305 N.Y. 395 | NY | 1953
Lead Opinion
This proceeding is brought under sections 64 to 68, found in article 6-A, as enacted in 1945 (L. 1945, ch. 869), of the General Corporation Law, which sections set up a system whereby the New York courts may, in certain situations, order that a corporation reimburse its officials for their previously
In the petition, which has been dismissed for insufficiency (and the allegations of which we accept as true), it is said, among other things, that in December, 1941, a Grand Jury in the United States District Court, Southern District of New York, indicted General Aniline & Film Corporation and other defendants, including petitioner Schwarz, individually, for alleged violations of the first section of the Sherman Anti-Trust Act (U. S. Code, tit. 15, § 1). Petitioner was at that time a vice-president and director of General Aniline & Film Corporation, but had resigned as officer and director, and retired, at the end of 1941, a few days after the indictment was handed up. The petition goes on to say that Schwarz was not guilty of any violation of the Sherman Act, that he pleaded not guilty to the indictment, and retained attorneys in New York City to whom he agreed to pay a fee of $7,500 to defend him up to but not including the trial if there should be one, these attorneys informing him at the time that, if the case should go to trial the fee for representing him at such a trial would be $1,000 per day; that Schwarz, from his own funds, paid these attorneys a retainer fee of $7,500 plus certain disbursements. The petition further says that, in January, 1950, petitioner’s lawyers informed him that the United States was no longer interested in prosecuting the cause, but desired to terminate it and was willing, if the court would consent, to permit all the individual defendants, including Schwarz, to plead nolo contendere (see Federal Buies of Criminal Procedure, rule 11), that petitioner did not wish to do so, but that he was told by his attorneys that he would probably be punished by a small fine only, and that the expense of a trial of the case would be financially crushing to him. He alleges in this petition that, pursuaded by these arguments, he pleaded nolo contendere, was fined $500 by the court, paid the fine and requested General Aniline & Film Corporation to reimburse him but that the corporation notified him that it did not feel authorized to do so without an order of
On petitioner’s appeal to the Appellate Division, the four Justices who voted for affirmance wrote no opinion, so that we do not know on which ground, or grounds, the majority based its approval of a dismissal of the petition. The dissenting Justice, in that court, was of the opinion that petitioner’s conviction did not constitute an adjudication of “ misconduct ” within the meaning of section 64. He stated that no moral
Neither court below discussed the question as to whether article 6-A was intended to apply to expenses incurred by an officer or director in his defense against a criminal indictment. For ourselves, however, we cannot believe that the Legislature, in enacting article 6-A, ever intended to provide reimbursement to anyone for his attorneys’ fees in a criminal cause against himself. As we know, these provisions for reimbursement came into the statute law after, and because of, the famous opinion of Judge Crouch, sitting as an Official Referee, in 1939, in New York Dock Co. v. McCollum (173 Misc. 106). (See Bailey v. Bush Term. Co., 293 N. Y. 735.) There it had been decided, in effect, that the corporation in whose behalf a stockholder’s suit is brought, was not obligated, at common law, to pay legal fees incurred by its directors in defending themselves as individual defendants in such an action. That left corporate directors (and officers) in an unsatisfactory position since, when sued and although successful in a stockholder’s suit, they would find themselves exonerated from fault but subject to the heavy attorneys ’ fees characteristic of the defense of such actions. To ameliorate their condition, article 6-A was put into the General
