## Facts

- Landmark Land Company of Carolina and affiliated entities operated real-estate resort developments financed largely through loans from Oak Tree Savings Bank, a related institution.
- As Oak Tree’s financial condition deteriorated, the Office of Thrift Supervision (OTS) imposed restrictions requiring prior approval for any “material transaction.”
- Landmark entities filed Chapter 11 petitions without obtaining OTS approval and obtained a temporary restraining order preventing Oak Tree from replacing Landmark management.
- OTS brought civil administrative charges against certain directors and employees, alleging fiduciary breaches and unsafe or unsound practices connected to the bankruptcy strategy and related conduct.
- While the restraining order was in effect and before federal receivership control, the Landmark entities adopted resolutions finding certain individuals acted in good faith and approving indemnification of defense costs in the OTS proceedings.
- After the restraining order expired, OTS placed Oak Tree into receivership; the Resolution Trust Corporation (RTC) assumed control and opposed indemnification demands in the bankruptcy cases.
- Directors and employees (and their counsel) sought orders compelling the debtor estates to pay defense costs under corporate indemnification provisions and governing state corporate law; the district court largely granted indemnification.

## Issues

1. Whether the debtor estates were required to indemnify directors for defense costs in OTS administrative proceedings when the conduct at issue included filing bankruptcy without required regulatory approval.
2. Whether and when employees were entitled to indemnification, including whether any were entitled to mandatory indemnification based on being “successful on the merits or otherwise.”
3. Whether findings in pre-receivership board indemnification resolutions bound the estates or controlled the court’s good-faith and corporate-interest determinations.

## Decision

- The Fourth Circuit affirmed in part and reversed in part the district court’s indemnification orders.
- The court denied indemnification to directors Barton, Vaughan, and Walser, holding they did not act in good faith because the bankruptcy filings and related actions were intended to circumvent OTS regulatory authority.
- The court affirmed indemnification for director Ille, finding he did not participate in the bankruptcy decision, resigned upon learning of it, and acted in good faith; OTS later dismissed charges against him.
- For employees, the court denied indemnification to those found to have acted in bad faith in furthering the same strategy (including Cone and Motahari).
- The court required indemnification for employees (including Trapani and Braun) who were successful in the OTS proceedings, triggering mandatory indemnification.
- The court treated the pre-receivership indemnification resolutions as non-dispositive and independently evaluated good faith and corporate interest, given conflicts of interest.

## Legal Principles

- Permissive corporate indemnification requires proof that the claimant acted in good faith and in a manner reasonably believed to be in, or not opposed to, the corporation’s best interests.
- Conduct aimed at evading or frustrating binding regulatory controls may constitute lack of good faith and preclude permissive indemnification.
- Mandatory indemnification applies when a claimant is successful “on the merits or otherwise” in defending the proceeding, regardless of whether permissive-indemnification standards would otherwise be satisfied.
- Courts may scrutinize and disregard self-interested indemnification determinations made by insiders, especially when adopted amid regulatory investigation and control disputes.

## Conclusion

The Fourth Circuit limited indemnification from bankruptcy estates for regulatory defense costs, denying coverage to directors and employees whose conduct showed bad faith in circumventing federal thrift supervision, while allowing indemnification for a director who withdrew and for employees entitled to mandatory indemnification based on success in the administrative proceedings.


In re Landmark Land Co. of Carolina, Inc., 76 F.3d 553 (4th Cir. 1996)