Heine v. Bank of Oswego
Filing
70
Opinion and Order - Based on the evidence presented at trial and the record in this case, the Court finds that Heine is entitled to partial judgment in his favor on his First and Third Claims. Moreover, Heine's existing debts to the Bank under the Bank's counterclaims may not be setoff against any advancement of expenses that the Bank is required to make to Heine in connection with the Criminal Action. Signed on 11/13/2015 by Judge Michael H. Simon. (mja)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
DAN HEINE,
Case No. 3:15-cv-01622-SI
Plaintiff,
OPINION AND ORDER
v.
THE BANK OF OSWEGO,
an Oregon corporation,
Defendant.
Caroline Harris Crowne, TONKON TORP LLP, 1600 Pioneer Tower, 888 S.W. Fifth Avenue,
Portland, Or 97204; Jeffrey Alberts and Bryan T. Mohler, PRYOR CASHMAN LLP, 7 Times
Square, New York, NY 10036. Of Attorneys for Plaintiff.
G. Kevin Kiely, Casey M. Nokes, and Nicole M. Swift, CABLE HUSTON LLP, 1001 S.W. Fifth
Avenue, Suite 2000, Portland, OR 97204. Of Attorneys for Defendant.
Michael H. Simon, District Judge.
From 2004 through September 2014, Plaintiff Dan Heine (“Heine”) was President, Chief
Executive Officer, co-founder, and a member of the Board of Directors of Defendant The Bank
of Oswego (the “Bank”). In June 2015, a federal grand jury indicted both Heine and Diana Yates
(“Yates”)1 for conspiracy to commit bank fraud and making false bank entries, reports, and
1
From 2004 through March 2012, Yates was Executive Vice President, Chief Financial
Officer, co-founder, and Secretary of the Bank’s Board of Directors.
PAGE 1 – OPINION AND ORDER
transactions during the time that Heine and Yates were affiliated with the Bank (the “Criminal
Action”).2 The Criminal Action is pending and in its early stages.
Invoking the Court’s diversity jurisdiction under 28 U.S.C. § 1332, Heine commenced
this civil lawsuit against the Bank in August 2015. In this action, Heine seeks: (1) advancement
of reasonable expenses that Heine will be incurring in his defense in the Criminal Action (“First
Claim”); (2) reimbursement of Heine’s reasonable attorney’s fees and expenses incurred in
bringing this action (“Second Claim”); and (3) a declaratory judgment stating that the Bank is
obligated to advance Heine’s expenses, including legal fees, incurred in his defense in the
Criminal Action (“Third Claim”). Heine contends that he is entitled to this relief based on the
indemnification and advancement provisions in Section VII of the Bank’s Articles of
Incorporation (“Articles”), as authorized under Oregon Revised Statutes (“ORS”) § 707.752,
which is part of the Oregon Banking Act.3
Both Heine and the Bank waived their rights to a jury in this civil case, and the Court
held a bench trial on November 3, 2015 on Heine’s First and Third Claims.4 The Court
conducted the bench trial on essentially stipulated facts. Pursuant to Fed. R. Civ. P. 52(a), this
2
United States v. Dan Heine and Diana Yates, Case No. 3:15-cr-00238-SI (D. Or.).
3
Invoking the Court’s ancillary jurisdiction, Yates presents virtually identical arguments
in support of her motion, filed in the Criminal Action, to compel the Bank to advance her
criminal defense legal fees and expenses. Because there is incomplete diversity between Yates
and the Bank, this Court would have lacked supplemental jurisdiction if Yates had sought to
intervene in this civil case as a co-plaintiff under Fed. R. Civ. P. 24. See 28 U.S.C. § 1367(b).
The Court has not yet ruled on whether it has ancillary jurisdiction to hear Yates’s motion filed
in the Criminal Action.
4
The Court will address Heine’s Second Claim separately, pursuant to Fed. R. Civ.
P. 42(b).
PAGE 2 – OPINION AND ORDER
Opinion and Order sets forth the Court’s Findings of Fact and Conclusions of Law on Heine’s
First and Third Claims.5
FINDINGS OF FACT6
Based on the record in this case and the exhibits received into evidence at the bench trial
held on November 3, 2015, the Court finds the following facts by a preponderance of the
evidence:
A. The Parties
The Bank is an Oregon corporation with its principal place of business in Lake Oswego,
Oregon. Ex. 1, p. 1. Heine was one of the Bank’s founders, its President, its Chief Executive
Officer, and a member of the Bank’s Board of Directors (the “Board”) beginning in
September 2004 and ending in September 2014. Ex. 2, p. 1. Yates was also one of the Bank’s
founders, its Executive Vice President, its Chief Financial Officer, and the Board’s Secretary
from 2004 to approximately March 2012. Ex. 2, p. 2.
On June 24, 2015, a federal grand jury in Portland, Oregon issued a twenty-seven count
indictment against both Heine and Yates. See United States v. Dan Heine and Diana Yates, Case
5
The Bank also asserted four counterclaims against Heine for unpaid debts owed to the
Bank. Heine has agreed that the Court may enter judgment in favor of the Bank on all four
counterclaims in the total amount of $141,645.39, provided that any such judgment will be
entered no earlier than the Court enters judgment on Heine’s First and Third Claims. The parties
further stipulated that Heine’s agreement to allow judgment against him on the Bank’s
counterclaims does not waive any party’s right to continue to litigate the question of whether the
counterclaim judgment amount in favor of the Bank should be allowed as a setoff against any
recovery that may be granted in favor Heine on his First or Second Claims.
6
Docket entries in this civil action are referred to as “Dkt.” Exhibits received in evidence
at trial are referred to as “Ex.” followed by the specific page number of that exhibit. The Court
received Heine’s exhibits one through six into evidence. The Court received the Bank’s
exhibits 201-211 and 213-214. The parties disputed the relevance of some exhibits. When the
Court cites to an exhibit, the Court finds the facts discussed by the Court to be true and relevant.
Neither party called any witness to testify at trial.
PAGE 3 – OPINION AND ORDER
No. 3:15-cr-00238-SI. Ex. 2, p. 1. The indictment charges both Heine and Yates with one count
of conspiracy to commit bank fraud, in violation of 18 U.S.C. § 1349; and twenty-six counts of
making false bank entries, reports, and transactions, in violation of 18 U.S.C. § 1005. Ex. 2,
pp. 1, 12. Heine and the Bank agree that Heine is a defendant in the Criminal Action by reason of
and arising from the fact that he was a director and officer of the Bank. Ex. 6, p. 7.
On July 3, 2015, Heine signed an engagement agreement with Pryor Cashman LLP, a
New York law firm, to represent Heine in the Criminal Action. Ex. 3, p. 5. Heine’s lead counsel
at Pryor Cashman is Jeffrey Alberts (“Alberts”), the head of Pryor Cashman’s White Collar
Defense and Investigations Practice. Ex. 209, p. 1. Alberts is also a member of Pryor Cashman’s
Financial Institutions Group, which focuses on representing financial institutions and individuals
in the community banking industry. Ex. 6, p. 7. The engagement agreement requires Heine to
pay Pryor Cashman a retainer of $400,000 to be applied toward future legal fees and expenses.
