Matter of Baldwin-United Corp., Civ. A. No. C-1-84-345.

• Decision Date: 31 August 1984
• Docket Number: Civ. A. No. C-1-84-345.
• Citation: 43 BR 443
• Parties: In the Matter of BALDWIN-UNITED CORPORATION, D.H. Baldwin Company, Debtors, Consolidated Appeals of the Unsecured Creditors' Committees of Both Debtors.
• Court: U.S. District Court — Southern District of Ohio

43 B.R. 443 (1984)

In the Matter of BALDWIN-UNITED CORPORATION, D.H. Baldwin Company, Debtors, Consolidated Appeals of the Unsecured Creditors' Committees of Both Debtors.

Civ. A. No. C-1-84-345.

United States District Court, S.D. Ohio, W.D.

August 31, 1984.

COPYRIGHT MATERIAL OMITTED

Paul B. O'Kelly, John Richards Lee, Gregory P. von Schaumburg, U.S.S.E.C., Chicago, Ill., for S.E.C.

Robert J. White, Linda J. Smith, O'Melveny & Myers, Los Angeles, Cal., Don R. Gardner, Genina C. Bowman, Keating, Muething & Klekamp, Cincinnati, Ohio, for debtors-in possession.

Joseph Patchan, Susan B. Collins, Baker & Hostetler, Cleveland, Ohio, Leon S. Forman, Thomas E. Biron, Wexler, Weisman, Forman & Shapiro, Philadelphia, Pa., for Unsecured Creditors' Committees.

OPINION AND ORDER

DAVID S. PORTER, Senior District Judge:

I. Introduction

The issue in these consolidated appeals from four orders of the United States Bankruptcy Court for the Southern District of Ohio boils down to whether or not the bankruptcy court has the discretion to permit a Chapter 11 debtor to advance its present and former non-management directors' funds from the estate with which to pay for their defense, as individual defendants, in securities actions alleging misconduct during their terms as directors. We conclude, for reasons which follow, that while the bankruptcy court may in a proper case order such disbursements, conditioned upon appropriate findings, on behalf of present directors of the debtors, the Bankruptcy Code does not give the bankruptcy court the power to authorize such payments on behalf of former directors of the debtors. We therefore reverse the orders appealed from and remand for further consideration below as to the present directors.

A. Parties

Debtors here are Baldwin-United Corporation and D.H. Baldwin Company. Their reorganization petitions were filed under Chapter 11 of the Bankruptcy Act, 11 U.S.C. §§ 1101 et seq., in September, 1983.

Appellants are the Unsecured Creditors' Committee of each debtor.

Amicus curiae briefs were received from the Securities and Exchange Commission and Jones, Day, Reavis & Pogue, a law firm which has been retained to defend 10 present and three former directors in various securities and other actions pending in this Court and in the United States Bankruptcy Court for the Northern District of Texas. The SEC's brief was requested by the Court, and Jones, Day's was filed with leave as an alternative to their petition to intervene.

B. Facts

About a dozen of debtors' present and former directors and officers are defendants in at least three civil suits pending in this and other courts. Included among the pending actions are Hilda Stoller, et al. v. Baldwin-United Corporation, et al., Civil Action No. C-1-82-1438 (S.D.Ohio, filed December 8, 1982);¹ Ralph Bedel, Trustee, Quality Scale Company Employee Profit Sharing Plan, etc. v. Morley Thompson, et al., Civil Action No. C-1-83-1990 (S.D. Ohio, filed December 13, 1983); and James B. Van Treese v. Baldwin-United Corporation, Adversary Proceeding No. 383-1054 (Bankr.N.D.Texas, filed October 10, 1983).

The Stoller and Quality Scale cases allege violations of the Securities Acts, and Van Treese asserts tortious interference with professional relationships or equivalent acts by defendants therein.

C.

This controversy arises from the debtors' efforts, through their current boards of directors, to give effect to a provision in the corporate bylaws of both debtors which provides as follows:

6.1 The Company may indemnify or agree to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the Company, by reason of the fact that he is or was a director, officer, employee, or agent of the Company . . . including attorneys\' fees, judgments, fines, and amounts paid in settlement . . . if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. . . . The termination of any action . . . by judgment, order, or settlement . . . shall not . . . create a presumption that the person did not act in good faith. . . .

