HomeMy WebLinkAbout2003-3702 Civil
RITE AID CORPORATION,
Plaintiff
IN THE COURT OF COMMON PLEAS OF
CUMBERLAND COUNTY, PENNSYLVANIA
vs.
03-3702 CIVIL
CIVIL ACTION - LAW
ERIC SORKIN,
Defendant
INRE: CROSS-MOTIONS OF THE PARTIES FOR SUMMARY JUDGMENT
BEFORE BAYLEY AND HESS, 1.1.
OPINION AND ORDER
On June 26, 2003, Eric Sorkin pled guilty to having participated in a criminal conspiracy
while serving as an officer of Rite Aid Corporation ("Rite Aid"). In particular, Sorkin pled
guilty to obstructing government investigations relating to Rite Aid by providing false and
misleading information to Rite Aid's internal investigators and the FBI, and lying under oath to a
federal grand jury. In connection with his guilty plea, Sorkin admitted (a) to having presented to
Rite Aid a fraudulently back- dated letter agreement purporting to grant Sorkin substantial
benefits in the event of the termination of his employment with Rite Aid; (b) to representing to
the company that the agreement had been executed on behalf of Rite Aid by its chief executive
officer, when in fact the letter had been written only after that CEO had been dismissed by Rite
Aid's Board; and (c) to having lied to the FBI, to United States Attorney's Office lawyers and to
the grand jury regarding the letter and other matters related to his employment with Rite Aid. On
May 26, 2004, Sorkin was sentenced by the United States District Court for the Middle District
of Pennsylvania.
Upon learning of his guilty plea, Rite Aid discontinued the advances it had been making
to Sorkin for the costs of his defense and demanded repayment of amounts the company had
previously advanced. On July 31, 2003, by complaint, Rite Aid commenced this action against
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Sorkin. In the four-count complaint, Rite Aid sought: (1) repayment of the amounts previously
advanced to Sorkin by the company pursuant to the terms of the Undertaking and applicable law
(Count I); (2) a declaration that Sorkin was not entitled to advancement or indemnification by
Rite Aid for expenses he incurred or will incur by reason of the fact that he was an officer of Rite
Aid or otherwise ( Count II); (3) a declaration that the company has no obligation to Sorkin
under his purported severance agreement (Count III); and (4) payment of the outstanding balance
of Sorkin's loan (Count IV).
On January 26, 2004, Sorkin filed an answer and counterclaim to the complaint. In the
counterclaim Sorkin seeks (1) continued advancements of his legal expenses under the terms of
Rite Aid's Certificate ofIncorporation (Count I); (2) continued advancement of his legal
expenses pursuant to the terms of an alleged oral agreement with Rite Aid (Count II); (3) a
declaration that he is entitled to exercise certain stock options granted to him by Rite Aid during
the course of his employment (Count III); and (4) partial indemnification for the costs he has
incurred in the defense of the criminal investigation and indictment pursuant to Del. Code. Ann.
Tit. S 145(C) (Count IV). The parties have filed cross motions for summary judgment on their
various claims.
It is Pa.R.C.P. 1035.2 which allows any party to move for summary judgment in whole
or in part as a matter of law:
(1) Whenever there is no genuine issue of any
material fact as to a necessary element of the cause
of action or defense which could be established by
initial discovery or report, or
(2) If, after the completion of discovery relative to
the motion, including the production of expert
reports, an adverse party who will bear the burden
of proof at trial has failed to produce evidence of
fact essential to the cause of action or defense
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which in a jury trial would require the issues to be
submitted to the jury.
Pa.R.C.P. 1035.2
In all summary judgment cases, the court "must view the record in the light most
favorable to the non-moving party, and all doubts as to the existence of a genuine issue of
material fact must be resolved against the moving party." Washington v. Baxter, 719 A.2d 733,
735 (Pa. 1998) citingPa. State Univ. v. County of Centre, 615 A.2d 303,304 (Pa. 1992).
Summary judgment is granted only in those cases which are free and clear from doubt. Id.
I. Rite Aid is contractually obligated to pay Sorkin's legal fees up until the date of his
sentencing.
