Sorensen v. The Overland Corporation

• Decision Date: 18 June 1956
• Docket Number: Civ. A. 1702.
• Citation: 142 F. Supp. 354
• Court: U.S. District Court — District of Delaware
• Parties: Charles E. SORENSEN, Plaintiff, v. THE OVERLAND CORPORATION, Defendant.

142 F. Supp. 354

Charles E. SORENSEN, Plaintiff, v. THE OVERLAND CORPORATION, Defendant.

Civ. A. 1702.

United States District Court D. Delaware.

June 18, 1956.

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James R. Morford (of Morford & Bennethum), Wilmington, Del., for plaintiff.

Edwin D. Steel, Jr. (of Morris, Steel, Nichols & Arsht), Wilmington, Del., for defendant.

LEAHY, Chief Judge.

Defendant (formerly Willys-Overland Motors, Inc.) moves for summary judgment.

As former officer and director of defendant, plaintiff sues for $41,350.46 for fees and expenses paid his attorney in defending two lawsuits brought against defendant corporation while plaintiff was a director.¹ Liability is based on Article XXIII of defendant's by-laws, sanctioned under the Delaware Corporation Law, § 2(10), 8 Del.C. § 122. The by-law purports to indemnify officers and directors for expenses incurred in defense of any suit "by reason of his being an officer or director of the corporation".²

By contract of June 12, 1944, defendant employed plaintiff as chief executive officer for a period of 10 years. Plaintiff agreed to develop executives, to whom he could delegate his duties, and with approval of the board of directors name a president of defendant corporation. Plaintiff was to receive $520,000 payable every six months in 1/240 installments. Neither termination of employment nor death was to affect defendant's liability to continue such payments. Also on June 12, 1944, defendant issued to plaintiff a stock option contract to purchase 100,000 shares (over a specific period) at $3.00 a share,³ subject to stockholder approval⁴ which was had on July 12, 1944. At the time of director and stockholder approval, plaintiff was not then either an officer or director who approved the employment or option contracts.⁵

In August 1948 a stockholder's derivative suit was started in the Delaware Court of Chancery by Hyman Krinsky against defendant corporation, its officers and directors (including present plaintiff). The Krinsky action involved "acquisition" causes. The complaint attacked three purchases by defendant of real estate, equipment and securities, without corporate need and at fraudulently excessive prices from corporations controlled by certain of defendant's directors and stockholders who were alleged also to control defendant corporation. The remaining cause of action attacked plaintiff's employment contract and options. On March 24, 1949, the Krinsky complaint was amended to drop the attack on plaintiff's contracts. On July 27, 1949, the Krinsky action was dismissed in the Delaware Court. But shortly before, on June 15, 1949, another action was started in the United States District Court for Michigan (E.D.) by Abraham Fistel against the same defendants as had been named in the Delaware action, including present plaintiff here. The specific wrong complained of was Sorensen's employment and option contracts.⁶ On December 30, 1950, the Fistel suit was dismissed as against all named defendants (for lack of service) except plaintiff herein. Then, on April 14, 1953, the Michigan action was dismissed on the merits with prejudice as against Sorensen.⁷ Plaintiff sues here for indemnification for attorney's fees and expenses incurred in defense of the Delaware Krinsky and Michigan Fistel actions.

The defenses to the present action are: the indemnification provisions of the by-laws are not applicable to the Krinsky and Fistel actions, and the instant suit is barred by the Delaware statute of limitations.

1. Defendant's by-law is clear. There is no indemnification unless there are reasonable expenses incurred in connection with a suit involving an officer or director "by reason of his being or having been an officer or director of the corporation". It is plain from a reading of the by-law that its purpose is to enable an officer or director to defend (without cost to himself) litigation when it is charged he acted illegally in the performance of his duties as an officer or director. Indemnification was not intended to cover expenses for defense of claims antedating alleged wrongdoing before the officer or director began to serve. By-laws for indemnification are limited to defense of actions based upon dereliction in office.⁸ The test, as stated by the Third Circuit in Mooney v. Willys-Overland Motors, Inc.,⁹ is whether or not the plaintiff was sued in his capacity as an officer or director, with primary emphasis placed upon the complaint.

