Managers May Be Entitled to Advancement of Legal Fees, Even If Accused of Wrongdoing
Where the operating agreement provides for indemnification and advancement of fees to a manager who becomes a party to any civil action “by reason of the fact that he was an authorized representative of the LLC,” the manager is entitled to have the LLC pay his legal fees as the litigation progresses. Vanguard Pai Lung, LLC v. Moody, 2020 NCBC 56 (J. Conrad). Because the plain language of the operating agreement mandated the LLC advance the manager his legal fees, the Business Court required the LLC to pay the manager’s attorneys’ fees even though the lawsuit asserted allegations that the manager had embezzled from and breached fiduciary duties owed to the LLC.
Defendant William Moody (“Moody”) was president, CEO and a manager of Plaintiff Vanguard Pai Lung, LLC (“Company”) for nearly a decade. The Company filed suit against Moody, claiming he engaged in self-dealing and improper activities which caused significant harm to the Company, including embezzlement and breach of his fiduciary duties. Moody filed a counterclaim seeking, inter alia, indemnification and a holding that the Company must pay his (Moody’s) attorneys’ fees that he had and would incur in defending against the Company’s lawsuit. The Company refused, contending that its lawsuit did not satisfy the operating agreement’s requirement that he be a party to the litigation “by reason of the fact” that he was an authorized representative of the Company.
The Business Court disagreed. Recognizing that the Company’s own complaint accused Moody of “using his position” with the Company to commit the various bad acts, the Business Court held such accusations provided the requisite nexus between the lawsuit and Moody’s position with the Company to trigger the operating agreement’s requirement that the Company advance Moody his fees during the litigation. The Business Court held Moody need not first prove he is entitled to indemnification in order to receive the advancement, so long as he agrees to undertake to repay any fees advanced if he ultimately loses the case. The fact that the Company accused Moody of breach of his fiduciary duties or to have “unclean hands” did not alleviate its obligation to advance Moody his legal fees, as neither affirmative defense was a defense to a claim for advancement. Finally, the Business Court recognized the doctrine of advancement can be wide enough to include those fees incurred in prosecuting a claim for advancement and, because the Company’s operating agreement did not exclude such fees from those that were recoverable, the Company had to pay Moody his legal fees both in prosecuting his advancement counterclaim and his fees incurred in defending against the Company’s claims.
Based upon this decision, a business may want to review its operating agreement or its by-laws before pursuing a claim against a former officer or manager, to determine whether its claims are worth potentially paying the legal fees of all parties involved.