The opinion of the court was delivered by: Berman, District Judge.
This securities fraud class action was filed on March 17, 1997
(the "Action").*fn1 Plaintiffs alleged that Defendants, Health
Management Systems, Inc. ("HMS")*fn2, and certain of its
officers and directors including Defendant Philip Siegel
("Siegel"), the former Chief Financial Officer for HMS,
disseminated false and misleading statements designed unlawfully
to inflate the price of HMS stock.
On August 6, 1998, a stipulation dismissing Siegel from the
Action "with prejudice" was executed by Plaintiffs and
Siegel.*fn3 Siegel was and is individually represented by Dennis
J. Block, Esq. and Michelle Roth, Esq. of Cadwalader, Wickersham
& Taft.*fn4 Initially, HMS refused to indemnify Siegel for the
attorneys' fees and expenses that he incurred in connection with
his defense in the Action arguing, among other things, that the
legal fees sought were neither reasonable nor necessarily
incurred because Siegel did not need representation separate from
the other Defendants.*fn5 HMS's refusal to provide indemnity has
precipitated the instant proceeding.
In November 1998, Siegel filed a motion, pursuant to the New
York Business Corporation Law ("BCL") and the by-laws of HMS, for
an order requiring HMS to indemnify him for his attorneys' fees
and expenses.*fn6 In June 1999, the Court referred Siegel's
motion for indemnification to United States Magistrate Judge
James C. Francis IV. Oral argument was held before Judge Francis
on September 9, 1999. While the matter was pending before Judge
Francis, HMS conceded that it was appropriate for Siegel to be
independently represented; HMS continued to argue that the fees
incurred by Siegel were not
reasonable. On October 25, 1999, Judge Francis issued a Report
and Recommendation ("Report") recommending that Siegel be awarded
indemnification against HMS for "$60,959.50 in attorneys' fees
and $6,677.23 in expenses, for a total of $67,636.73." (Report at
237). Judge Francis disallowed $17,147.64 on the grounds that
that amount of fees and costs was incurred in attempting to
secure indemnification (so-called "fees on fees").
In his Report, Judge Francis clearly advised and notified the
parties of the procedures for objecting to the Report, stating
that "[p]ursuant to Rule 72 of the Federal Rules of Civil
Procedure, the parties shall have ten (10) days from this date to
file written objections to this Report and Recommendation."
(Report at 237). On or about November 8, 1999, both HMS and
Siegel filed timely objections to the Report. In summary, Siegel
argues that he should be awarded "all of the fees he has incurred
in seeking to enforce his indemnification obligation against the
Company [HMS]." (Siegel's Objections dated November 8, 1999 at
25). HMS asserts that the Report should be "rejected to the
extent it recommends reimbursement of Siegel's legal fees,
pending the conduct by this Court of the mandatory Reform Act
review and a determination of the propriety, for Rule 11
purposes, of plaintiffs' having named Siegel as a defendant."
(HMS's Objections dated November 8, 1999 at 4).
This Court may adopt those portions of the Report to which no
objections have been made and which are not facially erroneous.
See Pizarro v. Bartlett, 776 F. Supp. 815, 817 (S.D.N.Y. 1991);
Nelson v. Smith, 618 F. Supp. 1186, 1189 (S.D.N.Y. 1985). The
Court conducts a de novo review of those portions of the Report
to which objections have been made. See Pizarro, 776 F. Supp. at
817. "Because 28 U.S.C. § 636(b) requires a `de novo
determination' rather than a de novo hearing, the district court
is free to place `whatever reliance . . . in the exercise of
sound judicial discretion, [it chooses] to place on a
magistrate's proposed findings and recommendations.'" Pizarro,
776 F. Supp. at 817 (quoting Grassia v. Scully, 892 F.2d 16, 19
(2d Cir. 1989)).
The Court has undertaken a de novo review of the record and the
law and, following such review, is in agreement with all of Judge
Francis' conclusions in every material respect. The Report is
adopted in its entirety. The Court will, however, briefly discuss
three issues raised in the parties' objections.
First, Siegel argues that it is unfair to conclude, as Judge
Francis did, that his "right to be indemnified does not include
the right to be reimbursed for the costs and fees he incurred" in
order to secure such indemnification (i.e., fees on fees).
(Siegel's Objections dated November 8, 1999 at 2). This is by no
means the first time that the issue of "fees on fees" has arisen.
The general rule for resolving this (indemnity) issue was stated
by the New York Court of Appeals as follows: "Inasmuch as a
promise by one party to a contract to indemnify the other for
attorney's fees incurred in litigation between them is contrary
to the well-understood rule that parties are responsible for
their own attorney's fees, the court should not infer a party's
intention to waive the benefit of the rule unless the intention
to do so is unmistakably clear from the language of the promise."
Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487,
549 N.Y.S.2d 365, 548 N.E.2d 903 (1989) (citations
omitted) (emphasis added). Although acknowledging that some
courts have awarded fees on fees*fn7, Judge Francis could find
no "unmistakably clear" language here supporting an award of fees
fees to Siegel.*fn8 See Bridgestone/Firestone, Inc. v. Recovery
Credit Services, Inc., 98 F.3d 13, 20-21 (2d Cir. 1996). This
Court agrees. See Mayer v. Executive Telecard, Ltd.,
705 A.2d 220 (Del.Ch. 1997).
The Court recognizes, as did Judge Francis, that there may be
an element of illogic in denying fees on fees. After all, the
purpose of indemnity is to make someone whole. In light of
existing precedents, however, the Court believes that the
appropriate resolution of this problem is to amend the applicable
instrument, be it a contract or a corporate by-law, explicitly to
authorize fees on fees*fn9, rather than to conclude that
language which is ambiguous is, actually, "unmistakably clear."
