The opinion
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, a
Delaware Corporation, et al,
Debtors.
LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, etc., et al,
Debtors-Appellants,
RESOLUTION TRUST CORPORATION, a
receiver (formerly conservator) for
Oak Tree Federal Savings Bank,
Creditor-Appellant,
v.
No. 94-2475
D. SCOTT CONE; JOHN WILSON REED,
Respondents-Appellees,
BERNARD G. ILLE, et al,
Claimants-Appellees,
JONES, DAY, REAVIS & POGUE;
MCGLINCHEY, STAFFORD & LANG;
MCNAIR & SANFORD, P.A.,
Parties in Interest-Appellees,
ALPHA NURSERY, INCORPORATED, et
al,
Creditors,
88314 ONTARIO LIMITED, et al,
Claimants,
BUREAU OF INDIAN AFFAIRS, et al,
Respondents,
US TRUSTEE,
Trustee.
In Re: LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, a
Delaware Corporation, et al,
Debtors.
LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, etc., et al,
Debtors-Appellees,
RESOLUTION TRUST CORPORATION, a
receiver (formerly conservator) for
Oak Tree Federal Savings Bank,
Creditor-Appellee,
No. 94-2490
v.
GERALD G. BARTON, et al,
Claimants-Appellants,
JONES, DAY, REAVIS & POGUE;
MCGLINCHEY, STAFFORD & LANG;
MCNAIR & SANFORD, P.A.,
Parties in Interest,
ALPHA NURSERY, INCORPORATED, et
al,
Creditors,
88314 ONTARIO LIMITED, et al,
Claimants,
2
BUREAU OF INDIAN AFFAIRS, et al,
Respondents,
US TRUSTEE,
Trustee.
In Re: LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, a
Delaware Corporation, et al,
Debtors.
LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, etc., et al,
Debtors-Appellees,
RESOLUTION TRUST CORPORATION, a
receiver (formerly conservator) for
Oak Tree Federal Savings Bank,
Creditor-Appellee,
No. 94-2491
v.
MCNAIR & SANFORD, P.A.,
Party in Interest-Appellant,
JONES, DAY, REAVIS & POGUE;
MCGLINCHEY, STAFFORD & LANG,
Parties in Interest,
ALPHA NURSERY, INCORPORATED, et
al,
Creditors,
88314 ONTARIO LIMITED, et al,
Claimants,
3
BUREAU OF INDIAN AFFAIRS, et al,
Respondents,
US TRUSTEE,
Trustee.
In Re: LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, a
Delaware Corporation, et al,
Debtors.
LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, etc., et al,
Debtors-Appellees,
RESOLUTION TRUST CORPORATION, a
receiver (formerly conservator) for
Oak Tree Federal Savings Bank,
Creditor-Appellee,
No. 94-2492
v.
MCGLINCHEY, STAFFORD & LANG,
Party in Interest-Appellant,
JONES, DAY, REAVIS & POGUE;
MCNAIR & SANFORD, P.A.,
Parties in Interest,
ALPHA NURSERY, INCORPORATED, et
al,
Creditors,
88314 ONTARIO LIMITED, et al,
Claimants,
4
BUREAU OF INDIAN AFFAIRS, et al,
Respondents,
US TRUSTEE,
Trustee.
In Re: LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, a
Delaware Corporation, et al,
Debtors.
LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, etc., et al,
Debtors-Appellees,
RESOLUTION TRUST CORPORATION, a
receiver (formerly conservator) for
Oak Tree Federal Savings Bank,
Creditor-Appellee,
No. 94-2493
v.
JONES, DAY, REAVIS & POGUE,
Party in Interest-Appellant,
MCNAIR & SANFORD, P.A.;
MCGLINCHEY, STAFFORD & LANG,
Parties in Interest,
ALPHA NURSERY, INCORPORATED, et
al,
Creditors,
88314 ONTARIO LIMITED, et al,
Claimants,
5
BUREAU OF INDIAN AFFAIRS, et al,
Respondents,
US TRUSTEE,
Trustee.
In Re: LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, a
Delaware Corporation, et al,
Debtors.
LANDMARK LAND COMPANY OF
CAROLINA, INCORPORATED, etc., et al,
Debtors-Appellants,
RESOLUTION TRUST CORPORATION, a
receiver (formerly conservator) for
Oak Tree Federal Savings Bank,
No. 94-2550
Creditor-Appellant,
v.
D. SCOTT CONE; JOHN WILSON REED,
Respondents-Appellees,
BERNARD G. ILLE, et al,
Claimants-Appellees,
JONES, DAY, REAVIS & POGUE;
MCGLINCHEY, STAFFORD & LANG;
MCNAIR & SANFORD, P.A.,
Parties in Interest-Appellees,
6
ALPHA NURSERY, INCORPORATED, et
al,
Creditors,
88314 ONTARIO LIMITED, et al,
Claimants,
BUREAU OF INDIAN AFFAIRS, et al,
Respondents,
US TRUSTEE,
Trustee.
Appeals from the United States District Court
for the District of South Carolina, at Charleston.
Falcon B. Hawkins, Chief District Judge.
(CA-91-5287-2-1, CA-91-3287-2-1, BK-91-5814, CA-91-5386-2-1,
CA-91-3286-2-1, BK-91-5815, CA-91-5291-2-1, CA-91-3291-2-1,
BK-91-5816, CA-91-5290-2-1, CA-91-3290-2-1, BK-91-5817,
CA-91-5289-2-1, CA-91-3289-2-1, BK-91-5819, CA-91-5288-2-1,
CA-91-3288-2-1, BK-91-5818, CA-92-3548-2-1, BK-92-77109)
Argued: June 8, 1995
Decided: February 15, 1996
Before RUSSELL, NIEMEYER, and MICHAEL, Circuit Judges.
_________________________________________________________________
Affirmed in part and reversed in part by published opinion. Judge
Russell wrote the opinion, in which Judge Niemeyer and Judge
Michael joined.
