Galante v. Queens Borough Public Library et al
Filing
55
OPINION AND ORDER: Plaintiff's 35 Motion for reimbursement and advancement of reasonable expenses including legal fees is hereby GRANTED. So Ordered by Judge Allyne R. Ross on 8/31/2016. (Lee, Tiffeny)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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THOMAS W. GALANTE,
Plaintiff,
-against-
l 5-CV-6267 (ARR) (RLM)
OPINION AND ORDER
QUEENS BOROUGH PUBLIC LIBRARY, HAEDA:
MIHAL TSES, and JUDITH BERGTRAUM,
NOT FOR ELECTRONIC OR
PRINT PUBLICATION
Defendants.
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ROSS, United States District Judge:
Plaintiff, Thomas W. Galante, is the former President and Chief Executive Officer of the
Queens Borough Public Library ("the Library"), a New York not-for-profit corporation. He
brought this action against the Library and two if its trustees, Haeda Mihaltses and Judith
Bergtraum. See Second Am. Comp!., Dkt. #24. Pending before this court is plaintiffs Motion for
Reimbursement and Advancement of Reasonable Expenses Including Legal Fees Pursuant to
New York Not-for-Profit Corporation Law§ 724(c). See Pl.'s Mot. for Reimbursement and
Advancement of Reasonable Expenses, Dkt. #35. For the reasons that follow, plaintiffs motion
is granted.
FACTUAL AND PROCEDURAL BACKGROUND
This court assumes familiarity with the factual and procedural background of this action,
which it sets forth in its recent opinion and order in this matter resolving a motion to dismiss. See
Op. & Order, Dkt. #51, at 1-8. The brief summary below describes only the Library's
counterclaims against Galante, upon which Galante's instant motion rests.
The Library has asserted counterclaims against Galante for breach of fiduciary duty,
conversion, recoupment of legal fees and costs, and replevin. See Def. Queens Borough Public
Library's Answer and Defenses to Second Am. Comp!. and Countercls., Dkt. #25, '\l'\128-50. The
Library alleges that, inter alia, Galante "charg[ ed] a multitude of personal expenses for goods
and services to the Library- such as meals, food and beverages (including alcoholic beverages),
tickets for parking violations, automobile-related expenses, concert tickets, movies, amusement
park admission, furniture and furnishings for his office, office roof deck or home, and books he
bought on Amazon for his Kindle," id. '\18; "was effectively working full-time for [another
employer ... ] in violation of' his obligations to the Library, id. '\112; "was conducting personal
business on Library time," id. '\114; "utilized the legal services of the Library's outside counsel
for his own personal benefit and to promote his own interests," id. '\115; and has "retained
possession of ... property belonging to the Library, and has ignored or refused to comply with
the Library's repeated demands that he return all such property to the Library," id. '\121.
Galante denies nearly all of the allegations contained in the Library's counterclaims. See
Pl.'s Answer to Countercls., Dkt. # 22, '\l'\18, 12, 14-15, 21. He maintains that the expenditures
alleged by the Library to have been for his personal gain were in fact for the benefit of the
Library; that the Library was aware of and expressly approved his outside consulting work; and
that he has not wrongfully retained any property belonging to the Library. See Pl. 's Mem. of
Law in Support ofMot. for Reimbursement and Advancement of Reasonable Expenses ("Pl.'s
Br."), Dkt. #35-1, at 6-7, 9.
Galante now seeks an order under the New York Not-for-Profit Corporation Law
§ 724(c) requiring the Library (1) to advance reasonable litigation expenses in connection with
his defense against the Library's counterclaims, (2) to reimburse such defense costs to date, and
(3) to reimburse his reasonable fees incurred in bringing this motion. See Pl.'s Mot. for
Reimbursement and Advancement of Reasonable Expenses, Dkt. #35.
2
DISCUSSION
I. Statutory Framework
New York Not-for-Profit Corporation Law§ 724(c) allows a director or officer of a notfor-profit corporation to seek advancement of legal fees when a lawsuit is filed against him for
which he may ultimately be entitled to indemnification. Advancement under § 724( c) is available
even when the employment contract and the by-laws of the not-for-profit corporation are silent
as to whether advancement is available. 1
The purpose of advancement is "to allow directors [and officers] to defend themselves"
by ensuring that they can access funds to pay for legal fees during the pendency of the lawsuit.
