In re THC Financial Corp., 76-0493 and 76-0512.

• Decision Date: 27 December 1977
• Docket Number: No. 76-0493 and 76-0512.,76-0493 and 76-0512.
• Citation: 446 F. Supp. 1329
• Parties: In re THC FINANCIAL CORP., a Hawaii Corporation, Debtor. In re The HAWAII CORPORATION, a Hawaii Corporation, Debtor.
• Court: U.S. District Court — District of Hawaii

446 F. Supp. 1329

In re THC FINANCIAL CORP., a Hawaii Corporation, Debtor In re The HAWAII CORPORATION, a Hawaii Corporation, Debtor.

Nos. 76-0493 and 76-0512.

United States District Court, D. Hawaii.

December 27, 1977.

Tamotsu Tanaka, Izumi & Tanaka, Honolulu, Hawaii, Stephen P. Feldman, Stutman, Treister & Glatt, Los Angeles, Cal., for Trustee in Reorganization of THC Financial Corp.

Don Jeffrey Gelber, Honolulu, Hawaii, for Trustee in Reorganization of The Hawaii Corp.

Allen F. Corotto, San Francisco, Cal., for Securities and Exchange Commission.

Paul E. Maki, Honolulu, Hawaii, for Randolph Crossley.

Theodore A. Kolb, Robert E. Graham, Sullivan, Roche & Johnson, August B. Rothschild, Linda Sorensen, Rothschild, Phelan & Montali, San Francisco, Cal., Alan M. Goda, Kobayashi, Koshiba & Watanabe, Honolulu, Hawaii, for various former Officers and/or Directors of THC Financial and/or The Hawaii Corp.

MEMORANDUM DECISION^*

ON

(1) THCF AMENDED MOTION TO REJECT EXECUTORY CONTRACTS FOR INDEMNITY OF OFFICERS AND DIRECTORS OR FOR ALTERNATIVE RELIEF,

AND

(2) THC AMENDED APPLICATION TO DETERMINE STATUS OF CLAIMS OF OFFICERS AND DIRECTORS FOR INDEMNITY, COSTS, AND EXPENSES

PENCE, District Judge.

Both The Hawaii Corporation (THC) and THC Financial Corporation (THCF) are Debtors under Chapter X of the Bankruptcy Act. Their respective Trustees are now before the court regarding indemnification agreements in each corporation's Articles and elsewhere between the corporation and its officers and directors. In brief, these provisions indemnify officers and directors for suits brought against them in their corporate capacities unless their challenged conduct amounted to a breach of fiduciary duties.

THCF asks that these agreements be rejected as executory; in the alternative, THCF asks, as does THC, that it be determined their respective estates have no administrative liability for such indemnification, if any, i. e., indemnification claims are not entitled to priority as administrative expenses but are no more than garden variety general unsecured claims. Opposition to this position is made by Messrs. Crossley, Sultan, Croasman, and Cooke, all of whom served as directors or officers of THC or THCF prior to bankruptcy.

THCF's contention that these indemnification agreements are executory contracts subject to rejection by the Trustee is not well taken. The officers and directors in question having already served in such capacities, they have performed their side of the agreements and nothing now remains save the corporations' obligation to indemnify.¹ THCF's argument that the various ministerial tasks attendant upon indemnification amount to more than that, is not persuasive.

A more difficult question is whether indemnification costs, assuming for the moment that the corporations would be obligated under the agreements to pay, would be administrative costs entitled to priority of payment or simple general unsecured claims standing in line with all others.

Section 216(3) of the Bankruptcy Act (11 U.S.C. § 616(3)) states that a Chapter X plan of reorganization "shall provide for the payment of all costs and expenses of administration and other allowances which may be approved or made by the judge." These costs take priority over general unsecured claims of creditors.

The Trustees argue that any indemnification claims cannot qualify for such priority treatment under section 216(3); they would arise from agreements entered into and performed on one side prior to filing of bankruptcy and thus not be necessary administrative costs of handling the debtors' estates.

This question presents what might be seen as a conflict between basic principles of corporations law and the Bankruptcy Act, the former leading all too often to the latter. On the one hand, it is a fundamental tenet that officers and directors lawfully acting on behalf of their corporation should do so at no risk of personal expense or liability in properly performing their duties. Indeed, this circumstance is most probably a necessary inducement for taking a corporate office. Indemnification agreements such as the ones in issue here exist in almost every corporate management contract.

On the other hand, costs incurred in the administration of a bankrupt debtor's estate are theoretically those actually necessary, in the case of terminal Chapter X proceedings for a corporation, to the winding up of the company. Allegations in a lawsuit of corporate management misconduct contributing to bankruptcy relate, ipso facto, to pre-petition activity, and so cannot be said to be administrative costs in the strict sense.

The basic equitable problem here is that officers and directors have served in reliance on indemnification, and to have them now personally held liable for costs and judgments against them for acts done in their corporate capacities, and giving them only dubious general unsecured claims against their now-bankrupt employer corporations appears "unfair".

Such seeming unfairness, though, is endemic in bankruptcy; the pertinent enquiry is whether their above status is any more unfair than that of anyone else providing goods and services to a corporation, and then not receiving full payment when it goes bankrupt. Officers...