Order, Mr. Gustavo Gomez Lopez is allowed an indemnification Claim in the amount of $ 1.200.000,OO of January 29, 2003.

There is no question that the Debtor had clearly and overtly threatened litigation against Mr. Gomez Lopez in June 1994.

BANCO LATINO INTERNATIONAL,

CASE NO. 94-10

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF FLORIDAGENERAT I BY•

Miami Division DATE: to ~

In re:

Debtor.

CHAPTER 11

I ORDER DETERMINING AMOUNT OF ALLOWED INDEMNIFICATION CLAIM OF GUSTAVO A. GOMEZ LOPEZ

THIS MATTER came before the Court on March 13,2003 at 10:00 a.m., pursuant to this

Court’s Order Granting in Part Motions for Allowance And Payment Of Indemnification Claims

(c.p. #1740; the «Indemnification Order»), and the Notice (c.p. # 1743) Detailing Amount of

Indemnification Claim of Gustavo A. Gomez Lopez («Mr. Gomez Lopez»). Having considered

the Notice, the Objection (c.p. #1750) filed by reorganized debtor Banco Latino International

(the «Debtor») and the Reply (c.p. #1759) filed by Mr. Gomez Lopez, and having considered the

arguments of counsel and the evidence adduced, the Court hereby finds and determines as

follows:

Background

1. In 1995, the Debtor commenced a lawsuit against Mr. Gomez Lopez and other

former officers and directors of the Debtor. The lawsuit was styled Banco Latino International

v. Gustavo A. Gomez Lopez et al., United States District Court, Southern District of Florida,

Miami Division, Case No. 95-1300-Civ-Highsmith-Garber (the «District Court Case»).

2. In 2000, the District Court Case was summarily dismissed, and Mr. Gomez Lopez thereafter moved in this Court (c.p. #1626; the «Indemnification Motion») for the allowance and

payment of his claim for indemnification (available to officers and directors o~ the Debtor),

3. While this Court took the Indemnification Motion under advisement, the Court in under the Debtor’s by-laws and applicable Florida law, of the fees and costs h9 incurred in

connection with the District Court Case. The Debtor opposed the motion, the court heard oral argument, and received pre- and post-hearing briefs.

the District Court Case granted Mr. Gomez Lopez’s motion for sanctions against the Debtor and

its counsel under Rule 11, Fed. R. Civ. P. By stipulation, the parties agreed that the amount of

the monetary sanction to be paid by the Debtor was $120,000, and the Debtor thereafter paid

such amount to Mr. Gomez Lopez.

4. This Court entered its Indemnification Order on January 23,.2003, allowing the

indemnification claim of Mr. Gomez Lopez as a class 5 claim under the Debtor’s confirmed

chapter 11 plan, and setting up a further procedure to fix the amount of the allowed claim. The

Indemnification Order did not determine the amount of the claim, but directed Mr. Gomez Lopez

to file a notice as to the amount of his claim, directed the Debtor to file objections ~if any) to that

amount and to request a hearing on any such objections, and established a timetable for doing

these things.

5. Mr. Gomez Lopez timely filed his Notice on January 30, 2003, detailing an

indemnification claim of $1,448,698.57 as of January 29, 2003. The Debtor filed i1s Objection to

the Notice on February 6, 2003. Mr. Gomez Lopez filed his Reply on February 18, 2003,

voluntarily reducing his indemnification claim (as of January 29, 2003) on ~count of the

Objection to $1,418,014.31.

6. On March 13, 2003, the Court held an evidentiary hearing on the Debtor’s

Objection.

The Debtor’s Objections I

I

7. The Notice contained legal bills from counsel for the period fr04 June 1994

through January 29, 2003 (which included several law firms). The Debtor’s Objection contested the Notice on various general grounds, including the lack of specificity and detail ~th respect to I

Itime billed and expenses incurred

8. At the hearing, the Debtor focused on four main objections, and has since waived

its objections except for the following four: (i) $133,600 in fees and costs incurred prior to the

filing of the District Court Case; (ii) an undetermined amount in fees and cost$ incurred in

successfully pursuing Rule 11 sanctions against the Debtor and its counsel in the District Court

Case; (iii) $120,000 comprising the Rule 11 sanction previously paid by the Debtor to Mr.