Levy v. Young Adult Inst., Inc., No. 13-cv-02861, 2015 WL 5333536, at *6 (S.D.N.Y. Sept. 14,
2015). Because the purpose of advancement is to enable directors and officers to present a
defense, advancement is available even when claims are levied against officers and directors
that, if successful, would ultimately render the director or officer ineligible for indemnification.
See Sierra Rutile Ltd. v. Katz, No. 90 Civ. 4913, 1997 WL 431119, at *l-2 (S.D.N.Y. July 31,
1997) ("[T]he Court may order [a] corporation to advance litigation expenses, notwithstanding
the corporation's allegations that the director or officer engaged in wrongdoing against the
corporation."). 2 All fees advanced under§ 724(c) "shall be repaid ... [if] the person receiving
1
The Library misapprehends the nature of the statutory right. It argues that "[i]n order for the Court to
grant Ga\ante's motion ... he must demonstrate that he is entitled to such relief under both the [New York Not-forProfit Corporation Law] and the Library's by-Jaws." Def.'s Br. 3. No authority supports this proposition.
Advancement need not be provided by the contract or the corporation's by-laws in order for an officer to be
entitled to advancement under§ 724(c). The Court may grant Galante's motion if he is entitled to such relief under
New York Not-for-Profit Corporation Law§ 724(c) unless the Library proves that this relief is otherwise barred by
the Library's by-laws or by agreement. See N.Y. Not-For-Profit Corp. Law§ 725(b); Levv v. Young Adult Inst.,
Inc., No. J3-CV-02861, 2015 WL 5333536, at *4 (S.D.N. Y. Sept. 14, 2015); Happy Kids, Inc. v. Glasgow, No. 0 I
Civ. 6434, 2002 WL 72937, at *4 (S.D.N.Y. Jan. 17, 2002) (holding that the party opposing the motion "has not met
its burden of proof to show that indemnification is not available") (emphasis added).
2
New York Business Corporation Law §§ 720- 726 contain indemnification and advancement provisions
that are virtually identical to the Not-For-Profit Law provisions at issue here. The two laws are "widely considered
to be analogous." Levy, 2015 WL 5333536, at *2 n.5. Following the practice of other courts and the parties, this
opinion cites to authority from both sets of statutes. See. e.g., Def. Library's Mem. in Opp'n. to Pl. 's Mot. for
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such advancement or allowance is ultimately found ... not to be entitled to indemnification."
N. Y. Not-for-Profit Corp. Law § 725(a).
Section 724( c) permits the court to order advancement oflegal fees whenever "the
court ... find[s] that the defendant has by his pleadings or during the course of the litigation
raised genuine issues of fact or law." § 724( c ). This burden "is not a stringent one." Levy. 20 J 5
WL 5333536, at *2. However, notwithstanding this lenient standard, a court may not order
advancement if such advancement would be "inconsistent with a provision of the certificate of
incorporation, a by-law, a resolution of the board ... , an agreement or other proper corporate
action, in effect at the time of the accrual of the alleged cause of action." N.Y. Not-for-Profit
Corp. Law § 725(b )(2).
Advancement under § 724( c) is limited in scope to "such reasonable expenses ... as are
necessary in connection with [the] defense." Id.§ 724(c).
II. Application
A.
The statutory provision providing for advancement of legal expenses, New York Not-forProfit Corporation Law§ 724(c), applies only to actions against a director or officer ofa not-forprofit corporation. The parties disagree about whether Galante was an officer of the Library.
Section 713 of the New York Not-for-Profit Corporation Law, titled "Officers," provides
that:
The board may elect or appoint a chair or president, or both, one or more vicepresidents, a secretary and a treasurer, and such other officers as it may determine,
or as may be provided in the by-laws. These officers may be designated by such
alternate titles as may be provided in the certificate of incorporation or the byJaws .... All officers as between themselves and the corporation shall have such
Reimbursement and Advancement of Legal Fees and Expenses ("Def.'s Br."), Dkt. #39, at 12; Pl.'s Mem. in Reply
to Def. Library's Mem. in Opp'n. to Pl. 's Mot. for Reimbursement and Advancement of Legal Fees and Expenses
("Pl. 's Reply"), Dkt. #41, at 5.
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authority and perform such duties in the management of the corporation as may be
provided in the by-laws or, to the extent not so provided, by the board.