I think plaintiff is not entitled to recover any expenses incurred by him in defense of the Krinsky and Fistel actions in defense of his personal conduct vis-a-vis the defendant corporation. The employment contract which plaintiff sought to uphold in both actions involved an agreement entered into prior to the time he became an officer and director of defendant. The challenged transactions were personal to Sorensen. He had bargained at arm's length with defendant corporation. His threatened liability was not as officer or director but as an individual and not for something he did or failed to do while acting in his capacity as an officer or director of defendant corporation.¹⁰ In neither of these causes of action was any charge aimed at Sorensen for official misconduct serving as an officer or director of defendant corporation. Relief was sought against him personally in his individual capacity to declare as "null and void" valuable rights which he had acquired individually under his employment and option contracts before becoming an officer or director. I conclude after an examination of the Krinsky and Fistel complaints it is clear as to plaintiff-Sorenson, causes of action in those cases, other than those of "acquisition", were such as to lay outside of the ambit of the indemnification provisions of defendant's by-laws.

Plaintiff did, however, incur certain legal expenses which were considered legitimate by defendant corporation and these were, in fact, paid. Plaintiff submitted a bill for $3,500 which he had received from his attorney Judge Harry S. Toy, after the Delaware Krinsky case was dismissed. Of this defendant paid $2,250 (on May 5, 1950, 5 years before the case at bar was begun) as that portion of the charge relating to the "acquisition" causes alleged in Krinsky which were based on transactions occurring after plaintiff had, in fact, become a director.¹¹ The remaining portion of $1,250 defendant refused to pay as it covered services rendered by Toy in the Krinsky action to protect plaintiff in his personal rights under his employment and option contracts (before he had become a director). This amount ($1,250) was included within Toy's subsequent statement for $26,350.46¹² which defendant rejected on the same ground.¹³

Obviously the parties did not think the Michigan Fistel litigation a mere continuation of the Delaware Krinsky litigation (which as against Sorensen had been dropped by the amended complaint filed in Delaware) because Toy segregated his fee charges in Krinsky from those of Fistel and this segregation was acquiesced in by plaintiff. Although similar in theory, both actions were considered sufficiently independent to justify separate billing.

2. But if the by-laws are inapplicable, plaintiff then urges recovery on a theory of implied contract because the attorneys of Willys (defendant's former name) suggested that Toy appear in the Fistel Michigan suit for plaintiff. Authority for such a proposition may be found both in the by-law and enabling statute reciting indemnification shall not be exclusive of other rights to which any officer or director may be entitled as a matter of law. In the Mooney case, supra, the Court of Appeals upheld this Court in permitting no overriding reference to statute where independent grounds exist for the payment of litigation expenses. In every instance this warrant to employ the means of ad hoc contracts and common law theories of recovery outside the statute and by-law must be construed within the demands of public policy.¹⁴

Here, plaintiff has failed to establish the independent legal ground which the appellate court said must be shown. As a resident of Michigan plaintiff was subject to the jurisdiction of the Michigan Federal Court,¹⁵ and had no alternative except to defend the action. None of the other defendants appeared in Michigan,¹⁶ and the action was dismissed as to them for lack of service.¹⁷ Thus no rational basis exists for saying defendant had assumed an implied contract to reimburse Sorensen for either his Krinsky (where Sorensen had not been served and was not subject to the jurisdiction of the Delaware Court) or Fistel expenses.

3. Whether the by-laws apply or not, defendant raises the Delaware statute of limitations against any recovery here because plaintiff's alleged claim is barred by both the one year¹⁸ and three year¹⁹ periods. Plaintiff contends the three years statute is applicable, but that this action is not barred under either.

The one year statute has a comprehensive sweep. It was intended to bar all claims arising out of the employer-employee relationship. The Act bars claims for "wages", "salary", and it like-wise applies to "overtime" and to any other "benefits" arising from the corporate-officer employment relationship. The word "benefits" is embracing and covers all advantages growing out of the employment.

Indemnification has been referred to as a "form of compensation" and as to directors is more equitable than a "fixed salary".²⁰ Professor Washington contrasts "direct rewards for services", such as salaries, bonuses and options, with indemnification against litigation expenses as "another type of reward".²¹ Risks potential in a corporate office, he states, must be cushioned by "higher pay, either in cash or in an agreement to reimburse him for his expenditures."²² All indemnity agreements are based on a quid pro quo for services rendered. It has been said the indemnification device is...