Section 27-a (supra) was quite restricted in that it had to do with repayment of litigation expenses, when permitted by certificate of incorporation or by-laws of a corporation only. Section 61-a (supra) contained another kind of limitation — or, at least, another kind of limitation was read into it by the courts — the courts holding that litigation expenses could not be assessed as special costs against a corporation in favor of its officers or directors, unless there was a showing that the corporation itself benefited by the defense of the individuals to the suit. In 1945, pursuant to recommendations by the Law Revision Commission, section 27-a became section 63 in a new article 6-A, and the remaining sections of article 6-A (§§ 64, 65, 66, 67, 68) were added. Sections 65, 66, 67 and 68 describe procedure only, whereas section 64, as pointed out above, contains broadened provisions for assessment against a corporation, of the expenses of any person who is made a party to “ any action, suit or proceeding ” because of his being an officer, director or employee, unless it shall have been adjudged that he was liable for neglect or misconduct in the performance of his duties. While it cannot, of course, be proven mathematically, it seems clear that there never was any intention to apply any of this to defense costs in a criminal case. There
It would be a very strange public policy, indeed, which would set up legal machinery whereby one charged with, or convicted of, a crime, of whatever kind, could require the corporation by whom he was employed to pay his legal expenses. And, aside from that aid to statutory construction, there are plenty of affirmative indications that the Legislature was thinking of, and legislating about, civil causes only. The Law Revision Commission’s report, with which the 1945 statutes originated, made it plain (see bottom p. 139) that the proposed 1945 revision (new article 6-A of the General Corporation Law) had for its purpose the “ making consistent ” of former sections 27-a and 61-a {supra) and setting up better machinery for enforcing (where charter and by-laws did not authorize) reimbursement by a corporation of litigation expenses of its directors and officers. No one ever suggested that former sections 27-a and 61-a had anything to do with criminal cases. At pages 140 and 141, the commission’s 1945 report is talking, obviously, about allowances and attorney’s fees and costs of parties in civil proceedings. Of the numerous decisions and writings cited in that report, not one had to do with a criminal case.
When the Legislature came to enact, into law, the 1945 suggestions of the commission, it included them in the very same chapter (L. 1945, ch. 869) which contained the new statutes requiring security from certain plaintiffs in stockholders’ suits. In other Words, the Legislature considered that articles 6 and 6-A
It is suggested that criminal proceedings are covered by the inclusive language of section 64: “ any action, suit or proceeding ”. Those words could, we suppose, carry that meaning, if they stood alone, and if we had no sure guides to their real significance. That identical phrase was in old sections 27-a and 61-a, and it was never asserted that those statutes applied to criminal cases — indeed, old section 61-a itself provided that the litigation expenses it described could be recovered as “ special costs ”, plainly a reference to civil litigation. We note, too, that the quite similar New Jersey, Kentucky and Delaware statutes set out in an appendix to the Law Revision Commission’s 1945 Report, all include the same verbiage: “ action, suit or proceeding ”, and it is not claimed that any of those statutes have ever been held to contemplate the reimbursement of lawyer’s fees in criminal trials. Our own conclusion is that the draftsman who was responsible for the statutory language: ‘ ‘ any action, suit or proceeding ’ ’ was being overcautious in making sure that the law would apply in an “ action” at law, a “ suit” in equity, or a special “ proceeding
Since we are holding that court-mandated reimbursement, under article 6-A, can never be had as to expenses of one defending himself against criminal charges, it is unnecessary to examine the interesting question of whether a plea of “ nolo contendere ” in a Federal court is an “ adjudication ” of “ misconduct ”. It is instructive, however, to look a little closer
Those who join in this opinion agree, also, with the able concurring opinion of Carswell, J., who sat with us in the rehearing of this appeal.
The order should be affirmed, with costs.
Concurrence Opinion
(concurring). I concur in Judge Desmond’s opinion for affirmance for the reasons given therein and for an additional reason.
