Fourth District, Division Three Affirms Denial of Fees Where Dismissal Predicated On Discovery Terminating Sanctions.
In our past post of May 28, 2008 on the unpublished decision of Optimal Water, Inc. v. Robbins, we discussed Corporations Code section 317, which provides for indemnification of corporate agents by corporations under specified circumstances. Section 317(d) states: "To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in subdivision (b) or (c) [i.e., a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason that the person was a corporate agent] or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith." Section 317(d) was at issue in the next case we discuss.
Gulfstream Retirement Corp. v. Hasso, Case No. G039901 (4th Dist., Div. 3 Aug. 13, 2008) (unpublished) involved an action brought by a corporation and its sole shareholder (Helen Hasso) against ex-officer/director May Hasso. The action was dismissed after the trial judge accepted a discovery referee's recommendation and granted a discovery motion for terminating sanctions. May Hasso filed a motion for attorney's fees under section 317(d), a request denied by the trial judge grounded on the fact the discovery sanction dismissal was not a merits-based determination. May Hasso appealed this ruling.
Justice Moore, writing for a 3-0 panel of our local Santa Ana-based Court of Appeal, affirmed after noting that the interpretation of section 317(d) was a de novo exercise on appeal, citing Groth Bros. Oldsmobile, Inc. v. Gallagher, 97 Cal.App.4th 60, 65 (2002).
The appellate panel observed that section 317(d) was derived from the Model Business Corporations Act, which provided for mandatory indemnification of a corporate agent to the extent of success "on the merits or otherwise." Because the California Legislature omitted the "or otherwise" language, it was facially clear that mandatory indemnification revolved around an actual judicial determination of the merits of the agent's defense. (Accord, American Nat. Bank & Trust Co. v. Schigur, 83 Cal.App.3d 790, 793 (1978).) In fact, the only case cited by May Hasso interpreting section 317—Groh Bros., supra, 97 Cal.App.4th at 73—actually supported the responding party, requiring that the defense was merits based—namely, "the disposition reflects the opinion of the court or the prosecuting party that the action would not succeed." Fee recovery was statutory foreclosed to appellant based on the plain meaning of section 317(d).