N.Y. Not-for-Profit Corp. Law§ 713(a),(e). Galante argues that he was an officer of the Library
within the meaning of the statute because he was charged by the Library's Board with managing
the Library's affairs, supervising the Library's staff, and maintaining general control over the
library system. See Pl.'s Mem. in Reply to Def. Library's Mem. in Opp'n. to Pl.'s Mot. for
Reimbursement and Advancement of Legal Fees and Expenses ("Pl. 's Reply"), Dkt. #41, at 3-4.
The Library claims that under the Library's by-laws, as amended May 2, 2016, Galante is a key
executive employee and not an officer. See Def. Library's Mem. in Opp'n. to Pl. 's Mot. for
Reimbursement and Advancement of Legal Fees and Expenses ("Def.'s Br."), Dkt. #39, at 5.
But, as the plaintiff correctly points out, these 2016 by-laws explicitly designate the President
and Chief Executive Officer as an Officer of the Library for indemnification purposes. 3 See Pl.'s
Reply at 2-3. The 2014 version of the Library's by-laws, offered by Galante, is less explicit-but
it too provides for indemnification of the President and Chief Executive Officer. See Pl.'s Br. Ex.
A, at Art. XIX. Because significant authority was delegated to Galante by the Library's board,
and the language of the 2014 by-laws' indemnification provision is very similar to the language
of the New York Not-for-Profit Corporation Law, the best reading of the 2014 by-laws is that as
President and Chief Executive Officer, Galante was an officer of the library for purposes of
indemnification. Thus, as a former officer of the Library, Galante falls within the scope of
§ 724(c).
'Article Xl of these by-laws, which governs indemnification, states that "[f]or the purposes of this Article
XI, the officers of the Corporation shall include ... key executive employees of the Corporation provided for in
Article IV." See Def.'s Br. Ex. J, at 27. In tum, Article IV states that "key executive personnel of the Corporation
shall include the ... President and Chief Executive Officer." !slat 11.
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B.
The court may order advancement of legal fees under § 724( c) upon finding that the
director or officer "has by his pleadings or during the course of the litigation raised genuine
issues of fact or law." N.Y. Not-for-Profit Corp. Law§ 724(c). This is "'a far less demanding
standard' than that necessary on a motion for summary judgment." Booth Oil Site Admin. Gm.
v. Safety-Kleen Corp., 137 F. Supp. 2d 228, 237 (W.D.N.Y. 2000) (quoting Sequa Com. v.
Gelmin, 828 F. Supp. 203, 206 (S.D.N.Y. 1993)).
Galante has met his burden of raising genuine issues of fact or law with respect to the
Library's counterclaims. The Library has asserted counterclaims against Galante for breach of
fiduciary duty, conversion, recoupment of legal fees and costs, and replevin. See Def. Queens
Borough Public Library's Answer and Defenses to Second Am. Comp!. and Countercls., Dkt.
#25, '11'1128-50. Galante has generally denied the Library's allegations, see Pl. 's Answer to
Countercls., Dkt. # 22, '1]'1] 8, 12, 14-15, 21, 28-50, and has provided a reasoned basis for doing
so. For example, he maintains that the expenses alleged by the Library to have been for his
personal gain were in fact for the benefit of the Library, and that the Library was aware of and
expressly approved his outside consulting work. See Pl.'s Br. at 6-9. Galante's denial of the
Library's counterclaims presents a genuine issue of fact that surpasses the standard required for
advancement.
Because Galante is a former officer of a not-for-profit corporation who is seeking
indemnification and has raised a genuine issue of fact, Galante is entitled to statutory
advancement under § 724( c ).
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c.
Section 725 of the Not-for-Profit Corporation Law limits the availability of advancement
under § 724( c ). A court may not order advancement that would otherwise be available if such an
order would be "inconsistent with ... a resolution of the board ... , an agreement[,] or other
proper corporate action, in effoct at the time of the accrual of the alleged cause of action asserted
in the threatened or pending action ... in which the expenses were incurred." N.Y. Not-for-Profit
Corp. Law § 725(b )(2). The Library makes two arguments that § 725 bars Galante from seeking
advancement. Neither is persuasive.