_________________________________________________________________
COUNSEL
ARGUED: Henry Robbins Lord, PIPER & MARBURY, Baltimore,
Maryland, for Appellants. John Wilson Reed, New Orleans, Louisi-
7
ana; Patrick Michael Duffy, MCNAIR & SANFORD, P.A., Charles-
ton, South Carolina, for Appellees. ON BRIEF: Stephen H.
Kaufman, PIPER & MARBURY, Baltimore, Maryland; Nathan B.
Feinstein, Daniel J. Carrigan, Timothy P. Branigan, Kimberly E.
Wolod, PIPER & MARBURY, Washington, D.C.; Kevyn D. Orr,
RESOLUTION TRUST CORPORATION, Washington, D.C., for
Appellants. Richard L. Tapp, Jr., MCNAIR & SANFORD, P.A.,
Charleston, South Carolina; M. Dawes Cooke, Jr., Robert Gritton,
BARNWELL, WHALEY & STEVENSON, Charleston, South Caro-
lina; Craig Caesar, Timothy Scott, MCGLINCHEY, STAFFORD &
LANG, New Orleans, Louisiana; Paul O'Hearn, R. Matthew Martin,
JONES, DAY, REAVIS & POGUE, Atlanta, Georgia; Evan Park
Howell, III, Metairie, Louisiana, for Appellees.
_________________________________________________________________
OPINION
RUSSELL, Circuit Judge:
This case comes before this Court at the twilight of the Debtors'
bankruptcy proceedings. The Resolution Trust Corporation ("RTC")
has already taken control of the Debtors and has liquidated their
assets. The bankruptcy proceedings have proven to be successful,
with the debtors-in-possession paying each claim in full. On this
appeal, the second to this Court, we consider only whether the debt-
ors' estates must indemnify several of the Debtors' former directors,
officers, and employees for their costs in defending themselves
against civil proceedings brought by the Office of Thrift Supervision
("OTS") in connection with the bankruptcy filings. The district court
found that the Debtors' estates must indemnify these directors, offi-
cers, and employees for their defense costs. We affirm in part and
reverse in part.
I.
A. The OTS Charges
On October 11, 1991, the Debtors (with one exception) filed for
bankruptcy.1 The Debtors were first- and second-tier subsidiaries of
_________________________________________________________________
1 The Debtors are Landmark Land Company of Carolina, Inc.
("Landmark Carolina"), Landmark Land Company of Oklahoma, Inc.
8
Oak Tree Savings Bank, S.S.B. ("Bank"). At the top of the corporate
structure was Landmark Land Company, Inc. ("Landmark Land"), a
publicly traded company. It was a holding company and whole owner
of the Bank, which was the whole owner of Clock Tower, which in
turn was the holding company and whole owner of Landmark Caro-
lina, Landmark Oklahoma, Landmark Florida, Landmark Louisiana,
and Landmark California.
Gerald G. Barton and William W. Vaughan, III, were prominent
figures in the Landmark corporations. Barton was the chairman of the
board of directors of Landmark Land, the Bank, and all of the sub-
sidiaries. He was also the chief executive officer of Landmark Land
and the Bank, and a 29% shareholder of Landmark Land. Vaughan,
Barton's son-in-law, was a director and officer of the Bank and most
of the subsidiaries. An attorney, he was the general counsel to the
subsidiaries. Joe W. Walser played a less prominent role in the Land-
mark hierarchy, but he served as a director of the Bank and some of
the subsidiaries. Bernard G. Ille served as a director of only the Bank,
but he did not participate actively in the management of the Bank or
the subsidiaries. He was employed by First Life Assurance Company,
a subsidiary of Landmark Oklahoma.
Prior to the bankruptcy filings, the subsidiary companies invested
profitably in real estate using the Bank's funds to finance their opera-
tions. They developed, owned, and managed residential resort com-
munities, complete with golf courses, tennis courts, and polo
facilities. During this time, the Bank loaned the subsidiaries more
than $986 million.
The financial position of the Landmark organization eventually
deteriorated. An OTS investigation on June 4, 1990 revealed that the
Bank was undercapitalized and had demonstrated a pattern of consis-
_________________________________________________________________
("Landmark Oklahoma"), Landmark Land Company of Florida, Inc.
("Landmark Florida"), Landmark Land Company of Louisiana, Inc.
("Landmark Louisiana"), Landmark Land Company of California, Inc.
("Landmark California"), and Clock Tower Place Investments Ltd.
("Clock Tower"). Carmel Valley Ranch did not file for bankruptcy at this
time and is not involved in this indemnification dispute.
9
tent losses. Despite several attempts, the Bank was unable to submit
to the OTS an acceptable plan for meeting the minimum capital
requirements. On January 15, 1991, the directors of the Bank signed
a Consent Agreement with the OTS in which they agreed that the
Bank's subsidiaries would not enter into any material transaction
without prior approval from the OTS. The Consent Agreement indi-
cated that the Bank was near failure and that an OTS takeover was
imminent.
Despite the terms of the Consent Agreement, the subsidiaries filed
for bankruptcy. Anticipating that the OTS would act quickly to take
control of the Bank, the Debtors immediately sought and obtained
from the bankruptcy court a temporary restraining order preventing
the Bank from exercising its shareholder rights to remove and replace
the management of the Debtors.
The bankruptcy filings did not receive a pleasant reception from
the OTS. On October 13, 1991, as expected, the OTS took control of
the Bank and appointed the Resolution Trust Corporation ("RTC") to
act as receiver for the Bank.2See Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No.
