A business, run by a man who killed himself under the cloud of a criminal investigation, can proceed against his estate to recoup the money that was advanced for his legal expenses.
Nassau County Surrogate Edward McCarty (See Profile) ruled FalconStor Software could move forward with a recoupment claim against ReiJane Huai’s estate for criminal defense costs. Although Huai was never convicted, the judge said, he could not be deemed successful on the merits of the criminal case while alive.
“Here, the decedent did not prevail during his lifetime. The action was terminated without any resolution,” he said in Proceeding to Determine the Validity of Claim Against the Estate of ReiJane Huai, 2011-367428/A.
The decision affects legal expenses related to the criminal case and not civil matters, such as shareholder derivative actions suits against Huai and FalconStor.
The recoupment claims were part of a larger case against the Huai estate brought by FalconStor. Those claims have been settled. Under terms announced on the company website, FalconStor will receive at least 3 million shares of company stock from the estate.
From 2001 to September 2010, Huai was president and CEO of FalconStor, a Long Island-based data management company he co-founded, which is incorporated in Delaware.
According to court papers, in 2007, Huai initiated a scheme to bribe JP Morgan Chase employees so that the financial giant would do more business with FalconStor.
Huai resigned in September 2010. That fall, the U.S. Department of Justice and Securities and Exchange Commission launched probes into the alleged scheme.
Months later, Huai executed an agreement with FalconStor stating that in return for an advance to pay legal fees, he “undert[ook] to repay all such monies advanced if it is determined that under the laws of the State of Delaware, or under the By-Laws of the Company, I am not entitled to indemnification.”
In September 2011, prosecutors at the Eastern District U.S. Attorney’s Office moved for leave to file a criminal information against Huai.
He shot himself in the chest three days after the government’s motion and, according to FalconStor court papers, one day before he was scheduled to enter a guilty plea.
In the wake of the suicide, the case was closed and Huai was never charged.
FalconStor ultimately entered a deferred prosecution agreement with the Justice Department.
The company sued Huai’s estate in 2013, seeking recoupment and redress for unjust enrichment, breach of contract and fiduciary duties.
In his ruling, McCarty said issues relating to a corporation’s internal affairs were controlled by the laws of the state of incorporation.
In this case, the relevant statute was Delaware General Corporation Law §145, where one provision said corporations must indemnify attorney’s fees incurred by a corporation officer who is “successful on the merits or otherwise” in defending the action. The provision also allowed indemnification because of technical grounds, like a statute of limitations.
FalconStor said Huai could not be deemed successful because he was about to enter a guilty plea.
Huai’s estate argued that the lack of a conviction should be deemed successful. Moreover, Huai’s death was the technical basis for the criminal case’s withdrawal, the estate argued.
But McCarty said that even with dismissals on technical grounds, corporate officers had to show they “prevailed” in the matter. That did not occur while Huai was living, he said.
Alan Vinegrad, a partner at Covington & Burling, and John M. McFaul, a partner at Rivkin Radler, represented FalconStor.
Vinegrad declined to comment.
John McEntee, a partner at Farrell Fritz, represented Shu-Wen Huai, executor of her husband’s estate. He said he was glad the estate and company were able to resolve the claims.