First, the Library argues that a resolution adopted by the Library's Board on January 28,
2016, which purported to retroactively revoke Galante's right to indemnification, bars Galante
from seeking advancement. See Def.'s Br. at 6-8. A claim accrues when it "come[s] into
existence as an enforceable claim or right." Accrue, Black's Law Dictionary (!Oth ed. 2014). As
the plaintiff correctly explains, "[t]he Library's claims against Galante began to 'accrue' when
Galante took the actions complained of as CEO and President, prior to December 19, 2014,"
because that is when the Library's counterclaims against Galante came into effect as an
enforceable right. Pl.'s Reply at 8. Therefore, the Library's January 28, 2016 resolution does not
bar Galante's motion, because it was not in effect when the Library's claims against Galante
accrued.
Second, the Library argues that silence in the Library's by-laws regarding advancement
should be strictly construed to bar advancement under§ 724(c). See Def.'s Br. at 10 ("[T]he Bylaws ... [are] completely silent on the issue of advancement of legal fees. This silence dooms
Galante's motion."). The Library relies on Hooper Assocs., Ltd. v. AGS Computs., Inc., 548
N.E.2d 903 (N.Y. 1989). Jn Hooper, the plaintiff sought indemnification only under the terms of
7
the contract. In that context, the court held that the contract's language must be "unmistakably
clear" in order to provide indemnification. Id. at 905. But the Library's reliance on Hooper here
is misplaced because this case deals with § 724( c ), a statutory advancement provision. Under this
statutory scheme, advancement is permitted unless barred by the by-laws or other agreement.
N.Y. Not-for-Profit Corp. Law§ 725(b)(2). Here -unlike in Hooper-silence in an agreement
will not be interpreted as barring statutory advancement. Cf. Levy, 2015 WL 5333536, at *5
("(S]ilence in the Employment Agreement cannot be interpreted as inconsistent with § 724
relief."). Therefore, silence in the Library's by-laws regarding advancement does not bar Galante
from receiving advancement under § 724( c ). 4
In short, Galante meets the requirements for advancement under§ 724(c): he is an officer
of a not-for-profit corporation who is seeking indemnification and has raised a genuine issue of
fact, for whom advancement is not otherwise barred by the organization's by-laws or by other
agreement.
D.
The Library makes additional arguments that Galante is not entitled to advancement: that
Galante acted in bad faith and that he acted in his personal, rather than official, capacity. See
Def.'s Br. at 11-16. In making these arguments, the Library fails to distinguish between the
different standards for determining whether a party is entitled to advancement or
indemnification. Advancement, a temporary remedy, is determined by the§ 724(c) standard
4
The 2014 by-laws provide for the payment of the costs of"defen[se]" in addition to the costs of
indemnification, Pl,'s Br. Ex. A, at Art. XIX; see also Pl. 's Reply at 9, and the 2016 by-Jaws explicitly grant the
right to advancement of legal expenses, including attorneys' fees, see Def. 's Br. Ex. I, at 26. In his reply, Galante
argues for the first time that this language provides him a right to advancement under the by-laws themselves. I
decline to rely on this argument because it was raised for the first time in the plaintiffs reply, see Knipe v. Skinner,
999 F.2d 708, 71 I (2d Cir.1993); Ruggiero v. Warner-Lambert Co., 424 F.3d 249, 252 (2d Cir. 2005), but I agree
with Galante that the most straightforward reading of these provisions is that the Library's by-laws explicitly
provide for advancement.
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described above. Indemnification, a permanent award, requires a much stricter standard. See
Schlossberg v. Schwartz, No. 014491-11, 2014 WL 1976650, at *3 (N.Y. Sup. Ct. May 14,
2014) ("[T]he detailed analysis required for an indemnification determination is not required for
an advancement determination."); Levy, 2015 WL 5333536, at *2 ('The court should not
evaluate the merits of the claims when deciding whether to award advancement of fees.").
Because indemnification is judged by a much stricter standard than advancement,
advancement is often available where, as here, claims are alleged against the director or officer
that-if successful-would ultimately preclude the officer from being indemnified. See Sierra
Rutilc Ltd., 1997 WL 431119, at * l; Booth Oil, 137 F. Supp. 2d at 236 (ordering advancement
of attorneys' fees but not indemnification where "parties dispute whether [one party] participated
in the alleged wrongful conduct as [a] corporate director[] or officer[] and in good faith").
