PreGel America makes and distributes products used in the gelato, ice cream and pastry business. But it alleges a far less than sweet experience with its former CEO, who the company says approved unauthorized personal salary hikes, misused corporate resources, and misappropriated corporate funds for his own benefit.

In PreGel America, Inc. v. Casol, 2023 NCBC 81, the Business Court considered PreGel’s second attempt to pursue recovery from Marco Casol, its former CEO, and his wife Tania Sovilla, a former inventory specialist for the company. First, the Business Court had to deal with the fallout from PreGel’s initial litigation effort, a federal action in the Western District of North Carolina that continued for two years before Casol secured a dismissal for lack of subject matter jurisdiction. Id. ¶¶ 7-8.

Casol asserted that PreGel was required to indemnify him, under the company’s Bylaws, for the costs of defending against the Western District action. PreGel contended indemnification was improper where Casol’s actions were “activities which were known or believed by him to be clearly in conflict with the best interests of the corporation.” Id. ¶¶ 9-10 (relying on an exception in the company Bylaws and N.C.G.S. § 55-8-57(a)).

It may take a fair amount of PreGel’s dessert ingredients to mask the taste of the Business Court’s conclusion that it has to cover Casol’s expenses in the Western District litigation and his expenses in the current litigation in pursuit of indemnification.

Judge Bledsoe determined the statutory scheme allowed for no other result.  Under North Carolina’s mandatory indemnification statute, § 55-8-52,

“Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he is or was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding.”

Here, PreGel’s Articles provided no contrary or limiting guidance, and Casol’s status as an officer was covered by § 55-8-56’s extension of the indemnification scope from directors to officers. Id. ¶ 23.

The Court’s analysis centered around whether Casol had been “wholly successful” in defending against PreGel in the Western District action where the dismissal was procedural as opposed to on the merits. While the Court held the undefined term ambiguous, it found interpretation assistance in the statute’s Official Comment. Id. ¶ 25 (citing Parsons v. Jefferson-Pilot Corp., 333 N.C. 420, 425 (1993) (“We are not bound by the commentary but give it substantial weight in our efforts to discern legislative intent.”)).  The Comment noted that “wholly successful” required that “the entire proceeding is disposed of,” and that it “include[d] situations where a defendant may prevail because of procedural defenses not related to the merits.”) Id. ¶ 26.

The Court held that Casol was “wholly successful, on the merits or otherwise” because the Western District dismissal, “while not involving an express finding of nonliability, reflected a victorious procedural defense unrelated to the merits.” It rejected PreGel’s contention that “success” had to include the termination of its right to pursue its claims elsewhere.  Id. ¶ 27.  Judge Bledsoe explained that “the fact that Casol may not prevail on his defenses in this action does not justify delay in awarding him the mandatory indemnification required by” statute for his success in the Western District case. Id. ¶ 30 (citing Zaman v. Amedeo Holdings, Inc., 2008 WL 2168397, 2008 Del Ch. LEXIS 60, at *72 (Del Ch. May 23, 2008) (“that the dismissal of a lot of the counts was without prejudice does not mean that the [plaintiffs] were not successful.”)).

Takeaways

• The Court cautioned that forum selection can have many, and varied, consequences. Here, “Casol did not choose to be sued in federal court, PreGel instead chose the federal forum.” Id. An unsuccessful outcome in the chosen forum, even apart from the merits, carried mandatory obligations for PreGel when it failed to succeed in claims against Casol.

[View source.]