Baker v. Health Management Systems, Inc.

Phillip Siegel (plaintiff), the chief financial officer of Health Management Systems, Inc. (HMS) (defendant), was joined as a defendant party for security-fraud class actions filed in federal district court concerning false and misleading statements designed to overinflate the price of HMS stock. Siegel had started working for HMS after the beginning date of the class-action period and after the time that the misconduct occurred. Siegel also had purchased, not sold, HMS stock during the period. Siegel retained separate counsel because his position was different from that of the other named defendants. The actions were consolidated, the class-action plaintiffs entered into a stipulated dismissal with prejudice as to all claims against Siegel, and the actions with the other named defendants were settled. HMS denied Siegel’s written request for indemnification for legal fees on the grounds that Siegel did not require separate counsel and his legal fees were not incurred out of necessity. In November 1998, Siegel filed a motion for indemnification for his legal fees of $84,784.37 for the underlying action. The district court denied Siegel’s request, because the general rule was that attorney’s fees may not be awarded unless provided for by statute or contract. Siegel appealed to the United States Court of Appeals for the Second Circuit, arguing that the New York statute reimburses a director or officer for his attorney’s fees in defending an underlying case brought against him in his official capacity and that the language of the statute is broad enough to allow fees on fees. HMS argued that Siegel’s request for reimbursement was not for the filed motion, but rather for his dismissal from the underlying action. The Second Circuit certified the question to the New York Court of Appeals.