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HomeMy WebLinkAbout2003-3700 Civil RITE AID CORPORATION, : IN THE COURT OF COMMON PLEAS OF Plaintiff : CUMBERLAND COUNTY, PENNSYLVANIA : vs. : CIVIL ACTION – LAW : NO. 03-3700 CIVIL MARTIN GRASS, : Defendant : IN RE: PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT BEFORE BAYLEY, P.J. AND HESS, J. OPINION AND ORDER Defendant Martin Grass, from 1995 to 1999, served as Chairman of the Board and Chief Executive Officer of Rite Aid Corporation (Rite Aid). Shortly after he resigned in 1999, the Securities and Exchange Commission and the United States Department of Justice commenced an investigation of his actions as director and executive officer, as well the actions of other executives of Rite Aid. Grass was named as a defendant in 36 counts of a 37-count indictment was obtained by the U.S. Attorney for the Middle District of Pennsylvania on June 21, 2002. On June 13, 2003, Grass entered into a plea agreement with the government in which he agreed to plead guilty to Count 1 and Count 33 of the 36 counts charged, in exchange for 1 dismissal of the rest of the counts. According to Count 1, Grass was involved in a conspiracy to defraud the United States, as well as Rite Aid and its Board of Directors, shareholders, investors, vendors, and lenders. According to Count 33, Grass was involved in a conspiracy to obstruct justice. Grass was sentenced to a term of imprisonment of 84 months followed by a three year term of supervised release, and ordered to pay a fine of $500,000. 1 The plea agreement provided that the government could reinstate any dismissed counts in the event that the defendant’s guilty plea was ever vacated or set aside. NO. 03-3700 CIVIL Rite Aid has filed a Complaint, in which it seeks (i) to recover defense costs advanced to Grass by the Company subject to Grass’s agreement to repay such advances upon determination that he is not entitled to indemnification, and (ii) a declaration that Grass is not entitled to any further advancement or indemnification from the Company. (Comp. at 2, ¶ 2). Rite Aid alleges that it advanced Grass $1,839,086, and is entitled to repayment because Grass was not successful in his defense. Rite Aid relies on its Certificate of Incorporation, which permits an advancement to officers “only upon delivery to the corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under [this Certificate].” However, the Certificate allows for indemnification “to the fullest extent authorized by the General Corporation Law” of the state of Delaware. (Comp. Ex. B, 6 ¶ 10(b)(1)). Before the court is a Motion for Summary Judgment, seeking: judgment in favor of Rite Aid and against Grass on Count I of the complaint in the amount of $1,839,085.91 plus pre- judgment interest at the rate of 6% per annum from June 17, 2003 to the date of entry of the judgment and post-judgment interest on that total from the date of the entry of judgment until judgment is paid; judgment entered in favor of Rite Aid and against Grass on Count II of the complaint, declaring that Grass is not entitled to any further indemnification from the Company; and judgment entered in favor of Rite Aid and against Grass on Grass’s counterclaim, dismissing that counterclaim with prejudice. Summary judgment should be granted if the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of 2 NO. 03-3700 CIVIL law. Williams v. Pilgrim Life Insurance Co., 452 A.2d 269, 270 (Pa.Super. 1982). Since the moving party has the burden of proving that no genuine issues exist as to the material facts, the record must be examined in a light most favorable to the non-moving party; in doing so all well- pleaded facts in the non-moving party's pleadings are accepted as true and that party is given the benefit of all reasonable inferences to be drawn therefrom. Spain v. Vicente, 461 A.2d 833, 835 (Pa.Super. 1983). Summary judgment should not be entered unless the case is free from doubt. Weiss v. Keystone Mack Sales, Inc., 456 A.2d 1009, 1011 (Pa.Super. 1983). According to 15 Pa.C.S. 4145(a), Pennsylvania courts that have proper jurisdiction “shall apply the law of the jurisdiction under which the foreign domiciliary corporation was incorporated.” Therefore, because Rite Aid is a Delaware corporation, Delaware law must be applied in this case. The pertinent Delaware statute to this case is 8 Del.C. § 145: (a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation . . . . … (c) To the extent that a present or former director or officer of a corporation has successful on the merits or otherwise been in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of shall any claim, issue or matter therein, such person be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. (Emphasis added.) Subsection (c) is mandatory for indemnification purposes. Chamison v. HealthTrust, Inc.