Wasitowski v. Pali Holdings, Inc.

In 2008, David Wasitowski (plaintiff) resigned as an officer and director of Pali Holdings, Inc. (Pali) (defendant), a New York corporation. Thereafter, in 2009, some of Pali’s shareholders initiated a derivative suit in state court against Pali and Pali’s board members, including Wasitowski, which alleged that the board unlawfully pursued a scheme to dilute shareholder voting power to maintain the board’s control over Pali. Wasitowski successfully moved to dismiss the lawsuit against him. Wasitowski paid his own legal fees to defend the lawsuit, which totaled over $580,000. During the proceeding, the trial court denied Wasitowski’s motion for an order directing Pali to advance his legal fees. The trial court noted that a subsidiary of Pali had initiated a pending Financial Industry Regulatory Authority arbitration against Wasitowski and another former Pali officer for breach of fiduciary duty and abuse of control and reasoned that the allegations of misconduct remained unresolved despite the dismissal of the lawsuit. Wasitowski commenced a separate proceeding against Pali asserting that Pali must indemnify him pursuant to New York Business Corporation Law (the BCL) and Pali’s bylaws. Wasitowski’s complaint did not mention the trial court’s denial of his motion for an order directing Pali to advance his legal fees. Pali moved to dismiss Wasitowski’s separate proceeding on the ground that Wasitowski failed to set forth reasonable cause for his failure to pursue indemnification as part of the underlying proceeding. Wasitowski moved for summary judgment and argued that multiple provisions of the BCL permitted court-ordered indemnification and that the reasonable-cause requirement applied only to a party who unsuccessfully sought indemnification in the underlying action.