Brief of Appellees at Appendices C, D. Pursuant to the terms of the indemnification provisions, the boards have voted to advance monies for the legal fees of their present and former directors and, with the exception of Morley Thompson, past president of the debtors, officers in the Stoller, Quality Scale and Van Treese cases.²

After the debtors' boards approved the indemnification proposals, debtors approached the bankruptcy court with motions seeking to retain counsel to represent various individuals and groups who do or did serve on the debtors' boards. After wrestling with the issue for some time, the bankruptcy court, in a series of orders in January, February, and March, 1984, granted the motions to retain counsel. The bankruptcy court's rationale, although never articulated at length, was made clear by a statement from the bench at an October, 1983 status conference:

it appears to me that the debtor continuing to pay for that representation is amply justified. . . . I don\'t think it\'s fair to require the directors to go out and borrow hundreds of thousands of dollars for their own defense and only have it paid back under certain circumstances.

That would appear to be as much of a chilling effect upon being a director as almost anything I can think of.

App. 517-18.³

These appeals followed.⁴ The proceedings below, although procedurally tedious, were relatively simple: the debtors moved to have their present and former directors be indemnified, and the bankruptcy court granted the motions. Unfortunately, the matter turns out to be a good deal more complicated than first appears, involving as it does matters of apparent first impression as to interpretation of the Bankruptcy Code.

D.

Indemnification of corporate directors for their legal expenses in defending suits challenging their activities while serving the corporation is a concept which has gained a great deal of support in recent years. As the debtors point out, 41 states presently have statutory provisions permitting incorporation of prejudgment indemnification provisions into corporate bylaws. These include Delaware and Ohio, the two states whose law is arguably relevant here. The authorities and references cited by the debtors leave little doubt, and appellants do not seriously dispute, that important public policy considerations militate in favor of such provisions. As noted in Wisener v. Air Express International Corp., 583 F.2d 579, 583 (2d Cir.1978) (footnote omitted),

a legislative judgment has been made that such protection is necessary or desirable to encourage recruitment of capable management, and that corporate assumption of officers\' liabilities for the costs of defense of suits based on decisions and actions, taken in the corporate interest, should properly be permitted and indeed required when the litigation has terminated successfully for the officer.

The Securities and Exchange Commission, in its role as amicus herein, takes a similar position, noting in its brief that it

believes that outside directors should be encouraged to serve on the boards of directors of publicly-held corporations. In the Commission\'s view, outside directors provide important protections for public investors in corporations generally and particularly where companies are financially troubled. Indemnification for costs incurred in the defense of the good faith exercise of their business judgment is an appropriate and necessary expense in order to attract qualified persons to serve in that capacity.

Brief of the Securities and Exchange Commission at 2-3.

Juxtaposed against these tenets of corporation policy is the "policy mandated by the bankruptcy laws of equality of distribution among the various members of each class of creditors." Id. at 3. As one court has noted in a similar context, "this question presents . . . a conflict between basic principles of corporations law and the Bankruptcy Code, the former leading all too often to the latter." In re THC Financial Corp., 446 F.Supp. 1329 (D.Hawaii 1977).

We observe these competing policy considerations early in this opinion because we find them, while certainly relevant to our consideration of the issues herein, not dispositive. Because our decision is based upon established principles of bankruptcy law, it has proven unnecessary to explore at length the appropriate balance between the corporate and bankruptcy policy factors just noted. We do believe, however, that were such a balancing essential, the federal policy of equality of distribution of assets among similarly situated creditors would outweigh the policies supporting indemnification of corporate directors once a corporation has become a Chapter 11 debtor.

II. Timeliness

Jones, Day, Reavis & Pogue, appearing as amicus curiae, asserts that at least as to the order authorizing their retention as counsel for ten individuals, this appeal is untimely. While we have reservations regarding their standing, as amicus, to argue a potentially dispositive issue not raised by the appellees in defense of their position, we do not address that concern because we resolve the timeliness issue in favor of the appellants.

The essence of Jones, Day's argument is that the bankruptcy court had, as early as October 17 and 21, 1984, and November 13, 1983, decided by means of appealable orders that it would authorize the debtors to advance fees to represent the individual defendants in the various pieces of litigation then pending. While the bankruptcy court indeed took steps in late 1983 which lend support to Jones, Day's position, examining the situation in context leads us to the conclusion that the appeals here are timely. We ...