The Minnesota Court of Appeals, in an unpublished decision, recently confirmed that a corporate officer is entitled to indemnification for her attorneys’ fees in defending allegations of corporate misconduct for her personal benefit. The underlying message: if you sue your business partner for taking money from the company, she may nevertheless get her legal fees paid by the company.
The parties in Dodge v. Stack were the two co-owners of a mental health clinic, each of whom received income from the company based in part on their respective provision of clinical services. Ultimately, they had a dispute about how the income should be allocated, and that dispute ended up in court. The details of who was to get paid what in that dispute will have no impact outside the confines of the suit itself. But other potential litigants should pay attention to what the Court of Appeals said about a corporation’s duty to indemnify its officers’ attorneys fees.
The lower court in Dodge denied the victorious shareholder’s request for payment of her attorney’s fees. She had requested those fees under Minnesota’s corporate indemnification statute, Minn. Stat. section 302A.521, subd. 2(a), which provides that a corporation must indemnify a corporate officer or director who is made party to a proceeding by reason of her official capacity with the corporation. The lower court held that the victorious shareholder had incurred fees “on behalf of her as [an] individual and not in her capacity as an officer or shareholder of [the company].” This ruling appears reasonable, since the dispute was about the amount of personal benefits she took from the company.
But not so fast, said the Court of Appeals. The higher court noted that everything she allegedly did wrong — from paying herself excessive funds, to failing to properly document expenditures, to managing the business contrary to her co-owner’s instructions — were only possible because she was a corporate officer. As a result, the suit was “potentially related to [her] role as a corporate officer” and she could be entitled to indemnification. The Court of Appeals reversed on this point, and remanded the case to the District Court to consider whether she met the remaining requirements of the indemnification statute.
Put most starkly, this case demonstrates that no matter how hard a shareholder tries to characterize his claims against a co-shareholder as claims for personal misconduct, if those claims relate to her actions as an officer or shareholder, she may be entitled to indemnification for attorneys’ fees. And that is obviously an important factor that both sides of any shareholder dispute should consider.
The Court of Appeals decision is Dodge v. Stack, No. A15-0968, (Minn. Ct. App. May 2, 2016), and the full opinion is available at http://mn.gov/law-library-stat/archive/ctapun/2016/opa150968-050216.pdf