Section 64 of the General Corporation Law directs reimbursement by a corporation of a director, officer or employee who has been put to expense as a consequence of having been made a party “ to any action,” etc., because he is or was a director, except when guilty of misconduct. This opening phrasing properly becomes the subject matter of interpretation only because certain terminology in section 64 and the following sections, characteristic of and conventionally used in civil actions, makes the meaning of the opening phrase obscure or equivocal or has a possibly restrictive effect upon it. It thus becomes necessary to determine by interpretation whether “ any action,” etc., includes both civil or criminal actions or is limited to a civil action. This requires us to ascertain whether the proper rule of interpretation is strict construction or liberal construction, in order to determine whether or to what extent the light shed by the context, on the words “ any action,” etc., reveals the true legislative purpose or intent, having in mind that the pertinent sections were all the subject of a single legislative document and enactment in chapter 869 of the Laws of 1945.
Reimbursement for such expenses could not be had at common law (Bailey v. Bush Term. Co., 293 N. Y. 735). Therefore, sections 64 and 65 are in derogation of the common law. Section
Section 64, therefore, is in derogation of both the common law and the contract rights or engagements of the parties. Strict construction, therefore, is the rule applicable (Matter of Ryan, 291 N. Y. 376, 400; Erickson v. Macy, 231 N. Y. 86, 91; Dean v. Metropolitan Elevated Ry. Co., 119 N. Y. 540, 547). Only by observing such a rule is the extension or broadening of a legislative change avoided and true legislative intent made effective.
Section 65 which is referred to in section 64 sheds light on the true scope of section 64. It provides in subdivision (a) that the reimbursement is to be sought in the “ action,” etc., in which the expenses were incurred or (b) in a separate proceeding in the Supreme Court. Subdivision (a) is the only one that specifies in detail what expenses are to be the subject of reimbursement. Applying the rule of strict construction here to ascertain legislative intent, subdivision (a) is the sole determinant of the extent of the reimbursement and if reimbursement cannot be had in subdivision (a) it may not be had in subdivision (b). If subdivision (a) is to be construed as inclusive of both a basic civil action and a basic criminal action, then subdivision (a) is valid as to a civil action but invalid as to a criminal action. The Legislature is without power to bestow jurisdiction in civil matters on a court which by constitutional provision is “ vested with jurisdiction only in criminal prosecutions or proceedings ” (N. Y. Const., art. VI, § 11). A typical example is the County Courts of Kings, Bronx, Queens and Richmond Counties. A director acquitted in a criminal action under the Donnelly Act, for instance, may not have reimbursement for expenses under subdivision (a) of section 65 under the
A judicial determination between two who were defendants in a criminal action as to the respective rights and obligations of one to the other based inter alla upon presence or absence of fault is a jurai question that is indisputably an exercise of civil jurisdiction. (Cf. Bailey v. Bush Term. Co., supra.)
Section 65, the complement of section 64, being thus limited to a basic civil action or proceeding, the legislative intention, therefore, clearly was to limit similarly section 64 to a civil action or proceeding. This is the inevitable consequence of the impact of context. If the legislative intention was to include a criminal action, under the rule of strict construction, a clear direction or an imperative command to include a criminal action must be given by the Legislature. To adopt the appellant’s construction would require that the effect of the impact of the context be dispelled by inserting before the word 11 action ” in the opening phrase in section 64 the words “ civil or criminal ” and would require a recasting of section 65 so as to specifically direct in subdivision (a) that reimbursement be had in the basic civil action and in the event the expenses were incurred in a criminal action provide for an explicit direction in subdivision (b) that such expenses be sought in a separate proceeding in the Supreme Court.
To accept appellant’s interpretation would be an unwarranted exercise by the court of the legislative function and give effect to an intent never expressed'by the Legislature, under the guise of interpretation, and would be in derogation both of the common law and the contract engagements of the parties made available to them by methods set out in section 63.
The foregoing analysis of sections 63, 64 and 65 discloses that the legislative intent, as expressed throughout chapter 869 of the Laws of 1945, is to confine reimbursement in proper situations to expenses incurred in a civil action or proceeding.
Carswell, J., designated for the purposes of this case.
