Hawaiʻi Supreme Court Clarifies Mandatory Director Indemnification and “Fees-on-Fees” Recovery

Loyalty Development Company, Ltd. v. Ching, 154 Haw. 256 (2025)

Introduction

In Loyalty Development Company, Ltd. v. Ching, the Supreme Court of Hawaiʻi delivered a landmark opinion that answers two unsettled questions under the Hawaiʻi Business Corporation Act (HBCA), HRS chapter 414:

1. What constitutes being “wholly successful, on the merits or otherwise” under HRS § 414-243?
2. Does the statute obligate a corporation to reimburse a director for the legal costs incurred in securing indemnification (so-called “fees-on-fees”)?

The Court, speaking through Chief Justice Recktenwald, held that (1) a dismissal without prejudice that leaves the director with no personal liability qualifies as “wholly successful,” and (2) the director’s statutory entitlement to indemnity necessarily includes reasonable fees and costs incurred while obtaining that indemnity. The decision reverses the Intermediate Court of Appeals and the Circuit Court, thereby establishing a robust protection for directors who successfully fend off corporate litigation.

Summary of the Judgment

Wallace S. J. Ching, a director of Loyalty Development Company (LDC), was sued by the corporation for a declaratory judgment validating a disputed conflict-of-interest clause. The circuit court dismissed the complaint without prejudice for failure to state a justiciable controversy. Ching then sought statutory indemnification for his defense costs and, crucially, for additional expenses incurred while forcing LDC to honor that right. After limited payment through an independent-counsel procedure, the circuit court denied any further recovery. The ICA affirmed, reading HRS § 414-245 as limiting “fees-on-fees” to situations where a court had first ordered indemnification.

The Supreme Court reversed, holding:

• Dismissal without prejudice that leaves a director with no liability is sufficient “success” under § 414-243.
• Indemnification under § 414-243 includes reasonable expenses of enforcing the right, in line with § 414-245 and the Model Business Corporation Act (MBCA).
• Settlements reached outside court do not bar a director from later asking the court to fix additional reasonable fees.

The case was remanded for the circuit court to determine the amount of Ching’s reasonable “fees-on-fees.”

Detailed Analysis

A. Precedents Cited and Their Influence

• Model Business Corporation Act (MBCA) §§ 8.52 & 8.54 – 1984 revisions form the template for HRS §§ 414-243 & 414-245; the Court relied heavily on MBCA commentary.
• Stifel Financial Corp. v. Cochran, 809 A.2d 555 (Del. 2002) – Delaware Supreme Court approved “fees-on-fees.” Though Delaware uses a different statute, Hawaiʻi adopted its reasoning as persuasive.
• Blair v. Ing, 96 Haw. 327, 31 P.3d 184 (2001) – Recognized that dismissal grants prevailing-party status for fee-shifting statutes; cited to support a broad reading of “success.”
• Food Pantry, Ltd. v. Waikiki Business Plaza, Inc., 58 Haw. 606, 575 P.2d 869 (1978) – Discussed prevailing-party concept; reinforced Court’s approach.
• Out-of-state MBCA cases: In re Internet Navigator (8th Cir. BAP), Sherman v. American Water Heater (Tenn.), Jerue v. Millett (Alaska) – All equate “wholly successful” with absence of liability.
• Federal fee-shifting rationale: In re Nucorp Energy, 764 F.2d 655 (9th Cir. 1985); Camacho v. Bridgeport Fin., 523 F.3d 973 (9th Cir. 2008) – Courts routinely allow fees for litigating the fee claim; cited by analogy.
• Public Access Trails Hawaiʻi v. Haleakala Ranch, 153 Haw. 1, 526 P.3d 526 (2023) – Hawaiʻi precedent recognizing fees-on-fees under the private-attorney-general doctrine; illustrates consistent policy.

B. Court’s Legal Reasoning

1. Statutory Interpretation Framework

Following its usual methodology, the Court started with the plain statutory text, then consulted legislative history—including MBCA commentary—when ambiguity appeared. It emphasized Hawaiʻi’s directive that statutes “in pari materia” be read together.

