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AUSTRIAN v. WILLIAMS

August 21, 1953

AUSTRIAN et al.
v.
WILLIAMS et al.



The opinion of the court was delivered by: WEINFELD

These are applications by some of the defendants, in whose favor judgment was rendered in this action brought by the plaintiffs as Trustees in reorganization of Central States Electric Corporation, for the determination and assessment against the Corporation of their reasonable expenses and attorneys' fees, incurred in the defense of the action. The motions are made pursuant to Article 6-A of the General Corporation Law of New York, *fn1" which contains provisions for the reimbursement of expenses incurred in the successful defense of actions brought against officers of corporations.

It is unnecessary to the disposition of these applications to give the history of this prolonged litigation which has been before the Supreme Court on the question of jurisdiction, *fn2" and before the Court of Appeals for this circuit on appeal from the judgment after trial in this Court. *fn3"

 It is sufficient to state that the action was commenced in this District by the plaintiff Trustees pursuant to an order of the District Court of Virginia, where the reorganization proceedings were pending. The complaint charged Williams, the principal stockholder of the debtor, the present petitioners and various officers and directors with breaches of fiduciary duty to the corporation with respect to thirteen transactions.

 After a long trial the complaint as to nine of the transactions was dismissed on the merits. The claims based on the remaining four transactions were also dismissed on the merits as to all defendants except as to Williams and one director. In three of the latter four transactions, it was found as to two of the moving defendants herein, that 'they failed to exercise due care or prudence in the discharge of their responsibilities to Central States and acted contrary' to its interests, but were held exonerated under the applicable Statute of Limitations. Upon Williams' appeal from the judgment entered against him on the four transactions the New York Statute of Limitations *fn4" was also held as a bar to recover, the judgment reversed, and the complaint dismissed.

 Article 6-A of the New York General Corporation Law was passed in 1945 and was intended to strengthen the then existing law with respect to recompense of directors and officers who had incurred substantial expenses in successfully defending their corporate actions. *fn5" Section 64, the key section of the statute, provides:

 '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.'

 Sections 65, 66, 67 and 68 contain procedural provisions. Section 65 permits the application for reimbursement to be made either in the action, suit or proceeding in which the expenses have been incurred or in a separate proceeding in the Supreme Court. Section 66 requires that the application must be on notice to the corporation. Section 67 provides for the award if 'the court shall find that the applicant * * * was successful in whole or in part, * * * (unless) (i) that the law of the state of incorporation * * * prohibits such indemnity or assessment, * * *.' Under Section 68 the act applies:

 '(a) when the corporation against whom the application is made for assessment * * * is a domestic corporation or a corporation doing business in this state;

 '(b) when such expenses were incurred in an action or proceeding maintained in a court in this state;

 '(c) when the application is made by a resident of this state and the director, officer or employee was a resident of this state at the time of the accrual of the alleged cause of action asserted in the litigation in which such expenses were incurred.'

 At the threshold of inquiry, we are faced with the fundamental question whether the New York Statute may be invoked at all in this action in the Federal Court. It is clear that the litigation expenses and attorneys' fees, reimbursement of which is provided for under that statute, are not conventional taxable costs. Their recovery is therefore not barred by the rule that in a court of the United States no costs, other than those prescribed by Federal law, may be taxed, *fn6" nor may it be doubted that if jurisdiction of the action were founded on diversity the statute would be applicable. *fn7" To be sure, this is not a diversity case, but in reversing the judgment herein the Court of Appeals stated: 'The fact that diversity jurisdiction is lacking does not, alone, preclude a result similar to that which would be reached if there were such jurisdiction.' This statement must be considered together with the nature of the suit brought by the plaintiff Trustees which has been described as one 'in equity for an accounting based on a charge that the affairs of a state-created corporation had been conducted by the officers in violation of state law * * * called for a determination of no law question except those arising under state laws'. *fn8"

 In my opinion, the ruling of the Court of Appeals that this case is governed by the Statute of Limitations of New York as applied and interpreted by the New York Courts, unaffected by the Federal equity doctrine which suspends its running while the derelictions complained of remain undiscovered and while the Corporation was under the domination of the wrongdoers, *fn9" requires a like holding with respect to the provisions of the New York General Corporation Law with which we are now dealing. Every reason which led to that result on the main appeal applies equally here.

 In my view, the reasoning of the holding in Austrian v. Williams, compels the conclusion that the successful defendants are entitled to assert such rights as the New York Statute gives them -- and the fact that a federal forum *fn10" was made available to the reorganization Trustees to advance their claim against the defendants does not deprive them of such rights.

 The plaintiffs in resisting the application also urge that Central States Electric Corporation is not named as party in the action, is not before the Court, and hence no award may be made against it. The petitioners answer that Section 66 of the Statute prescribes notice to the Corporation but does not require the Corporation to be made a party. *fn11" It need not be determined here whether a valid assessment could be made against a corporation on a notice which did not effectively bring it before the Court. For it would be wholly unrealistic to adopt the view that the Central States Electric Corporation is not before the Court in this action and on the present application. The suit, as previously noted, was commenced by the plaintiff Trustees in this District upon express authorization by the reorganization court in Virginia. The action was considered as a valuable contingent asset, and the plan of reorganization not only provided for the retention and enforcement of the law suit by the Trustees and a distribution of the proceeds of recovery to stockholders of Central States, but also made provision for a reserve fund 'to be retained by the Trustees for allowances and expenses * * * in retaining and enforcing the contingent assets of the Estate, and in distributing the proceeds thereof.' True, the corporation itself has been reorganized and many of its assets have been turned over to the Blue Ridge Mutual Fund Inc., the successor corporation under the plan of reorganization. But the Trustees here speak for Central States. The Trustees represent the corporation in the fullest sense and stand in its shoes for every practical purpose. They were cast in the role ...


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