Ex. 3, p. 3. Alberts’s hourly billing rate is $640, and the engagement agreement states that the
rates to be charged by other attorneys at Pryor Cashman will range from $310 to $950 per hour.
Ex. 3, p. 2.
B. Heine’s Request for the Advancement of Legal Expenses
Section VII of the Bank’s Articles of Incorporation, which were in full force and effect at
all times relevant to this action, contain the following provision regarding indemnification:
A. Right to Indemnification. Subject to the provisions of Sections
B, D and E below, the Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or investigative (including
all appeals), by reason of or arising from the fact that the person is
or was a director or officer of the Corporation . . . against
reasonable expenses . . . actually and reasonably incurred by the
person to be indemnified in connection with such action, suit or
proceeding if the conduct of the person was in good faith, the
person reasonably believed that such person’s conduct was in
PAGE 4 – OPINION AND ORDER
the best interests of the Corporation, and, with respect to any
criminal proceeding, the person had no reasonable cause to
believe such person’s conduct was unlawful . . . .
Ex. 1, p. 4 (emphasis added). Under this indemnification provision, the Bank may and shall
indemnify a director or officer against reasonable expenses if: (1) the conduct of the director or
officer was in good faith; (2) the director or officer reasonably believed that his conduct was in
the Bank’s best interest; and (3) the director or officer had no reasonable cause to believe that his
conduct was unlawful.
Indemnification under Section VII.A is subject to the provisions of Sections VII.B,
VII.D, and VII.E. Section VII.B provides that the Bank may not indemnify a director or officer
unless it is expressly determines that he or she has met the standard of conduct set forth in
Section VII.A. Ex. 1, p. 4. Section VII.D provides for mandatory indemnification of a director or
officer who is successful on the merits or in defense of any action. Ex. 1, p. 5. Section VII.E
requires that a director or officer who seeks the benefits of indemnification must “promptly
notify the Corporation that the person has been named a defendant to an action, suit or
proceeding . . . and intends to rely upon the right of indemnification . . . .” Ex. 1, p. 5.
The Bank’s Articles of Incorporation also provide for the advancement of expenses.
Section VII.F reads as follows:
F. Advances for Expenses. Expenses incurred by a person
indemnified hereunder . . . shall, to the extent not prohibited by
applicable law or regulation, be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such person to repay
such expenses if it shall ultimately be determined that the person is
not entitled to be indemnified by the Corporation and a written
affirmation of the person’s good faith belief that he or she has met
the applicable standard of conduct. The undertaking must be a
general personal obligation of the party receiving the advances but
need not be secured and may be accepted without reference to
financial ability to make repayment.
PAGE 5 – OPINION AND ORDER
Ex. 1, p. 6. Thus, a person seeking advancement for expenses must satisfy, at a minimum, three
requirements. He must: (1) timely notify the Bank that he or she has been named a defendant and
intends to rely upon the right of indemnification, under Section VII.E; (2) provide the Bank with
an undertaking that he or she will repay advanced expenses if it is ultimately determined that he
is not entitled to indemnification, under Section VII.F; and (3) provide the Bank with a written
affirmation of his or her good faith belief that he or she has met the standard of conduct set forth
in Section VII.A, under Section VII.F.
On July 7, 2015, Heine sent a letter through Alberts to Stephen Andrews (“Andrews”),
the Bank’s President and Chief Executive Officer. Ex. 4, p. 4. In the letter, Heine notified
Andrews that Heine had become a party to the Criminal Action by reason of and arising out of
the fact that he was a former director and officer of the Bank. Ex. 4, p. 4. Heine requested that
the Bank advance all reasonable expenses that Heine incurs in defending the Criminal Action.
Heine also provided the Bank with an undertaking to repay the advanced expenses in the event it
is ultimately determined that he is not entitled to indemnification. Ex. 4, p. 4. Additionally,
Heine affirmed his good faith belief that: (1) his conduct was in good faith; (2) he reasonably
believed that his conduct was in the best interests of the Bank; and (3) he had no reasonable
cause to believe that his conduct was unlawful. Ex. 4, p. 4.
On July 21, 2015, the Board passed a resolution stating, in part, that the Bank is not
permitted to indemnify Heine under the Articles of Incorporation because “the Board cannot
conclude that Mr. Heine acted in good faith and in a manner he believed to be in the best interest
of the Bank.” Ex. 5. In passing this resolution, the Board considered the Criminal Action,
including the allegations contained in the indictment and the records underlying the transactions
PAGE 6 – OPINION AND ORDER
described in the indictment. Ex. 5. The Board made its determination regarding Heine’s conduct
under Section VII.B. of the Articles of Incorporation. Ex. 5.
Section VII.B reads, in relevant part:
B. Determination of Right to Indemnification in Certain Cases.
Subject to the provisions of Section D and E below,
indemnification under Section A of this Article shall not be made
by the Corporation unless it is expressly determined that
indemnification of the person who is or was an officer or
director, or is or was, serving at the request of the Corporation as a
director, officer, partner, or trustee of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan
or other enterpr[i]se, is proper in the circumstances because the
person has met the applicable standard of conduct set forth in
Section A. That determination may be made by any of the
following:
(a) By the Board of Directors by a majority vote of a quorum
consisting of directors who are not or were not parties to the
action, suit or proceeding . . . .
Ex. 1, p. 4 (emphasis added). The Board also determined that, as an alternative and independent
reason for denying advancement of Heine’s fees and expenses, Heine’s undertaking to repay
could not be accepted because Heine previously told the Bank that he could not repay his
existing debt that he owes to the Bank. Dkt. 66-1 at 3-4.7
The Bank has not withdrawn its decision to deny Heine’s request for advancement of
legal fees and expenses, and the Bank continues to maintain that it is not obligated to advance
these fees and expenses. Ex. 6, p. 9. Heine and the Bank agree that if it is ultimately determined
that Heine is not entitled to indemnification, it is more likely than not that Heine will be unable
to repay any advanced legal fees and expenses. Ex. 6, p. 8.
7
Heine does not allege that the Bank acted in less than good faith in passing the July 21,
2015 resolution, nor did Heine submit any evidence that the Bank acted in less than good faith.
Thus, the Court concludes as a Finding of Fact that the Bank, at all relevant times, acted in good
faith.
PAGE 7 – OPINION AND ORDER
C. Heine’s Debts to the Bank
The Bank brings four counterclaims against Heine for unpaid debts that Heine owes to
the Bank. The total amount sought in all four counterclaims is $141,645.39. The counterclaims
result from a loan agreement between Heine and the Bank and Heine’s credit card account with
Elan Financial Services (“Elan”).
1. The Loan Agreement
On June 15, 2011, Heine, as the borrower, and the Bank, as the lender, entered into a loan
agreement. Ex. 201, p. 21. The principal amount Heine borrowed from the Bank is $100,000.
Ex. 201, p. 15; Ex. 202. The maturity date of the loan was June 15, 2015, when the “entire
unpaid principal balance, all accrued and unpaid interest, and all other amounts payable
thereunder [was] due and payable.” Ex. 6, p. 4. In the loan agreement, Heine agreed that he
would be in default under the loan if he failed to make any payment when due. Ex. 6, p. 5. Heine
also agreed that, upon default, the Bank “may declare the entire unpaid principal balance under
[the loan] and all accrued unpaid interest immediately due.” Ex. 6, p. 5. Heine has yet to make
any payments due on the loan. As of September 15, 2015, Heine owes the Bank $113,157.17
under the loan agreement, including principal, late fees, and interest. Ex. 202.
