## Facts

- Federal securities-fraud class actions were filed against Health Management Systems, Inc. (HMS) and several officers and directors, including CFO Phillip Siegel, alleging dissemination of false statements inflating HMS stock price.
- Siegel joined HMS after the alleged misconduct began and, unlike other defendants, purchased (rather than sold) HMS shares during the relevant period; he retained separate counsel.
- Plaintiffs stipulated to dismiss all claims against Siegel with prejudice.
- HMS refused Siegel’s request to reimburse his attorneys’ fees and expenses.
- Siegel moved in federal court for indemnification under the New York Business Corporation Law (BCL), including fees incurred in pursuing the indemnification request itself (“fees on fees”).
- The district court awarded indemnification for fees and expenses incurred defending the securities litigation but denied recovery of “fees on fees.”
- The Second Circuit certified to the New York Court of Appeals whether BCL §§ 722(a), 723(a), and 724(a) permit recovery of “fees on fees” when the officer was successful in the underlying defense and the corporation did not act in bad faith.

## Issues

1. Whether BCL § 722(a)’s authorization to indemnify “reasonable expenses, including attorneys’ fees actually and necessarily incurred as a result of such action or proceeding,” permits a successful officer to recover attorneys’ fees incurred in litigating an indemnification application under BCL § 724(a).

## Decision

- The Court of Appeals answered the certified question in the negative.
- BCL indemnification authorizes reimbursement for reasonable defense expenses incurred in the underlying action, but not for attorneys’ fees incurred to obtain indemnification in a separate application.
- Section 724(a) provides a mechanism to obtain indemnification when a corporation refuses, but it does not expand the categories of indemnifiable expenses beyond those allowed by § 722(a).
- The court relied on the American Rule, requiring clear statutory or contractual authorization for shifting attorneys’ fees; the BCL contains no explicit authorization for “fees on fees.”
- A dissent would have construed “as a result of such action or proceeding” to include enforcement costs to effectuate the protective purpose of corporate indemnification.

## Legal Principles

- Under the American Rule, attorneys’ fees are not recoverable from an opponent absent express statutory, contractual, or rule-based authorization.
- BCL § 723(a)’s mandatory indemnification for a “successful” defense is limited by BCL § 722(a)’s definition of indemnifiable expenses.
- “Attorneys’ fees actually and necessarily incurred as a result of such action or proceeding” in BCL § 722(a) refers to expenses incurred defending the underlying action in which the officer is sued by reason of corporate status, not expenses incurred prosecuting an indemnification claim.
- BCL § 724(a) authorizes a court to order indemnification when a corporation refuses but does not create additional fee-shifting for the indemnification proceeding itself.

## Conclusion

New York’s corporate indemnification statute requires indemnification of a successful officer’s reasonable defense costs in the underlying litigation, but it does not permit recovery of attorneys’ fees incurred to secure that indemnification absent explicit legislative or contractual authorization.


Baker v. Health Mgmt. Sys., Inc., 98 N.Y.2d 80 (2002)