Rite Aid is a Delaware corporation. A resolution of the dispute between these parties
involves the application of Delaware Law. A parallel case was brought by Sorkin against Rite
Aid in the Delaware Court of Chancery. The Chancery Court has deferred action pending the
outcome of this Pennsylvania action.
Section 145(a) of the Delaware General Corporation Law ("the GCL") empowers a
Delaware corporation like Rite Aid:
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 another corporation, partnership, joint
venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably
incurred by the person in connection with such
action, suit or proceeding. . . .
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Del. Code Ann. Tit. 8 Section 145(a). Such powers of a Delaware corporation to indemnify its
officers, however, is limited. Under Section 145(a) a corporation may indemnify an officer:
if the person acted in good faith and in a manner
the person reasonably believed to be in or not
opposed to the best interests of the corporation,
and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the
person's conduct was unlawful.
Id. Thus, it is well settled that a Delaware corporation may not indemnify its officers for
knowingly unlawful conduct, or for conduct not in good faith or in the best interest of the
corporation. See Vonfeldt v. Stifel Fin. Servs., Inc., 1999 WL 413393, (Del. Ch. June 11, 1999)
( Holding that Delaware corporations lack the power to indemnify a party who did not act in
good faith or in best interests of the corporation); Waltuch v. Conticommodity Servs., Inc., 88
F.3d 87, 96 (2d Cir. 1996) (same).
Because the good faith and lawfulness of an officer's conduct cannot normally be
determined before the final disposition of the action against him, Section 145 of the GCL also
permits payment on account of a corporation's obligation to indemnify an officer for the cost of
the officer's defense in advance of the final disposition of the action, provided that the officer
agrees to repay amounts so advanced if it is determined that he is not entitled to indemnification:
Expenses (including attorneys fees) incurred by an
officer or director in defending any civil, criminal,
administrative, or investigative action, suit or
proceeding may be paid by the corporation in
advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or
on behalf of director or officer to repay such
amount if it shall ultimately be determined that
such person is not entitled to be indemnified by the
corporation as authorized in this section. Such
expenses (including attorneys fees) incurred by
former directors and officers or other employees
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and agents may be paid upon such terms and
conditions, if any, as the corporation deems
appropriate.
Del Code Ann. Tit. 8 Section 145( e).
In accordance with Section 145, Rite Aid adopted a Restated Certificate ofIncorporation
("Certificate") in which it undertook to indemnify its officers "to the fullest extent authorized by
the General Corporation Law." Certif. Art. Tenth, ~ (B)(I). With respect to advancement, Rite
Aid's Certificate provides that
The right to indemnification conferred in this
Section B shall be a contract right and shall include
the right to be paid by the corporation the expenses
incurred in defending any such proceeding in
advance of its final disposition; provided, however,
that if the General Corporation Law requires, the
payment of such expenses incurred by a director or
officer. . . in advance of the final disposition of the
proceedings, shall be made 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 Section B or otherwise.
Id. The Undertaking signed by Sorkin in connection with his request for advancement of the
costs of his defense tracked the language of Section 145 ( e) of the GCL and Rite Aid's
Certificate verbatim.
The GCL prohibits a corporation from indemnifying an officer whose conduct was
knowingly unlawful, but permits a corporation to advance costs incurred in defending an action
accusing him of such conduct until it can be determined whether the officer's conduct was
lawful or not, provided that the officer agrees to repay the corporation any amount so advanced
if it is ultimately determined that he is not entitled to indemnification. The GCL does not
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require a determination by a court before an officer's expenses are discontinued. It requires
only an "ultimate determination" that the officer is not entitled to indemnification. Rite Aid in
its Certificate of Incorporation chose to declare the right of indemnification to be a contractual
right providing for the payment of all expenses incurred in defending any proceeding in
advance of its "final disposition."
Final disposition occurred on May 26,2004, when Sorkin was sentenced by the United
States District Court for the Middle District of Pennsylvania, a sentence from which he took no
appeal. Sorkin was contractually entitled to legal fees and expenses incurred until this date and
Rite Aid was contractually obligated to advance him these expenses. Rite Aid could have (and
perhaps should have) drafted this provision differently, but simply did not. Rite Aid Corp. v.