2. The Elan Credit Card Account
On March 1, 2005, Heine sought a credit card from Elan. Ex. 6, p. 5. Elan determined
that Heine was not eligible to receive the credit card under Elan’s credit standards. Ex. 6, p. 5.
After an employee of the Bank signed a full recourse agreement, Elan then issued a credit card to
Heine, and the Bank agreed to purchase the account from Elan upon demand. Ex. 203.
On January 20, 2015, Heine sent a letter to Andrews stating that:
I am not able to continue making $720 monthly payments on my
PLOC. I have not located employment and have little income. I
have used reserves for several months and can no longer. . . . When
PAGE 8 – OPINION AND ORDER
and if my circumstances change, I will do my best to fulfill my
obligation to the bank.
Ex. 208. On January 23, 2015, Heine’s credit card account with Elan had a balance of
$28,488.22 and was 120 days delinquent. Ex. 204. On February 12, 2015, the Bank sent Heine a
notice of default, demanding that Heine cure the default on both the loan and the credit card.
Ex. 205. The next day, Elan charged the Bank for the entire $28,488.22 due on the credit card.
Ex. 206. Elan has assigned its rights, title, and interest in the credit card to the Bank. Ex. 207.
CONCLUSIONS OF LAW
Based on the foregoing Findings of Fact and the legal standards that follow, the Court
makes the following Conclusions of Law under Fed. R. Civ. P. 52(a)(1):
A. General Principles Regarding Indemnification and Advancement Obligations
Indemnification and advancement obligations by an institution can arise when an
individual is a party to a civil or criminal proceeding arising from the fact that the individual is or
was a director or officer of that institution and the institution assumed or has such an obligation
either by contract or by statute. Indemnification generally refers to the right of a director or
officer to be reimbursed for expenses incurred by him or her in such a proceeding. In many
jurisdictions, the right to indemnification cannot be established until after the legal proceeding at
issue has concluded. See generally Richard A. Rossman, Matthew J. Lund, and Kathy K.
Lochmann, A Primer of Advancement of Defense Costs: The Rights and Duties of Officers and
Corporations, 85 U. Det. Mercy L. Rev. 29, 31 (2007).
Advancement generally refers to the right of a director or officer to receive an advance
for expenses that he or she incurs in the legal proceeding before its final disposition. A director
or officer’s entitlement to an advancement of expenses is related to his or her entitlement to
indemnification; however, the eligibility requirements for each are distinct. Id. at 53; see also
PAGE 9 – OPINION AND ORDER
Holley v. Nipro Diagnostics, Inc., 2014 WL 7336411, at *10 (Del. Ch. Dec. 23, 2014) (stating
that the Delaware Supreme Court has held that indemnification and advancement are “separate
and distinct legal actions”) (quoting Homestore, Inc. v. Tafeen, 888 A.2d 204, 212 (Del. 2005)).
Thus, an individual ultimately determined to be ineligible for indemnification may still be
entitled to advancement before that ultimate determination. Rossman, 85 U. Det. Mercy L. Rev.
at 53; see also Homestore, 888 A.2d at 211 (stating that a director’s right to indemnification
“cannot be established . . . until after the defense to the legal proceedings has [concluded.]”).
There is a strong public policy in support of advancing fees to directors and officers.
Rossman, 85 U. Det. Mercy L. Rev. at 33. Advancement is in the best interest of the corporation
because the corporation may benefit from its director or officer’s enhanced ability to defend
against claims. Id.; see also Homestore, 888 A.2d at 218 (“Although advancement provides an
individual benefit to corporate officials, it is actually a desirable underwriting of risk by the
corporation in anticipation of greater corporate-wide rewards for its shareholders.”) (footnote
omitted) (quotation marks omitted). Advancement provisions also serve to help the corporation
recruit capable individuals as directors and officers. Stephen A. Radin, “Sinners Who Find
Religion”: Advancement of Litigation Expenses to Corporate Officials Accused of Wrongdoing,
25 Rev. Litig. 251, 252 (2006).
Generally, it is not necessary for an officer or director or former officer or director to
prove that his or her conduct met an applicable standard before obtaining advancement of legal
fees and expenses. Rossman, 85 U. Det. Mercy L. Rev. at 33. Requiring a determination of
whether the director or officer is entitled to indemnification before the advancement of legal fees
“is impractical, imposing burdens of investigation and procedural requirements which could
make advances for expenses effectively unavailable.” Andrew J. Morrow, Jr., Appendix: Task
PAGE 10 – OPINION AND ORDER
Force Report, Oregon Revised Model Business Corporation Act, 30 Willamette L. Rev. 407, 464
(1994). Thus, under Oregon banking law, ORS § 707.752(1) permits banking institutions to
advance a director’s reasonable expenses if two procedural conditions are met: (1) the director
provides the banking institution with a written affirmation of the director’s good faith belief that
he or she has met the applicable standard of conduct; and (2) the director provides the banking
institution with a written undertaking to repay the advancement if it is ultimately determined that
the director did not meet the required standard of conduct. ORS § 707.752(1), however, is
permissive, rather than mandatory. It establishes only the ability or authority of a banking
institution to grant advancement. See Rossman, 85 U. Det. Mercy L. Rev. at 34 (stating that
“permissive” advancement statutes establish only the ability of a corporation to grant
advancement, whereas “mandatory” advancement statutes require the corporation to advance
expenses under certain circumstances).
A corporation, or banking institution, has a great deal of discretion to provide limitations
to advancement and indemnification, provided those limitations are stated unambiguously. See
ORS § 707.764(2) (“If articles of incorporation limit indemnification or advance of expenses,
any indemnification and advance of expenses are valid only to the extent consistent with the
articles of incorporation.”); Rossman, 85 U. Det. Mercy L. Rev. at 32-33 (“[O]rganizational
documents are a primary basis of the corporation’s contractual obligations relating to
advancement and indemnification.”). If done ambiguously, however, the corporation or banking
institution’s articles, bylaws, or other relevant documents may be construed against the
corporation or banking institution and in favor of the director or officer seeking advancement and
indemnification. See ORS § 42.260 (“When different constructions of a provision are otherwise
PAGE 11 – OPINION AND ORDER
equally proper, that construction is to be taken which is most favorable to the party in whose
favor the provision was made.”)
In this case, the Court first considers whether Heine is entitled to the advancement of
expenses he incurs in defending himself in the Criminal Action. Second, the Court determines
whether Pryor Cashman’s hourly fees and retainer demand are “reasonable expenses” under
Section VII.A and ORS 707.752. Third, the Court addresses the Bank’s argument that it is
entitled to “setoff” Heine’s existing debts to the Bank, as established in the Bank’s four
counterclaims, against any advancement of Heine’s expenses. Finally, the Court considers the
Bank’s argument that Heine is “equitably estopped” from making his undertaking to repay the
advancement in the event it is ultimately determined that he is not entitled to indemnification,
which would preclude Heine from being entitled to any advancement.
