Waskel v. GUARANTY NAT. CORP.

• Decision Date: 26 October 2000
• Docket Number: No. 99CA1795.,99CA1795.
• Parties: David WASKEL and Stanley Bowman, Plaintiffs-Appellants, v. GUARANTY NATIONAL CORPORATION, Guaranty National Insurance Company, and Landmark American Insurance Company, Defendants-Appellees.
• Court: Colorado Court of Appeals

23 P.3d 1214

David WASKEL and Stanley Bowman, Plaintiffs-Appellants, v. GUARANTY NATIONAL CORPORATION, Guaranty National Insurance Company, and Landmark American Insurance Company, Defendants-Appellees.

No. 99CA1795.

Colorado Court of Appeals, Div. II.

October 26, 2000.

Certiorari Denied May 21, 2001.¹

Shughart Thomson & Kilroy, P.C., Joseph J. Mellon, Denver, CO, for Plaintiffs-Appellants.

Baldwin & Brown, P.C., Robert M. Baldwin, Ellen Rubright Ivy, Denver, CO, for Defendants-Appellees.

Opinion by Judge VOGT.

Plaintiffs, David Waskel and Stanley Bowman, appeal a summary judgment in favor of defendants, Guaranty National Corp. (GNC), Guaranty National Insurance Co. (GNIC), and Landmark American Insurance Co. (LAIC), on their claims for indemnification and damages. We affirm in part, reverse in part, and remand with directions. Between 1979 and 1992, plaintiffs were associated with the defendant companies in various capacities. At the time their employment ended in 1992, plaintiff Bowman was a claims supervisor and plaintiff Waskel was vice-president of claims for defendant GNIC, a subsidiary of GNC and an affiliate of LAIC. Waskel was also an officer of GNC and LAIC.

As employees of GNIC, plaintiffs also handled claims under insurance policies issued by LAIC. In that capacity, they were involved in the decision to deny coverage on a claim against a trucking company insured by LAIC.

After leaving GNIC in 1992, plaintiffs began working for Scottsdale Insurance Co. While reviewing Scottsdale's closed files, they determined that Scottsdale might have a claim for reimbursement from GNIC and LAIC for sums it had paid in settlement of the claim asserted against the LAIC-insured trucking company. Their determination led to two lawsuits, which were ultimately resolved in favor of GNIC and LAIC.

Thereafter, GNIC and LAIC filed suit against Bowman, Waskel, and Scottsdale, alleging, as pertinent here, that Bowman and Waskel had breached their fiduciary duties and duties of loyalty to them. The jury found that both individuals breached fiduciary duties and duties of loyalty and that GNIC and LAIC suffered damages; however, it also found that the individuals' actions were not the cause of the companies' damages. Thus, no money judgment was entered against Bowman and Waskel. The judgment was affirmed on appeal, see Guaranty National Insurance Co. v. Scottsdale Insurance Co., (Colo.App. No. 97CA1571, August 26, 1999) (not selected for official publication), and the supreme court denied certiorari.

Citing various provisions from defendants' bylaws, the GNC charter, and Waskel's severance agreement, plaintiffs requested that defendants indemnify them for their attorney fees and other expenses incurred in connection with the lawsuit brought against them by GNIC and LAIC. When defendants refused, plaintiffs filed the instant action, seeking damages for defendants' refusal to indemnify them and asserting claims for additional damages under theories of outrageous conduct and malicious prosecution.

Defendants moved for summary judgment on all claims. Plaintiffs responded by cross-moving for partial summary judgment on the indemnification issue and requesting additional time to conduct discovery pursuant to C.R.C.P. 56(f) on the claims of malicious prosecution and outrageous conduct.

Finding that there were no genuine issues of material fact and that there was "no legal basis requiring Defendants to indemnify Plaintiffs," the trial court granted defendants' motion for summary judgment, denied plaintiffs' cross-motion, and entered judgment in favor of defendants without ruling on plaintiffs' C.R.C.P. 56(f) request.

I.

Plaintiffs contend that, under the terms of the corporate documents and under Colorado statutes, they were entitled to indemnification as a matter of law, and that the trial court erred in concluding to the contrary. We agree.

We review a summary judgment de novo, applying the same standards that govern the trial court's determination. Summary judgment is warranted only when there is a clear showing that no genuine issue exists as to any material fact and that the moving party is entitled to judgment as a matter of law. Churchey v. Adolph Coors Co., 759 P.2d 1336 (Colo.1988); C.R.C.P. 56(c).

