Gaines West v. Balfour Beatty Const

Revised April 29, 2002
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________
No. 00-51328
_______________________
In The Matter Of: WILLIAM L. MILLER,
Debtor.
____________________
GAINES WEST, Chapter 7 Trustee,
Appellant,
versus
BALFOUR BEATTY CONSTRUCTION, INC.; BALFOUR BEATTY, INC.,
Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Western District of Texas
_________________________________________________________________
April 24, 2002
Before JONES and DeMOSS, Circuit Judges, and FELDMAN, District
Judge:*
EDITH H. JONES, Circuit Judge:
The issue in this case is whether a corporate officer is
entitled to indemnification under Delaware law for acts committed
for his own benefit before he was employed by the corporation.
*
District Judge of the Eastern District of Louisisna, sitting by
designation.
Affirming the decisions of the bankruptcy and district courts in
the narrow circumstances presented, we hold that he is not so
entitled, because he was not sued “by reason of the fact” that he
was a officer of the potential indemnitor. See Del. Code Ann. tit.
8, § 145(a).
This case has been appealed by the Trustee of the estate
of William L. Miller, who sought bankruptcy relief after being
pursued to judgment by his former employer for misappropriation of
proprietary information or improper use of trade secrets. Miller
had worked for Abrams, Inc., a large Texas road construction
contractor, unhappily for several years. He plotted his escape
over a period of time, finally deciding to attract another major
construction company, Balfour Beatty,1 into the Texas market with
him as its leader. While negotiating with Balfour Beatty in the
autumn of 1993, and still an employee of Abrams, Miller took three
boxes of Abrams documents and apparently used them to persuade
Balfour Beatty of the attractiveness of competing in Texas. Miller
then jumped ship to become Balfour Beatty’s chief operating officer
in Texas in February 1994.
Abrams immediately retaliated with a lawsuit against
Miller and Balfour Beatty. In the state trial court, Abrams
achieved a judgment for $1 million against Miller individually, but
1
This opinion will refer to Balfour Beatty as shorthand for both
corporate defendants.
2
the jury did not accept Abrams’s claims that Balfour Beatty
actually conspired with, participated in or profited from Miller’s
actions.
Miller sought Chapter 7 bankruptcy relief to avoid paying
the Abrams judgment, and Abrams then sued for non-dischargeability
of the debt. The bankruptcy court entered judgment against Miller.
The Fifth Circuit, however, disagreeing with both the bankruptcy
court and district court in its appellate capacity, reversed one
ground of liability but remanded with respect to another ground.
See Miller v. J.D. Abrams, Inc., 156 F.3d 598 (5th Cir. 1998).
Before trial on the remand to bankruptcy court, Miller settled with
Abrams for only $75,000.
Abrams did not give up. It continued to press the long-
simmering issue of Balfour Beatty’s obligation to indemnify Miller
for the Abrams judgment under company bylaws and Delaware
corporation law. As a result, Miller’s Chapter 7 Trustee demanded
indemnification be paid to Miller’s estate, prompting an adversary
proceeding by Balfour Beatty against Miller, the Trustee and Abrams
for declaratory relief against indemnification. The Trustee
counterclaimed in favor of indemnification.
“And now continues the saga”, Bankruptcy Judge Frank
Monroe wrote, indicating his frustration with six years of costly
and vindictive litigation by both parties. In a carefully detailed
opinion after trial, the court found, among other things, that
3
Miller returned the documents to Abrams when asked, and it was
undisputed that Miller never affirmatively used Abrams documents
while an employee of Balfour Beatty at all, much less to compete
unfairly against his former employer. The bankruptcy court also
found that most of Miller’s actions concerning Abrams documents
were taken before Miller was employed by Balfour Beatty. The court
concluded that “Miller was sued predominately because of activity
he undertook to obtain employment, which was for his own personal
benefit and not in furtherance of [Balfour Beatty’s] policies or
objectives.” Consequently, Miller’s conduct did not fall within
the scope of any corporate duties and responsibilities for which
Balfour Beatty is required to indemnify Miller.
The district court affirmed the judgment, and the Trustee
has appealed.
DISCUSSION2
In the absence of any express indemnity agreement between
Miller and Balfour Beatty, the Trustee’s right to recover turns on
the Company’s bylaws, which adopt Delaware corporation law.