101-73, 103 Stat. 183 (1989) (codified in scattered sections of 12
U.S.C.). More importantly, the OTS filed civil administrative charges
against Barton, Vaughan, Walser, and Ille (collectively, the "Direc-
tors"). The OTS alleged that the Directors breached their fiduciary
duties to the Bank because they knew that the bankruptcy filings
would have a substantially adverse effect on the Bank's ability to col-
lect on the secured and unsecured lines of credit to the Debtors. The
OTS also charged the Directors with violating the terms of the Con-
sent Agreement by having the Debtors enter into a material
transaction--the filing for bankruptcy--without receiving OTS
approval. The OTS assessed a fine of one million dollars against the
Directors, and it fined Landmark Land $500,000 for each day it failed
_________________________________________________________________
2 The RTC then organized, and the OTS chartered, Oak Tree Federal
Savings Bank, F.S.B. ("New Oak Tree"). Pursuant to a purchase and
assumption agreement, New Oak Tree purchased all of the RTC's right,
title and interest in Oak Tree's assets, including its wholly owned sub-
sidiaries. The OTS then appointed the RTC as conservator for New Oak
Tree.
10
to seek dismissal of the bankruptcy proceedings. On November 18,
1991, the OTS amended its charges to add allegations that the Direc-
tors had mishandled certain large loans. The Directors hired attorneys
to defend themselves against the OTS charges.
As the OTS continued its investigation into the Bank's affairs, sev-
eral members of the Bank's accounting department became subjects
of investigation. D. Scott Cone,3 although he was an officer and direc-
tor of Landmark Louisiana, headed the Bank's accounting depart-
ment. Mohamed Motahari was a vice-president and the comptroller of
the Bank. Gina Trapani was a vice-president, assistant comptroller,
and tax manager of the Bank. Gary Braun was an accountant for the
Bank. Motahari, Trapani, and Braun became employees of Landmark
Louisiana soon after the Debtors' filed for bankruptcy.
By March or April 1992, Cone, Motahari, Trapani, and Braun (col-
lectively, the "Employees"), believing that the OTS might take action
against them, retained counsel. On April 21, 1992, the OTS filed civil
administrative charges against Cone and Motahari. The OTS alleged
that, in monthly reports to federal regulators, they had misrepresented
that the Debtors' debt to the Bank was secured, even though it was
actually unsecured. The OTS never brought charges against Trapani
or Braun.
B. The Reimbursement Motion
Although the RTC took control of the Bank, the original boards of
directors remained in control of the Debtors until September 1992.
Once the RTC was appointed conservator of the Bank, it immediately
moved the district court to lift the temporary restraining order so that
it could call a shareholders meeting and exercise its ownership rights
over the Debtors. However, the district court, acting as the bankruptcy
court, denied the RTC's motion and converted the temporary restrain-
ing order into a preliminary injunction. See Landmark Land Co. of
Carolina v. Resolution Trust Corp. (In re Landmark Land Co. of
Okla.), 134 B.R. 557 (D.S.C. 1991), rev'd 973 F.2d 283 (4th Cir.
1992). The RTC was not able to take control of the subsidiaries until
_________________________________________________________________
3 Cone died during the course of this litigation and is represented by his
estate.
11
this Court lifted the injunction on August 18, 1992. See In re Land-
mark Land Co. of Okla., 973 F.2d 283 (4th Cir. 1992). On September
12, 1992, the RTC took control of the Debtors, terminated the original
boards of directors, and fired the Debtors' attorneys.
During the eleven-month interim when the original board con-
trolled the Debtors, the Directors arranged for the Debtors to pay for
the fees and costs of defending themselves against the OTS charges.
On March 26, 1992, the Debtors filed a Reimbursement Motion
requesting permission to fund the Directors' indemnification. After
making the motion, several of the Debtors' boards of directors met to
approve the indemnification.
On April 8, 1992, the board of directors for Landmark Oklahoma
met to discuss and vote on indemnification for Walser and Ille. Land-
mark Oklahoma's board consisted of three members: Barton, Lowery
Bea Roselle, and Bill D. Thompson. Only Roselle and Thompson
were present, but the two constituted a quorum. They found that Wal-
ser and Ille "had acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of [Landmark
Oklahoma]." Accordingly, the board voted in favor of indemnifica-
tion.
On April 21, 1992, the board of directors for Clock Tower met to
discuss and vote on indemnification for Barton and Vaughan. Clock
Tower's board consisted of five members: Barton, Vaughan, Roselle,
Thompson, and a fifth director. At the time of the meeting, the fifth
director had resigned and had not yet been replaced. The other four
members of the board were present, constituting a quorum. The board
found that Barton and Vaughan "had acted in good faith and in a man-
ner they reasonably believed to be in, or not opposed to, the best
interests of [Clock Tower]." Roselle and Thompson voted in favor of
indemnification, and Barton and Vaughan abstained from the vote.
Although the Employees were not included in the Reimbursement
Motion, the board of directors for Landmark Louisiana met on April
21, 1992 to discuss and vote on indemnification for the Employees.
Landmark Louisiana's board consisted of five members: Barton,
Vaughan, Cone, Roselle, and Thompson. Cone was not present, but
the other four directors constituted a quorum. The board found that
12
the Employees had acted in good faith and in the best interests of
Landmark Louisiana, and they voted unanimously to indemnify the
Employees for their expenses. Barton and Vaughan participated in the
vote.
On June 3, 1992, the district court held a hearing on the Reim-
bursement Motion. The court did not rule on the motion at the time,
and the motion remained dormant for almost two years.
On August 27, 1992, the Debtors amended their Reimbursement
Motion to include the Employees' legal expenses. Even before this
formal application, however, the Debtors had already begun indemni-
fying the Employees. In March 1992, Clock Tower paid $21,825
toward Motahari's legal expenses, and Landmark Louisiana paid
$1,000 toward Braun's expenses. In June 1992, Clock Tower paid
$35,398.48 toward Cone's, Motahari's, and Trapani's legal expenses.
Thus, Clock Tower paid more than $57,000 toward the Employees'
legal expenses, even though its board never voted to indemnify them.
In total, the Debtors have paid $122,493.20 of the Employees' legal
expenses.
