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New York’s highest court has been asked to clarify a portion of the state’s Business Corporation Law relating to the indemnification of corporate officers. The 2nd U.S. Circuit Court of Appeals on Tuesday certified a question for the New York Court of Appeals, asking the court to decide whether the law requires a company to compensate an executive for the costs he incurred in fighting for indemnification, or what is commonly known as a “fees on fees” dispute. The 2nd Circuit’s decision in Baker v. Health Management Systems, 00-7736, came after contentious oral arguments in April over Health Management Systems’ alleged bad faith refusal to fully indemnify executive Phillip Siegel. There was also some sharp sparring over the amount of work that Siegel’s lawyer actually performed on Siegel’s behalf. Following his dismissal from a series of securities fraud class actions against the corporation, Siegel sought reimbursement of $80,000 in fees and costs spent in his defense, and another $17,147 he spent litigating the issue of his indemnification. Federal Judge Richard Berman of the U.S. District Court for the Southern District of New York granted some, but not all, of Siegel’s request for indemnification on the main action — $67,636 in total — and denied Siegel’s application for fees on fees. Appealing to the 2nd Circuit, Siegel argued that he should have been reimbursed for the entire amount because the fees and costs were incurred in the “successful” defense of the action under the Business Corporation Law. He also claimed that Judge Berman should have ordered complete reimbursement because of bad faith on the part of the corporation. Writing for the 2nd Circuit, Judge Fred I. Parker said that the court was affirming all of Judge Berman’s factual determinations, including a finding that the corporation did not act in bad faith — a matter that Berman said was “regrettably, a very close call.” Parker said two sections of the Business Corporation Law were at issue: the phrase attorney’s fees “actually or necessarily incurred” as a result of the litigation in �722(a), and the definition of a “successful” defense of an action in �723(a). Here, he said, the corporation unsuccessfully contested the duty to indemnify Siegel, contested “with partial success” the amount of indemnification, and escaped a finding of bad faith. This, Parker said, amounted to a unique fact pattern that called for the New York Court of Appeals to declare the law on the matter. While the corporation had used Skadden, Arps, Slate, Meagher & Flom, with Coleman, Rhine & Goodwin as co-counsel, to defend the company and its individual officers, Siegel opted for his own attorney. He hired Dennis Block, then of Weil, Gotshal & Manges and now of Cadwalader, Wickersham & Taft. Because Siegel joined the corporation three months after the conduct occurred that prompted the class actions, Block was able to win a quick dismissal from the case. UP TO $200,000 IN COSTS At oral argument before the 2nd Circuit in April, Block argued that the company was guilty of “outrageous conduct” in its refusal to fully indemnify Siegel when he clearly was not with the company during the relevant time period. Block also said that the costs and fees incurred by Siegel to win indemnification, and then to prosecute the appeal, had risen from $80,000 to $200,000. Defending his own fees in the case, Block said that “Mr. Siegel should not have to incur $200,000 in costs to get the $80,000 he was entitled to get.” But Howard Rhine, of Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine, said that New York law requires that there be “unmistakably clear” language in a contract provision before the issue of bad faith refusal to indemnify can arise. Rhine also argued that Block did minimal work on the case, merely filing a four-page motion to dismiss before Judge Berman that mimicked a similar motion filed by Skadden. “Given the amount of money expended by Skadden, to have Siegel make the same argument [before the trial judge seems redundant,]” Rhine told the panel. “ The work that was done was already researched.” But with the issue of bad faith settled by the court, Judge Parker said that because of “a dearth of case law on the ‘fees on fees’ issue in this particular context, we hereby certify the following question to the New York Court of Appeals: “Where a corporate officer is ‘successful’ within the meaning of New York Business Corporation Law Section 723(a), where the corporation unsuccessfully contests the duty to indemnify and contests with partial success the amount of indemnification, and where there is no bad faith on the part of the corporation, does the phrase ‘attorneys’ fees actually and necessarily incurred as a result of such action or proceeding,’ [in �722(a)] provide for recovery of reasonable fees incurred by a corporate officer … ?” Judges Dennis G. Jacobs and Robert A. Katzmann joined in the opinion. Michelle L. Roth and Jasmine Khalili joined Block in representing Siegel.

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