## Facts

- In 2008, David Wasitowski resigned as an officer and director of Pali Holdings, Inc. (Pali), a New York corporation.
- In 2009, Pali shareholders filed a derivative action in New York state court against Pali and members of its board, including Wasitowski.
- The derivative complaint alleged that the board pursued a plan to dilute shareholder voting power to keep control of the company.
- Wasitowski successfully obtained dismissal of the derivative claims against him.
- Wasitowski paid his own attorneys’ fees and costs to defend the derivative action, totaling more than $580,000.
- While the derivative action was pending, Wasitowski sought an order directing Pali to advance his defense expenses; the state court denied advancement.
- In denying advancement, the state court noted that a Pali subsidiary had a pending FINRA arbitration against Wasitowski and another former officer alleging breach of fiduciary duty and abuse of control, and it reasoned that misconduct allegations remained unresolved notwithstanding dismissal of the derivative claims.
- After the dismissal, Wasitowski filed a separate federal diversity action against Pali seeking indemnification for his defense expenses under the New York Business Corporation Law (BCL) and Pali’s bylaws.
- Wasitowski’s federal complaint did not reference the state court’s prior denial of advancement.
- Pali moved to dismiss (or to stay) the federal action, arguing that Wasitowski failed to show “reasonable cause” for not pursuing indemnification in the underlying derivative proceeding.
- Wasitowski moved for summary judgment, arguing that the BCL and Pali’s bylaws entitled him to indemnification because he was successful in the derivative action.

## Issues

1. Whether the BCL bars a former director/officer from bringing a separate action for indemnification when he did not seek indemnification in the underlying derivative proceeding and allegedly failed to show reasonable cause for that omission.
2. Whether a former director/officer who obtained dismissal from a shareholder derivative suit is entitled to indemnification of defense expenses under the BCL and the corporation’s bylaws.
3. Whether the earlier state-court denial of advancement, and the existence of unresolved misconduct allegations in a related FINRA arbitration, defeat or postpone indemnification for fees incurred in the dismissed derivative action.

## Decision

- The court denied Pali’s motion to dismiss (and declined to stay the case).
- The court held that the BCL did not bar Wasitowski’s separate indemnification action on the theory that he lacked reasonable cause for not pursuing indemnification in the derivative case.
- The court concluded that Wasitowski’s dismissal from the derivative action constituted success for indemnification purposes and required Pali to indemnify him for covered, reasonable defense expenses under the BCL and Pali’s bylaws.
- The court treated advancement and indemnification as different remedies and did not treat the earlier advancement denial as dispositive of Wasitowski’s post-dismissal indemnification claim for the derivative action.

## Legal Principles

- A corporation’s bylaws and the BCL may require indemnification of a director or officer who is “successful on the merits or otherwise” in defending an action brought by reason of corporate service, including defense-cost reimbursement after dismissal.
- Advancement of expenses during litigation and indemnification after the matter ends are separate; denial of advancement does not automatically resolve a later claim for indemnification once the covered action is concluded.
- Statutory limits on bringing indemnification in a “separate proceeding” turn on the statute’s text and purpose; they do not necessarily bar a later indemnification suit where the applicant’s entitlement matured after the underlying action ended.
- Unresolved accusations in other forums do not, without more, negate indemnification tied to the applicant’s successful defense of the specific action for which reimbursement is sought.

## Conclusion

In *Wasitowski v. Pali Holdings, Inc.*, the Southern District of New York permitted a former officer and director—dismissed from a shareholder derivative suit—to pursue indemnification in a separate federal action and held that the corporation was required under the BCL and its bylaws to reimburse his qualifying defense expenses, notwithstanding an earlier state-court denial of fee advancement and ongoing allegations against him in a related FINRA arbitration.


Wasitowski v. Pali Holdings, Inc., 2010 U.S. Dist. LEXIS 37802 (2010)