Judge: Thomas S. Mcconville, Case: 2022-01250772, Date: 2023-05-15 Tentative Ruling

The Motion for Advancement of Attorneys’ Fees brought by Defendants Hong Peow Ong and Christine Tan is DENIED.  Within this motion, Defendants Hong Peow Ong and Christine Tan request the Court order Plaintiff to advance attorneys’ fees and expenses pursuant to Corporations Code §317 and Article X, Section 1, of Plaintiff’s bylaws.   Neither, however, compels the advancement of attorneys’ fees in this action. 

Pursuant to Corporations Code §317(f), “[e]xpenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of the proceeding upon receipt of an undertaking by or on behalf of the agent to repay that amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this section.” (Corporations Code §317(f) [emphasis added.])

The language in Corporations Code §317(f) is discretionary and permissive. Defendants additionally cite Corporations Code §317(g) which states:

“The indemnification authorized by this section shall not be deemed exclusive of any additional rights to indemnification for breach of duty to the corporation and its shareholders while acting in the capacity of a director or officer of the corporation to the extent the additional rights to indemnification are authorized in an article provision adopted pursuant to paragraph (11) of subdivision (a) of Section 204.”  (Corporations Code §317(g).) 

This provision indicates that corporations can separately agree to additional indemnification or the advancement of fees; however, this provision is likewise unavailing to Defendants, as the relevant language included within Plaintiff’s bylaws is similarly discretionary. 

Pursuant to Article X, Section 1 of Plaintiff’s bylaws:

“The Board of Directors may, in its discretion, cause the expense of officers and Directors incurred in defending a civil or criminal action, suit or proceeding to be paid by the Corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay the amount  if it is ultimately determined by a court of competent jurisdiction that he or she is not entitled to be indemnified by the Corporation.”  (¶8 of Ong Declaration and Exhibit 2 thereto [emphasis added].)  The above language is wholly discretionary and permits the corporation to choose whether to advance costs.

While Defendants attempt to rely on Delaware law, the same is similarly unavailing.  The cited Delaware authority, interpreting the comparable Delaware Corporations Code §145(e), likewise indicates advancement is discretionary. As explained by the court in Homestore, Inc. v. Tafeen (Del. 2005) 888 A.2d 204, “[t]he advancement authority conferred by section 145(e) is permissive.” (Id. at 212.)  “Section 145(e) leaves to the business judgment of the board the task of determining whether the undertaking proffered in all of the circumstances, is sufficient to protect the corporation’s interest in repayment and whether, ultimately, advancement of expenses would on balance be likely to promote the corporation’s interest.” (Advanced Min. Systems, Inc. v. Fricke (Del. 1992) 623 A.2d 82, 84.)

In contrast to the bylaws herein, in Homestore the relevant bylaws stated: “The Corporation shall pay all expenses (including attorney’s fees) incurred by such a director or officer in defending any such Proceeding as they are incurred in advance of its final disposition...” (Homestore, Inc. v. Tafeen (Del. 2005) 888 A.2d 204, 212.)  The court in Homestore, thus, concluded that “Homestore’s advancement provision is mandatory and unconditional.” (Id. at 213.)

As the instant bylaws include no such mandatory language requiring advancement of fees and, instead, leave the matter to the discretion of the corporation, Defendants have not demonstrated entitlement to an order advancing fees.

Defendants assert within their Reply that court intervention is appropriate, “because HOT PEPPER does not have a majority of disinterested directors, HOT PEPPER has not held a board meeting in several years, and the two existing HOT PEPPER directors are both parties to this case…” (Reply: 2:11-16 and Reply: 8:1-10:8.)  This argument, however, appears to be an improper invocation of Corporations Code §317(e), which is limited to ordering indemnification pursuant to Corporations Code §317(b) or (c).

Corporations Code §317(e) states: “Except as provided in subdivision (d), any indemnification under this section shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in subdivision (b) or (c), by any of the following: (1) A majority vote of a quorum consisting of directors who are not parties to such proceeding[;] (2) If such a quorum of directors is not obtainable, by independent legal counsel in a written opinion[;] (3) Approval of the shareholders…[or] (4) The court in which the proceeding is or was pending upon application made by the corporation or the agent….”

Notably, while Corporations Code §317(e)(4) permits a court determination, this provision remains unavailing to Defendants as: (1) The provision references only indemnity; and (2) A determination pursuant to this provision can only be made after trial.

Based on the above, Corporations Code §317(c) and (e) permit indemnification, after trial on the allegations in the complaint and findings which support good faith and agency.   Consequently, any request for attorneys’ fees pursuant to Corporations Code §317(c) and (e), prior to trial, is premature.

Concerning Defendants objections to the Declaration of Yuan Ning Sun, the court declines to rule on those as they are immaterial to the resolution of the motion pending.

Plaintiffs to give notice.