To be sure, the statutory indemnification provision requires that in order for an officer to
ultimately be indemnified by the corporation for which he worked in an action by that
corporation, he must have acted "in good faith" and "for a purpose which he reasonably believed
to be in ... the best interests of the corporation." N.Y. Not-for-Profit Corp. Law§ 722(c). But
such a determination is not made at this stage in the case, and cannot preclude advancement.
III. Scope of Advancement
Plaintiff is entitled to advancement of funds for "such reasonable expenses ... as are
necessary in connection with [the] defense." N.Y. Not-for-Profit Corp. Law§ 724(c). 5
5 The Library argues that the word "necessary" in the statute requires the movant to show his personal
economic need as a prerequisite for advancement. Def 's Br. at 5-6. However, it cites no authority that supports this
argument. Moreover, the word "necessary" modifies the phrase "in connection with [the] defense" and clearly refers
to the amount of expenses incurred during the litigation; it does not refer to the financial status of the officer or
director.
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Separation of Affirmative and Defensive Expenses: Plaintiffs advancement is limited to
the expense of defending the counterclaims that the Library has asserted against him. He may not
require the Library to advance the expense of litigating affirmative claims. When advancement is
sought by a plaintiff for his defense against counterclaims, expenses must be "proper[ly]
apportion[ ed]" between the cost of defending against the lawsuit and litigating the plaintiffs
affirmative claims~with acknowledgment that there "may be some overlap." Schlossberg, 2014
WL 1976650, at *10. Plaintiff must separate reasonable litigation expenses related to the
counterclaims from other expenses incurred during this lawsuit.
Retrospective and Prospective Advancement: Plaintiff seeks prospective advancement of
reasonable expenses, as well as retrospective reimbursement of reasonable litigation expenses
already incurred. Section 724(c) permits advancement both prospectively and retrospectively.
See Levy, 2015 WL 5333536, at* 5. Therefore, plaintiff is entitled to advancement of both
expenses already incurred and prospective expenses.
Fees on Fees: Plaintiff seeks reimbursement of fees incurred in bringing this motion for
advancement. Starting from the general American Rule that fees are not awarded absent explicit
statutory authority, the Court of Appeals of New York has been clear that statutory
indemnification provisions should be strictly construed, and has held accordingly that the
indemnification provision, § 722, is not sufficiently explicit to permit the award of fees-on-fees.
Baker v. Health Mgmt. Sys., Inc., 772 N.E.2d 1099, 1103-04 (N.Y. 2002). The Court explained
that § 722's fee award provision applies only to fees incurred "actually and necessarily ... as a
result of' an action filed against a director or officer, and reasoned that because the attorneys'
fees required for litigating indemnification were caused by the other party's "refusal to
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indemnify" rather than by the original lawsuit filed against the director, the fee provision did not
apply. Id. at 1101-02.
Applying Baker's reasoning to the statutory advancement provision yields the opposite
result. Baker requires that the advancement provision of§ 724( c) be strictly construed. Section
724(c) permits advancement for expenses that are "necessary in connection with [the] defense."
Even strictly construed, this provision must encompass fees expended litigating advancement,
because advancement is necessary for litigants to be able to present a defense. The purpose of
advancement is to permit the defendant to raise a defense to the claims against him. See Levy,
2015 WL 5333536, at *6. Fees expended litigating the advancement are fees necessary for the
defense, for without the motion for advancement, the defendant may not be able to fund a
defense at all. Therefore, plaintiff is entitled to advancement of fees incurred in bringing this
motion.
CONCLUSION
Plaintiff requests that this court order the Library to advance reasonable litigation
expenses in connection with his defense against the Library's counterclaims, to reimburse such
defense costs to date, and to reimburse his reasonable fees incurred in bringing this motion. For
the reasons set forth above, plaintiffs motion for reimbursement and advancement of reasonable
expenses including legal fees is hereby GRANTED.
The parties are reminded that all fees advanced must be repaid ifthe plaintiff is
ultimately found not to be entitled to indemnification, or if the expenses advanced exceed the
indemnification to which he is ultimately entitled. N.Y. Not-for-Profit Corp. Law§ 725(a).
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This matter is respectfully referred to Magistrate Judge Roanne L. Mann. The parties are
directed to contact Magistrate Judge Mann to determine a payment schedule for the fees due to
be advanced.
SO ORDERED.
s/Allyne R. Ross
ge
Dated:
August 3 ', 2016
Brooklyn, New York
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