B. Whether Heine is Entitled to Advancement of Expenses under Section VII.F
Among other things, the Bank’s Articles of Incorporation create contractual rights and
obligations, including third-party beneficiary rights and obligations, between the Bank and its
officers and directors. See generally Dentel v. Fidelity Sav. & Loan Ass’n, 273 Or. 31, 33 (1975)
(“The bylaws of the corporation have been termed a contract between the members of the
corporation, and between the corporation and its members. . . . The articles of incorporation
constitute ‘a contract between the corporation and the state, and between the corporation and its
owners, and between the owners themselves.’”) (quotation omitted). Relying upon the Articles,
Heine asserts a contractual right to receive an advancement of his expenses. The Bank maintains
that, under the facts presented and the terms of the Articles, it has no such contractual obligation
to Heine. At the center of the parties’ disagreement, Heine and the Bank dispute the meaning of
the phrase “person indemnified hereunder,” as that phrase is used in Section VII.F, the
advancement provision. See Ex. 1, p. 6 (“Expenses incurred by a person indemnified hereunder
PAGE 12 – OPINION AND ORDER
in defending a . . . [criminal] proceeding (including all appeals) or threat thereof, shall, to the
extent not prohibited by applicable law or regulation, be paid by the Corporation in advance of
the final disposition . . . .”).
Heine argues that the phrase refers back to Section VII.A’s description of:
[A]ny person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative
(including all appeals), by reason of or arising from the fact that
the person is or was a director or officer of the Corporation or one
of its subsidiaries, or is or was serving at the request of the
Corporation as a director, officer, partner, or trustee of another
foreign or domestic Corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise . . . .
Ex. 1, p. 4. In essence, Heine maintains that, in the context of this case, the phrase a “person
indemnified hereunder” means “a person who is a party to a criminal proceeding by reason of or
arising from the fact that the person was a director or officer” of the Bank. Thus, according to
Heine, he is a “person indemnified hereunder” and thus entitled to advancement of his
reasonable expenses.
The Bank, however, argues that a “person indemnified hereunder” means that a
determination already has been made under Section VII.B that the person is entitled to
indemnification under Section VII.A and that such a determination must be made before the
Bank may, or must, advance expenses. The Bank also argues that under Section VII.F, it has the
discretion to evaluate an applicant’s financial ability to repay any advancement when
determining whether advancement is proper. See Ex. 1, p. 6 (“The undertaking must be a general
personal obligation of the party receiving the advances but need not be secured and may be
accepted without reference to financial ability to make repayment.”).
Because the resolution of the parties’ dispute turns upon the interpretation of a phrase in
the parties’ “contract,” ordinary principles of contract interpretation apply. Contract
PAGE 13 – OPINION AND ORDER
interpretation is a matter of substantive law to which state law applies in this diversity case. See
Getlin v. Maryland Cas. Co., 196 F.2d 249 (9th Cir. 1952) (“This case is in federal court by
diversity of citizenship only. The law of the state in which the court sits must apply.”); Snook v.
St. Paul Fire & Marine Ins. Co., 220 F. Supp. 314, 316-17 (“This being a diversity case,
jurisdiction is grounded on that fact and the policy must be interpreted and construed in
accordance with the Laws of Oregon, the place where the contract was made.”). The Bank
adopted the Articles of Incorporation pursuant to the Oregon Bank Act. Ex. 1, p. 1. Thus, the
Court interprets the “contract” in accordance with Oregon law.
In Yogman v. Parrott, the Oregon Supreme Court established a three-step process for
interpreting a disputed contractual provision. 325 Or. 358 (1997). First, the court must determine
whether, as a matter of law, the relevant provision is ambiguous. Id. at 361. A contractual
provision is ambiguous if it can “reasonably be given more than one plausible interpretation.”
Williams v. RJ Reynolds Tobacco Co., 351 Or. 368, 379 (2011). “The court must, if possible,
construe the contract so as to give effect to all of its provisions.” Id. Further, when construing a
contract provision, the court is “not to insert what has been omitted, or to omit what has been
inserted.” ORS § 42.230; see also Yogman, 325 Or. at 361 (citing ORS § 42.230 at step one of
the analysis).
The analysis ends if the meaning of the provision is clear from the text and context of the
contract. Williams, 351 Or. at 379-80. The court then applies the contractual term to the facts.
Yogman, 325 Or. at 361. If the provision is ambiguous, however, the court proceeds to the
second step. Id. at 363. At the second step, the trier of fact examines extrinsic evidence of the
contracting parties’ intent and construes the contractual provision consistent with that intent, if
such a resolution can be determined. Id. Because Oregon follows the objective theory of
PAGE 14 – OPINION AND ORDER
contracts, relevant evidence at step two may include actual “manifestations of intent, as
evidenced by the parties’ communications and acts.” Holdner v. Holdner, 176 Or. App. 111, 120
(2001) (quotation marks omitted). If, after examining extrinsic evidence, the contract is still
ambiguous, the court applies appropriate maxims of construction at the third step. Yogman,
at 364.
1. Whether the Advancement Provision Has More Than One Plausible
Interpretation
Applying step one of the Yogman analysis, the Court first considers whether the Bank’s
interpretation of Section VII.F is plausible. The Court then considers whether Heine’s
interpretation of Section VII.F is plausible.
a. The Bank’s Interpretation
The Bank argues that Section VII.F is contingent rather than mandatory. First, the Bank
argues that advancement of legal expenses is conditional upon a determination, made by one of
the procedures described in Section VII.B, that the individual met the standard of conduct set
forth in Section VII.A. Second, the Bank asserts that it may deny Heine advancement because of
Heine’s inability to repay any advanced expenses. Each argument is addressed in turn.
i. A “Person Indemnified Hereunder”
The Bank argues that the determination of whether an applicant for advancement of
expenses is a “person indemnified hereunder” requires a review, under Section VII.B, of whether
indemnification is “proper in the circumstances because the person met the applicable standard
of conduct set forth in Section A.” Ex. 1, p. 4. Section VII.B states that “indemnification under
Section A of this Article shall not be made by the Corporation unless it is expressly determined
that indemnification of the person . . . is proper in the circumstances because the person has met
the applicable standard of conduct set forth in Section A.” Ex. 1, p. 4. That determination may be
PAGE 15 – OPINION AND ORDER
made by the Board “by a majority vote of a quorum consisting of directors who are not or were
not parties to the action, suit or proceeding . . . .” Ex. 1, p. 4.
Section VII.A requires that “the conduct of the person was in good faith, the person
reasonably believed that such person’s conduct was in the best interests of the Corporation, and,
with respect to any criminal proceeding, the person had no reasonable cause to believe such
person’s conduct was unlawful . . . .” Ex. 1, p. 4. Thus, under the Bank’s interpretation, before an
applicant may qualify as a “person indemnified hereunder,” the Board must determine, by a
majority vote consisting of directors who are not or were not parties to the action, suit, or
proceeding, that the applicant meets the good faith standard of conduct set forth in
Section VII.A.
The Bank asserts that this case is comparable to other federal court cases upholding a
corporation’s denial of the advancement of expenses when that corporation’s bylaws establish
that the board of directors must review the applicant’s conduct before advancing fees or other
expenses. For example, in Cox v. Fletcher Allen Health Care, the Fletcher Allen bylaws
provided that the advancement of expenses was conditioned upon “a determination . . . that the
facts then known to those making the determination do not preclude indemnification.”
