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Third Circuit Got it Wrong on Advancement of Defense Costs

November 19, 2014 | Posted in : Coverage of Fees, Defense Fees / Costs

A recent New Jersey Law Journal editorial, “Third Circuit Got It Wrong on Advancement of Defense Costs,” writes about the recent decision in the U.S. Court of Appeals for the Third Circuit, Aleynikov v. Goldman Sachs Group.  The case raises serious questions about the effectiveness of advancement for individuals who may elect to litigate that issue in federal court in the Third Circuit.  The editorial states:

Explicitly or by implication, the statutes allow companies to advance reasonable attorney fees and defense costs, subject to repayment if the individual is ultimately found to have acted wrongfully.  Advancement is a natural corollary to the right of indemnification; if the individual cannot afford to pay an attorney to provide a defense from the outset of litigation, the right to indemnification at the end of the case is less meaningful.

In the underlying case, Goldman Sachs computer programmer Sergey Aleynikov was convicted of criminal offenses in federal court but the U.S. District Court of Appeals for Second Circuit reversed and directed an acquittal.  Goldman refused to pay his legal fees.  Aleynikov filed suit for indemnification as to his legal fees for his successful defense of the federal charges and for advancement of fees he was incurring in the case.

The key issue on the motion for advancement was whether the plaintiff was an “officer” entitled to the request relief.  There are hosts of people called “vice president” at Goldman Sachs and the company argued that only those with executive supervisory authority and responsibility were “officers” entitled to advancement under the advancement clause of its bylaws.  The third circuit found the term “officer” was ambiguous and the ambiguity could not be resolved and remanded the case to the trial court.

We believe the Third Circuit ignored the fundamental precept that the right to interim advancement is separate from the right to final indemnification, and that undue delay may moot the right to advancement.  The district court understood it better.  As it noted, “To stay advancement is to destroy its utility.”

We also believe that the opinion should have been nonprecedential.  The policy considerations voiced by the district court were not captured by the Aleynikov majority, and the precedent may well deprive subsequent claimants of an effective remedy in federal court.  Under the Third Circuit’s internal operating procedures, a precedential opinion is an unlikely candidate for en banc review; nor is there a path to consideration by the U.S. Supreme Court.

NALFA also reported on this case in Jury to Decide if Goldman Sachs Pays Legal Bills”