Brown, 02-4922 Civil at p. 7. citing Bergonzi v. Rite Aid Corp., 2003 Del Ch. WL22407303
(Del. Ch. Ct. Oct.20, 2003), appeal denied 836 A.2d 514 (Del. 2003). Rite Aid could not
choose to unilaterally stop advancing Sorkin's expenses short of the final disposition of his case.
The fact that the final disposition has now come does not cure Rite Aid's breach.
Rite Aid argues that an award of past due advances would be pointless because Sorkin
would have an immediate obligation to repay such advancements to Rite Aid pursuant to the
Undertaking and as a matter of law. There is something of sophistry in this argument. The
fundamental purpose of advancing expenses incurred in a defense is to permit Sorkin to meet his
obligations in such a defense. Whether, at the end of the day, Sorkin repays such advancements
used to pay such expenses is a separate question. More specifically, if Rite Aid's argument is
correct, then the advancement provisions of Rite Aid's contract with its executives are rendered a
nullity. It would permit Rite Aid to predict the likelihood of ultimate success and terminate
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advances at a point in the proceedings of its own choosing. Counsel's representation could then
cease and the purpose of the advancement contract would be defeated.
Sorkin's motion for summary judgment on Count I of his counterclaim will be granted as
Sorkin is entitled to advancement of his legal costs until May 26,2004. Rite Aid's motion for
summary judgment on Count I of its complaint will be denied.
II. Sorkin's right to indemnification from Rite Aid is a question of fact and cannot be
decided on a motion for summary judgment.
Rite Aid argues that Sorkin is not entitled to indemnification because he admitted that (a)
he attempted to defraud Rite Aid with the backdated severance letter, (b) he deliberately and
intentionally lied to government investigators and perjured himself before a federal grand jury
regarding the scheme, and (c) he lied to Rite Aid and federal investigators regarding the nature of
pharmaceutical purchase and rebate agreements he helped negotiate on behalf of Rite Aid.
Title 8 Section 145(a) of the Delaware Code describes a corporate officer's right to
indemnification:
A corporation shall have the 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, employer or agent of the
corporation, or is or was serving at the request of
the corporation as a director, officer, employee or
agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses
(including attorneys fees), judgments, fines, and
amounts paid in settlement actually and reasonably
incurred by the person in connection with such
action, suit or proceeding if the person
reasonably believed to be in or not opposed to
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the best interests of the corporation, and with
respect to any criminal action or proceeding,
had no reason to believe the person's conduct
was unlawful. The termination of any action,
suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act
in good faith and in a manner which the person
believed to be in or not opposed to the best
interests of the corporation, and, with respect to
any criminal trial or proceeding, had reasonable
cause to believe that the person's conduct was
unlawful. (Emphasis added)
8 Del. Ch. 8 Ann. Tit. S 145(a). While it appears clear in the record of the criminal case that the
defendant must have known that his conduct was unlawful, the wording of the Delaware statute
is also clear that his guilty plea does not give rise to a presumption in favor of Rite Aid. In other
words, it would appear that Sorkin cannot be denied indemnification solely because he pled
guilty and was convicted on criminal charges. While the above statute does not mention
disposition by guilty plea, it does make reference to a "conviction" and, as Black's Law
Dictionary suggests, a guilty plea is a type of conviction. We reach the rather odd conclusion
that an admission of wrongdoing does not give rise to a presumption that the person making the
admission had reasonable cause to believe that his conduct was unlawful. This anomalous result
is dictated by the plain language of the Delaware Statute, which we are not at liberty to ignore.
In addition, in the new matter appended to his answer, Mr. Sorkin expressly denies that
he did not act in good faith or in the best interest of the corporation. He observes that he
remained employed at Rite Aid after his indictment. He contends also that the conduct for which
he pled guilty in the Middle District did not harm the financial interests of Rite Aid. He observes
also that his guilty plea was the result of a plea bargain. According to his new matter, Mr. Sorkin
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voluntarily cooperated with the United States Attorney's office and gave testimony favorable to
Rite Aid in a companion case.