Dissenting Opinion
(dissenting). I.cannot agree that the lone circumstance that petitioner’s legal expenses were incurred in defending a criminal, rather than a civil, antitrust proceeding removes his claim from the compass of section 64 of the General Corporation Law. Both the language and the design of that statute point the conclusion — apparently adopted by all the judges who passed upon the case below •— that that factor does not, in and of itself, constitute a bar to reimbursement.
Nor do I believe that such recompense is proscribed on the further ground — not considered by the court (opinion of Desmond, J., pp. 403-404) —that the judgment entered upon petitioner’s plea of nolo contendere constitutes, in the language of section 64, an adjudication that he is “ liable for negligence or misconduct in the performance of his duties ” as an official of the corporation. Especially so, where, as here, petitioner was made a party defendant to the antitrust suit in his ‘ ‘ capacity ’ ’ as officer and director of a corporate defendant, with which he had not the slightest connection until some six years after the allegedly illegal agreement was concluded and the unlawful conspiracy begun.
Section 64 of the General Corporation Law, upon which decision depends, reads as follows:
“ Any person made a party to any action, suit or proceeding by reason of the fact that he * * * is or was a director, officer or employee of a corporation shall be entitled to have his reasonable expenses, including attorneys’ fees, actually and necessarily incurred by him in connection with the defense of such action, suit or proceeding ® * * assessed against the corporation * * ° except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such officer, director or employee is liable for negligence or misconduct in the performance of his duties.” (Emphasis supplied.)
That provision is bare of any limitation restricting its scope or application to civil eases. In point of fact, the legislature adopted language as broad and as all-inclusive as was possible. The statute encompasses “ any action, suit or proceeding ”, and, in so many words, entitles any person made a party to reimbursement for attorneys’ fees incurred in connection with
Before 1945, when Article 6-A, with its section 64, was added to the General Corporation Law, section 27-a empowered a corporation to provide in its certificate of incorporation or its by-laws that each director should be indemnified against expenses incurred in connection with the defense of “ any action, suit or proceeding ” in which he was made a party by reason of his having been a director. Section 61-a, though broader in its coverage (applying to officers as well as directors) was expressly limited to “ any action, suit or proceeding ” against such officers or directors “ brought by the corporation, or brought in its behalf ”. Here, then, was language to be used if the legislature desired to provide reimbursement only in a limited type of case. No such verbiage — indeed, no limiting language whatsoever — was employed when the legislature enacted section 64. Instead, as already indicated, it provided that reimbursement could be had by any person made a party ‘ ‘ to any action, suit or proceeding ” by reason of his being a corporate officer or director. In other words, while, before 1945, only expenses in actions “ brought by the corporation, or brought in its behalf ”, were mandatorily reimbursable, new section 64, in sharp contrast, called for reimbursement in 11 any action, suit or proceeding ”. Rejection of the narrow language of former section 61-a, and adoption in its place of the exceedingly broad phrasing of section 64, bespeaks a design completely at odds with the restriction now imposed by the court.
Indeed, the Law Revision Commission, the very body responsible for the enactment of Article 6-A, suggested a special proceeding for collecting fees expended in defending a “ criminal ” antitrust suit (1945 Report of N. Y. Law Revision Commission [N. Y. Legis. Doc., 1945, No. 65], at p. 161, fn. 36). Thus, in the study submitted by the commission to the legislature, there is a discussion of the ‘ ‘ type of action covered ’ ’ by the proposed article. After calling attention to the broad language of old
“ might cover certain types of actions [fn. 36, E.g., a criminal proceeding against the corporation and its officers or directors for violation of the anti-trust laws] in which the court, lacking powers of a court of equity, would not he in a position to pass upon the right to indemnity or to make allowances. ’ ’
This contingency, the study continued, “ can he avoided ” by providing for ‘1 the maintenance of a special proceeding against the corporation for the sole purpose of determining these questions ” (1945 Report of N. T. Law Revision Commission, op. cil., p. 161.) Adopting that proposal, the legislature made provision in subdivision (b) of section 65 for the suggested special “separate proceeding.” This, I suggest, was the clearest indication possible that Article 6-A was meant .to entitle officers and directors to reimbursement for expenses incurred in defending a criminal antitrust proceeding.
