Where a company’s federal lawsuit against its former officer was dismissed for lack of subject matter jurisdiction, the former officer was considered to have been “wholly successful,” notwithstanding the company’s decision to refile its claims in state court.  PreGel Am., Inc. v. Casol, 2023 NCBC 81 (J. Bledsoe). As a result, the company was obligated to indemnify the former officer for all expenses he incurred in the federal action.

Plaintiff employed Defendant as its President and CEO from 2003 until 2020. In 2020, Plaintiff fired Defendant, accusing him of misusing corporate credit cards, improperly increasing his salary, and misappropriating corporate funds. Plaintiff sued Defendant in federal court for breach of fiduciary duty and other claims.  The federal litigation continued for more than two years until it was ultimately dismissed for lack of subject matter jurisdiction.  Plaintiff refiled its action with all of the same claims in state court.  Defendant thereafter sought indemnification pursuant to North Carolina’s mandatory indemnification statute (N.C.G.S. §§55-8-52 and 55-8-56) for his expenses (including attorneys’ fees) incurred in the federal litigation.  Plaintiff refused, contending that Defendant was not entitled to indemnification given that Plaintiff had refiled its claims in state court.

The Business Court disagreed and ordered Plaintiff to indemnify Defendant. Recognizing that North Carolina mandates a company indemnify any officer who is “wholly successful, on the merits or otherwise, in defense…” of any action brought because he was an officer, the Business Court first acknowledged the law requires the entire proceeding be disposed of with a finding of nonliability.  Determining that the federal action constituted a “completed proceeding” under the statute, the Business Court then held that Defendant had “otherwise” prevailed in the federal court matter, notwithstanding that the dismissal was “unrelated to the merits.” (Opinion, ¶27). Relying on decisions from Delaware’s Chancery Court that interpreted a similar statute, the Business Court held that the dismissal satisfied the “or otherwise” requirement under North Carolina’s statute.  Defendant’s right to indemnification, the Business Court held, was not affected by the fact that Plaintiff ultimately refiled the same claims against Defendant in a new proceeding in state court.   (Id., ¶27). As to the federal court litigation, the Business Court held, Defendant was wholly successfully and thus entitled to his expenses per the statute.

Based upon this decision, a company should keep in mind that if it needs to refile an action against an allegedly bad officer, it might be responsible for its former officer’s fees.