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GOLDSTEIN v. ALODEX CORP.

March 19, 1976

GILBERT GOLDSTEIN, et al.
v.
ALODEX CORPORATION, et al. v. HARRIS, KERR, FORSTER & COMPANY, JOSEPH M. CLEMMER, et al. v. ALODEX CORPORATION



The opinion of the court was delivered by: BRODERICK

 BRODERICK, J.

 Presently before the Court are the motions of defendants Richard M. Paget and Charles E. Dykes for summary judgment on their cross-claims against defendant Alodex Corporation (Alodex). Both Mr. Paget and Mr. Dykes seek indemnity from Alodex in connection with the reasonable expenses, including attorneys' fees, incurred by them in defending against the plaintiffs' claims in both the Goldstein and the Clemmer actions. There are no factual disputes in connection with the motions of Mr. Paget and Mr. Dykes; the only issue is an issue of law as to whether Mr. Paget and Mr. Dykes are entitled to indemnity from Alodex in connection with the reasonable expenses incurred by them in defending the plaintiffs' Securities Act claim. As a matter of law, we find that Mr. Paget and Mr. Dykes are entitled to summary judgment.

 The plaintiffs brought these two class actions alleging violations of the Securities Act of 1933, 15 U.S.C. § 77k. The lawsuits alleged that Alodex issued a false and misleading prospectus in connection with a registration statement approved by the Securities and Exchange Commission on March 31, 1971. It was alleged that the registration statement was false and misleading in that Alodex failed to disclose large costs overruns on a number of its construction contracts. Mr. Paget and Mr. Dykes are named as individual defendants, along with the other directors of Alodex, Alodex itself, W. E. Hutton & Company, the lead underwriter, and Harris, Kerr, Forster & Company, Alodex's accountant at the time of the public offering. Mr. Paget and Mr. Dykes were both "outside" directors at the time that the registration statement was issued and the public offering was made. The other directors of Alodex were "insiders", i.e. both directors and officers or employees of the corporation. When the two suits were filed, all the directors, with the exception of Mr. Paget and Mr. Dykes, were represented by the same counsel, which counsel also represented Alodex itself. However, Mr. Paget and Mr. Dykes obtained their own separate counsel because of their belief that a potential conflict of interest existed on the part of any counsel representing them, Alodex, and the "inside" directors. *fn1" Discovery proceeded and eventually both the Goldstein and Clemmer actions were settled. The Court, in a Memorandum and Order dated December 7, 1973, approved the settlement reached by the parties. Pursuant to the agreed upon settlement, neither Mr. Paget nor Mr. Dykes contributed any money to the settlement of the claims and the complaint against them was dismissed with prejudice. The Court approved the payment of attorneys' fees to the plaintiffs' attorneys from the settlement fund in the same Memorandum and Order dated December 7, 1973. Finally, on November 24, 1975, the Court discharged the settlement committee from further duties and ordered the disbursement of the balance of the settlement fund.

 During the pendency of this litigation, both Mr. Paget and Mr. Dykes filed cross-claims against Alodex seeking reimbursement from Alodex for reasonable expenses, and attorneys' fees in connection with the defense of the action. These cross-claims were not settled pursuant to the parties' settlement agreement, but were expressly reserved for future determination by the Court's Order of December 7, 1973.

 Mr. Paget and Mr. Dykes allege that under the law of Tennessee (the state of incorporation of Alodex) they are entitled to indemnification for all expenses incurred by them in defending the Goldstein and Clemmer actions, as provided in the By-Laws of Alodex. They further contend that indemnification by Alodex will not contravene any public policy of the Securities Act of 1933. The defendant Alodex, while stating that it is not opposed in principle to indemnifying either Mr. Paget or Mr. Dykes, has asked the Court to grant the relief requested only if under the By-Laws and charter of Alodex such indemnification is permitted under the law of Tennessee and is not contrary to the public policy expressed in the Securities Act of 1933. *fn2"

 Section 408 of the Tennessee General Corporation Act provides as follows:

 
(1) A corporation may indemnify any person made . . . a party to a suit . . . whether civil or criminal . . . which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he . . . was a director or officer of the corporation . . . against judgments, fines, amounts paid in settlement and reasonable expenses, including attorney fees actually and necessarily incurred as a result of such suit . . . if such director . .. acted in good faith for a purpose which he reasonably believed to be in the best interest of the corporation . . . .
 
(2) The termination of any such civil . . . action . . . by judgment, settlement . . . or its equivalent, shall not in itself create a presumption that any such director or officer did not act in good faith for a purpose which he reasonably believed to be in the best interests of the corporation or that he had reasonable cause to believe that his conduct was unlawful. *fn3"

 Section 410 of the Tennessee General Corporation Act provides that a court may direct the indemnification of a corporate director:

 
(1) Notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board or of the shareholders . .. in the specific case . . . indemnification shall be awarded by a court to the extent authorized under §§ 48-407, 48-408 . . . . Application therefore may be made in every case, either:
 
(a) In the civil suit or proceeding in which the expenses were incurred or other amounts were paid, or
 
(b) To a court in a separate proceeding . . . . *fn4" ...

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