To the point, made in Judge Desmond’s opinion (p. 402), that it would be a “ strange public policy ” to set up legal machinery by which a person, charged with a crime, “ could require the corporation by whom he was employed to pay his legal expenses ”, several answers are at hand. There is nothing either “ strange ” or against “ public policy ” in reimbursing a corporate official for the expenses of defending an action brought against him solely because of his acts on behalf of the corporation which he, in good faith, believed would further its best interests. The legislature, having in mind the realities of business life, may well have concluded that the risk of an official’s indictment under the antitrust laws is no more than a normal hazard of corporate operation, a risk of doing business to be borne by the company which, in all probability, profited from his activities. In point of fact, as Justice Carswell himself notes in his concurring opinion (p. 405), a corporation would be “ free ”, under the procedure embodied in section 63, to indemnify an officer or director against reasonable expenses incurred by him in defending “not only civil but criminal actions.” And, even apart from section 63, it has been held that a corporation is empowered to pay attorneys’ fees and other legal expenses incurred by a director in defending a criminal
And what of the official or director who, following indictment and trial, is actually acquitted? Certainly, no reason of policy may be advanced for denying him reimbursement for attorneys’ fees in defending the suit. His only fault was that he was an official of a corporation whom the government chose to indict for a violation of the antitrust laws. Nevertheless, according to the court, even such an official — his complete innocence established and the indictment against him dismissed — would be barred from obtaining reimbursement under section 64. Mere statement of such a consequence compels rejection of the underlying rationale.
The basic flaw in the majority’s reasoning, it seems to me, stems from a faulty assumption of an essential difference between the criminal and the civil in the area of antitrust regulation. As a general rule, it is of course true, a criminal proceeding is aimed at redressing a wrong to the public, while a civil suit brought by a private citizen seeks to vindicate only a personal right. Moreover, the difference between the two usually reflects a corresponding difference in the degree of dereliction charged or the importance of the duty violated. In the area of antitrust or, for that matter, of most economic regulation, however, both civil and criminal proceedings involve assertion of a public right and protection of a social interest. As a result, there appears little justification for sanctioning reimbursement of expenses in a civil antitrust case and refusing like recovery following a criminal antitrust proceeding — particularly since the choice of procedure under the statute is left completely with the Attorney General (see U. S. Code, tit. 15, §§ 1,4, 24) and there is no suggestion that exercise of his discretion is to be governed by the enormity of the violation charged. Under those circumstances, the right to recovery of expenses should
In either case, it appears clear that the legislature intended that an officer or director should recover his reasonable defense expenses under section 64. The fact undoubtedly is, as Judge Desmond states (opinion, pp. 402-403), that abuses attending the prosecution of stockholders’ derivative suits prompted enactment of Article 6-A. However, a statute’s reach is not to be measured solely by the evil that occasioned its birth. (See, e.g., Fasulo v. United States, 272 U. S. 620, 627; see, also, Crawford, Statutory Construction [1940], pp. 247-248.) And, as I have tried to show, both the language chosen and the procedures adopted in Article 6-A manifest the design that reasonable expenses incurred in defending an antitrust suit are recoverable — provided, of course, that the petitioning officer or director has not been “ adjudged * liable for negligence or misconduct in the performance of his duties.”
