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June 14, 2004

That $1.45 Million House May Not Look So Great Now

You're a public-company officer. Your company's been having -- or will soon have -- financial troubles. You've had a hankering for a million-dollar home in Florida. You might want to think twice about buying that house. A former officer of Homestore, Inc., who is now a defendant in a variety of securities lawsuits. recently learned that his purchase of a $1.45 million home in Florida could eventually be found to constitute a sheltering of his assets from creditors, which in turn could make him ineligible to have the company advance his defense costs in various securities lawsuits. See the opinion by the Delaware Chancery Court. (Link via BNA Corporate Counsel Weekly [$])

Here's what happened. Homestore.com's corporate bylaws contain a fairly typical indemnification provision. The provision is designed to protect the company's officers and directors if they are sued for their actions or omissions in that capacity. Under that provision, the company is required to indemnify the officer or director, and to advance the defense costs for the suit.

But there's a catch. To be entitled to indemnification, the officer must have "acted in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe the person's conduct was unlawful." If the officer is ultimately found not to be entitled to indemnification, he or she must repay the company for the defense-cost advances.

Homestore's former officer, one Peter Tafeen, sued the company to get an advancement of his defense costs in the securities litigation. Homestore contested Tafeen's suit. It noted that, during the time that the alleged securities frauds were supposedly taking place, Tafeen had built a $1.45 million house in Florida. It argued that what Tafeen really had in mind was to shelter his assets, so that, if he were ultimately found not to be eligible for indemnification, he could avoid repayment of the company's advances of defense costs. This, the company said, constituted "unclean hands" that justified the company's refusal to advance defense costs.

The court agreed that this was a possibility. It said it could not determine Tafeen's intent without a trial (presumably including Tafeen's testimony and cross-examination). The court therefore denied Tafeen's motion for a summary judgment.

June 14, 2004 in Litigation, Securities law, SEC regs / actions | Permalink

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Comments

What about his summer home in his father's name in South Carolina? How about all his exotic automobiles in his brother in law's name? He's definitely hiding assets!

Posted by: dave at Jul 26, 2004 8:03:22 AM

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