Article VIII of the corporate bylaws provides:
To the extent permitted by § 145 of the General
Corporation Law of the State of Delaware . . . [Balfour
Beatty] shall indemnify any person who was or is a party
. . . to any threatened, pending or completed action,
2
In appeals from bankruptcy court, we review conclusions of law de
novo and findings of fact for clear error. Matter of El Paso Refining, L.P., 171
F.3d 249, 253 (5th Cir. 1999).
4
suit or proceeding . . . by reason of the fact that he is
or was a director, officer, employee or agent of the
corporation.
The pertinent portion of the Delaware General Corporation
Law provides:
(a) A corporation may indemnify any person who was or
is a party or is threatened to be made a party to
any threatened, pending or completed action, suit
or proceeding . . . by reason of the fact that he
is or was a director, officer, employee or agent of
the corporation . . . if he acted in good faith and
in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation . .
. . The termination of any action, suit or
proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a
presumption that the person did not act in good
faith and in a manner which he reasonably believed
to be in or not opposed to the best interest of the
corporation . . . .
Delaware Code Ann. tit. 8, § 145(a). Read together, these
provisions require Balfour Beatty to indemnify Miller if he was
sued “by reason of the fact” that he is an officer and employee of
the corporation, and if Miller “acted in good faith and in a manner
he reasonably believed to be in or not opposed” to Balfour Beatty’s
best interests. It will be unnecessary to reach the good faith
prong of this test, since we conclude, like the bankruptcy and
district courts, that Miller was not sued “by reason of the fact”
that he was an officer and employee of Balfour Beatty.
Thirty-five years after its revision, this
indemnification provision of Delaware law has seldom been
5
interpreted in court. The lack of caselaw may seem detrimental to
analysis of a close case, but on the other hand, it suggests that
the law has admirably fulfilled the purpose of guiding public
conduct without need to resort to the courts. In any event, the
available decisions establish a clear framework for analysis. They
proceed from the proposition that Delaware intended to encourage
capable people to serve as corporate employees, officers and
directors by permitting corporations to shield them from liability
for their official activities. Indemnification also ensures that
corporate officials will and can defend themselves against
unjustified suits and claims. VonFeldt v. Stifel Fin. Corp., 714
A.2d 79, 87 (Del. 1998). The cases thus broadly interpret “by
reason of the fact” to require no more than a nexus between the
corporate officers’ or directors’ official activity and the matter
for which indemnification is sought. See Witco Corp. v. Beekhuis,
38 F.3d 682, 693 (3d Cir. 1994); Heffernan v. Pacific Dunlop GMB
Corp., 965 F.2d 369, 374 (7th Cir. 1992). Further, whether a nexus
exists is a question of fact to be determined by the trial court
considering all the circumstances surrounding the proposed
indemnification. See Heffernan, supra; Plate v. Sun-Diamond
Growers of California, 225 Cal. App. 3d 1115, 1124 (Cal. App. 1990)
(interpreting “by reason of” language in California Corporations
Code indemnification provision).
6
The parties agree on these general principles, but the
Trustee asserts that Miller’s status as a corporate officer,
together with Abrams’s motivation to sue him because he had jumped
ship to work for a competitor, is sufficient to establish the
requisite nexus as a matter of law. The Trustee contends, in other
words, that Balfour Beatty’s indemnity obligation covers any
individual “who is sued because he is an employee - but not because
of his actions as an employee.” We reject this position. There is
no caselaw support for interpreting “by reason of the fact” to
allow indemnification for the mere status of being a corporate
officer, director, employee or agent; indeed, the language seems to
demand a causal connection.3
The Trustee also fears that if he does not prevail,
corporations will be unable to offer indemnification against
claimed misappropriation of trade secrets or violation of non-
compete clauses as an inducement to employees they wish to hire
from a competitor. Likewise, employers would not be able to
indemnify their new recruits against suits from vindictive former
employers.
3
The decision in Essential Enterprises Corp. v. Automatic Steel Prod.,
Inc., 164 A.2d 437 (Del. Ch. 1960), is not to the contrary. While that decision
interprets “by reason of” in an earlier corporate indemnification statute to
apply “solely because of the offices [the directors who were sued] held,” 164
A.2d at 441, the lawsuit sought to oust those who were then serving as directors.