C. The RTC-controlled Debtors
The RTC took control of the Debtors on September 12, 1992, and
replaced the boards of directors. On November 5, 1992, the RTC-
controlled Debtors sought, by means of a consent order, to withdraw
the Reimbursement Motion. The district court denied the withdrawal
because it had already heard argument on the motion and had taken
the motion under advisement. The district court also recognized that
the beneficiaries of the Reimbursement Motion--namely, the Direc-
tors and the Employees--were not represented in the proposed con-
sent order.
The RTC, once it took control of the Debtors, decided that it was
advantageous to operate the Debtors in bankruptcy and chose not to
withdraw the Debtors from the bankruptcy proceedings. The RTC
even decided to place another Bank subsidiary, Carmel Valley Ranch,
in bankruptcy. The RTC filed a reorganization plan for the Debtors
that was approved by the district court.
13
Meanwhile, the OTS settled its civil administrative actions against
some of the Directors and Employees. On October 30, 1992, the OTS
dropped its charges against Cone and Motahari in exchange for their
consent to orders (1) prohibiting them from participating in the affairs
of any insured depository institution and (2) debarring them from
practicing before the OTS. Although Cone and Motahari accepted
prohibition and debarment, neither admitted, and both specifically
disputed, the OTS charges.
On April 1, 1993, the OTS dropped the charges against Ille with
only the mildest rebuke: Ille had to sign a cease and desist order, pro-
hibiting him from engaging in unsafe and unsound banking practices
and from breaching fiduciary duties to a federally insured depository
institution. In other words, Ille agreed to follow diligently in the
future the standard of conduct already required of him. Ille received
this lenient treatment because he did not participate in the bankruptcy
filings. He learned of the decision to place the Debtors in bankruptcy
during a telephone call from Barton on the evening of October 10,
1991, the day before the bankruptcy filings; that same evening, he
resigned from his position as a director of the Bank. At most, Ille
failed only to follow the affairs of the Bank more diligently.
As of the date of this opinion, the OTS proceedings against Barton,
Vaughan, and Walser remain unresolved.
D. The District Court's Orders
On May 27, 1994, more than two years after the filing of the
motion, the district court granted the Reimbursement Motion. The
district court found that "the evidence demonstrates that the officers
and directors of the Debtor companies sought the protection of the
bankruptcy court in good faith." In re Landmark Land Co. of Okla.,
Civ. Action No. 2:91-5286-1, order at 12 (D.S.C. May 27, 1994) (J.A.
1278). It also concluded that the RTC-controlled Debtors "ratified the
decision to reorganize under the protection of the bankruptcy court,
demonstrating that the placement of the Debtors into bankruptcy is
reasonably viewed as being in the best interests of the Debtors." Id.
Thus, the district court ordered the Debtors' estates to indemnify the
Directors and Employees for their defense costs, and it granted the
applications for payment from the Employees' attorneys.
14
The RTC-controlled Debtors filed a motion for reconsideration on
June 6, 1994. When the Debtors filed this motion, the following par-
ties moved to intervene:
1. the Directors;
2. McNair & Sanford, P.A. ("McNair"), the attorneys for
the Debtors before the RTC took control;
3. Jones, Day, Reavis & Pogue ("Jones Day") and
McGlinchey, Stafford & Lang ("McGlinchey"), the
Directors' former OTS defense attorneys;
4. John W. Reed (of Glass & Reed), attorney for Cone;
David Popper (of Popper & Popper), attorney for Mota-
hari; Herbert V. Larson, Jr., attorney for Motahari; Rob-
ert H. Habans, attorney for Trapani; and William R.
Campbell, Jr., attorney for Braun.
The district court granted their motions to intervene on August 31,
1994. The Employees themselves did not move to intervene.
On October 5, 1994, the district court denied the Debtors' motion
for reconsideration with respect to the indemnification of the Direc-
tors. The district court did, however, grant the motion for reconsidera-
tion with respect to the applications of the Employees' attorneys. In
a separate order on November 9, 1994, the district court approved the
applications for payment from the Employees' attorneys.
The RTC and the RTC-controlled Debtors appeal from the district
court's orders.
II.
The RTC and the RTC-controlled Debtors raise a host of argu-
ments challenging the district court's granting of the Reimbursement
Motion. Rather than addressing all of their arguments, we address the
issue most troubling to us about the district court's decision: the dis-
trict court's finding that the Directors acted in good faith and in the
15
best interests of the Debtors. We conclude that the district court
clearly erred in finding that the Directors, with the exception of Ille,
acted in good faith.4
A.
California, Oklahoma, and Louisiana have similar statutes regard-
ing the indemnification of officers and directors for the costs and
expenses of legal proceedings.5 Under the California statute (as well
as the other statutes), indemnification is mandatory if a corporate
agent successfully defends himself in any proceeding. In such a case,
the corporation has a duty to indemnify the agent for his costs and
expenses, and the agent can sue the corporation if it fails to do so.
Even where the litigation does not result in a complete vindication
for the agent, "[a] corporation shall have the power to indemnify any
person who was or is a party or is threatened to be made a party to
any proceeding . . . if that person acted in good faith and in a manner
the person reasonably believed to be in the best interests of the corpo-
ration . . . ." Cal. Corp. Code § 317(b). Thus, the statute allows for
indemnification even where the agent was negligent or committed
some error, as long as the agent acted in good faith and in the best
_________________________________________________________________
4 At least one court has held that the good faith determination is a ques-
tion of fact reviewed under a clearly erroneous standard. Plate v. Sun-
Diamond Growers of Calif., 275 Cal. Rptr. 667, 672 (Cal. Ct. App. 1990)
(holding that the "question of whether a corporate agent . . . acted in
good faith and for the best interests of the corporation[ ] appears to be
an essentially factual question for the trial court"). The good faith deter-
mination strikes us as a question of law, or at least a mixed question of
law and fact; although the facts supporting the good faith determination
should be reviewed for clear error, an appellate court should review de
novo whether or not those facts lead to the conclusion that the agent
acted in good faith. Nonetheless, we need not at this time decide the
appropriate standard of review for the good faith determination because
our reasoning applies under either standard.
