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Advanced Multilevel Concepts, Inc., et al. v. Vitaminspice

November 28, 2012

ADVANCED MULTILEVEL CONCEPTS, INC., ET AL. PLAINTIFFS,
v.
VITAMINSPICE, INC., ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Baylson, J.

MEMORANDUM RE: MOTION FOR INDEMNIFICATION AND ADVANCEMENT OF EXPENSES

Presently before the court is Defendant Dr. Richard Seelig's Motion for Indemnification and Advancement of Expenses from VitaminSpice (ECF No. 45). For the reasons set forth below, the motion is DENIED without prejudice.

I. Procedural Background

On June 8, 2011, Plaintiffs, investors in VitaminSpice, Inc., sued VitaminSpice, its CEO Edward Bukstel, its director Dr. Richard Seelig, and Does 1-30 (persons responsible for various events and acts), for breach of the U.C.C., conversion, breach of the duty of care, breach of the duty of loyalty, and securities fraud. Most of the causes of action named VitaminSpice and/or Mr. Bukstel. Plaintiffs alleged Mr. Bukstel "initiated a systematic effort to block Plaintiff shareholders from selling their holdings" in VitaminSpice, thereby harming Plaintiffs and enriching himself. (Complaint, ¶¶ 37-39 (ECF No. 1)). As to Dr. Seelig, the company's sole outside director, Plaintiffs contended his primary wrongdoing was failing to discover Dr. Bukstel's fraudulent scheme. Two of the causes of action named Dr. Seelig: "Breach of Director's Duty of Due Care" (Count III) and "Fraud" in violation of securities laws (Count VI). (Id. ¶¶ 93-102, 115-23).

Defendants filed Counterclaims against Plaintiffs and against Third-Party Defendant Jehu Hand, VitaminSpice's attorney. (ECF No. 9). Plaintiffs and Hand moved to dismiss the Counterclaims. (ECF Nos. 16 & 25). On September 20, 2012, this court granted Plaintiffs' and Hand's motion to dismiss without prejudice, granting Defendants an opportunity to amend their Counterclaims. (ECF No. 44). Defendants filed the amended pleadings on October 11, 2012. (ECF No. 47). Meanwhile, Seelig filed the present Motion for Indemnification and Advancement of Expenses from VitaminSpice (ECF No. 45), pursuant to Wyo. Stat. § 17-16-854.

II. Relevant Statutory Provisions

Wyo. Stat. § 17-16-854 provides that "a director may apply for indemnification or an advance for expenses to the court conducting the proceeding" in which he is a party. Upon receiving the motion, the court shall proceed as follows:

(1) If the court determines the director is entitled to mandatory indemnification under Wyo. Stat. § 17-16-852, it "shall order" indemnification.

(2) If the court determines the director is entitled to indemnification or advancement of expenses pursuant to the company's articles of incorporation, bylaws, contracts or other documents, as set forth in Wyo. Stat. § 17-16-858(a), it "shall order" indemnification or advancement.

(3) If the court "determines, in view of all the relevant circumstances that it is fair and reasonable" to indemnify or to advance expenses to the director, the court "shall order" indemnification or advancement.

SeeWyo. Stat.§ 17-16-854 (a)(i)-(iii). For Seelig to succeed on his motion, he must show one of the three grounds specified in Section 17-16-854(a), upon which courts "shall issue" orders for indemnification or advancement of expenses, is satisfied.

The first ground upon which a court "shall order" indemnification under Section 17-16-854(a) is if the director is entitled to mandatory indemnification under Wyo. Stat. § 17-16-852. That provision, in turn, provides that companies in Wyoming must indemnify directors if they were successful on the merits of a proceeding. SeeWyo. Stat. § 17-16-852 ("A corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because he was a director of the corporation against reasonable expenses incurred by the director in connection with the proceeding.").

The second ground upon which a court "shall order" indemnification or advancement of expenses is if the director is entitled to such benefits under the company's contracts or governing documents, as set forth in Wyo. Stat. § 17-16-858(a). Section 17-16-858(a), in turn, authorizes corporations to offer protection beyond what is required under Wyoming law, i.e., mandatory indemnification, by stating such in their internal documents. See Wyo. Stat. § 17-16-858(a) ("A corporation may, by a provision in its articles of incorporation or bylaws or in a resolution adopted or a contract . . . obligate itself in advance of the act or omission giving rise to a proceeding to provide indemnification in accordance with W.S. 17-16-851 [authorizing permissive indemnification] or advance funds to pay for or reimburse expenses in accordance with W.S. 17-16-853 [authorizing advancement of fees]."); seeid.§ 17-16-851(a)(i)("[A] corporation may indemnify . . . a director against liability incurred in the proceeding if: (A) The director conducted himself in good faith; and (B) He reasonably believed that his conduct was in or at least not opposed to the corporation's best interests . . ."); id.§ 17-16-853(a) ("A corporation may, before final disposition of a proceeding, advance funds to pay for or reimburse the expenses incurred in connection with the proceeding . . . if [the director] delivers to the corporation: (i) A written affirmation of his good faith belief that the standard of conduct described in W.S. 17-16-851 has been met . . . and (ii) His written undertaking to repay any funds advanced if the director is not entitled to mandatory indemnification . . .").

Finally, the court "shall order" indemnification or advancement of expenses if it "determines, in view of all the relevant circumstances that it ...


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