In Paul S. Levy, et al. v. Hayes Lemmerz International, Inc., download file, former directors and officers of a company that filed for bankruptcy sought indemnification under the bylaws of “an old company”, as well as the “new company” that emerged after reorganization under Chapter 11. The Chancery Court recently determined that the directors of the new company that emerged after bankruptcy reorganization had no obligation to indemnify the former directors and officers of its predecessor. However, the court denied the motion to dismiss as to the old company because the court found that the directors had preserved their right to proceed against the “old company” with their claim. The reorganization plan, in essence, protected the new company from the claims against the old company that predated the bankruptcy filing. In interpreting the reorganization plan, the court relied, at footnote 18, on the basic contract principle that “a trial court may not consider parol evidence when interpreting a clear and unambiguous contract.”
Key observations were made about indemnification claims in general. For example, the court rejected the argument that an indemnitee must make a demand on the corporation before suit, in a way analogous to the normal procedure in a derivative suit that gives the power to the board of directors over a derivative claim. The court cited to prior Supreme Court case law which held that there is no requirement that an undertaking for purposes of indemnification include a financial ability to repay. Thus, the creditworthiness of the person making an undertaking, as a prerequisite to an indemnification claim, can not be considered by the corporation. The court also noted that indemnification agreements can, and often do, provide greater protection than enjoyed under either the Certificate of Incorporation, the bylaws or the insurance provided by the corporation.
The court distinguished contractual indemnification with what it described as “common law indemnification” which was defined as “a general right of reimbursement for debts owed to third parties by the [indemnifier] as a secondarily-liable party.”
Common law indemnification contemplates the accrual of a cause of action after the party seeking indemnification has made payment to the third party and the dispute with that party is finally concluded.