Gomez Lopez per stipulated order in the District Court Case, which payment the Debtor argues

should be credited against whatever indemnification is awarded in this Court; .and (iv) the

allowance of post-petition interest on the principal amount of the indemnification claim. At the

hearing, the Debtor indicated that it would not oppose the entry of an Order determining Mr.

Gomez Lopez’s Indemnification Claim in an amount commensurate with the Objections.

Fees Incurred Prior to Filing( of District Court Case

9. The Notice included legal fees and costs and costs allegedly incurred on Gomez

Lopez’ behalf by the law firm of Greenberg Traurig. These charges include $133,6qO in fees and costs incurred from June 1994 through May 1995. As the District Court Case wa$ not initiated

until June 1995, the Debtor argued in its Objection that these charges should be stricken. At the

hearing, the Debtor clarified its objection, arguing that the time entries in the Greenberg Traurig bills make reference to many things, few if any of which are clearly prompted by or I related to the I

threatened litigation. Where the entries are unclear, particularly prior to the litigation , the Debtor

argues that it is the burden of Mr. Gomez Lopez to establish that the time is compensable and

that any doubt must be resolved in the Debtor’s favor. See ACLU of Georgia v. Barnes, 168

F.3d 423,427 (11th Cir. 1999).

Successful Prosecution of Rule 11 Motion

10. The next issue relates to Rule 11 sanctions which Mr. Gomez Lope~ sought and

obtained against the Debtor in the District Court Case pursuant to which $120,000 was paid to

Gomez Lopez. The District Court Case was concluded in May 2000 when Mr. Gomez Lopez

and the other defendants were awarded a summary judgment. Subsequent to that judgment, the

Notice indicates that Mr. Gomez Lopez’ counsel billed him $353,019 in fees and costs as of

January 29, 2003. These fees and costs all relate to this indemnity proceeding and prosecuting

the Rule 11 proceeding. The majority of them, as Mr. Gomez Lopez conceded in his Reply,

relate to the Rule 11 motion. The Debtor argues that the issue then, is a simple one: can Mr.

Gomez Lopez pursue fees and costs in the District Court Case under Rule 11 and then have the

fees and costs of that pursuit reimbursed under the indemnification theory. The Debtor contends

that because indemnification speaks to fees and costs incurred in connection with the defense of

any proceeding, once the District Court Case was concluded and Gomez Lopez went on the

offensive, the fees and costs are his own responsibility.

11. The Debtor takes the position that fees and costs incurred in pursuit of Rule 11

sanctions are not compensable. Mr. Gomez Lopez cites National Portland Cement co. v. Goudie

718 So.2d 274 (Fla. 2nd DCA 1998) in support his position that indemnification does apply. In

National Portland, the Court allowed indemnification for defense of a counterclaim where the

4

CASE NO. 94-1 02~2-BKC-AJC «issues were significantly and inextricably intertwined». The Debtor contends that it is hard to

!

fathom that the Rule 11 proceeding is inextricably intertwined with the District I Court Case,

when the District Court Litigation has been over for three years. Mr. Gomez Lopez also cites Citadel Holding Corp v. Roven, 603 A.2d 818 (Del. 1992) for the notion that indemnification is

available for attorneys fees and costs and costs incurred in prosecuting a compulsory

counterclaim (emphasis added). The Debtor counters that Rule 11 is neither compulsory nor a

counterclaim. Further, the Debtor contends that the cases state an obvious rule of law, but that

the rule is wholly inapposite to the facts here. Moreover, the Debtor notes that

cites no case for the proposition that post-judgment Rule 11 proceedings are properly the subject

of a simultaneous indemnification proceeding.

