## Facts

- Willem Ridder, Lyndon C. Merkle, John T. Hurst, and Gregory DeVany worked for City Collateral and Financial Services, Inc., an indirect subsidiary of CityFed Financial Corporation.
- After CityFed failed and entered receivership, the Resolution Trust Corporation (RTC), as receiver, sued the employees in a separate action alleging fraud and breaches of fiduciary duty, including unauthorized loan approvals, concealment and misrepresentation to a credit committee, falsified records, and misuse of confidential information.
- The employees demanded that CityFed advance their attorneys’ fees and defense expenses under Article XI of CityFed’s bylaws.
- Article XI promised indemnification “to the fullest extent” permitted by Delaware law and expressly included payment of defense expenses “in advance of” final disposition, conditioned on delivery of an undertaking to repay advanced amounts if indemnification were later found unavailable.
- CityFed refused to advance expenses, and the employees filed suit seeking to compel advancement.

## Issues

1. Whether, under Delaware General Corporation Law § 145 and CityFed’s bylaws, CityFed had to advance defense costs upon receipt of the required repayment undertaking, regardless of the seriousness of the RTC’s allegations.
2. Whether CityFed’s receivership and concerns for creditors permitted withholding advancement otherwise required by the bylaws and Delaware law.
3. Whether the district court properly denied a preliminary injunction and summary judgment seeking immediate advancement.

## Decision

- The Third Circuit reversed the district court’s denial of both preliminary injunctive relief and summary judgment.
- The court held the employees were entitled to advancement of defense expenses upon providing an appropriate undertaking to repay if indemnification were ultimately unavailable.
- The court rejected the district court’s reliance on the apparent strength of the RTC’s claims and potential effects on creditors in receivership as grounds to deny advancement.

## Legal Principles

- Under DGCL § 145, a corporation may provide (by bylaw or agreement) for advancement of litigation expenses to covered persons, conditioned on an undertaking to repay if indemnification is later found improper.
- A bylaw granting advancement “to the fullest extent” permitted by Delaware law creates an enforceable obligation once the bylaw’s stated conditions (including any undertaking requirement) are met.
- Advancement is distinct from indemnification and is not conditioned on an initial evaluation of the merits of the underlying claims.
- Corporate insolvency or receivership does not, by itself, negate an otherwise valid advancement obligation; the undertaking requirement serves as the mechanism to protect the corporation’s interests through later recoupment if warranted.

## Conclusion

The Third Circuit enforced CityFed’s Delaware-law advancement bylaw as written, requiring CityFed to pay the employees’ defense costs in advance upon receipt of a repayment undertaking, and held that neither the merits of the RTC’s accusations nor receivership-related creditor concerns justified denying advancement.


Ridder v. CityFed Fin. Corp., 47 F.3d 85 (3d Cir. 1995)