2005 WL 2457632, at *4 (D. Vt. Oct. 5, 2005). The indemnification provision of the bylaws
reads, in relevant part, as follows:
The corporation shall not indemnify an Eligible Person under this
section . . . [if] it shall be finally adjudged in said action, suit or
proceeding that such person is liable for gross negligence or such
person has knowingly and willfully acted in a manner contrary to
the best interests of the corporation[.]
Id. The district court held that Fletcher Allen’s board of directors could make its own,
independent determination that the plaintiff failed to meet this standard of conduct and reject the
plaintiff’s request for indemnification of expenses based upon this determination. Id. at 5; see
PAGE 16 – OPINION AND ORDER
also Flood v. ClearOne Comm’ns, Inc., 618 F.3d 1110, 1120 (10th Cir. 2010) (considering
nearly identical language regarding the requirement of a determination “that the facts then
known to those making the determination would not preclude indemnification” and finding that
advancement is contingent upon this determination). The Bank here asserts that, as in Flood and
Cox, it has the discretion to deny advancement if the applicant does not meet the standard of
conduct set forth in Section VII.A.
The Bank’s interpretation of “person indemnified hereunder” does not contradict any
other provision of the Articles of Incorporation and is a reasonable reading of this phrase in
Section VII.F. Thus, the Court finds that the Bank’s interpretation of a “person indemnified
hereunder” is plausible.
ii. Whether the Bank May Consider Heine’s Ability to Repay
The Bank also argues that it properly considered Heine’s ability to repay in denying him
advancement under Section VII.F. ORS § 707.752 merely permits a Bank to reimburse the
reasonable expenses incurred by a director who affirms his good faith belief and furnishes an
undertaking to repay; it does not require the Bank to do so. ORS § 707.752 states that “[t]he
undertaking . . . must be an unlimited general obligation of the director but need not be secured
and may be accepted without reference to financial ability to make repayment.” The last sentence
of Section VII.F contains the same wording as ORS § 707.752: “The undertaking . . . may be
accepted without reference to financial ability to make repayment.” Ex. 1, p. 6. The Bank argues
that because the advancement provision does not say that the Bank must accept an undertaking
without reference to financial ability to make repayment but only that the Bank may accept the
undertaking, the Bank retains the discretion to refuse to accept Heine’s undertaking. Given
Section VII.F’s use of the permissive word “may,” rather than the mandatory word “must,” the
Court also finds that the Bank’s interpretation of the last sentence of Section VII.F is plausible.
PAGE 17 – OPINION AND ORDER
b. Heine’s Interpretation
Heine argues that indemnification is retrospective, while advancement is necessarily
prospective; therefore, in the advancement section, Heine asserts “person indemnified
hereunder” refers only to any person who may later be found to be entitled to indemnification
under the Articles of Incorporation. Additionally, Heine argues that the Bank cannot refuse to
advance expenses based upon Heine’s inability to repay the advancement in the event that it is
ultimately determined that he is not entitled to indemnification. The Court addresses each
argument in turn.
i. A “Person Indemnified Hereunder”
Heine argues that the determination of whether a director or officer has met the
applicable standard of conduct required for indemnification can only be made after the legal
proceeding at issue has concluded and that this ultimate indemnification determination is
irrelevant to the immediate need and obligation to advance defense costs. Section VII.D provides
for mandatory indemnification when a director is successful in defense of any action.
Section VII.D states that “to the extent a director, officer, employee or agent (including an
attorney) is successful on the merits or otherwise in defense of any action . . . that person shall be
indemnified against expenses (including attorneys fees) actually and reasonably incurred by him
in connection therewith.” Ex. 1, p. 5. ORS § 707.748 also provides for mandatory
indemnification in such circumstances as follows:
Unless limited by its articles of incorporation, a banking
institution shall indemnify a director who was wholly
successful, on the merits or otherwise, in the defense of any
proceeding to which the director was a party because of being a
director of the banking institution against reasonable expenses
incurred by the director in connection with the proceeding.
PAGE 18 – OPINION AND ORDER
(emphasis added). Thus, if Heine successfully defends himself in the Criminal Action, he will be
entitled to indemnification under Section VII.D of the Articles of Incorporation and
ORS § 707.748, regardless of any decision made by the Bank’s Board.
Conversely, both the Articles of Incorporation and Oregon statutory law prohibit
indemnification in certain circumstances. Section VII.A states, in relevant part, that “no
indemnification shall be made in connection with a proceeding . . . in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable for deliberate misconduct
in the performance of that person’s duty to the Corporation . . . .” Ex. 1, p. 4. ORS
§ 707.746(4)(b) prohibits a banking institution from indemnifying a director in connection with
any proceeding in which the director was found liable for improperly receiving a personal
benefit. Thus, argues Heine, the ultimate determination of whether Heine is entitled to
indemnification can only be made after the end of proceedings in the Criminal Action.
Heine argues that to interpret Section VII.F’s phrase “person indemnified hereunder” as
requiring an indemnification determination before an advancement of any expenses is
inconsistent with Sections VII.D and VII.A. Thus, Heine asserts, in the context of this case
Section VII.B’s requirement that a determination be made that the person seeking
indemnification meets the applicable standard set forth in Section VII.A is only triggered if the
Criminal Action is dismissed without a finding on the merits, thereby rendering the prohibition
of indemnification in Section VII.A and the mandatory indemnification under Section VII.D
inapplicable.
Heine also argues that Flood and Cox are distinguishable because in both cases, the
advancement provisions unambiguously required an advance determination “that the facts then
known to those making the determination would not preclude indemnification.” Flood, 618 F.3d
PAGE 19 – OPINION AND ORDER
at 1113; see also Cox, 2005 WL 2457632, *4 (considering nearly identical language).
Section VII.F—the advancement provision at issue here—does not unambiguously provide for
such an advance determination regarding “the facts then known.”
Indeed, such language was omitted from the advancement provision contained in the
Oregon Model Business Corporations Act. Morrow, 30 Willamette L. Rev. at 464. The Task
Force Report describing the amendments to the Model Business Corporations Act states that
“[t]he requirement of a determination [that the director met the applicable standard of conduct
for indemnification] in advance is impractical, imposing burdens of investigation and procedural
requirements which could make advances for expenses effectively unavailable.” Id. Heine argues
that the Bank may have had the ability and discretion to include such a phrase in its advancement
provision, but it chose not to do so. Thus, advancement is not contingent upon an independent
advance determination considering “the facts then known.”
In response, the Bank argues that Heine’s interpretation of “person indemnified
hereunder” adds words to the text in violation of ORS 42.230, which states that a court must not
“insert what has been omitted.” Although this is not a frivolous argument, without those
additional words, the phrase makes no sense in context of the advancement provision. The word
“indemnified” is used in the past tense. Yet, if someone already has been indemnified, that
person has no need of an advancement. Thus, without some words being added, the clause makes
no sense, and it is not appropriate to construe a text in a way that renders it nonsensical or
meaningless. See ORS § 42.230 (“[W]here there are several provisions or particulars, such
construction is, if possible, to be adopted as will give effect to all.”); Thomas Creek Lumber &
Log Co. v. State Forester, 157 Or. App. 204, 213 (1998) (“We do not construe contracts in a
manner that renders a portion of the contract meaningless.”).
