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Court Rules That Non-Innocent Agent Must Be Indementified

Section 317 of the California Corporations Code authorizes a California corporation to indemnify its agents (as defined) under certain circumstances.  The statute deals separately with third party claims (Subdivision (b)) and claims brought by or in the right of the corporation (Subdivision (c)).  Subdivision (d) of the statute mandates indemnification in two circumstances.  The first is when the agent is successful on the merits in the defense of any proceeding.  The second is when the agent successful in defense of "any claim, issue or matter" in the proceeding.  

Superior Court Judge William D. Claster recently addressed the second situation in a case in which he had found that the agent had breached his fiduciary duty and engaged in constructive fraud.  The agent nonetheless claimed, and Judge Claster agreed, that he had prevailed on four issues at trial.  The agent contended that he was entitled to indemnification as to these issues pursuant to Section 317(d).

The corporation argued allowing indemnification would "reward a corporate agent for his or her own misconduct".  Judge Claster, however, ruled that the agent was entitled to indemnification:

"[t]he Court appreciates Hutton's obvious frustration.  Hutton believes that it proved Bellavia acted wrongfully (the Court agreed), and that this finding alone should end the discussion over indemnification.  And if Section 317(d) was [sic] couched in terms of who won and who lost the lawsuit, then Hutton might have a point.  The problem, of course, is that the statute is not written that way, but instead has been drafted to provide protection for the employee for his work for the corporation.  Unlike§§ 317(b) and (c), Bellavia's lack of good faith is not an issue.  Nor is the fact that Hutton succeeded on the merits of several causes of action against Bellavia."

Bellavia v. Hutton Dev. Co., Cal. Super. Ct. Case No. 30-2015-00773108 (Jan. 3, 2019).

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...