Wisener v. Air Exp. Intern. Corp., 380

• Decision Date: 01 November 1978
• Docket Number: D,No. 380,380
• Court: U.S. Court of Appeals — Second Circuit
• Parties: John WISENER, Plaintiff-Appellant, v. AIR EXPRESS INTERNATIONAL CORPORATION, Defendant-Appellee. NOVO CORPORATION, Plaintiff, v. ARTHUR ANDERSEN & CO., Defendant. ARTHUR ANDERSEN & CO., Defendant and Third-Party Plaintiff, v. Albert F. BEITEL, etc., et al., Third-Party Defendants. ocket 77-7272.

Page 579

583 F.2d 579

John WISENER, Plaintiff-Appellant, v. AIR EXPRESS INTERNATIONAL CORPORATION, Defendant-Appellee.

NOVO CORPORATION, Plaintiff, v. ARTHUR ANDERSEN & CO., Defendant.

ARTHUR ANDERSEN & CO., Defendant and Third-Party Plaintiff, v. Albert F. BEITEL, etc., et al., Third-Party Defendants.

No. 380, Docket 77-7272.

United States Court of Appeals, Second Circuit.

Argued Dec. 9, 1977.

Decided June 15, 1978.

Rehearing Denied Nov. 1, 1978.

David W. Cohen, New York City (Freeman, Meade, Wasserman & Schneider, New York City, W. Lawrence Joachim, New York City, of counsel), for plaintiff-appellant.

Joseph L. Forstadt, New York City (Stroock & Stroock & Lavan, New York City, William J. Robbins, New York City, of counsel), for defendant-appellee.

Before FRIENDLY, SMITH and MESKILL, Circuit Judges.

J. JOSEPH SMITH, Circuit Judge:

Two actions based on claimed violations of federal securities acts in connection with an aborted merger of two air express companies, Novo and Air Express International ("AEI"), brought in the United States District Court for the Southern District of New York were settled and dismissed except for cross-claims in each action by Wisener, former officer and director of AEI, for indemnification from AEI for his legal fees and expenses incurred in defending himself in the litigation. The cross-claims were consolidated for trial and tried to the court. The court, Lee P. Gagliardi, Judge, dismissed the cross-claims, holding an amended corporate by-law on indemnification inapplicable. We find error in the ruling as to the amended by-law and reverse and remand.

Wings & Wheels, Inc., primarily a domestic air freight forwarding corporation with total annual billings of some $7,000,000, in September, 1967 acquired Air Express International, an air freight forwarder operating primarily internationally with total annual billings of some $18,000,000. The combined corporation was thereafter known as Air Express International.

Following the death, on November 4, 1968, of Richter, founder of Wings & Wheels, Inc. and principal shareholder of AEI, Wisener, who had been hired by Richter as vice president of the corporation and general manager of the international operations, became president, director and chairman of the board of AEI. Negotiations were undertaken to dispose of the AEI stock, some 31%, held by the Richter estate to Novo Corporation, another air freight forwarder. Novo, relying on AEI's latest full-year financial figures audited by Arthur Andersen & Co. and on unaudited interim figures of AEI of May 12, 1970 for the period subsequent to these audited figures, contracted to purchase not only the Richter stock but also two other large blocks, and to merge the corporations on August 21, 1970. The unaudited figures turned out to be seriously in error, subsequent adjustments reducing an apparent nine-month gain of $1,200,000 by some $800,000. The merger agreement was terminated by mutual consent. Securities Acts and fraud actions, cross-actions and third-party actions among Novo, AEI, AEI officers and directors, the Richter estate, Andersen and Wisener were settled and withdrawn with the exception of the pending third-party claim by Wisener for indemnification from AEI for his litigation expenses. The court denied relief to Wisener on the ground that under state law then prevailing and the corporate by-laws then effective negligence was a bar to recovery. It found negligence on Wisener's part for permitting Novo to rely on the interim figures when he knew or should have known from Andersen's so-called "blue back" reports with its audits of serious deficiencies in AEI's accounting system and when he had warnings from AEI's staff that serious discrepancies were surfacing just prior to the merger agreement. Wisener contended that there was no lack of due care on his part, pointing to the effective functioning of the manual accounting system under Richter, the mushrooming of business after the acquisition of AEI by Wings & Wheels from $25,000,000 to some $39,000,000 annually, steps taken toward a data processing system and the tentative nature of the data indicating possible discrepancies.

While under these circumstances the issue of Wisener's negligence is by no means free from doubt, we find no sufficient reason to disturb the court's conclusion that ordinary care would require notice to the parties of the possible discrepancies before AEI warranted the interim figures as correct. The bookkeeping difficulties of the expansion period may be a sufficient explanation to negate any active fraud or deception, but they were circumstances known to Wisener, and may well be held to require more caution in reacting to the surfacing discrepancies before permitting the parties so seriously to commit themselves on the basis of the unaudited figures.

This is not, however, the end of Wisener's claim. There is little doubt that a corporation may commit itself to indemnify its officers and directors for litigation expenses incurred in defending against liability for actions taken in carrying out corporate responsibilities, even though negligent, if the corporation finds it in the corporate interest to undertake such a commitment. See generally, Bishop, Indemnification of Corporate Directors, Officers and Employees, 20 The Business Lawyer 833 (1965). Benefit to a corporation comes from inducing valuable executives to serve it by promising them protection against unjustified litigation. Id. at 839.

AEI is an Illinois corporation and the court held and the parties agree that Illinois law is applicable.

At the time of the issuance of the interim financial statement, May 12, 1970, and the signing of the merger agreement, August 21, 1970, the corporate by-laws ¹ provided for indemnification unless there was reasonable ground to adjudge the officer liable for negligence or misconduct.

On November 12, 1970 the by-law was amended "to provide the broadest possible indemnification . . . permitted under the laws of the State of Illinois."

The court held that the amended by-law could not be applied in the absence of clearer indications of an intent to make it applicable retroactively, particularly in view of the public policy (as it then appeared to the court) of the State of Illinois, which lacked an indemnification statute. We think, however, that both the plain wording of the by-law and the circumstances under which it was adopted require a finding that the board intended it to apply to the then threatened litigation, and that a subsequent Illinois statute has removed any public policy underpinning of the holding. Following the decision below of May 4, 1977, Illinois, on October 1, 1977, continuing a long-time trend in many of the states, ² modified its statutes to include a broad indemnification provision. ³ An appellate court will in most instances, absent manifest injustice, apply the law in effect at the time it renders its...