Mr. Sorkin has raised factual issues concerning whether he acted in good faith. At the
same time, the Delaware statute does not permit us to infer otherwise from his guilty plea.
Accordingly, Rite Aid's right to relief is not so clear, at this juncture, as to warrant the entry of
summary judgment.
III. Factual issues remain regarding the loan agreement making summary judgment
inappropriate at this time.
In Count IV of its complaint Rite Aid seeks repayment of a $260,000 loan it made to
Sorkin on May 6, 1999. The loan was payable in full if Sorkin was fired for cause. Sorkin
claims the loan is forgiven for two reasons. First, Sorkin asserts that he was not fired for
"cause." Second, Sorkin claims that the loan was forgiven because of a "change in control" of
Rite Aid.
The loan agreement provides that the loan would "be payable within 30 days after. . . the
termination for cause of your employment with PCS or with Rite Aid Corporation or any of its
subsidiaries." Complaint, Ex. E. It further provided that "cause" shall mean fraud, dishonesty,
and willful neglect to perform your assigned duties." Id. Sorkin pled guilty to conspiracy to
obstruct justice by lying to Rite Aid, the FBI and the grand jury. That would appear to end the
mqmry.
Sorkin argues, however, that his loan was forgiven due to a "change in control" at Rite Aid.
The agreement provided that the loan was to be completely forgiven if there was a "change in
control" as described in the agreement. The agreement defines a "change in control" to include
three events: (1) the acquisition by any person of securities of the company representing 20% or
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more of the total voting power of the then outstanding securities; (2) any period of two
consecutive years during which the individuals, who at the beginning of such period constitute
the board of directors, and any new director, whose election by the board of directors or whose
election by the board of directors or nomination for election by the company's stockholders was
approved, by at least two-thirds of the directors of the two year period or whose election or
nomination for election was previously so approved cease to constitute a majority of the board of
directors; and (3) the stockholders of the company approve a merger or consolidation of the
company with any other corporation, a plan of complete liquidation or an agreement for the sale
or disposition of all or substantially all of the company's assets. Complaint, Ex. E.
Sorkin asserts that there was a change in control as described in subsection 2 of the definition
of "change in control." Sorkin draws the courts attention to the turnover in the Board of
Directors. Rite Aid reported on its Form 10-Q that the board of directors, on October 16, 1999
consisted of: Martin Grass, Noonan, Neivert, Liberman, Stern, Bratton, Tisch, Brown, Tsai, and
Alex Grass. As of June 27, 2001, within the two year period, Rite Aid again reported its board
of directors on its 10-Q form. This time the board consisted of: Sammons, Stern, Green, Miller,
Bratton, Gleason, Lieberman, Sloan, and Sokoloff.
It appears that there has been a "change in control" as defined in subsection 2 as only three of
the 1999 Board members remained in 2001. Rite Aid refutes Sorkin's claim with a testimonial
affidavit that purports to show that every new member of the Board was elected by unanimous
vote. Complaint, Ex. 5, Sari aff., ~ (b). This testimonial evidence is contested by Sorkin.
Testimonial evidence, even if uncontested, cannot solely support a motion for summary
judgment. See Nanty Glo v. American Surety Co. 163 A. 523 (Pa. 1932); also Garcia v.
Savage, 586 A.2d 1375 (Pa.Super. 1991). Because factual issues remain as to whether there was
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a change of control as contemplated by the loan agreement, Rite Aid's motion for summary
judgment on Count IV of the its complaint will be denied. Likewise, summary judgment on
Count IV of Sorkin's counterclaim will also be denied.
IV. Because factual issues remain regarding Sorkin's entitlement to Rite Aid stock options,
summary judgment is inappropriate.
Sorkin, in Count III, of his counterclaim, seeks a declaration that he is still has a right to
exercise stock options he was granted while employed by Rite Aid. The options were granted
pursuant to and governed by Rite Aid's 1990 Omnibus Stock Incentive Plan ("1990 Plan") (Ex.