PAGE 20 – OPINION AND ORDER
Thus, the phrase “person indemnified hereunder” necessarily is shorthand and requires
additional words. Heine interprets that phrase to mean, in the context of this case, a former
director or officer who is a party to a proceeding because of or arising out of his or her former
work for the Bank. The Bank interprets that phrase to mean a person who has been determined
under the procedures of Section VII.B to meet the standards for indemnification under Section
VII.A. Because both interpretations add words to the text, and necessarily do so, ORS § 42.230
does not result in either party’s position being validated or eliminated.
Thus Court finds that Heine’s interpretation of “person indemnified hereunder” also is a
reasonable reading of Section VII.F and does not contradict any other provision in the Articles of
Incorporation. Because both Heine’s interpretation and the Bank’s interpretation of the phrase
“person indemnified hereunder” are plausible, and the meaning of the phrase is not clear from
the text and context of the Articles of Incorporation, “person indemnified hereunder” is an
ambiguous term.
ii. Whether the Bank May Consider Heine’s Ability to Repay
Heine also argues that the Bank may not deny him advancement based upon his inability
to repay advanced expenses. The last sentence of Section VII.F—“The undertaking must be a
general personal obligation of the party receiving the advances but need not be secured and may
be accepted without reference to financial ability to make repayment”—is taken nearly verbatim
from ORS § 707.752(2), which states: “The undertaking . . . must be an unlimited general
obligation of the director but need not be secured and may be accepted without reference to
financial ability to make repayment.”
Heine asserts that this phrase is nearly identical to language the Texas Court of Appeals
considered in In re Aguilar, 344 S.W.3d 41 (Tx. App. 2011). See id. at 45 (“‘The written
undertaking described above must be an unlimited general obligation of the person but need not
PAGE 21 – OPINION AND ORDER
be secured. The written undertaking may be accepted without reference to financial ability to
make repayment.’”). In Aguilar, the defendant argued that the board of directors had the
discretion to refuse advancement if it determined that the plaintiff would not be able to repay the
advanced funds. Id. at 50. The court reasoned that viewing the advancement provision as a
whole, the plaintiff’s alternative interpretation was correct. Id. at 51. The structure of the first
sentence, which provided that the director “‘shall be paid . . . after the Corporation receives a . . .
written undertaking’” indicated that the defendant has a mandatory duty to advance defenses
costs after it receives the undertaking. Id. Although the last sentence provided that the
undertaking “‘may be accepted,’” it did not unambiguously condition the defendant’s duty to pay
an advancement on whether the defendant accepts the undertaking. Id.
The court in Aguilar additionally noted that the text stating that the undertaking “may be
accepted without reference to financial ability to make repayment” was taken verbatim from a
revision to the Model Business Corporation Act. Id. The commentary for this section of the
revision provides that:
The revision makes it clear that the undertaking need not be
secured and that financial ability to repay is not a prerequisite, on
the ground that it is not fair to favor wealthy directors who may be
in less need of financial assistance in mounting their defense over
directors whose financial resources are modest.
Id. (quotation marks omitted).
As in Aguilar, here the advancement provision begins with the use of the mandatory
“shall,” indicating that upon receipt of the undertaking, the Bank must provide for advancement.
Given the public policy favoring advancement, the commentary regarding similar language in
the Model Business Corporation Act, and the interpretation by the Texas Court of Appeals in
Aguilar, the Court finds that Heine’s reading of the final sentence in Section VII.F is reasonable.
PAGE 22 – OPINION AND ORDER
Thus, both parties’ interpretations of Section VII.F are plausible, rendering Section VII.F
ambiguous. Accordingly, the Court proceeds to step two of Yogman.
2. Extrinsic Evidence of the Parties’ Intent
At step two of the Yogman analysis, the trier of fact looks to extrinsic evidence of the
contracting parties’ intent to interpret the ambiguous contractual provision. Yogman, 325 Or.
at 363. In this bench trial, the Court is the trier of fact. Neither party, however, submitted any
extrinsic evidence of intent. Thus, the Court proceeds to Yogman step three.
3. Maxims of Contract Interpretation
At step three of the Yogman analysis, a court resolves the remaining ambiguity in the
contractual provision at issue by applying appropriate maxims of construction. Id. at 364. One
such maxim of construction is the rule of interpretation against the drafter. Hoffman Const. Co.
of Alaska v. Fred S. James & Co. of Oregon, 313 Or. 464, 470-71 (1992); see also Restatement
(Second) of Contracts § 206 (“In choosing among the reasonable meanings of a promise or
agreement or a term thereof, that meaning is generally preferred which operates against the party
who supplies the words or from whom a writing otherwise proceeds.”). Here, neither party
submitted evidence regarding who drafted the Articles of Incorporation. Without such evidence,
it is unknown what role either Heine or the Bank may have played in drafting the document or
the ambiguous provision. Thus, the Court cannot apply this maxim of construction.
ORS § 42.260, titled “Ambiguous terms,” provides another maxim of construction. See
Copeland Sand & Gravel v. Estate of Dillard, 267 Or. App. 791, 799 (2014) (applying ORS
§ 42.260 at step three of the Yogman analysis). ORS § 42.260 states, in relevant part, that
“[w]hen different constructions of a provision are otherwise equally proper, that construction is
PAGE 23 – OPINION AND ORDER
to be taken which is most favorable to the party in whose favor the provision was made.” 8
Before a party is entitled to the application of the second sentence of ORS § 42.260 in their
favor, that party must demonstrate that their construction of a provision is at least “equally
proper” in comparison with the opposing party’s construction. See Peace River Seed CoOperative, Ltd. v. Proseeds Marketing, Inc., 355 Or. 44, 70 n.17 (2014).
The Court finds that the maxim of construction described in ORS § 42.260 is
appropriately applied in this case because both Heine’s and the Bank’s interpretations of the
advancement provision at issue are equally proper. Thus, because advancement and
indemnification are generally viewed as rights of a director or officer and made to favor a
director or officer, see generally Rossman, 85 U. Det. Mercy L. Rev. at 30-31, Heine’s
construction of the advancement provision must prevail at step three of Yogman. Thus, Heine is
8
The full text of ORS § 42.260 reads as follows:
When the terms of an agreement have been intended in a different
sense by the parties, that sense is to prevail, against either party, in
which the party supposed the other understood it. When different
constructions of a provision are otherwise equally proper, that
construction is to be taken which is most favorable to the party in
whose favor the provision was made.
The Court notes that both ORS § 42.260 and ORS § 42.230, which the Court applied at step one
of the Yogman analysis, appear in ORS Chapter 42. Chapter 42 provides statutory rules for the
interpretation of writings. Oregon courts, however, apply the two statutes at different steps of the
Yogman analysis. Oregon courts consider ORS § 42.230 at step one. See Williams, 351 Or.
at 379; Oregon v. Heisser, 350 Or. 12, 25 n.9 (2011); Yogman, 325 Or. at 361. Courts generally
apply the second sentence of ORS § 42.260 at step three. See Copeland, 267 Or. App. at 799;
Crossroads Plaza, LLC v. Oren, 176 Or. App. 306, 310 (2001) (holding that because a lease
provision “is ambiguous and there is no evidence that bears on the ambiguity, it must be
construed in favor of defendants, the parties in ‘whose favor the provision was made.’”) (quoting
ORS § 42.260). C.f. Portland Fire Fighters’ Ass’n, Local 43 v. City of Portland,
181 Or. App. 85, 94 n.6 (2002) (citing ORS § 42.260 and stating that “[s]tatutory rules that
authorize consideration of extrinsic evidence may be implicated at the second level of analysis
rather than the first or third.”).