Credit For Payment of Monetary Sanction

12. Rule 11 is the underpinning of the Debtor’s next issue as well. The Debtor

contends that the $120,000 sanction it has already paid to Mr. Gomez Lopez under Rule 11 must

be applied to any fees and costs sought or awarded in this indemnification Claim. Mr. Gomez

Lopez disagrees, and argues that the Rule 11 payment is designed «for punishment and

deterrence» since «Rule 11 is not a fee shifting statute.» The Debtor contends that Mr. Gomez

I

Lopez sought fees and costs from two courts at the same time arising from the litigation. In the Debtor’s view, for Mr. Gomez Lopez to urge that he can keep both, without an accounting,

is «aggressive» to say the least. As a matter of equity and common sense, the Debtor urged that

the $120,000 be a credit against any amount awarded.

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CASE NO. 94-102~-BKC-AJC

I

Post-Petition Interest

13. The Debtor’s next objection concerned post petition interest.

the Debtor

conceded that the confirmed chapter 11 plan allowed for post petition interest, the debtor argued

that the very allowance of Gomez Lopez’s claim was a matter of equity and that same equity

dictated that the claim not include interest.

Mr. Gomez Lopez’s Reply

Fees Incurred Prior to Filing of District Court Case

14. Mr. Gomez Lopez observes in his Reply that the Debtor, in its written Objection,

makes the bare, unsubstantiated assertion that fees and costs incurred by Mr. Gomez Lopez prior

to the commencement of the District Court Case in June 1995 are simply not indemnifiable. The

Debtor’s position, according to Mr. Gomez Lopez, is wrong as a matter of law. As set forth in

the Reply, the applicable indemnification statute plainly and specifically provides for

indemnification in connection with the defense of «threatened,» as well as pending, litigation.

See Fla. Stat. § 607.0850(3) & (11). Not only does the applicable indemnification statute by its

plain terms specifically indemnify corporate officers and directors for attorney’s fees incurred as

a result of threatened litigation, such indemnification is widely accepted in jurisdictions

throughout the United States. See DEL. CODE ANN. Tit. 8, § 145(b) (2002); N.Y. BUSINESS

CORPORATION LAW § 722(c) (McKinney 2003); MICH. COMPo LAWS § 450.1562 (2003); OHIO

REv. CODE ANN. § 1702.12(E)(2) (West 2002); ALASKA STAT. § 10.06.490(b) (Mihie 2002).

15. Mr. Gomez Lopez argues that he is entitled to be indemnified for fees and costs

actually and reasonably incurred in connection with the defense of threatened litigation. If all of the $133,600 incurred by Mr. Gomez Lopez between June 1994 and May 1995 was actually and

6

i I

CASE NO. 94-102?2-BKC-AJC

i

reasonably incurred in connection with the defense of threatened litigation by the debtor, then it

is properly part of the Mr. Gomez Lopez’s indemnification claim. There is no question that the Debtor had clearly and overtly threatened litigation against Mr. Gomez Lopez in June 1994.

Although Mr. Gomez Lopez and other officers and directors had regularly been referred to as

litigation targets since the commencement of this bankruptcy case in January 1994, Mr. Gomez

Lopez was specifically identified as a litigation target of the reorganized Debtor on June 16,

1994 upon the filing of the Amended Disclosure Statement for Amended Plan of Liquidation

Proposed by Official Committee of Unsecured Creditors (the «Amended Disclosure Statement»).

The Amended Disclosure Statement provided, in pertinent part:

The purpose of this disclosure is to apprise certain interested parties that they may be subject of litigation claims or that their Claims against the estate may be objected to and disallowed. Based on such disclosure, these interested parties are encouraged to consult their legal counsel …. «

* * *

The Plan provides that the Trustee or Liquidating Trustee will file or pursue objections to scheduled or filed claims or pursue litigation seeking affirmative recovery from third parties, interested parties and creditors, including but not limited to (i) those individuals and entities set forth in Exhibits E, F, and G to the Disclosure Statement ….