Here, there is no disputed issue of fact regarding the provisions of the corporate documents that bear on plaintiffs' claims for indemnification. Among the provisions on which plaintiffs rely are the following:

[GNC Charter] X. INDEMNIFICATION:

The Corporation shall, to the fullest extent now or hereafter permitted by law, indemnify and make whole any person who was or is a party . . . to any . . . action, suit or proceeding . . . by reason of the fact that he is or was a director, officer, or employee of the Corporation or a subsidiary of the Corporation, . . . if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation.

. . . .

[GNC Bylaws] 8.3. Indemnity for Successful Defense of Certain Matters. Notwithstanding the other provisions of this Article . . ., to the extent that a director, officer or employee of the Corporation has been wholly successful on the merits or otherwise in defense of any action, suit or proceeding [brought by third parties or by or in the right of the Corporation, by reason of the fact that he or she is or was a director, officer, or employee], he or she shall be indemnified and made whole against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith.

Other provisions of the GNC bylaws extend indemnification to the employees of GNC's subsidiaries and provide that indemnification under the bylaws shall be "to the fullest extent permitted by applicable law." Waskel's severance agreement states that GNC will indemnify him, to the same extent as its directors and executive officers generally, for expenses sustained by him in connection with any action to which he is made a party "by reason of . . . having been . . . [an] officer of GNC or any subsidiary or affiliated company or by reason of any action . . . taken by [him] on behalf of GNC or any subsidiary or affiliated company."

Relying on these and other provisions, as well as on the Colorado statutes discussed below, plaintiffs assert that, inasmuch as they were sued for the breach of duties that arose solely by reason of their employment relationship with defendants and prevailed on all claims against them in that action, they are entitled to indemnification for the expenses they incurred in defending against those claims.

Defendants argue that plaintiffs do not qualify for mandatory indemnification within the meaning of the corporate documents and the Colorado statutes and that public policy prohibits indemnification for wrongful acts against one's own corporation.

A.

We first consider whether plaintiffs qualify for mandatory indemnification under Colorado law or the relevant corporate documents.

The Colorado Business Corporation Act, § 7-101-101, et seq., C.R.S.2000, includes provisions regarding both permissive and mandatory indemnification. Mandatory indemnification is addressed in § 7-109-103, C.R.S.2000, which provides:

Unless limited by its articles of incorporation, a corporation shall indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because the person is or was a director, against reasonable expenses incurred by him or her in connection with the proceeding. (Emphasis added.)

Section 7-109-107, C.R.S.2000, provides that a corporate officer is entitled to mandatory indemnification under § 7-109-103 to the same extent as a director and that a corporation may indemnify an employee, fiduciary, or agent to the same extent as a director.

Although § 7-109-103 permits a corporation to include in its articles of incorporation a provision placing limits on mandatory indemnification, defendants have not done so here. Rather, using the same language as that used in § 7-109-103, the GNC bylaws mandate indemnification in situations where a director, officer, or employee of the corporation has been "wholly successful on the merits or otherwise" in defense of an action brought by third parties or by or in the right of the corporation.

Plaintiffs contend that they were "wholly successful" in the previous litigation because they were not found liable on any claims and were in fact awarded their costs at the conclusion of the action. Defendants respond that parties who are found to have breached their duties to their corporations cannot be deemed wholly successful so as to entitle them to mandatory indemnification. Most of the courts and commentators that have addressed this issue have interpreted "successful" as plaintiffs do.

The Colorado statutes at issue here are based on a pre 1994 version of the Model Business Corporation Act (MBCA). The official comment to MBCA § 8.52, which corresponds to § 7-109-103, states that a defendant is "wholly successful" "only if the entire proceeding is disposed of on a basis which does not involve a finding of liability." "Liability" is defined, for purposes of the indemnification provisions, as the "obligation . . . to pay a judgment" or other sums. MBCA § 8.50(5); § 7-109-101(4), C.R.S.2000.

The MBCA comment also explains that the word "wholly" was added to avoid the result reached in a case finding entitlement to partial mandatory indemnification where the defendant was able to obtain the dismissal of some but not all counts of a criminal indictment. Further, the phrase "on the merits or otherwise" was intended to show that mandatory indemnification applies even where the defendant prevails because of procedural defenses, such as the statute of limitations, which are not related to the merits.

The courts have similarly recognized that entitlement to mandatory...