Fourth District, Division 3 Finds Corporation Presented Inadequate Appellate Record to Properly Challenge Award.
California Corporations Code section 317(d) allows a corporate agent who has been successful in the defense of any action by the corporation, where the purpose was to procure a judgment in the corporation’s favor “by reason of the fact that the person is or was an agent of the corporation,” to be indemnified against “expenses actually and reasonably incurred by the agent in connection therewith.” Section 317(c) also provides that the expenses can be reimbursed “if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders." Most corporate agents rely on these statutes, frequently supplemented by complementary by-laws allowing for indemnification, to protect their interests while acting on behalf of a corporation so as to avoid expenses from third-party actions as well as “strike” suits brought by the corporation after the agency has been terminated.
A recent unpublished decision, Optimal Water, Inc. v. Robbins, Case No.G038067 (4th Dist., Div. 3 May 23, 2008), illustrates the value of these fee/cost shifting indemnification provisions.
Corporation sued a former CEO for breach of fiduciary duty and unfair competition, and the former agent cross-claimed for unpaid wages. A trial court defensed the corporation’s claims, and a special jury verdict determined the corporation owed former CEO almost $59,000 in unpaid wages (with the ultimate judgment including $22,000 more in interest and penalties).
Former CEO moved for an award of attorney’s fees exceeding $330,000 and an award of costs approaching $50,000. The trial court ultimately awarded former CEO $8,041 in costs and $130,512 in attorney’s fees under Corporations Code section 317. (The lower court also awarded $3,600 in fees pursuant to Labor Code section 218.5—an area of the law that will be the subject of a future post.)
Corporation appealed. It lost, primarily because of presenting an inadequate record on appeal.
Acting Presiding Justice Rylaarsdam, writing for the unanimous panel, affirmed the fee/cost award. Not only did the Court of Appeal find that section 317 was sufficiently broad to authorize the fee award, it found that corporation’s failure to provide a reporter’s transcript of the trial prevented meaningful review of the contention that former CEO was not entitled to indemnification because he acted in bad faith. This underscores what we said in an earlier post about appellate practice being a boutique area that contains traps for the unwary. (See May 22, 2008 post.) Justice Rylaarsdam has written many articles stressing the necessity of creating an adequate record on appeal. (See, e.g., W.F. Rylaarsdam, “Writ Proceedings in the Court of Appeal,” Association of Business Trial Lawyers Report, Vol. III, No. 2, May 2001, p. 12 [“Failure to provide an adequate record is likely to result in an automatic and immediate denial of the petition.”].)
The appellate court also rejected the argument that former CEO’s activities for which he was sued happened to be divorced from his corporate responsibilities. The corporation’s complaint belied this challenge, showing various claims attacking his conduct while he was acting as a corporate agent. This sufficiently satisfied section 317’s “agency” nexus requirements.
Former CEO won on appeal, and was also awarded additional costs as the appellate winner.