5 California law applies to Barton and Vaughan, Oklahoma law to Wal-
ser and Ille, and Louisiana law to the Employees. Because the indemnifi-
cation statutes are substantially similar, compare Cal. Corp. Code § 317
with Okla. Stat. tit. 32, § 1031 and La. Rev. Stat. Ann. § 12:83, we focus
on the California statute for purposes of this discussion.
16
interests of the corporation. Plate v. Sun-Diamond Growers of Calif.,
275 Cal. Rptr. 667, 672 (Cal. Ct. App. 1990). In such circumstances,
indemnification is only permissive: the corporation does not have a
duty to indemnify the agent but simply has the option to indemnify
as long as the good faith requirement is satisfied.
Indemnification is never allowed where the agent acted in bad faith
and against the best interests of the corporation. As one California
court has stated:
Indemnification, if permitted too broadly, may violate . . .
basic tenets of public policy. It is inappropriate to permit
management to use corporate funds to avoid the conse-
quences of wrongful conduct or conduct involving bad faith.
A director, officer, or employee who acted wrongfully or in
bad faith should not expect to receive assistance from the
corporation for legal or other expenses and should be
required to satisfy not only any judgment entered against
him but also expenses incurred in connection with the pro-
ceeding from his personal assets. Any other rule would tend
to encourage socially undesirable conduct.
Plate, 275 Cal. Rptr. at 672 (citing 2 American Bar Assoc., Model
Business Corp. Act Ann., introductory cmt. to chapter 8, at 1082 (3d
ed. 1987 supp.)).6
Thus, there are two requirements for permissive indemnification
under § 317(b): (1) the corporation must authorize the indemnifica-
tion, and (2) the agent must have acted in good faith and in the best
interests of the corporation. It is not clear, however, whether the good
faith determination should be made by a court or by the corporation
itself. Section 317(e) provides that, before a corporation can authorize
indemnification, the corporation must determine that the agent has
acted in good faith and in the best interests of the corporation. The
corporation can make this determination in any of the following ways:
_________________________________________________________________
6 The most recent supplement to the Model Business Corporation Act
Annotated contains similar but slightly different language. See 2 Ameri-
can Bar Assoc., Model Business Corp. Act Ann., introductory cmt. to
subchapter E of chapter 8, at 8-289 to 8-290 (3d ed. 1995 supp.).
17
(1) A majority vote of a quorum consisting of directors
who are not parties to such proceeding.
(2) If such a quorum of directors is not obtainable, by
independent legal counsel in a written opinion.
(3) Approval of the shareholders . . . , with the shares
owned by the person to be indemnified not being entitled to
vote thereon.7
Cal. Corp. Code § 317(e). At first glance,§ 317(e) suggests that the
corporation's finding of good faith settles the matter, and that the
court's role is limited to ensuring that the corporation made its finding
of good faith by proper procedures.
We do not agree that the court's role is so narrow. Although a cor-
poration has to find that the agent acted in good faith before authoriz-
ing indemnification, nothing in § 317(e) restricts a court's authority
under § 317(b) to make an independent assessment of the agent's
good faith. Section 317(b) allows permissive indemnification where
the agent has acted in good faith, not where the corporation finds that
the agent has acted in good faith. Reading § 317(b) together with
§ 317(e), we conclude that the issue of an agent's good faith is a ques-
tion for the courts to decide.
_________________________________________________________________
7 The California Code also provides a fourth way in which a corpora-
tion can determine that an agent has acted in good faith and in the best
interests of the corporation:
(4) The court in which the proceeding is or was pending
upon application made by the corporation or the agent or the
attorney or other person rendering services in connection with
the defense, whether or not the application by the agent, attorney
or other person is opposed by the corporation.
Cal. Corp. Code § 317(e)(4). This fourth option, which is not found in
the Oklahoma or Louisiana statutes, is actually an exception. It provides
that an agent can receive indemnification over the corporation's opposi-
tion if the court in the proceedings for which the agent seeks indemnifi-
cation found that the agent acted in good faith and in the best interests
of the corporation.
18
In making the good faith determination, however, a court cannot
ignore the factual findings made during the underlying proceeding for
which the agent seeks indemnification. If the court or administrative
panel in the underlying litigation made factual findings relevant to the
determination of the agent's good faith, the indemnification court can-
not reevaluate the evidence and reach the opposite conclusion. Even
the findings of an administrative agency have collateral estoppel
effect on the indemnification court. As the Supreme Court has stated:
When an administrative agency is acting in a judicial capac-
ity and resolves disputed issues of fact properly before it
which the parties have had an adequate opportunity to liti-
gate, the courts have not hesitated to apply res judicata to
enforce repose.
United States v. Utah Construction & Mining Co. , 384 U.S. 394, 422
(1966).
Furthermore, where a court decides the question of indemnification
before the completion of the underlying proceeding, the court must
tread even more carefully. In determining whether or not the agent
acted in good faith and in the best interests of the corporation, the
indemnification court should not make any factual or legal determina-
tions that are properly before the court or administrative panel in the
underlying proceeding. The indemnification court should not base its
good faith determination on its own conclusions about the merits of
the charges in the underlying proceeding.
The indemnification court, however, does not need to postpone its
determination until after the completion of the underlying proceeding.
The indemnification court should consider whether the agent could
have acted in good faith and in the best interests of the corporation
if the charges against the agent turn out to be true.8 If the indemnifica-
_________________________________________________________________
8 The indemnification court does not need to consider the agent's good
faith if the charges turn out to be false. If the agent succeeds on the mer-
its in the underlying proceeding, he is entitled to mandatory indemnifica-
tion. See Cal. Corp. Code § 317(d). In such a situation, the issue of
permissive indemnification would be moot, thus rendering the good faith
determination unnecessary.
