adequate remedy at law to deny motion for preliminary injunction); In re Central Banking System, 1993 WL 183692 (Del. Ch. 1993) (nothing in indemnification agreement nor Delaware law requires undertaking to be secured or accomplished by a showing of indemnitee's financial responsibility); Bishop, supra. at § 6.03 (an undertaking by definition constitutes no more that a mere promise to repay); Veasey, Finkelstein & Bigler, Delaware Supports Directors with a Three-Legged Stool of Limited Liability, Indemnification, and Insurance, 42 Bus.Law. 399 (1987) (requirement that directors secure promise to repay would undermine policy of encouraging qualified people to serve as officers and directors).
In light of the specific language of the DING Bylaws and taking into consideration the policy underlying the advancement provisions of both the Delaware Code and the Model Act, after which the Pennsylvania Statute was modelled, we can find no reason to diverge from the plain language of the bylaws which requires no additional security for the undertaking other than a promise to repay. If the drafters had so desired the Bylaws could have conditioned the directors and officers rights to advancements upon the provision of appropriate security. See In re Central Banking, 1993 WL 183692 at *3 ("A corporation does have the undoubted power to require. . . that the recipient advance indemnification furnish appropriate security or demonstrate financial responsibility as a condition to receiving advances."). Instead, the language of the Bylaws is silent on this issue, and in accordance with the decision in Little, 836 F.2d at 796, the plaintiffs are bound by the terms originally chosen.
B. Pennsylvania Business Corporation Law
Plaintiffs argue that they are governed by the Pennsylvania Business Corporation Law, 15 Pa.C.S.A. § 1745 which makes advancement of expenses permissive rather than the Bylaws which makes such advancements mandatory.
Both the Model Act and the Delaware Law delineate the outer-limits of indemnification rights. That is, corporations can contract to expand the right to indemnification beyond that provided by the applicable statute. See Section 8.58, Official Comment, reprinted in Model Business Corporation Act Annotated, Vol. 2 (3d ed. 1985 and 1987 supp.) ("The standards for indemnification of directors contained in this subsection define the outer limits for which voluntary indemnification is permitted. . .") and Del. Code § 145(f) ("the indemnification provided by this section shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw [or] agreement. . ."). The Delaware Supreme Court specifically held that a corporation can "grant indemnification rights beyond those provided by the statute." Hibbert, 457 A.2d at 344; see also Pepsico, Inc. v. Continental Cas. Co., 640 F. Supp. 656, 661 (S.D.N.Y. 1986) (Pepsico's bylaws supplanted the backstop provisions of Delaware corporate law). Pennsylvania's law is similarly nonexclusive. Section 1746 states that the "indemnification and advancement of expenses provided by, or granted pursuant to, the other sections of this subchapter shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw [or] agreement. . ." 15 Pa.C.S.A. § 1746(a). As to advancing expenses, the Committee Comment-1988 reads: "By its terms this section is permissive, and does not restrict other arrangements on the same subject authorized pursuant to 15 Pa.C.S.A. § 1746." Accordingly, while the Pennsylvania law establishes a floor for when expenses may be advanced, there is nothing to preclude a corporation from contracting through its bylaws, articles of incorporation or by private contract to provide for mandatory advancements.
However, while the advancement provision of the Bylaws does not directly conflict with § 1745, it does run contrary to the fiduciary obligations imposed upon directors under both Pennsylvania law and the Bylaws. Section 512 of the Pennsylvania Business Corporation Law states:
A director of a domestic corporation shall stand in a fiduciary relation to the corporation and shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances.
15 Pa.C.S.A. § 512(a); see also Enterra Corp. v. SGS Associates, 600 F. Supp. 678, 684 (E.D.Pa. 1985). The nature of the relationship between the directors and the corporation requires that the directors devote themselves to the affairs of the corporation with a view toward promoting the best interests of the corporation. Committee of Unsecured Creditors of Specialty Plastic v. Doemling, 127 Bankr. 945, 951 (Bkrtcy. W.D.Pa.) affirmed 952 F.2d 1391 (3d Cir. 1991). Unlike the indemnification provisions of the Pennsylvania Business Corporation Laws, the standards of care imposed upon directors under Pennsylvania law cannot be abrogated by the individual bylaws of a corporation. Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 245, 84 L. Ed. 281 (1939) (directors' dealings with corporation subject to strict scrutiny); In re Specialty Tape Corp., 132 Bankr. 297, 301 (Bkrtcy. W.D.Pa. 1991) (directors' fiduciary duties require them to act so as to promote common interests of shareholders); 3 Fletcher, Supra. § 850 (Supreme Court rejects lax view of fiduciary obligations and insists upon their scrupulous observance).