The judgment entered upon petitioner’s plea of nolo contendere does not, in my view, adjudge him so liable. Far from being an acknowledgment of guilt or an admission of misconduct, that plea “ is in the nature of a compromise between the Government and the defendants ’ ’, a device, so to speak, by which the proceeding may be settled with the approval of the court. (Twin Ports Oil Co. v. Pure Oil Co., 26 F. Supp. 366, 372; see, also, State v. La Rose, 71 N. H. 435.) And the New Hampshire Supreme Court has written, “ Under the plea of nolo, the defendant does not confess or acknowledge the charge against him as upon a plea of guilty * * ®. The plea is in the nature of a compromise between the state and the defendant — a matter not of right, but of favor. Various reasons may exist Avhy a defendant conscious of innocence may be willing to forego his right to make defence if he can be permitted to do so Avithout acknowledging his guilt.” (State v. La Rose, supra, 71 N. H. 435, 438-439.) Indeed, in People v. Daiboch, 265 N. Y. 125, we actually recognized that a plea of nola contendere or, more precisely, its equivalent, a plea of non vult, does not constitute a concession of any fact set out in the indictment. Although the court there held that it
Any doubt that a judgment entered upon a nolo contendere plea is in the nature of a compromise, a settlement of the controversy, rather than an adjudication of any fact asserted or a determination of any charge alleged, is laid to rest by a Clayton Act provision (38 U. S. Stat. 731, U. S. Code, tit. 15, § 16), distinguishing between a judgment of conviction following a trial and one entered after a plea of nolo. “ A final judgment or decree rendered in.any criminal prosecution ” brought by the United States under the antitrust laws, the statute recites, “ shall be prima facie evidence against such defendant in any suit or proceeding brought by any party against such defendant ’ ’. However, the statute goes on expressly to exclude from its application “ consent judgments or decrees entered before any testimony has been taken ”, and the term, “ consent judgments or decrees ”, has been held to include a decree entered after a plea of nolo contendere. (See, e.g., Twin Ports Oil Co. v. Pure Oil Co., supra, 26 F. Supp. 366, 371-372; Barnsdall Refining Corp. v. Birnamwood Oil Co., 32 F. Supp. 308, 311-312.)
Beyond that, however — and I go further than is necessary for decision in this case — even if I were to assume that a plea of nolo contendere is an acknowledgment of guilt, it still would not follow that the judgment entered upon such a plea amounts to an adjudication that petitioner was “ liable for negligence or misconduct in the performance of his duties.” That exception obviously exempts a corporation from the duty to reimburse its officials only when they have been disloyal, or breached some obligation, to the corporation itself. It has no application when, in the faithful discharge of corporate duties and in the furtherance of what are regarded as the company’s best interests, ah officer or director may incidentally have committed acts involv
The circumstance of such an adjudication does not suggest any disloyalty to corporate interests or even imprudence in the conduct of business affairs. “ In view of the extreme uncertainty which prevails as a result of * * * vague and conflicting adjudications ”, two authorities on the subject have written, “ it is impossible for a lawyer to determine what business conduct will be pronounced lawful or unlawful by the courts. * * Legitimate business enterprise, desirous of knowing and obeying the law, has no safe standards by which to be guided.” (Jackson and Dumbauld, Monopolies and the Courts, 86 U. of Pa. L. Rev. 231, 232, 236; see, also, Cahill, Must We Brand American Business as Criminal?, Amer. Bar Assn., Proceeding of Section of Antitrust Law [1952], 26, 29-31.) And in the Socony-Vacuum Oil Co. case (supra, 267 App. Div. 890, affg. 179 Misc. 202), the court ruled that directors may not be held personally liable to stockholders for expending corporate funds on behalf of themselves in connection with their defense of a criminal antitrust suit, even though they were convicted after trial. While observing that those officials had participated in the unlawful acts leading to their prosecution and conviction, the court declared (179 Misc., at p. 203) that the evidence indicated that they “ did not violate any duty which they owed the corporation; that they acted honestly and reasonably and for what they believed to be the best interests of the company.”
Dye and Fboessel, JJ., concur with Desmond, J.; Cars-well, J.,
. Order affirmed.
Designated pursuant to section 5 of article VI of the State Constitution in place of Van Voorhis, J., disqualified.