19
tion court finds that the agent could have acted in good faith even if
the charges were true, it should grant indemnification because the
indemnification determination is not contingent on the result of the
underlying proceeding. On the other hand, if the indemnification
court finds that the agent's alleged misconduct, if true, demonstrates
that the agent acted in bad faith, the indemnification court should
deny permissive indemnification; it should hold its indemnification
decision in abeyance until the completion of the underlying proceed-
ings and then grant indemnification only if the agent succeeds on the
merits. For instance, an agent defending himself against charges of
negligent conduct should receive indemnification if the indemnifica-
tion court finds that the agent, even if he were negligent, acted in
good faith. However, an agent defending himself against charges of
intentionally wrongful conduct should receive indemnification only if
he succeeds on the merits.
In the instant case, it is not clear whether the district court--the
indemnification court in this case--recognized the proper scope of its
"good faith" determination. In finding that the Directors acted in good
faith and in the best interest of the Debtors when they filed the peti-
tions for bankruptcy, the district court offered little explanation on
how it reached its finding. In its May 27, 1994 order, it simply stated:
[T]his court finds that the evidence demonstrates that the
officers and directors of the Debtor companies sought the
protection of the bankruptcy court in good faith. Further this
court finds that the Debtors' new management ratified the
decision to reorganize under the protection of the bank-
ruptcy court, demonstrating that the placement of the Debt-
ors into bankruptcy is reasonably viewed as being in the best
interest of the Debtors.
In re Landmark Land Co. of Okla., Civ. Action No. 2:91-5286-1,
order at 12 (D.S.C. May 27, 1994) (J.A. 1278). Neither in this order
nor in any of its subsequent orders did the district court articulate how
the evidence demonstrated the Directors' good faith. More impor-
tantly, the district court did not explain how the Directors could have
acted in good faith if the OTS charges filed against them were true.
Apparently, the district court's finding of the Directors' good faith
stems from its belief that the OTS charges had no merit. From the
20
very beginning of the bankruptcy proceedings, the district court found
that the Directors "possesse[d] the requisite expertise to continue
managing the debtors' estates in a manner most profitable for the
preservation of corporate assets." Landmark Land Co. of Carolina v.
Resolution Trust Corp. (In re Landmark Land Co. of Okla., 134 B.R.
557, 560 (D.S.C. 1991), rev'd 973 F.2d 283 (4th Cir. 1992). It found
that "the RTC ha[d] acted with complete disregard of the efforts of
management to keep the debtor companies afloat." Id. It seems that
the district court believed that federal regulators were hampering the
Directors' legitimate efforts to reorganize the companies, and that the
Directors sought the protection of the bankruptcy code to protect
themselves from an overrun bureaucracy. The district court thought
little of the OTS charges, referring to them as an attempt by the OTS
to "seek[ ] atonement from the named Debtor officers for placing the
Debtor companies in bankruptcy." In re Landmark Land Co. of Okla.,
Civ. Action No. 2:91-5286-1, order at 8 (D.S.C. Oct. 5, 1994) (J.A.
2452). Furthermore, it found that the Directors had the best interests
of the Debtors in mind when they filed for bankruptcy because the
RTC ratified the Directors' action by keeping the Debtors in bank-
ruptcy once it obtained control over them.
Even if the district court was correct that the OTS was inept and
overbearing, the Directors' action to file for bankruptcy was a deliber-
ate attempt to circumvent the regulatory authority that Congress had
clearly given to the OTS. Congress created the OTS in 1989 in
response to the crisis in the savings and loan industry, which occurred
when the insolvency of a large number of savings and loans bank-
rupted the Federal Savings and Loan Insurance Corporation.
Although the majority of savings and loans were healthy financial
institutions, Congress found that the thrift crisis was concentrated in
the roughly twenty-five percent of the industry having capital, mea-
sured under generally accepted accounting principles, of less than
three percent. H.R. Rep. No. 101-54(I), 101st Cong., 1st Sess. 303
(1989), reprinted in 1989 U.S.C.C.A.N. 86, 99. Congress found that,
"[t]o a considerable extent, the size of the thrift crisis resulted from
the utilization of capital gimmicks that masked the inadequate capital-
ization of thrifts. . . . [I]f a crisis of this nature is to be prevented from
happening again, thrifts must be adequately capitalized against
losses." H.R. Rep. No. 101-54(I), 101st Cong., 1st Sess. 310 (1989),
reprinted in 1989 U.S.C.C.A.N. 86, 106. Congress invested the OTS
21
with broad regulatory powers to oversee financial institutions and
ensure that they were adequately capitalized.
By placing the Debtors in bankruptcy, the Directors intended to
prevent the OTS from enforcing the minimum capitalization require-
ment against the Bank. According to the OTS charges, the OTS inves-
tigated the Bank on June 4, 1990 and found that the Bank was
inadequately capitalized and had demonstrated a pattern of repeated
losses. The OTS directed the Bank to infuse sufficient capital to meet
the minimum capitalization requirement, but the Bank did not submit
an acceptable plan. Because of the Bank's inability to meet the
requirement, the OTS forced the Bank directors to sign a Consent
Agreement on January 15, 1991, signalling to the Directors that an
OTS takeover was imminent. Instead of working with the OTS to cor-
rect the Bank's capitalization problem, the Directors filed the bank-
ruptcy petitions to prevent the OTS from exercising control of the
Bank's subsidiaries.
We cannot conclude that the Directors' action was taken in good
faith. If the OTS charges are accurate, the Director's action to place
the Debtors in bankruptcy was a deliberate attempt to prevent the
OTS from exercising control over the Bank's assets, thus hindering
the OTS's ability to deal effectively with a failing savings and loan.