See Mayer, 705 A.2d at 223 ("the Delaware General Assembly
apparently has concluded that allowing mandatory indemnification
for fees incurred in the underlying action is an adequate
incentive, without also requiring indemnification of the fees
incurred by the claimant in the indemnification action itself.
Reasonable persons may disagree with that judgment, i.e., whether
`fees for fees' is also needed as a further incentive for capable
persons to serve as directors or officers of Delaware
corporations. In the end, however, that judgment is legislative,
not judicial"); Chamison v. HealthTrust, Inc., 735 A.2d 912,
926 (Del.Ch.1999) (citing Mayer, the Court stated that
"[o]rdinarily, under Delaware law, a successful suit for
indemnification does not entitle the successful director or
officer to recover `fees for fees'"). See also Canpartners
Investments IV, LLC v. Alliance Gaming Corp., 981 F. Supp. 820,
826-27 (S.D.N.Y. 1997).
Second, Siegel asserts that HMS should be obligated to
reimburse him "for all his costs he incurred in prosecuting the
instant application because the incurrence of such fees was
entirely the result of the Company's [HMS] unreasonableness, bad
faith conduct, and dilatory tactics in connection with Mr.
Siegel's efforts to recover the costs of his legal representation
in the Action to which he is absolutely entitled." (Siegel's
Objections dated November 8, 1999 at 21). The Court of Appeals
for the Second Circuit has held that "[u]nder the inherent power
of the court to supervise and control its own proceedings, an
exception to the American Rule has evolved which permits the
court to award a reasonable attorneys' fee to the prevailing
party when the losing party has `acted in bad faith, vexatiously,
wantonly, or for oppressive reasons . . .'" Oliveri v.
Thompson, 803 F.2d 1265, 1272 (2d Cir. 1986), cert. denied,
480 U.S. 918, 107 S.Ct. 1373, 94 L.Ed.2d 689 (1987) (citation
omitted). The Second Circuit has also cautioned that "[t]his
circuit has interpreted the standard restrictively." Id.
The determination of whether HMS's conduct vis-a-vis Siegel's
indemnity rose to the level of bad faith is regrettably a very
close call. HMS's initial determination to resist
indemnification arguing that Siegel had no need for separate
representation was untenable. It should have been clear to HMS
from the start that Siegel's unique circumstances (i.e., the fact
joined HMS three months after the alleged fraudulent conduct had
commenced and the fact that, unlike the other individual
Defendants, he had purchased rather than sold HMS stock at the
allegedly inflated price) warranted separate representation. On
the other hand, HMS backed away from this initial position. As
Judge Francis explained in the Report: "[i]n its initial response
to [Siegel's] application, HMS contended that the fees sought
were neither reasonable nor necessarily incurred because Mr.
Siegel had no need for separate representation. Thereafter, the
company modified its position and now concedes that it was
appropriate for Mr. Siegel to be independently represented.
However, HMS continues to argue that the fees incurred were not
reasonable, and that indemnification should be limited to the
`value added' by Mr. Block to the work done by Skadden on behalf
of all defendants." (Report at 5-6). But for this change in
position, HMS's conduct may well have justified an award of
additional fees to Siegel. See Dunlap v. Sunbeam Corp., 1999 WL
1261339 at * 6 (Del.Ch. July 9, 1999) ("[w]hile this Court has on
occasion awarded `fees for fees,' I do not find Sunbeam's actions
in disputing this matter to be so egregious or in such bad faith
as to require that special form of discipline").*fn10
Third, HMS argues that Siegel breached his duty to HMS and,
therefore, forfeited his right to indemnification, by including a
waiver of attorneys' fees in the stipulation pursuant to which
the claims against him were dismissed. HMS asserts that "the
Magistrate Judge left HMS in the position of having to reimburse
Siegel for fees which the Court may well find should never have
had to be incurred (by virtue of Siegel's wrongful inclusion in
the lawsuit), but without the means (soley by virtue of Siegel's
gratuitous act) of being made whole." (HMS's Objections dated
November 8, 1999 at 3-4). HMS's argument is not persuasive.*fn11
HMS's argument, in this regard, stands logic on its head by
suggesting that Siegel should have remained as a defendant in the
Action — thereby, incidentally, incurring additional legal fees
and expenses — rather than achieve dismissal with prejudice.
Siegel persuasively points out that "there is no authority — and
the Company [HMS] cites none — that stands for the proposition
that by waiving his right to seek sanctions against plaintiffs'
counsel Mr. Siegel has fortified [sic]*fn12 his right to
indemnification from the Company." (Siegel's Opposition to HMS's
Objections dated December 3, 1999 at 5). And, in any event, as
HMS also concedes "[e]ven though Siegel was dismissed out (and
subsequently stipulated out of the case he was no longer in),
that dismissal does not preclude the court's review of the
sanctions issue as respects Siegel . . ." (HMS's Objections dated
November 8, 1999 at 3).
Accordingly, the Court incorporates the Report by reference
and, for the reasons set forth herein, directs that Siegel
forthwith be awarded indemnification against HMS for $60,959.50
in attorneys' fees ...