* * *

As has been previously mentioned, the Debtor’s parent corporations were seized amidst allegations of fraud and mismanagement. It is likely that insiders of the Debtor and those who had relationships with the Debtor’s parent corporations engaged in conduct which was detrimental to the Debtor and its creditors. The Trustee or Liquidating Trustee will pursue claims against such individuals and entities.

7

CASE NO. 94-1010r-BKC-AJC

Amended Disclosure Statement at p. 9-10 (emphasis added). Exhibit G to e Amended

Disclosure Statement, entitled «Potential Litigation Claims,» specifically lists Mr. Gomez Lopez

as a litigation target. Notably, Mr. Gomez Lopez retained counsel during this time period, and

the first attorney time entry in his Notice is from June 1994. I

16. At the hearing, the Debtor acknowledged that pre-suit fees and cost were not

excluded from recovery, but argued that certain of the time entries during the subjec1 period were

not clearly related to pending or threatened litigation. The Debtor focused at the he;Wng on time

entries regarding «corporate proofs of claim» and argues that the entries did not appear on their

face to be related to the threatened litigation. Tom Meeks testified as Mr. Gomez Lopez’s expert

witness at the hearing. Mr. Meeks testified that he had reviewed the time entries and the key

court papers in the District Court Case, and had discussed the case with Attorney Roberto

Martinez, the lead counsel for Mr. Gomez Lopez during the subject time period. Mr. Meeks

further testified that, in his opinion, the pre-suit time was related to the threatened litigation that

the Debtor ultimately commenced in May 1995. Upon cross-examination by the Debtor, Mr.

Meeks testified that he did not know whether or not the work on corporate proofs of claim

concerned the threatened litigation. The one entry upon which Mr. Meeks was qmiied involved

$60 in fees. The Debtor presented no other evidence to refute Mr. Gomez Lopez’s claim and his

evidence that the pre-suit fees were incurred in connection with the defense of the Debtor’s

threatened claims. The Court’s review of the time records discloses a total of 34 entries, in

addition to the one discussed at the hearing, that mention the preparation or filing of a proof of claim, between the commencement of services for Mr. Gomez Lopez, and the claims bar date of August 9, 1994. The total amount charged for these entries is $10,381, and it is clear from the

CASE NO. 94-1020~-BKC-AJC

time entries that this figure also includes services rendered in areas unrelated to the proof of

claim.

Successful Prosecution of Rule 11 Motion

17. The Debtor argues that Mr. Gomez Lopez is not entitled to be indemnified for the

fees and costs he incurred in successfully prosecuting his Rule 11 motion against the Debtor in

the District Court Case. As discussed above, the Debtor contends that such fees and Costs are not

incurred in connection with Mr. Gomez Lopez’s defense of the District Court Case as required

by statute (Fla. Stat. § 607.0850). Although in his written Objection, the Debtor identifies the

objectionable fees and costs in this category as the $208,473 in attorney’s fees and costs sought

by Mr. Gomez Lopez after proposed orders were submitted to this Court on the Indemnification

Motion in October 2000, there is no question that a significant portion of the subject time was

devoted to preparing and filing various court papers in support of the Indemnification Motion. It

is undisputed that the fees and costs incurred by Mr. Gomez Lopez in seeking indemnification

are indemnified under applicable law. Fla. Stat. § 607.0850(9); See Stifel Financial Corp. v.

Cochran, 809 A.2d 555 (Del. 2002) (requiring indemnification for fees and expenses incurred in

successfully seeking entitlement to indemnification). Thus, the fees and costs expended in

prosecuting the Rule 11 motion are significantly less than the $208,473 suggested by the Debtor.

