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CEO Not Entitled to Advancement Of Legal Fees for Criminal Defense

CEO Not Entitled to Advancement Of Legal Fees for Criminal Defense

Court says officer failed to show that he had acted in the best interests of the corporations

The former CEO of two nonprofit corporations affiliated with the State University of New York Polytechnic Institute has been denied an advancement of legal fees to defend against criminal charges resulting from the corporations’ procurement practices.  An appellate court in New York has affirmed a trial court order denying payment.

The President and CEO of the institute had also served as CEO of corporations running a state-funded development project and a student housing project.  In 2015, the New York Attorney General and the U.S. Attorney began an investigation of their procurement practices.  The corporations retained counsel for themselves and the CEO, but in May 2016, the CEO obtained independent counsel.  In September, he was indicted for wire fraud in connection with the development project and anti-trust violations on the housing project.  He pled not guilty.

On September 22, he entered into an “undertaking” to refund advance legal defense costs if it was ultimately determined that he was not entitled to it.  The corporations agreed to pay his costs only through September 22 but later refused to pay beyond June 30.  The CEO sued for payment.  A trial court denied payment.

The Appellate Division pointed out that the state’s Not-for-Profit Corporation Law provides that an officer or director is entitled to indemnification if he or she acted in good faith for a purpose which he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, in criminal actions, had no reason to believe that the conduct was unlawful.  The statute provides that the officer is entitled to indemnification if the officer is “successful, on the merits or otherwise” in defense of the action.

The statute also provides that the corporation may advance legal defense fees if a court finds that the defendant has “raised genuine issues of fact or law” during the litigation.  The governing standard, the Court said, “is not a stringent one.”  It does not require a successful result, but merely a genuine question of fact or law.

The CEO failed to meet the standard in this case, the Court said.  He presented an affidavit of counsel that he denied the charges and had pled not guilty.  A not guilty plea “is without probative value,” the Court said, and a statement from the defendant that he had acted in good faith was “glaringly absent.”  Given the “inadequate showing,” the Court said it could not say that the trial court’s denial of payment was an abuse of discretion.  (Kaloyeros v. Fort Schuyler Management Corporation, Supreme Court, App. Div., Third Dept., NY, No. 525121, 1/18/18.)


State indemnification statutes are not universally the same, and the advancement of legal fees to a defendant is not normally guaranteed.  The legal standard for obtaining advanced fees may vary, and may be affected by provisions of the bylaws and any applicable insurance.  For the defendant, there is always a risk if it appears that the defendant may not have acted in good faith.

Supreme Court
App. Div.
Third Dept.

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