There was no question of a nexus between their current official positions and the
lawsuit’s allegations.
7
These concerns, while not insubstantial, are not realized
in the case before us. The right to corporate indemnification is
necessarily judged case-by-case. Even the Trustee agrees that
“conduct that occurs prior to employment cannot, by definition, be
related to an employee’s corporate duties and therefore cannot be
a basis for indemnity.” Trustee’s brief at 25. See Sorensen v.
The Overland Corp., 242 F.2d 70 (3d Cir. 1957) (no indemnification
for suit arising out of employment contract that plaintiff
negotiated with company before he became an officer or director).
Yet that is exactly the finding that the bankruptcy court
made and the district court affirmed: Miller was sued in his
personal, not official, capacity for actions before he was employed
by Balfour Beatty that benefitted only himself. There is abundant
support for this finding in the record. Abrams’s state court
petition did not sue Miller in his capacity as an officer or
employee of Balfour Beatty. Indeed, very little of the complaint
alleged facts occurring after Miller was employed by Balfour
Beatty. The petition alleged various causes of action against
Miller and Balfour Beatty, but only the claims for Miller’s breach
of fiduciary duty toward Abrams, misappropriation of Abrams’s
proprietary information and trade secrets, and civil conspiracy
were submitted to the jury. On each count, the jury was instructed
that Balfour Beatty was liable for the acts of its employees or
agents. The jury verdict exonerated Balfour Beatty and rejected the
8
fiduciary duty breach and civil conspiracy claims, but they held
Miller personally liable because he “misappropriated proprietary
information or made an improper use of trade secrets belonging to
Abrams.” The bankruptcy court, finding Miller a credible witness,
accepted Miller’s uncontradicted explanation in his testimony
before the bankruptcy court that he had taken three sets of
documents. He used two sets solely for the purpose of getting a
job with Balfour, and the other set remained boxed up when he left
Abrams but was never used after he became employed with Balfour.
He returned the documents to Abrams when asked.
The most likely inferences from these facts and
circumstances are that (a) Abrams sued Miller primarily for
Miller’s individual actions; (b) Miller was held liable for actions
that he took for his personal benefit before he was employed by
Balfour; (c) Balfour did not participate in or profit from those
actions. In sum, Miller was not sued “by reason of the fact” that
he was employed by Balfour.4 The Trustee has not proved these
findings to be clearly erroneous.
This is not a case in which the gravamen of the complaint
was against Miller’s conduct as an officer or employee of Balfour.
Compare Heffernan, 965 F.2d at 373, 374 (“the gravamen of Pacific’s
complaint is that Heffernan, at least in part because he was a
4
That Balfour defended both itself and Miller jointly does not bear
on the propriety of indemnification.
9
director . . . either knew or should have known that [the
companies] may be subject to environmental and other liabilities .
. .”). Instead, we hold that no nexus existed because, as the
state court judgment revealed, the lawsuit related to conduct that
occurred when Miller was not employed by the indemnifying company,
and Miller’s personal motives, rather than Balfour Beatty’s
corporate functions, were the primary reason for the conduct giving
rise to the lawsuit. The scope of corporate indemnification under
Delaware law, while justly broad, cannot cover individual conduct
by a person that is wholly outside and indeed prior to his
corporate employment.
The Trustee argued as a fallback position that Balfour
Beatty must indemnify Miller for the Abrams lawsuit under a theory
of estoppel. This theory would apply to corporate indemnification
the concept from insurance law that when the insurer defends its
insured without a reservation of rights, it is later estopped to
deny coverage. See e.g., Farmers Texas County Ins. Co. v.
Wilkenson, 601 S.W.2d 520, 521-22 (Tex. App. 1980). The Trustee
cites no cases suggesting that the reservation of rights theory in
insurance law should be transferred to corporate indemnification
law. Under Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817(1938), there is no basis for us to hold, much less “guess,” that
Delaware would so interpret its corporate indemnification
provision. This point is meritless.
10
For the foregoing reasons, the judgments of the
bankruptcy and district courts denying relief to the Trustee are
AFFIRMED.
11