18. The parties have not cited and the Court has not uncovered any case law

discussing the specific issue of whether the successful prosecution of a Rule 11 motion by an

indemnified party is taken «in connection with the defense of’ the covered proceeding, requiring

indemnification of fees and costs incurred in prosecuting the motion. Mr. Gomez Lopez makes

three points in support of requiring indemnification of these fees and costs. First, he argues that

CASE NO. 94-1 o2k-BKC-A JC

such items are indemnifiable under the plain reading of the statute. Simply stated~ Mr. Gomez Lopez argues that successfully prosecuting a Rule 11 motion in response to the filing of a frivolous complaint is an action taken «in connection with the defense of’ the casse. This is particularly so in this case, Mr. Gomez Lopez argues, because the Rule 11 motion in this ! instance was filed in the District Court Case prior to the granting of Mr. Gomez Lopez’s motion

for summary judgment, and accordingly was filed in defense of the Debtor’s then pending

claims. Rather than withdrawing its offending complaint as contemplated by Rule 11, the Debtor

opposed the summary judgment. After the District Court found the Debtor’s Complaint to be

baseless and granted summary judgment, Mr. Gomez Lopez argues that the Debtor is hard

pressed to argue that its obligation to indemnify Mr. Gomez Lopez for actions «in connection

with the defense» of the claims does not include the prosecution of his previously l’ending Rule

11 motion, filed in defense of the Debtor’s claims.

19. Second, Mr. Gomez Lopez likens the Rule 11 motion to a compulsory

counterclaim in that the Rule 11 motion flows directly out of the facts and circumstances of the

Debtor’s lawsuit, that it requires the existence of such lawsuit, and that it is directly! responsive to

such suit. Not only do such circumstances arise «in connection with» the defense of the case as

required by the statute, courts have held that fees and costs incurred in prosecuting la compulsory

counterclaim to a covered proceeding must be indemnified. National Portland ~cement Co. v.

Goudie, 718 So.2d 274, 275 (Fla. 2nd DCA 1998) (indemnification available for successful

defense of counterclaim because issues were «significantly and inextricably intertwined»);

Citadel Holding Corp. v. Raven, 603 A.2d 818 (Del. 1992) (indemnification available for attorneys fees and costs incurred by a director in prosecuting compulsory counterplaim against

CASE NO. 94-102(J2-BKC-AJC

20.

Finally, Mr. Gomez Lopez points to the purpose and

-,

i 1

pOlicJ

behind the

corporation).

indemnification statute to attract qualified corporate officers and directors, who would otherwise

be dissuaded from serving unless protected against financial and reputational ruin. By using the

language «in connection with», Mr. Gomez Lopez contends that the statute iSi purposefully

broadened, consistent with the policy behind the statute, to require indemnification of a wide

range of actions involving defense and vindication of corporate officers. See SNfel Financial

Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002) («the indemnification statute should be broadly

interpreted to further the goals it was enacted to achieve»).

Credit For Payment of Monetary Sanction

21. The Debtor’s next objection is that the amount of Mr. Gomez Lopez’s

indemnification claim should be reduced by the $120,000 the Debtor paid to Mr. Gomez Lopez

as a monetary sanction per court order in the District Court Case. Mr. Gomez Lopez argues that

it is not appropriate to credit any of the monetary sanction against the indemnification claim.

22. Mr. Gomez Lopez points out, as he did in the District Court when seeking the

imposition of sanctions, that Rule 11 is not a fee shifting statute. Rather, sanctions issued under

Rule 11 are for punishment and deterrence. E.g., Baker v. Alderman, 158 F .3d 1516, 528 (11 th

Cir. 1998); Fed.R.Civ.P. 11(c)(2) & Advisory Committee Notes (1993 Amendments).

