Allocation, Indemnity: CFO Was Entitled To Attorney’s Fees Indemnification Under Corporations Code Section 317(d) For Win On Settlement Release Issue

Remand Requires To Apportion Fees Expended In Establishing Validity Of Release And Defendants Against Fraud In The Inducement Claims—However, It Did Not Adopt Wilshire Test For Corporate Indemnification.

            Protech Services, Inc. v. Gillette, Case No. C083975 (3d Dist. Dec. 6, 2018) (unpublished) is an interesting decision on the scope of mandatory indemnification under Corporations Code section 317(d) where a CFO won a dispute based on a release in a separation agreement. However, the real issue was whether he was entitled to indemnification under section 317(d), with the Third District essentially eschewing the reasoning on the issue in Wilshire-Doheny Associates, Ltd. v. Shapiro, 83 Cal.App.4^th 1380, 1394 (2000).

            What happened here was that CFO won various-fraud based theories brought by his former employer after a bifurcated trial in which a release in a separation agreement was found to have released the claims against him. The trial court awarded CFO, as against plaintiff corporation, attorney’s fees pursuant to an indemnity provision contained in his employment agreement, Corporations Code section 317, and the corporation’s bylaws—to the tune of $715,770. The Third District agreed fee recovery was justified, but decided it had to be apportioned to only encompass work spent in establishing the validity of the release and defending against the fraud rescissionary claim.

            The Court of Appeal had no difficulty in concluding CFO was entitled to mandatory indemnification under section 317(d). Where it had difficulty was following language in Wilshire determining that, although mutual release was a release on the merits for a corporate agent, a remand was necessary to determine if the officer properly acted as an agent. Instead, the Third District interpreted requiring “success on the merits” to require both lack of liability and innocence of the alleged misconduct. (Slip Op., at p. 27.) It did not agree with Wilshire that only one of these elements was required to determine “success on the merits.” However, both of these elements were established by CFO here. In the end, because the award encompassed a variety of work, it needed a “re-do” to determine the fees expended in establishing the validity of the release and defending the claims or fraud in the inducement. Because the corporate bylaws provided no greater indemnification than section 317, no further analysis was needed.