Despite the district court's findings that the federal regulators had
interfered with the Directors' efforts to keep the Debtors afloat, the
fact remains that the Bank could not comply with the minimum capi-
talization requirement, and the OTS therefore had a statutory duty to
force the Bank's management to comply with the capitalization
requirement. The Directors acknowledged the OTS's regulatory
authority when they signed the Consent Agreement and agreed that
the Bank's subsidiaries would not enter into any material transaction
without prior approval from the OTS. When the OTS threatened to
take control of the Bank, however, the Directors' used the bankruptcy
code to stymie the OTS, even though their action breached the Con-
sent Agreement with the OTS and violated their fiduciary duties to
the Bank. We cannot condone the Directors' blatant attempt to cir-
cumvent the OTS's regulatory authority by holding that they acted in
good faith.
Even if the bankruptcy filings benefitted the Debtors, we still could
not conclude that the Directors acted in good faith. An agent who has
22
intentionally participated in illegal activity or wrongful conduct
against third persons cannot be said to have acted in good faith, even
if the conduct benefits the corporation. Plate , 275 Cal. Rptr. at 672.
"For example, corporate executives who participate in a deliberate
price-fixing conspiracy with competing firms could not be found to
have acted in good faith, even though they may have reasonably
believed that a deliberate flouting of the antitrust laws would increase
the profits of the corporation." 1 Harold Marsh, Jr. and R. Roy Finkle,
Marsh's California Corporation Law (3d ed.) § 10.43, at 751; see
Plate, 275 Cal. Rptr. at 672 (citing same language from second edi-
tion). We recognize that the Directors did not break any law by filing
the bankruptcy petitions, and that the OTS has not filed criminal
charges against the Directors. Nonetheless, we find that a deliberate
attempt to undermine the regulatory authority of a government agency
cannot constitute good faith conduct, even if such actions benefit the
corporation.
The Directors intentionally breached their fiduciary duties to the
Bank and their Consent Agreement with the OTS in order to prevent
the OTS from exercising the powers granted to it under FIRREA. The
Directors knew the impropriety of their actions, and one of the
Directors--Ille--resigned his position when he learned of the
scheme. We therefore conclude that the Directors did not act in good
faith when they placed the Debtors in bankruptcy.
B.
We do not reach the same conclusion with respect to Ille. Because
the OTS and Ille entered into a settlement and the OTS has dropped
its charges against Ille, we have the benefit of the factual admissions
contained in the settlement agreement. That agreement confirms that
Ille had no part in the filing of the bankruptcy petitions. He learned
of the decision to place the Debtors in bankruptcy on the evening of
October 10, 1991, the day before the bankruptcy filings. Ille resigned
his directorship later that same evening. In the settlement agreement,
Ille admitted knowing of numerous serious underwriting deficiencies
on loans approved by the Bank, and that he relied on representations
by the Bank's management that these deficiencies were being
addressed instead of his independently investigating the deficiencies
known to him. At most, Ille failed only in his duties to follow the
23
affairs of the Bank more diligently. The OTS, recognizing Ille's mini-
mal participation, dropped the charges against him with only a mild
punishment: it required Ille to sign a cease and desist order prohibit-
ing him, in effect, from his breaching fiduciary duties in the future.
The terms of Ille's settlement agreement informs our decision
regarding whether Ille acted in good faith and in the best interests of
the corporation. The settlement agreement confirms that Ille commit-
ted no intentional wrongful act. Most importantly, upon realizing that
the other Directors had schemed to circumvent the OTS's authority
by placing the Debtors into bankruptcy, he immediately resigned from
his position as a Bank director. We find that Ille acted in good faith
and in the best interests of the Debtors.
We conclude, however, that Ille cannot receive indemnification
from Landmark Oklahoma because he was not an agent of that corpo-
ration. Ille was not a member of the boards of directors of Landmark
Oklahoma or any of the Bank's other subsidiaries. He was a director
only of the Bank, and as the settlement agreement shows, he was not
an active participant in the management of either the Bank or the sub-
sidiaries. Ille's only connection to Landmark Oklahoma is that he was
employed by First Life Assurance Company ("First Life"), a subsid-
iary of Landmark Oklahoma. His employment status, however, does
not make him an agent of Landmark Oklahoma, especially because
First Life has no involvement whatsoever in the bankruptcy filings or
this litigation. Because Ille was not an agent of Landmark Oklahoma,
he would have to seek indemnification from the Bank. Hence, Ille is
not entitled to indemnification from Landmark Oklahoma.
Although Ille has not sought indemnification from the Bank, we
note that, under Louisiana law, Ille would likely be entitled to manda-
tory indemnification from the Bank.9 The Louisiana indemnification
statute provides for mandatory indemnification of an agent to the
extent that he "has been successful on the merits or otherwise in
defense" of the OTS charges. La. Rev. Stat. Ann.§ 12:83(B). Ille
never received an adjudication on the merits, but courts in other juris-
dictions have interpreted similar language to require indemnification
_________________________________________________________________
9 The Louisiana indemnification statute would apply to the Bank
because it was chartered under Louisiana law.
24
when a settlement agreement demonstrates that the agent succeeded
on the merits. See Wisener v. Air Express Int'l Corp., 583 F.2d 579,
583 (2d Cir. 1978) (holding, under Illinois law, that the phrase "on the
merits or otherwise" is "surely . . . broad enough to cover a termina-
tion of claims by agreement without any payment or assumption of
liability."); Waltuch v. Conticommidity Servs. Inc., 833 F. Supp. 302,
310-11 (S.D.N.Y. 1993) (following Wisener in interpreting Delaware
law, although ultimately concluding that plaintiff was not successful
on merits); B & B Investment Club v. Kleinert's, Inc., 472 F. Supp.