Moreover, Mr. Gomez Lopez argues that allowing the Debtor a credit for payment of a penalty

under Rule 11 would render Rule 11 meaningless in this case because Mr. Gomez Lopez was

already entitled to indemnification as a matter of statutory and contract law. The Debtor filed a

frivolous lawsuit that pended for five years in federal district court before being summarily

dismissed. The time expended in defending that frivolous suit was considerable and millions of I

dollars in attorneys fees and costs were incurred by the parties. The district court punished the

Debtor under Rule 11, and that punishment included, inter alia, a monetary sanctio of $120,000

payable to Mr. Gomez Lopez. Mr. Gomez Lopez contends that the monetary portion of the

punishment would be a nullity if credited against the Debtor’s indemnification obligation here,

because it would give the Debtor a credit toward something the Debtor was already~ obligated to

pay, thus eliminating any punishment and deterrence to the Debtor. Mr. Gomez Lopez

accordingly argues that the Debtor is not entitled to a credit against its indemnification obligation

on account of the penalty it paid as a Rule 11 sanction.

Post-Petition Interest

23. Mr. Gomez Lopez contests the Debtor’s argument that he is not entitled to post-

petition interest on his indemnification claim. Mr. Gomez Lopez contends that the award of

post-petition interest is the law of this case for all class 5 claimants and observes that the Debtor

states absolutely no basis for the objection whatsoever, other than the notion that the allowance

of the claim was based on equity. Mr. Gomez Lopez further points to the Order Granting in Part

the Creditors’ Committee’s First and Second Motions in Aid of Confirmation of ~he Plan dated

November 28, 1994 (c.p. #637), and paragraph 11 of the BLCA Agreement (incorporated into

the confirmed chapter 11 plan), which provides that unsecured creditors in this case are entitled

to post-petition interest at the rate of 2.5%. Further, Mr. Gomez Lopez argues that the equitable

aspects of the allowance of his indemnification claim, if any, are irrelevant; because the claim

was allowed as a class 5 claim, well-established bankruptcy law requires that Mr. Gomez Lopez,

12

like all other claimants in the class, receive the same treatment, which includes tlte payment of

post-petition interest.

Fee Comparison

24. In response to all of the Debtor’s Objections, Mr. Gomez Lopez points to the

testimony of Mr. Meeks regarding the much higher fees incurred by the Debtor throughout the

subject time period in this matter. Mr. Meeks testified that the bulk of legal services rendered to

Mr. Gomez Lopez was provided at below-market hourly rates, such that Mr. Gomez Lopez

received a «good deal.» Moreover, Mr. Meeks, analyzed the fees and expenses incurred by the

Debtor and by Mr. Gomez Lopez in this matter, and prepared a summary of his analysis which

was admitted into evidence (the «Summary»). The Summary demonstrates that in a 58 month

period for which fee data was available (i.e. only about half of the 103 months from the subject

period of June 1994 through January 2003), the Debtor expended over $3.9 millioIl1 in connection

with the District Court Case and indemnification proceedings in this Court. For each and every

one of these 58 months, Mr. Meeks’s Summary shows that the Debtor incurred substantially

greater legal fees than Mr. Gomez Lopez, usually to the extent of several orders of magnitude.

Mr. Gomez Lopez contends that in the face of this evidence, the Debtor is constrained to argue

that the $1,418,014.31 sought by Mr. Gomez Lopez for the entire 103 month period ending

January 29, 2002 is unreasonable.

CASE NO. 94-1 02 Ot-BKC-AJC

I

Conclusion

Accordingly, having considered the record, the Notice, the Objection, the Reply, the I

arguments and representations of counsel on the record at the hearing, and the evidence adduced,

and the Court being otherwise fully advised, it is :

ORDERED and ADJUDGED that in accordance with the terms of the January 23, 2003

Order, Mr. Gustavo Gomez Lopez is allowed an indemnification Claim in the amount of $ 1.200.000,OO of January 29, 2003.

DONE and ORDERED in Chambers in Miami, Southern District of Florida this june 23 day of 2003.

A. JAY CRISTOL

A. JAY CRISTOL

u.s. BANKRUPTCY JUDGE

14