Moreover, the DING Bylaws reflect the requisite deference to the Pennsylvania law in the preamble which states, "These Bylaws are supplemental to the Pennsylvania Business Corporation Law and other applicable provisions of law, as the same shall from time to time be in effect." Further, § 501(a) of the Bylaws acknowledges the mandatory duties of the directors by denying a director his rights to indemnification in the event he breaches or fails to perform his duties under Section 8363 the Pennsylvania Directors' Liability Act. The section referred to in the Bylaws, 42 Pa.C.S.A. § 8363, was repealed in December 1990 but related to standard of care, justifiable reliance and personal liability of directors . For the subject matter which was contained in former § 8363 the Historical and Statutory Notes specifically refer to 15 Pa.C.S.A. § 512, the present provision imposing fiduciary duties upon directors.
Thus, while the language of § 503 of the Bylaws makes advancement of expenses mandatory, it cannot supersede the overriding duty of the directors to act in the best interest of the corporation. The directors cannot shirk the duties imposed upon them by statue as well as by conflicting provisions of the Bylaws. It is elementary contract law that when interpreting a specific term of a contract, the entirety of the contract must be taken into consideration. Capitol Bus Co. v. Blue Bird Coach Lines, Inc., 478 F.2d 556, 560 (3d Cir. 1973); Kay v. Thrift and Profit Sharing Plan for Employees of Boyertown Casket Co., 780 F. Supp. 1447, 1455 (E.D.Pa. 1991); First Philadelphia Realty Corp. v. Albany Savings Bank, 609 F. Supp. 207, 210 (E.D.Pa. 1985). In this case, the Ding/Star States directors are backed into a corner by simultaneously being required by § 503 of the Bylaws to advance the expenses of this lawsuit to Felicetti and Scarcia and being bound by their fiduciary duties to act only in the best interest of the corporation, actions which the directors have definitively decided are irreconcilable.
Unlike the undertaking issue addressed above, this case is distinguishable from the Third Circuit's Little case. Little, 836 F.2d 789. In that case, the directors were not torn by conflicting duties faced by the DING/Star States directors because the obligation to advance the costs of the litigation was with the insurance company rather than the Bank itself.
Further, while we are not bound by the Citadel decision, that opinion is also distinguishable from the situation here presented. The dispute in Citadel, 603 A.2d 818, arose from the provisions contained in an indemnity agreement between Citadel, the employing savings and loan association, and Roven, the director accused of wrongdoing. The indemnity agreement was specifically intended to provide Roven with greater protection than that provided by the certificate of incorporation and was a separate contract. Id. at 820. The Citadel directors were not presented with the same internal inconsistency of the Bylaws that the DING/Star States directors are presently facing. In the instant case, the directors are instructed in the preamble and § 501 of the Bylaws to comply with their fiduciary obligation to act only in the corporation's best interest while at the same time § 503 of the Bylaws mandates that they advance expenses which they have already determined is not in the best interest of the corporation. In Citadel, the indemnification agreement was clear that advancements were mandatory and that it was an agreement separate and apart from the articles of incorporation. Here, the Bylaws must be read as a whole to resolve the quandary into which the DING directors have been placed and after having done so, the Court concludes that the only reasonable interpretation requires that the directors abide by their fiduciary obligations to act only as they believe is in the best interest of the corporation. Accordingly, DING is not required to advance the funds necessary for Felicetti and Scarcia to defend themselves in this action.
Because of our above conclusion, at this stage in the proceeding we need not address plaintiffs' last two arguments regarding Felicetti's alleged fraud in formulating the Bylaws and plaintiffs' right to appoint counsel for the directors.
An appropriate order follows.
ORDER - August 5, 1993, Filed
AND NOW, this 4th day of August, 1993 upon consideration of the Motion of Defendants Felicetti and Scarcia for Partial Summary Judgment and Plaintiffs' Cross-Motion for Partial Summary Judgment, it is hereby ORDERED that Plaintiffs' Motion is GRANTED and Defendants Felicetti and Scarcia's Motion is DENIED.
BY THE COURT:
J. Curtis Joyner, J.