787, 790-91 (E.D. Pa. 1979) (interpreting Pennsylvania law). But see
American Nat'l Bank & Trust Co. of Eau Claire, Wis. v. Schigur, 148
Cal. Rptr. 116, 117-18 (Cal. Ct. App. 1978) (holding, under Califor-
nia law, that mandatory indemnification requires a judicial determina-
tion of the merits of the agent's defense).10 The settlement agreement
strongly suggests that Ille successfully defended himself against the
OTS charges. Nevertheless, we cannot reach the issue of mandatory
indemnification because the Bank is not a defendant and has not had
an opportunity to argue against mandatory indemnification.11
_________________________________________________________________
10 The reasoning of the California court in American Nat'l Bank &
Trust does not apply to Louisiana law. The mandatory indemnification
provision in most states follows the language of the Model Business Cor-
porations Act, which provides for mandatory indemnification of an agent
who "has been successful on the merits or otherwise in defense" of any
action. 1 Model Business Corporations Act Ann.2d§ 5; see, e.g., La.
Rev. Stat. Ann. § 12:83(B). The California statute, however, does not
include the words "or otherwise," suggesting"a legislative intent that
mandatory indemnification should depend upon a judicial determination
of the actual merits of the agent's defense . . . ." American Nat'l Bank
& Trust, 148 Cal. Rptr. at 118. Therefore, the American Nat'l Bank &
Trust court's interpretation of California law has no bearing on Louisiana
law.
11 We note that Ille has not paid any portion of his defense costs. In his
deposition of April 9, 1992, he testified that the Directors' attorneys rep-
resented him in defense of the OTS charges. Because his position was
different from the other three Directors, he hired a personal attorney. He
never received the bills from this attorney, who was paid by Barton. See
J.A. 259-60.
25
III.
We next consider the district court's finding that the Employees
acted in good faith and in the best interests of the Debtors. The district
court found that:
There is no evidence before this court that the employees
had any reason to believe that their efforts in taking the
company into bankruptcy were opposed to the best interests
of the corporation. While Cone and Motahari were investi-
gated for criminal conduct and the OTS brought administra-
tive charges for breach of fiduciary duty against them, they
were never found guilty of any charge. Braun and Trapani
were never even named in any administrative or criminal
proceeding. They were only questioned concerning actions
taken in the discharge of their duties of employment.
In re Landmark Land Co. of Okla., Civ. Action No. 2:91-5286-1,
order at 5 (D.S.C. Nov. 9, 1994) (J.A. 2518) (footnote omitted). We
find the district court's reasoning to be somewhat illogical. The
Employees had no involvement in the Directors' decision to take the
subsidiaries into bankruptcy. The OTS investigated the Employees to
determine whether, in conducting the business of the Bank, they par-
ticipated in unsafe and unsound business practices or violated banking
laws and regulations. The charges brought against Cone and Motahari
focused on their representations to federal regulators that the Debtors
owed to the Bank over $950 million in secured debt, when in fact the
debt was unsecured. The government has never alleged that any of the
Employees participated in the decision to place the Debtors into bank-
ruptcy.
We therefore conclude that the district court's holding that the
Employees acted in good faith and in the best interests of the Debtors
was clearly erroneous, at least with respect to Cone and Motahari.
The OTS alleged that Cone and Motahari engaged in unsafe and
unsound business practices by arranging for the Bank to loan over
$950 million to its subsidiaries without securing the debt for the
Bank. The OTS further alleged that they misrepresented to federal
regulators that the loans were secured. Although Cone's and Mota-
hari's settlement agreement stated that they continue to dispute the
26
OTS charges against them, they accepted prohibition from practicing
in the affairs of any insured depository institution and debarment from
practicing before the OTS. In other words, the OTS kicked them out
of the profession. Unlike the district court, which stated that the set-
tlement agreement should not connote Cone's and Motahari's guilt,
In re Landmark Land Co. of Okla., Civ. Action No. 2:91-5286-1,
order at 5 n.4 (D.S.C. Nov. 9, 1994) (J.A. 2518 n.4), we conclude that
their punishment is strong evidence that they acted in bad faith.12
With respect to Trapani and Braun, we see little evidence in the
record on which to base a "good faith" determination, and therefore
conclude that the district court's finding of good faith was clearly
erroneous. Nonetheless, Trapani and Braun have a right to mandatory
indemnification because they succeeded on the merits. Like Cone and
Motahari, the OTS investigated Trapani and Braun for possible viola-
tions of banking statutes and regulations and for any participation in
unsafe or unsound business practices. After this investigation, the
OTS subpoenaed Trapani and Braun and made them give depositions
under circumstances that were clearly adversarial. The OTS never
filed any charges against Trapani and Braun. Under these circum-
stances, we conclude that they succeeded on the merits in their
defense and are thus entitled to mandatory indemnification under La.
Rev. Stat. Ann. § 12:83(B).
We therefore reverse the district court's granting of the Reimburse-
ment Motion with respect to Cone and Motahari, and we affirm on
different grounds the district court's granting of the motion with
respect to Trapani and Braun.
IV.
We conclude that the district court erred in finding that Barton,
Vaughan, Walser, Cone, and Motahari acted in good faith and in the
best interests of the Debtors. Furthermore, we find that Ille, although
_________________________________________________________________
12 We note that some of the subsidiaries have already indemnified Cone
and Motahari for a substantial portion of their defense costs. The govern-
ment represented at oral argument that it sought only prospective relief
and that it was not demanding that Cone and Motahari repay the amounts
already received.
27
he acted in good faith and in the best interests of the Bank, was not
an agent of Landmark Oklahoma and could not receive indemnifica-
tion from that entity. Therefore, we reverse the district court's grant-
ing of the Reimbursement Motion with respect to those parties. We
conclude also that Trapani and Braun succeeded on the merits in their
defense and were entitled to mandatory indemnification from their
employer, Landmark Louisiana. We therefore affirm, on different
grounds, the district court's granting of the Reimbursement Motion
with respect to Trapani and Braun.
Because of the grounds upon which we base our conclusions, we
need not reach the numerous other issues raised by the parties.13
AFFIRMED IN PART AND REVERSED IN PART
_________________________________________________________________
13 We note that the appellees have filed a motion to dismiss this appeal.
Because our decision in this case renders this motion moot, we take no
action on the motion.
28