⁴ Initially, HMS refused to indemnify Siegel for the attorneys' fees and expenses that he incurred in connection with his defense in the Action arguing, among other things, that the legal fees sought were neither reasonable nor necessarily incurred because Siegel did not need representation separate from the other Defendants.⁵ HMS's refusal to provide indemnity has precipitated the instant proceeding.

In November 1998, Siegel filed a motion, pursuant to the New York Business Corporation Law ("BCL") and the by-laws of HMS, for an order requiring HMS to indemnify him for his attorneys' fees and expenses.⁶ In June 1999, the Court referred Siegel's motion for indemnification to United States Magistrate Judge James C. Francis IV. Oral argument was held before Judge Francis on September 9, 1999. While the matter was pending before Judge Francis, HMS conceded that it was appropriate for Siegel to be independently represented; HMS continued to argue that the fees incurred by Siegel were not reasonable. On October 25, 1999, Judge Francis issued a Report and Recommendation ("Report") recommending that Siegel be awarded indemnification against HMS for "$60,959.50 in attorneys' fees and $6,677.23 in expenses, for a total of $67,636.73." (Report at 237). Judge Francis disallowed $17,147.64 on the grounds that that amount of fees and costs was incurred in attempting to secure indemnification (so-called "fees on fees").

In his Report, Judge Francis clearly advised and notified the parties of the procedures for objecting to the Report, stating that "[p]ursuant to Rule 72 of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from this date to file written objections to this Report and Recommendation." (Report at 237). On or about November 8, 1999, both HMS and Siegel filed timely objections to the Report. In summary, Siegel argues that he should be awarded "all of the fees he has incurred in seeking to enforce his indemnification obligation against the Company [HMS]." (Siegel's Objections dated November 8, 1999 at 25). HMS asserts that the Report should be "rejected to the extent it recommends reimbursement of Siegel's legal fees, pending the conduct by this Court of the mandatory Reform Act review and a determination of the propriety, for Rule 11 purposes, of plaintiffs' having named Siegel as a defendant." (HMS's Objections dated November 8, 1999 at 4).

This Court may adopt those portions of the Report to which no objections have been made and which are not facially erroneous. See Pizarro v. Bartlett, 776 F.Supp. 815, 817 (S.D.N.Y.1991); Nelson v. Smith, 618 F.Supp. 1186, 1189 (S.D.N.Y. 1985). The Court conducts a de novo review of those portions of the Report to which objections have been made. See Pizarro, 776 F.Supp. at 817. "Because 28 U.S.C. § 636(b) requires a `de novo determination' rather than a de novo hearing, the district court is free to place `whatever reliance ... in the exercise of sound judicial discretion, [it chooses] to place on a magistrate's proposed findings and recommendations.'" Pizarro, 776 F.Supp. at 817 (quoting Grassia v. Scully, 892 F.2d 16, 19 (2d Cir.1989)).

The Court has undertaken a de novo review of the record and the law and, following such review, is in agreement with all of Judge Francis' conclusions in every material respect. The Report is adopted in its entirety. The Court will, however, briefly discuss three issues raised in the parties' objections.

First, Siegel argues that it is unfair to conclude, as Judge Francis did, that his "right to be indemnified does not include the right to be reimbursed for the costs and fees he incurred" in order to secure such indemnification (i.e., fees on fees). (Siegel's Objections dated November 8, 1999 at 2). This is by no means the first time that the issue of "fees on fees" has arisen. The general rule for resolving this (indemnity) issue was stated by the New York Court of Appeals as follows: "Inasmuch as a promise by one party to a contract to indemnify the other for attorney's fees incurred in litigation between them is contrary to the well-understood rule that parties are responsible for their own attorney's fees, the court should not infer a party's intention to waive the benefit of the rule unless the intention to do so is unmistakably clear from the language of the promise." Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 549 N.Y.S.2d 365, 548 N.E.2d 903 (1989) (citations omitted)(emphasis added). Although acknowledging that some courts have awarded fees on fees⁷, Judge Francis could find no "unmistakably clear" language here supporting an award of fees on fees to Siegel.⁸ See Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 20-21 (2d Cir.1996). This Court agrees. See Mayer v. Executive Telecard, Ltd., 705 A.2d 220 (Del.Ch.1997).

The Court recognizes, as did Judge Francis, that there may be an element of illogic in denying fees on fees. After all, the purpose of indemnity is to make someone whole. In light of existing precedents, however, the Court believes that the appropriate resolution of this problem is to amend the applicable instrument, be it a contract or a corporate by-law, explicitly to authorize fees on fees⁹, rather than to conclude that language which is ambiguous is, actually, "unmistakably clear." See Mayer, 705 A.2d at 223 ("the Delaware General Assembly apparently...