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A federal judge has ruled that the Reading, Pa.-based vehicle battery-maker Exide Corp. must pay the legal expenses of two former top corporate officers who were indicted and named in a handful of civil lawsuits because the company’s bylaws promise the advancement of legal expenses for all corporate officers in any legal proceeding they did not initiate. In his 26-page opinion in Pearson v. Exide Corp., U.S. District Judge Eduardo C. Robreno rejected arguments that the two officers — the former president and the chief financial officer — are not entitled to the funds because they allegedly engaged in wrongful and “ultra vires” conduct. The ruling is a victory for Douglas N. Pearson, Exide’s former president of North American operations, and Alan E. Gauthier, the company’s former CFO, both of whom were indicted in March in the Southern District of Illinois for wire fraud and mail fraud. The indictments came one day after Exide Corp. pleaded guilty to similar charges arising out of consumer fraud and illegal gratuity payments made by Exide to an employee of Sears. Pearson and Gauthier were fired from Exide in the latter half of 1998, but the company’s bylaws provided for indemnification as well as advancements for litigation for all of its corporate officers, both current and former. Around the time they were fired, both Pearson and Gauthier signed separation agreements with Exide that provided them with compensation, health care and long-term disability. Since then, Exide has accused both men of fraud and has stopped making any payments to them, arguing that the separation agreements are null and void. The alleged corporate improprieties of Pearson and Gauthier has become the subject of several lawsuits and criminal prosecutions involving plaintiffs since the summer of 1999. The first litigation began in the Eastern District of Michigan when Exide’s former CEO, Arthur M. Hawkins, filed a claim against the corporation for breach of his separation agreement. Exide filed a counterclaim against Hawkins for fraud, breach of fiduciary duty, misappropriation of corporate assets and civil conspiracy. In its counterclaim, Exide joined Pearson and Gauthier as additional counterclaim defendants. The gist of Exide’s counterclaim was that Pearson and Gauthier had committed fraud against Exide in securing their separation agreements. Since then, Pearson and Gauthier were dismissed from the case by agreement of the parties. In August 1999, Pearson and Gauthier filed separate lawsuits against Exide in the Eastern District of Pennsylvania claiming breach of contract over Exide’s refusal to pay on the separation agreements. Once again, Exide responded with counterclaims accusing both men of fraud, breach of fiduciary duty and misappropriation of corporate assets. Pearson and Gauthier responded by amending their suits to add a claim for advancement of litigation expenses for all the litigation brought against them. A third lawsuit was brought by Exide in the Circuit Court of Cook County, Illinois, against Sears, which in turn filed a counterclaim against Exide. Pearson and Gathier were drawn into that litigation as well when Exide filed a third-party complaint against them. A fourth lawsuit began in June 2000 when Johnson Controls Inc. sued Exide, Pearson and Gauthier, alleging violations of the Robinson-Patman Act and RICO, as well as tortious interference with prospective business opportunity in the Northern District of Illinois. That case was stayed pending the outcome of the criminal investigation. Judge Robreno found that only one of the civil suits was “voluntarily brought” by Pearson and Gauthier, while in the other cases, both civil and criminal, the two were involuntarily brought into the legal controversy. Robreno found that Delaware law permits its corporations to provide for the indemnification of its officers and directors, but only if the director or officer “acted in good faith and in a manner that he reasonably believed to be in the best interests of the corporation.” The same statute, Robreno found, also allows corporations to advance litigation expenses, including attorneys’ fees. Robreno found that Delaware courts “have consistently found that a corporation may bind itself in advance, through its bylaws or by contract, to advance the costs of litigation incurred by present or former directors or officers.” In Exide’s case, Robreno found that the company’s bylaws “clearly establish a mandatory right to the advancement of litigation expenses.” Exide’s lawyers, Richard L. Strouse and Raymond A. Quaglia of Ballard Spahr Andrews & Ingersoll, along with William G. Schopf, Kenneth E. Kraus, Mary Katherine Danna and Veronica Gomez of Schopf & Weiss in Chicago, argued that the former officers’ wrongful conduct had voided their rights to litigation expenses. Robreno disagreed, saying Exide was confusing the Delaware statute’s restrictions on indemnity with its rules about litigation expenses which include no such limits. But Robreno also ruled that Pearson and Gauthier failed to follow all of the appropriate procedures for enforcing their mandatory right to advancements. Although both men showed that the litigation was started by another party and that they had promised to repay the expenses if it is ever determined that they are not entitled to indemnification, Robreno found that neither met the third requirement of putting their claim in writing. Pearson, he found, has never provided an expense sheet specifically enumerating his litigation expenses. And while Gauthier gave the company an expense sheet for the Michigan, Pennsylvania and Cook County actions, he never provided an expense sheet for the other litigation expenses. As a result, Robreno concluded that “until Pearson and Gauthier provide a detailed, itemized invoice of the expenses for the Michigan, Pennsylvania, Cook County, and Illinois actions, as well as the criminal proceedings, Exide has no obligation to provide advancements.” Once they do so, Robreno said, “Exide will then have an opportunity to review those invoices and, in the event that Exide finds, in good faith, particular litigation expenses which are unreasonable, they can file objections to those specific unreasonable expenses.” But in the meantime, Robreno said, “Exide must provide advancement of litigation expenses for all items for which it does not object.”

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