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Commerce Bancorp, Inc. v. InterArch, Inc.

417 N.J. Super. 329, 9 A.3d 1056 (App. Div. 2010)

CORPORATIONS; AGENTS; INDEMNIFICATION — New Jersey’s corporate statute allowing for indemnification of a corporate agent and provides that an adverse judgment, order, settlement, conviction or a plea of nolo contendere does not create a presumption that a corporate agent fails to meet the applicable standard to qualify for indemnification whether in civil or criminal proceedings.

In 1993, a bank hired a construction company to work on a new office building. The bank also hired a design company owned by the wife of the bank’s founder and chairperson to perform work on the same building. In 1994, the bank terminated the construction company’s contract. The construction company instituted arbitration of a breach of contract claim, and was awarded damages. Then, the construction company won a claim against the design company for tortuously interfering with its construction contract. The Appellate Division affirmed the award of compensatory and punitive damages, finding that a jury could have reasonably found malice. Three months later, the interior design firm sought statutory indemnification from the bank. The bank’s board of directors referred the matter to a sub-committee. The bank retained a firm to investigate the indemnification request. It found a legal and factual basis for the bank to indemnify the design company.

After considering the advice of outside counsel, the sub-committee recommended to the board that it indemnify the design company for the compensatory damages award, current and future interest, and legal fees incurred, but not for the punitive damages component. In 2002, the board adopted a resolution approving an indemnification payment in the approximate amount of $1.3 million.

The bank later merged with another bank, and a number of shareholder derivative lawsuits were filed against various officers and directors of the bank on behalf of the newly formed company. For the most part, they alleged that the old bank’s founder and chairperson breached his fiduciary duty, wasted corporate assets, and unjustly enriched himself at the corporation’s expense. As a result, the bank created a special litigation committee (SLC) which concluded that the board had not been fully apprised of the full range of legal defenses available and, thus, could not have known that indemnification was improper. The bank then filed a two-count complaint against the design company sounding in declaratory judgment and filed a claim against the old president to set-off the amounts it provided in indemnification to him. The lower court held that the Business Corporation Act does not permit a corporation to indemnify its agent after an adverse civil judgment. In its opinion, the old president, as an agent, did not act in good faith and in the best interests of the corporation. The statute provides that an adverse judgment, order, settlement, conviction or upon a plea of nolo contendere does not create a presumption that the corporate agent failed to meet the applicable standard of conduct to qualify for indemnification. However, based on the structure of the statute, which addresses civil and criminal proceedings in separate sections, the lower court construed this provision to be applicable only to criminal proceedings.

On appeal, the Appellate Division observed that the indemnification statute contains two clauses separated by a semi-colon. The first established the qualifications for a corporate agent to obtain indemnity in any proceeding in which he or she is involved by reason of his or her agency. The second clause imposes an additional criterion upon a corporate agent seeking indemnity in a criminal proceeding. It contained a second sentence, which states that the termination of any proceeding by way of a judgment creates no presumption that the corporate agent failed to meet the standards of conduct enunciated in both clauses. Simply because of its structural proximity and connection, the lower court had construed the second sentence as relating to only the second clause, and thus applicable only to corporate agents seeking indemnity in criminal proceedings. According to the Court, in doing so, the lower court disregarded the plain language of the second sentence.

First, the Court looked to the punctuation of the statute. The anti-presumption provision was set off from the second clause by a comma, rather than a period, indicating that the second sentence modified the preceding sentence in its entirety. Next, the Court noted that by following the definition of proceeding set forth in the statute, it was obvious that the anti-presumption language related to both civil and criminal matters. Additionally, the plain language of the anti-presumption sentence explicitly and directly referred back to both sets of standards. Finally, the Court’s review of the legislative intent further supported the construction that the second sentence applied to the entire section. Thus, the Court reversed and remanded the matter with direction to enter judgment of dismissal.

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