In Re Health Management Systems, Inc. Securities Litigation, 99 N.Y.2d 80 (2002)
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New York Business Corporation Law § 722(a) does not provide for the recovery of legal fees incurred by a corporate officer in making an application to a court for indemnification of legal fees (‘fees on fees’) following the successful defense of an underlying action.
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Summary
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Phillip Siegel, CFO of Health Management Systems (HMS), was named in a securities fraud class action. After being dismissed from the suit, HMS denied his request for indemnification of legal fees. Siegel then sought indemnification in district court, including reimbursement for the fees incurred in making the indemnification motion (‘fees on fees’). The Second Circuit certified to the New York Court of Appeals the question of whether § 722(a) of the Business Corporation Law allows for recovery of these ‘fees on fees’. The Court of Appeals held that the statute does not independently provide for such recovery, adhering to the American Rule against awarding attorney’s fees absent explicit statutory authorization.
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Facts
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Securities fraud class actions were brought against HMS and its officers, including Phillip Siegel. Plaintiffs alleged false statements designed to inflate HMS stock prices. Siegel, unlike other defendants, joined HMS *after* the alleged misconduct and *purchased* HMS stock during the relevant period. He retained separate counsel. Siegel was dismissed from the consolidated actions by stipulation. HMS denied Siegel’s request for indemnification, arguing separate counsel was unnecessary.
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Procedural History
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Siegel moved for indemnification in the District Court under Business Corporation Law § 724 and HMS’s bylaws. The District Court referred the motion to a Magistrate Judge, who recommended rejecting Siegel’s claim for ‘fees on fees,’ relying on the American Rule. The District Court adopted the Magistrate Judge’s report. The Second Circuit affirmed the denial of fees based on HMS’s alleged bad faith, but certified the question of statutory authorization for ‘fees on fees’ to the New York Court of Appeals.
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Issue(s)
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Whether the phrase “attorneys’ fees actually and necessarily incurred as a result of such action or proceeding,” as used in New York Business Corporation Law § 722(a), provides for recovery of reasonable fees, incurred by a corporate officer in making an application for fees before a court (as authorized by New York Business Corporation Law § 724(a))?
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Holding
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No, because the statute requires a substantial nexus between the expenditures and the underlying suit, and fees incurred in seeking indemnification are caused by the refusal to indemnify, not directly by the underlying action. The statute does not explicitly authorize ‘fees on fees,’ and New York adheres to the American Rule against awarding attorney’s fees absent such explicit authorization.
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Court’s Reasoning
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The Court reasoned that § 722(a) requires a “reasonably substantial nexus” between the expenses and the underlying suit. Fees on fees are caused by the corporation’s refusal to indemnify, not the underlying suit itself. The Court analyzed the legislative history of Business Corporation Law Article 7, noting that each major amendment had a specific, limited purpose, focusing on indemnifying officers for actions taken on behalf of the corporation. The Court highlighted that in 1986 and 1987, when the legislature made amendments favorable to officers and directors, they reviewed statutes like the Model Business Corporation Act, and laws in Indiana and California, but notably omitted provisions authorizing recovery of fees incurred to enforce indemnification rights. The Court invoked the American Rule, stating that attorney’s fees are incidents of litigation not recoverable absent explicit statutory authority: “we follow ‘a general practice of not awarding fees to a prevailing party absent explicit statutory authority.’” The Court clarified that § 721 expressly allows corporations to provide indemnification for ‘fees on fees’ through bylaws, contracts, or insurance, indicating the statute is not an exclusive remedy. To the extent that Professional Ins. Co. of N.Y. v Barry conflicted, it was explicitly not to be followed. The absence of a specific provision for