PAGE 24 – OPINION AND ORDER
entitled to the advancement of “reasonable expenses incurred” in the Criminal Action and
judgment in his favor on his first and third claims.
C. Whether Heine’s Expenses in the Criminal Proceeding are Reasonable
The Articles of Incorporation permit indemnification of “reasonable expenses (including
attorney’s fees) . . . actually and reasonably incurred by the person to be indemnified . . . .” Ex. 1,
p. 4. Similarly, ORS § 707.746(5) provides that indemnification is limited to “reasonable
expenses incurred in connection with the proceeding.” The Court first considers whether the
hourly rates of the New York attorneys at Pryor Cashman as set forth in the engagement
agreement are reasonable. The Court then considers whether the retainer requested by Pryor
Cashman is a reasonable expense “incurred” under the Articles of Incorporation.
1. Pryor Cashman’s Hourly Rates
The Court looks to the prevailing market rate to set reasonable hourly rates for Heine’s
defense in the Criminal Action. See Gonzalez v. City of Maywood, 729 F.3d 1196, 1205 (9th Cir.
2013) (noting that the “‘prevailing market rates in the relevant community’ set the reasonable
hourly rate”). “Generally, when determining a reasonable hourly rate, the relevant community is
the forum in which the district court sits.” Id. (quotation marks omitted). Within this geographic
community, the district court should consider the experience, skill, and reputation of the
attorneys or paralegals involved. In determining reasonable hourly rates, typically “[a]ffidavits of
the plaintiffs’ attorney and other attorneys regarding prevailing fees in the community, . . .
particularly those setting a rate for the plaintiffs’ attorney, are satisfactory evidence of the
prevailing market rate.” United Steelworkers of Am. v. Phelps Dodge Corp., 896 F.2d 403, 407
(9th Cir. 1990).
At trial, the Court accepted the declaration and supplemental declaration of Ron Hoevet
(“Hoevet”) into evidence. Hoevet is a partner at Hoevet Olson Howes, PC, a law firm in
PAGE 25 – OPINION AND ORDER
Portland, Oregon that specializes in criminal defense. Dkt. 47 at 2. Hoevet stated that, according
to the Oregon State Bar 2012 Economic Survey, an hourly billing rate of $429 is in the 95th
percentile for criminal defense attorneys in Portland. Dkt. 47 at 3-4. Hoevet opined that an
hourly billing rate of $550 and an initial evergreen retainer of $50,000 are reasonable to defend
Heine in the Criminal Action. Dkt. 47 at 4. Hoevet also stated that the $585 hourly rate of Per
Ramfjord (“Ramfjord”)—Heine’s expert witness—is the top hourly rate charged for white collar
criminal defense in Portland, Oregon. Dkt. 48 at 1.
The Court also accepted in evidence Ramfjord’s expert report. Dkt. 43. Ramfjord is a
partner at Stoel Rives, LLP in Portland, Oregon. Dkt. 43 at 3. A principal focus of his work at
Stoel Rives is white collar criminal defense work. Dkt. 43 at 3. Ramfjord opined that Alberts’s
rate of $640 per hour was reasonable in this community in light of Alberts’s combination of
criminal and banking law expertise and his firm’s capabilities. Dkt. 43 at 6. In determining the
appropriateness of Alberts’s rate, Ramfjord considered Alberts’s skills, reputation, and
experience, as well as the nature of the work to be performed. Dkt. 43 at 6. Ramfjord also based
his conclusion on the 2014 Morones Survey of Commercial Litigation Fees for Portland, Oregon,
which listed $621 per hour as the average rate for the highest category of litigators in 2014,
before any 2015 rate increases. Dkt. 43 at 7. Ramfjord explained that Alberts’s rate is not
significantly different from the rates charged by other experienced white-collar criminal defense
lawyers in Portland or Seattle who work in large offices and have the capability to handle cases
involving the volume of documents at issue in the Criminal Action. Dkt. 43 at 7.
In light of Alberts’s criminal and banking law expertise, the 2014 Morones Survey
average rate of $621 per hour for the highest category of litigators in Portland is comparable to
Alberts’s hourly rate of $640 in 2015. Thus, the Court finds that Alberts’s rate of $640 in 2015
PAGE 26 – OPINION AND ORDER
dollars is not significantly higher than the 2014 Morones Survey average rate of $621 for top
litigation attorneys in Portland. The Court additionally finds that, given the age of the Oregon
State Bar 2012 Economic Survey, the 2014 Morones Survey is more persuasive. Thus, the Court
concludes as both a Finding of Fact and a Conclusion of Law that $640 in 2015 dollars is the
upper limit of a reasonable rate for Heine’s defense in the Criminal Action.
2. Pryor Cashman’s Proposed Retainer
The Articles of Incorporation permit the advancement of “[e]xpenses incurred.” Ex. 1,
p. 6. The purpose of a retainer is to ensure payment for future services that have not yet been
rendered. See “Retainer,” Black’s Law Dictionary (10th ed. 2014) (providing that “retainer” may
be defined as “[a]n advance payment of fees for work that the lawyer will perform in the
future.”) (emphasis added). Because a retainer serves as a guarantee to pay expenses incurred in
the future, it is not itself an “expense incurred,” even if Heine contractually agreed to pay such a
retainer. Additionally, nothing in the Articles of Incorporation compels the Bank to advance a
“retainer” to a director or officer. Thus, Heine is not entitled to any advancement of a retainer.9
D. The Bank’s Affirmative Defenses
The Bank asserts setoff, recoupment, and estoppel as affirmative defenses. Dkt. 26 at 7.
The Court first examines the Bank’s arguments regarding setoff and recoupment, and then turns
to the Bank’s estoppel argument.
1. Setoff and Recoupment
The Bank argues that Heine’s $141,654.39 debt to the Bank should be setoff, or
recouped, against any advancement of expenses the Bank makes to Heine in connection with the
9
The engagement agreement states that Pryor Cashman LLP will send Heine monthly
statements setting forth the fees and expenses incurred in the previous month. Ex. 3, p. 3. The
balance on each monthly statement is due no later than 30 days after the date of the bill. Ex. 3,
p. 3. The Court finds that it is commercially reasonable to require monthly payments.
PAGE 27 – OPINION AND ORDER
Criminal Action. Setoff and recoupment can “liquidat[e] the whole of part of [a] plaintiff’s claim
in situations where an independent action [or counterclaim] would not lie.” Rogue River Mgmt.
Co. v. Shaw, 243 Or. 54, 60 (1966). Setoff is an equitable defense applied within the court’s
discretion. See Bennington v. Inland Investments Co., 153 Or. App. 209, 221 (1998). A court
may consider a party’s insolvency in determining whether setoff is equitable. Pearson v.
