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The issue of whether a company should pay the attorney’s fees incurred by executives forced to fight that company for full indemnification of the costs of an independent defense is now before the 2nd U.S. Circuit Court of Appeals. In oral arguments Friday, lawyers in a so-called “fees on fees” case presented radically different views over whether a company’s refusal to pay the cost of an executive’s battle for full indemnification amounts to bad faith. The issue arose after attorney Dennis Block was hired by Philip Siegel, chief financial officer of Health Management Systems Inc., who retained his own counsel in a class action suit alleging that HMS and some of its directors and officers made misleading statements to inflate the price of the company’s stock. Block, of Cadwalader, Wickersham & Taft, told the 2nd Circuit that HMS exhibited bad faith and “outrageous” conduct when it refused to pay the full amount of his attorney’s fees for representing Siegel. Block also said Siegel should be reimbursed for attorney’s fees incurred in forcing the company to indemnify Siegel, which he termed “enforcement fees.” Under the “bad faith” exception, Block said, a judge may award fees incurred in fighting an argument that is utterly without merit and asserted for purposes of harassment, delay or some other improper reason. The very act of HMS arguing it was not obligated to indemnify Siegel to the full amount, Block said, was evidence of bad faith. But Howard Rhine of Coleman & Rhine, who represents HMS, said the New York state law is unambiguous: there must be “unmistakably clear” language in a contract or other instrument that requires the company to fully indemnify an executive for retaining independent counsel. Rhine also said HMS exhibited no bad faith in fighting the full indemnification of Siegel, and therefore has no obligation to pay Block’s fees. HMS contends that Block’s fees were unreasonable and, and Rhine told the court on Friday that there was no need for Siegel to mount a defense separate from that of the company. Because Siegel had joined HMS in the spring of 1996, three months after the conduct that prompted the securities fraud class action had occurred, he was quickly dismissed as a defendant in the case. On Friday, Block asked the 2nd Circuit to overturn a ruling by federal Judge Richard Berman of the U.S. District Court for the Southern District of New York, who had accepted the recommendation of Magistrate Judge James C. Francis IV that Siegel should be indemnified for $60,959 in fees and a small amount of expenses. But Judge Berman disallowed Block’s full request of $80,000, which included some $17,000 in “fees-on-fees,” or the amount that Siegel paid to Block and co-counsel Michelle Roth to force HMS to indemnify him. Block on Friday told Judges Fred I. Parker, Dennis G. Jacobs and Robert Katzmann that the cost of defending Siegel, including the appeal, has since risen from $80,000 to $200,000. “Mr. Siegel should not have to incur $200,000 in costs to get the $80,000 he was entitled to get,” Block said. In his decision, Judge Berman had noted that “there may be an element of illogic in denying fees on fees.” But the judge agreed with Rhine that it is up to the parties to make it “unmistakably clear” in a contract or some other instrument that the executive will be completely indemnified for the costs of an independent defense. Judge Berman also commented on HMS’ repeated insistence that it was not obligated to fully indemnify Siegel because he had forfeited that right, which is a position the company ultimately abandoned at the last minute. “The determination of whether HMS’s conduct vis-�-vis Siegel’s indemnification rose to the level of bad faith is regrettably a very close call,” Berman wrote. “HMS’s initial determination to resist indemnification arguing that Siegel had no need for separate representation was untenable.” On Friday, Rhine told the 2nd Circuit that despite the strong language, Judge Berman had nonetheless stopped short of finding bad faith by HMS. Judge Jacobs noted Berman was clear in stating that if the company had not abandoned its position that Siegel was not entitled to full indemnification, Berman would have been justified in awarding fees on fees to Siegel. And Rhine said that Berman made the right decision given the facts of the case. HMS, Rhine said, not only had the right to argue there was a limit on the amount of indemnification for Siegel, it also had the right to question the reasonableness of Block’s fees. But Jacobs then asked Rhine, “do you think it is good faith to argue” that Siegel had forfeited the right to full indemnification? Rhine said that it was, because the involvement of Block in the case was minimal, and that the attorney rode the coattails of HMS’ lawyers at Skadden, Arps, Slate, Meagher & Flom for the short time Siegel was involved in the case. Siegel was still in the case when Skadden argued a motion to dismiss “at the outset of the litigation,” Rhine said, before discovery and interrogatories had commenced, and that Block had merely filed a four-page motion to dismiss that dovetailed with Skadden’s own motion. STANDARD OF REVIEW “Given the amount of money expended by Skadden, to have Siegel make the same argument (before the trial judge seems redundant),” Rhine said. “The work that was done was already researched. They signed on to the brief that Skadden filed and the arguments made in the case were identical.” Judge Katzmann asked Block if the standard of review for Berman’s decision was simply for “abuse of discretion,” or whether the court was entitled to undertake a more liberal review of the ruling. Block said the court should review Berman’s ruling “de novo,” without restrictions, and find that Siegel is entitled to the fees. But Rhine said the standard was abuse of discretion. He also argued that it would be unfair to award fees on fees as a means of punishing the company for exercising its right to argue the reasonableness of Block’s fees. The appeals court took the matter under submission without issuing a ruling.

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