-- , Hospital Co.735 A.2d 912, 919 (Del.Ch., 1999). Therefore, if Martin Grass, as a former 3 NO. 03-3700 CIVIL director and officer of Rite Aid, was “successful on the merits or otherwise” in the defense of an 2 action referred to in subsection (a), he shall be indemnified for his legal expenses incurred. Because the criminal action in which Grass was a defendant is covered by the Delaware statute, the question remains whether Grass can be considered “successful on the merits or otherwise” when the majority of charges against him were dropped after he entered into a plea bargain in which he pleaded guilty to two of the most serious charges. The seminal Delaware case interpreting 8 Del.C. § 145, and discussing the meaning of “successful on the merits or otherwise,” is Merritt-Chapman & Scott Corp. v. Wolfson, 321 A.2d 138 (Del. Super. Ct. 1974). In Merritt, the Delaware Superior Court rejected the corporation’s argument that the statute should be read to only require indemnification of a director or officer in a criminal action where there has been a finding or concession of innocence, and not when charges were dropped for practical reasons. Id. at 141. Instead, the court held that “[i]n a criminal action, any result other than conviction must be considered success.” Id. Admittedly, the facts in Merritt are very different from this case. In Merritt, the defendants, Louis Wolfson and Elkin Gerbert, were found guilty by a jury of most of the charges pending against them. The convictions were, however, reversed. There were two retrials of the perjury and filing false annual report charges against Wolfson and Gerbert. At the first retrial the court entered a judgment of acquittal on count four at the end of the State’s case, and the jury could not agree on the other counts. At the second retrial the jury returned a guilty verdict on count three, but could not agree further. The charges were then settled as follows: Wolfson entered a plea of Nolo contendere to count five and the other charges against him were dropped. 2 Subsection (a) includes indemnification claims arising out of completed criminal action, such as the completed criminal action in which Grass was the defendant. 4 NO. 03-3700 CIVIL He was fined $10,000 and given a suspended sentence of eighteen months. Gerbert agreed not to appeal his conviction of count three, on which he was fined $2,000 and given a suspended sentence of eighteen months, and the other charges against him were dropped. Id. at 140. In this case, of course, there was no trial. Instead, Mr. Grass entered pleas of guilty to two of the numerous charges pending against him. Nonetheless, we do not believe that this factual distinction makes a difference in the application of the clear language of the Merritt decision. The statute does not require complete success. It provides for indemnification to the extent of success “in defense of any claim, issue or matter” in an action. Claimants are therefore entitled to partial indemnification if successful on a count of an indictment, which is an independent criminal charge, even if unsuccessful on another, related count. Id at 141. In In Re Adelphia Communications Corp., the United States Bankruptcy Court for the Southern District of New York, when analyzing a Georgia statute which called for a corporation to indemnify a director who was “wholly successful,” reasoned that the word “wholly” was added to avoid the argument accepted in Merritt “that a defendant may be entitled to partial mandatory indemnification if, by plea bargaining or otherwise, he was able to obtain the dismissal of some but not all counts of an indictment.” In Re Adelphia Communications Corp., 323 B.R. 345, 382 (Bankr. S.D. N.Y. 2005). The Bankruptcy Court reasoned that “[u]nder Merritt’s holding . . . success . . . does not mean moral exoneration. Escape from an adverse judgment or other detriment, for whatever reason, is determinative. [T]he only question a court may ask is what the result was, not why it was.” Id. at 384. 5 NO. 03-3700 CIVIL In sum, 8 Del.C. § 145 differs from statutes in other states in that it does not require complete success in defense of an action for a defendant director or officer to be indemnified. Rather, it provides for indemnification to the extent of success. The quantification of “success” in this case must be left to the trier of fact. This will involve, among other things, an assessment of the allocation of counsel fees and an analysis of whether any counts which were dismissed were “related” to a count to which the defendant pled guilty. ORDER th AND NOW, this 30 day of April, 2007, the motion of the plaintiff for summary judgment is DENIED. BY THE COURT, _______________________________ Kevin A. Hess, J. William A. Slaughter, Esquire Lesley F. Wolf, Esquire For the Plaintiff Hubert X. Gilroy, Esquire For the Defendant :rlm 6 RITE AID CORPORATION, : IN THE COURT OF COMMON PLEAS OF Plaintiff : CUMBERLAND COUNTY, PENNSYLVANIA : vs. : CIVIL ACTION – LAW : NO. 03-3700 CIVIL MARTIN GRASS, : Defendant : IN RE: PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT BEFORE BAYLEY, P.J. AND HESS, J. ORDER th AND NOW, this 30 day of April, 2007, the motion of the plaintiff for summary judgment is DENIED. BY THE COURT, _______________________________ Kevin A. Hess, J. William A. Slaughter, Esquire Lesley F. Wolf, Esquire For the Plaintiff Hubert X. Gilroy, Esquire For the Defendant :rlm