14); Rite Aid's 1999 Stock Option Plan ("1999 Plan") (Ex. 15); Rite aid's 2000 Omnibus Equity
Plan ("2000 Equity Plan") (Ex. 16); and/or Rite Aid's 2001 Stock Option Plan ("2001 Plan") (Ex.
17). Under each of these plans, Sorkin's right to exercise his options terminated with his
employment. The 1990 Plan provided:
[no] Incentive Award may be exercised and no
amount or property under any Incentive Award
shall be paid unless the Participant is at such time
in full-time employ of the Company, and shall
have been continuously so employed by the
Company since the date of the Incentive Award
was awarded.
(Ex. 14, 1990 Plan, ~ 5(e)). The other plans contained similar language.
Rite Aid terminated Sorkin for cause on June 26,2003. However, with each grant of Rite
Aid stock options, Sorkin was given stock option grant letters and option agreements. Each of
the grant letters allowed Sorkin to exercise vested stock options no later than ten (10) years
following the time when the options were granted. One letter granting Sorkin stock options
states:
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You may exercise this option as to 1J4 of the shares
on or after November 10, 2000 and as to an
additional1J4 of the option on each anniversary date
thereafter. You may, however, delay the exercise
fall or part of the option until November 10, 2009.
The option is subject to all of the provisions of the
plan; a copy of the Plan is available upon request
from Joe Speaker.
Sorkin Appendix, Ex. L. For subsequent grants, each letter uniformly states "you may exercise
vested options at any time as long as the company has a qualified registration statement on file
with the Securities and Exchange Commission." Sorkin Appendix, Ex. M, N, 0, P.
In short, the plan and the letters seem to contradict each other. Accordingly, a grant of
summary judgment on Count III of Sorkin's counterclaim is inappropriate.
v. Sorkin has no rights under the back-dated severance letter, but summary judgment on
Count III is inappropriate.
In Count III of its complaint, Rite Aid seeks a determination that Sorkin has no
contractual rights under the back-dated letter. Sorkin does not dispute this claim. However,
Count III of Rite Aid's complaint reads:
WHEREFORE, Rite Aid demands judgment in its
favor declaring that Rite Aid has no obligation to
Sorkin under his purported severance agreement or
otherwise. (Emphasis added)
There is no dispute that Sorkin has no rights under the backdated severance letter. However,
there is a dispute as to whether Rite Aid has obligations to Sorkin outside of the severance letter.
In order to determine whether Rite Aid has further contractual obligations to Sorkin, factual
questions must be resolved. Therefore, Rite Aid's motion for summary judgment on Count III
must be dismissed.
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ORDER
AND NOW, this 13th day of October, 2004, the motion of the defendant, Eric Sorkin,
for summary judgment on the question of whether Rite Aid is required to pay his expenses,
including attorneys' fees, incurred in his defense up until the date of his sentencing as claimed in
Count I of his complaint is SUSTAINED.
The remaining motions of the parties for summary judgment are DENIED.
BY THE COURT,
Kevin A. Hess, 1.
William A. Slaughter, Esquire
F or the Plaintiff
Steven E. Grubb, Esquire
F or the Defendant
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RITE AID CORPORATION,
Plaintiff
IN THE COURT OF COMMON PLEAS OF
CUMBERLAND COUNTY, PENNSYLVANIA
vs.
03-3702 CIVIL
CIVIL ACTION - LAW
ERIC SORKIN,
Defendant
INRE: CROSS-MOTIONS OF THE PARTIES FOR SUMMARY JUDGMENT
BEFORE BAYLEY AND HESS, 1.1.
ORDER
AND NOW, this 13th day of October, 2004, the motion of the defendant, Eric
Sorkin, for summary judgment on the question of whether Rite Aid is required to pay his
expenses, including attorneys' fees, incurred in his defense up until the date of his sentencing as
claimed in Count I of his complaint is SUSTAINED.
The remaining motions of the parties for summary judgment are DENIED.
BY THE COURT,
Kevin A. Hess, 1.
William A. Slaughter, Esquire
F or the Plaintiff
Steven E. Grubb, Esquire
F or the Defendant
:rlm