2. Meaning of “Wholly Successful, on the Merits or Otherwise”

• The HBCA does not define “success.” MBCA commentary clarifies that success exists where the director incurs no liability, even if the win is procedural.
• A dismissal without prejudice can be “wholly successful” if (a) it ends the litigation, and (b) no liability or payment results. The Court distinguished the Delaware federal case Galdi v. Berg where parallel litigation remained pending.
• Requiring a director to endure full trial to prove innocence would undermine judicial economy and the Legislature’s intent to protect directors acting in good faith.

3. Scope of Indemnification – Including “Fees-on-Fees”

Section 414-243 obligates indemnity for “reasonable expenses.” Section 414-245(b) confirms that, if a court finds entitlement, it must also award the expenses “incurred in connection with obtaining court-ordered indemnification.” Read together with MBCA commentary, the phrase shows legislative intent to make the director whole, including the cost of enforcing his right.

The ICA had imposed a restriction—indemnity only if a court had already ordered it. The Supreme Court found that:

• This interpretation nullifies § 414-243 in cases where parties partially settle or where a corporation anticipates losing and tenders partial amounts.
• It would deter early settlement, contrary to Hawaiʻi’s policy favoring compromise.
• The director has no control over whether the corporation pays voluntarily or forces litigation; penalizing the director for accepting partial payment is illogical.

Thus, the Court held that Ching’s statutory right never evaporated and included all reasonable “fees-on-fees.”

4. Policy Considerations

• Encouraging qualified individuals to serve as directors without fear of ruinous litigation costs.
• Preventing corporations from leveraging “deep pockets” to exhaust directors during indemnity disputes.
• Maintaining consistency with the national trend and with internal Hawaiʻi fee-shifting jurisprudence.

C. Impact of the Decision

The ruling has immediate and far-reaching consequences:

• Corporations: Must reevaluate indemnification bylaws and the cost–benefit calculus of suing their own directors. A procedurally dismissed claim may translate into a sizeable indemnity bill.
• Directors & Officers (D&O) Insurers: Policy forms may need to clarify coverage for “fees-on-fees,” particularly in Hawaiʻi.
• Circuit Courts: Gain clear guidance that “wholly successful” equals no liability, regardless of prejudice designation, and that “fees-on-fees” are within mandatory indemnity.
• Future Litigation: Expect fewer contested indemnity motions and more prompt settlements; when disputes arise, courts will start their analysis with this case.
• Legislature: Unless dissatisfied, no statutory amendment is needed; if contrary policy is desired, explicit limitation will have to be crafted.

Complex Concepts Simplified

Indemnification

Reimbursement by the corporation to a director or officer for legal fees, judgments, fines, or settlements incurred in litigation due to their corporate role.

“Wholly Successful”

A director incurs zero personal liability in the proceeding. Success may be based on merits or procedural grounds (e.g., statute of limitations, failure to state a claim).

Dismissal without prejudice

The court ends the current case but allows the plaintiff to re-file. Here, because LDC never re-filed and Ching faced no liability, the dismissal equals complete success.

Fees-on-Fees

Attorneys’ fees and costs incurred after the underlying lawsuit, in litigating or negotiating the right to have the initial defense fees paid.

In pari materia

Latin for “upon the same matter.” When statutes cover the same subject, courts interpret them together to ensure coherent meaning.

Model Business Corporation Act (MBCA)

A model statute published by the American Bar Association to serve as a template for state corporate codes; Hawaiʻi’s chapter 414 is largely adapted from the 1984 MBCA revision.

Conclusion

Loyalty Development Company, Ltd. v. Ching cements two principles in Hawaiʻi corporate law:

1. A director who emerges from litigation with no personal liability—regardless of whether the dismissal is with or without prejudice—is “wholly successful” and therefore entitled to mandatory indemnification under HRS § 414-243.
2. Mandatory indemnification necessarily covers the reasonable cost of obtaining that indemnification, i.e., “fees-on-fees,” even when the corporation has partially indemnified the director outside court.

The decision aligns Hawaiʻi with the dominant national view, reinforces statutory protections that attract competent directors, and discourages corporations from wielding litigation as a tactical bludgeon against their fiduciaries. Practitioners should advise clients—both corporations and their directors—that indemnification disputes in Hawaiʻi now carry potential exposure well beyond the underlying defense costs.