Murphree v. Federal Ins. Co.
| Citation | 707 So.2d 523 |
| Decision Date | 10 April 1997 |
| Docket Number | No. 94-CA-00669-SCT,94-CA-00669-SCT |
| Parties | David L. MURPHREE v. FEDERAL INSURANCE COMPANY and Institute for Technology Development, Inc. |
| Court | Mississippi Supreme Court |
William C. Walker, Jr., Oxford, for appellant.
Ralph E. Rood, Gholson Hicks Nichols & Ward, Columbus; David M. Leonard, Lord Bissell & Brook, Atlanta, GA; Neville H. Boschert, Ricky G. Luke, Whitney B. Byars, Watkins Ludlam & Stennis, Jackson, for appellee.
En Banc.
STATEMENT OF THE CASE
This case comes before this Court as an appeal from a grant of summary judgment in favor of Institute for Technology Development, Inc. (ITD) and Federal Insurance Company (Federal) in a civil action filed by the appellant David L. Murphree ("Murphree") for bad faith and punitive damages regarding their failure to timely pay attorney's fees incurred in the federal criminal proceeding against Murphree.
On February 3, 1993, Murphree filed his complaint against the appellees, ITD and Federal, alleging that both had committed bad faith by refusing to honor their contractual obligations to provide funds for legal expenses and fees incurred in Murphree's defense. Federal and ITD both answered denying their liability for bad faith breach of contract. At the completion of discovery, separate motions for summary judgment were filed by ITD and Federal, to which Murphree responded. On March 4, 1994, a hearing was had on the motions, and on July 5, 1994, the trial judge granted both ITD's and Federal's motions for summary judgment.
It is from these grants of summary judgment that the aggrieved Murphree has filed his appeal and brings the matter before this Court contending:
THE TRIAL COURT ERRED IN GRANTING THE MOTIONS FOR SUMMARY JUDGMENT IN FAVOR OF ITD AND FEDERAL INSURANCE COMPANY IN LIGHT OF THE GENUINE ISSUES OF MATERIAL FACT IN THE RECORD.
Murphree, a former officer and director of ITD, was indicted February 12, 1991, in the United States District Court for the Southern District of Mississippi. The indictment contained fifteen counts, each of which alleged that Murphree "did knowingly and willfully embezzle, steal, purloin, and convert for his own use" various sums of money of the United States and departments and agencies of the United States, in violation of 18 U.S.C. § 641. A demand was made by Murphree on ITD for an advancement of attorney's fees and expenses incurred in the defense of the federal criminal charges against him. Murphree claimed he was entitled to indemnification according to the charter of ITD under Article X, which is lengthy, but provides in pertinent part:
* * * * * *
(e) Advancing expenses. The corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an Indemnified Representative * * * * * *
in advance of the final disposition of a Proceeding upon receipt of an undertaking by or on behalf of the Indemnified Representative to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation pursuant to this Article. The financial ability of an Indemnified Representative to repay an advance shall not be a prerequisite to the making of such advance
ITD consulted with its attorneys and concluded no payment could be made to Murphree for fear of violating Miss.Code Ann. § 79-11-281(2), (3) and (5) because the indictments charged embezzling for personal benefit. Miss.Code Ann. § 79-11-281(2), (3) and (5) provide:
(2) Except as provided in subsection (3) of this section, a corporation may indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if:
(a) He conducted himself in good faith; and
(b) He in good faith believed:
(i) In the case of conduct in his official capacity with the corporation that his conduct was in its best interests; and
(ii) In all other cases, that his conduct was at least not opposed to its best interests; and
(c) In the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful.
A director's conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subsection (2)(b)(ii) of this section.
The termination of a proceeding by judgment, order, settlement or conviction is not, of itself, determinative that the director did not meet the standard of conduct described in this section.
(3) A corporation may not indemnify a director under this section:
(a) In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or
(b) In connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him.
Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding.
(5) A corporation may pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding if:
(a) The director furnishes the corporation a written statement of his good faith belief that he has met the standard of conduct described in subsection (2) of this section;
(b) The director furnishes the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet the standard of conduct; and
(c) A determination is made that the facts then known to those making the determination would not preclude indemnification under Sections 79-11-101 et seq.
The undertaking required by subsection (5)(b) of this section shall be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment.
Determinations and authorizations of payment under this section shall be made in the manner specified in subsection (7) of this section.
The federal investigators revealed documents to Leonard Vernamonti, president and CEO of ITD, which indicated Murphree misappropriated funds for his personal benefit.
The record is void of any other research or investigation conducted by ITD to determine the culpability of Murphree. At the time of the denial by ITD, Federal had not received any information from ITD or Murphree with regard to payment of attorney's fees.
The United States dismissed the indictments against Murphree without prejudice on April 23, 1991. On May 7, 1991, the board of directors of ITD considered George L. Lucas' (Murphree's then attorney) request for payment of attorney's fees. That request was denied. Then on June 20, 1991, the United States indicted Murphree on three counts of "intentionally misapplying and knowingly embezzling, by fraud or otherwise without authority converting to the use of persons other than the rightful owner, monies in excess of $5,000," these monies having been in the care, custody and control of ITD, all in violation of 18 U.S.C. § 666(a)(1)(A). Whereupon, demand was made on ITD for the advancement of attorney's fees. ITD again refused, referring to the same Miss.Code sections as before.
Federal was first notified of Murphree's indictments in October of 1991, when Murphree submitted a claim to Federal for the payment of attorney's fees. Federal contacted ITD and determined that ITD had not indemnified or agreed to indemnify Murphree for these expenses and costs arising out of these claims of embezzlement, fraud, and wrongful conversion. The policy coverage provided by Federal to ITD was set forth in two clauses as follows:
1. Insuring Clause 1 dealt with those claims against ITD officers and directors for which the officer or director "is not indemnified by ITD." 1
2. Insuring Clause 2 dealt with those claims against ITD officers and directors for which ITD "grants indemnification." 2
Since ITD had not indemnified or agreed to indemnify Murphree, Federal reviewed the claim under Insuring Clause 1 of the policy. This clause contained an exclusion that specifically addressed the Insured Person having allegedly gained an improper personal profit or advantage:
3.2 The Company shall not be liable under Insuring Clause 1 to make any payment for Loss in connection with claim(s) made against any of the Insured Person(s):
* * * * * *
(e) based upon or attributable to such Insured Person having gained any personal profit or advantage to which he was not legally entitled regardless of whether or not (1) a judgment or other final adjudication adverse to such Insured Person establishes that such personal profit or other advantage to which he was not entitled, or (2) the Insured Person has entered into a settlement agreement to repay such unentitled personal profit or advantage to the Insured Organization.
(emphasis added).
Because the indictments against Murphree charged embezzlement for personal profit or advantage, Federal construed the above language to require a denial of payment to Murphree. Federal claimed that the validity of the allegations were immaterial since it was the allegations themselves that determined On June 22, 1992, after the Government had rested, Murphree moved the federal court to enter a judgment of acquittal on all counts of the indictments. Subsequent to arguments from both sides, a judgment for acquittal was granted by the trial judge. Murphree's attorney made demand on ITD on June 25, 1992, after the judgment was entered into the record. ITD claimed that it had notified its insurer, Federal, of its intent to discharge any and all liability of...
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