Richards, 106 Or. 78, 93-94 (1922).
A defendant may raise the defense of setoff when the plaintiff owes him a contract debt
“independent of and unconnected with the cause of action set forth in the complaint.” Oregon ex
rel. Key W. Retaining Sys., Inc. v. Holm II, Inc., 185 Or. App. 182, 190 (2002) (quotation marks
omitted). Recoupment, by contrast, is “confined to matters arising out of and connected with the
transaction upon which the action is brought.” Rogue River, 243 Or. at 58-59. Here, the debt
Heine owes the Bank under the loan agreement and the Elan credit card account is independent
of and unconnected with the advancement of expenses under the Bank’s Articles of
Incorporation. Thus, setoff—and not recoupment—is the appropriate vehicle for any “netting
out” of Heine’s obligations to the Bank.
The Bank argues that setoff is equitable here because Heine is insolvent and Heine agrees
that it is more likely than not that he will be unable to repay any advanced expenses to the Bank
in the event that it is ultimately determined he is not entitled to indemnification. Several courts
have concluded, however, that advancement proceedings are inappropriate forums for setoff and
recoupment. For example, in Kaung v. Cole Nat’l Corp., the Delaware Supreme Court held that
“an advancement proceeding is summary in nature and not appropriate for litigating
indemnification or recoupment.” 884 A.2d 500, 510 (Del. 2005); see also Westar Energy, Inc. v.
Wittig, 235 P.3d 515, 525-26 (Kan. Ct. App. 2010) (reasoning that “advancement is meant to
PAGE 28 – OPINION AND ORDER
alleviate an officer from personally providing the enormous resources required to litigate against
corporate charges. . . . Permitting an offset or recoupment during this process undermines that
objective of relieving the accused wrongdoer from making the expenditures.”).
Additionally, in Miller v. U.S. Foodservice, Inc., the district court concluded that
advanced legal expenses were not properly subject to setoff or recoupment. 405 F. Supp. 2d 607,
620 (D. Md. 2005). The defendant corporation asserted sought recoupment and setoff for the
plaintiff’s breach of his fiduciary duties and breach of his employment agreement with the
defendant. Id. at 619-20. The defendant argued that it should be allowed to withhold any
advancement of legal fees and expenses it owed the plaintiff against its counterclaims until both
parties’ right and obligations were finally adjudicated. Id. at 620. Following the approach of
Delaware courts, the Miller court reasoned that “[i]f a corporation can circumvent its obligation
to pay an officer’s legal fees simply by filing a counterclaim against the officer, then advance
indemnification provisions will be rendered virtually null whenever a corporation wishes to
avoid that obligation.” Id.
Here, the Bank argues that Kaung and Westar are distinguishable from this case because
in both Kaung and Westar, the indemnitor was seeking to recoup already advanced defense costs.
Central to both courts’ conclusions, however, was the public policy favoring advancement. See,
e.g., Kaung, 884 A.2d at 509 (“Rights to indemnification and advancement are deeply rooted in
the public policy of Delaware corporate law in that they are viewed less as an individual benefit
arising from a person’s employment and more as a desirable mechanism to manage risk in return
for greater corporate benefits.”). Because courts consider setoff to be inconsistent with the
advancement of legal fees in the corporate setting, the Court finds that allowing the Bank to
PAGE 29 – OPINION AND ORDER
setoff Heine’s debts against the advancement of legal expenses Heine incurs in the Criminal
Action would not be equitable.10
2. Estoppel
The Bank also argues that Heine’s prior misrepresentations to the Bank regarding his
creditworthiness, and his subsequent default, prevent Heine from making the undertaking to
repay the advancement in the event it is ultimately determined that he is not entitled to
indemnification. If Heine is precluded from making this undertaking, then he has not satisfied a
condition precedent to being eligible to receive advancement.
The equitable estoppel doctrine is “‘employed to prevent one from proving an important
fact to be something other than what by act or omission he has led another party justifiably to
believe.’” State v. Bush, 174 Or. App. 280, 292 (2001) (quoting Stovall v. Sally Salmon Seafood,
306 Or. 25, 33 (1988)). Under Oregon law, the equitable estoppel doctrine precludes a person, by
virtue of his conduct, from asserting a right which he otherwise would have had. Day v. Adv.
M&D Sales, Inc., 336 Or. 511, 518 (2004) (en banc). Equitable estoppel has five elements:
(1) there must be a false representation; (2) the representation must have been made with
knowledge of the facts; (3) the other party must have been ignorant of the truth; (4) the
representation must have been made with the intention that it should be acted upon by the other
party; and (5) the other party must have been induced to act upon the representation. Id.
at 518-19.
The Bank argues that Heine should be estopped from asserting that he will undertake to
repay the advancement because he previously made a false representation of creditworthiness in
10
The Court has not yet decided whether to award attorneys’ fees in this matter under
Heine’s Second Claim. The Court expresses no opinion on whether setoff would be appropriate,
or equitable, if the Court were to award fees in favor of Heine on his Second Claim.
PAGE 30 – OPINION AND ORDER
the loan agreement and then defaulted on the loan. The loan agreement states that “I
(‘Borrower’) promise to pay to The Bank of Oswego (‘Lender’), or order, in lawful money of the
United States of America, the principal amount of One Hundred Thousand & 00/100 Dollars
($100,000.00), together with interest on the unpaid principal balance from October 20, 2014,
until paid in full.” Ex. 201, p. 1. The statement “I promise to pay,” however, is not equivalent to
“I have the current ability to pay.” Because the statement “I promise to pay” was not a false
representation, it does not form the basis of estoppel.
The loan agreement also contains a clause stating: “Please notify us if we report any
inaccurate information about your account(s) to a consumer reporting agency.” Ex. 201, p. 2.
The Bank argues that Heine’s failure to provide a statement that he would be unable to repay the
loan was a false representation by Heine. The loan agreement clause, however, does not require
Heine to notify the Bank that he could not repay the loan. Thus, Heine’s failure to provide such a
statement is not a false representation.
Additionally, Heine did not make any false statements regarding his inability to repay the
amount of the loan. To the contrary, Heine’s letter dated January 20, 2015, to Andrews stated, “I
am not able to continue making $720 monthly payments on my PLOC. . . . When and if my
circumstances change, I will do my best to fulfill my obligation to the bank.” Ex. 208. Finally,
Section VII.F does not require a person seeking advancement to undertake or represent that he is
able to repay the advancement. Rather, the Articles of Incorporation simply require “an
undertaking by or on behalf of such person to repay such expenses.” Ex. 1, p. 6. Because the
Bank has not identified any false representations made by Heine, the Bank’s estoppel argument
fails.
PAGE 31 – OPINION AND ORDER
CONCLUSION
Based on the evidence presented at trial and the record in this case, the Court finds that
Heine is entitled to partial judgment in his favor on his First and Third Claims. Moreover,
Heine’s existing debts to the Bank under the Bank’s counterclaims may not be setoff against any
advancement of expenses that the Bank is required to make to Heine in connection with the
Criminal Action.
IT IS SO ORDERED.
DATED this 13th day of November, 2015.
/s/ Michael H. Simon
Michael H. Simon
United States District Judge
PAGE 32 – OPINION AND ORDER
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?