Ridder v. CityFed Financial Corp.

CityFed Financial Corp. (plaintiff) (CityFed) sued some CityFed employees (defendants) for fraud and breaches of their fiduciary duties due to CityFed. At the time of the suit, CityFed was in receivership, and a receiver had been appointed. Upon notice of the lawsuit, the CityFed employees requested advance payment of attorney’s fees to defend themselves in the lawsuit. CityFed denied the request, and the CityFed employees filed a motion for a preliminary injunction requesting payment for attorney’s fees. The district court denied the CityFed employees’ motion for a preliminary injunction. The CityFed employees argued that the CityFed bylaws required CityFed to indemnify and hold harmless all employees sued for their employment with CityFed, including the right to be paid the expenses included in defending the proceedings in advance, unless the employees were not entitled to be indemnified. CityFed by-laws were similar to the provisions of Delaware corporation law. CityFed argued that it was entitled to refuse to advance the defense costs because the directors had to act in the best interests of the corporation. The district court denied the injunction because the employees failed to show the likelihood of success on the merits, and because the rights of other creditors were implicated if employees were to receive funds toward litigation. The district court also held that the employees’ claims could not be higher in priority than those of other creditors. The employees appealed.