October 13, 2005
An Attack on Attorney's Fees
A National Law Journal article (available here on Law.Com) discusses a new tactic the government used to keep a company from advancing legal fees to two former officers who were prosecuted for their conduct at the business. In the recent retrial of former Westar Energy executives David Wittig and Douglas Lake, the government obtained a restraining order on their assets to prevent the company from complying with its contractual obligation to advance their attorney's fees in the case. A common contractual or by-law provision in corporations is that the company will pay the costs, most importantly the attorney's fees, of an officer or director in any case related to their conduct on behalf of the company; the agreement is known as an indemnification provision. Such provisions are authorized by state corporate law, but the Department of Justice has come to view the payment of attorney's fees by a company for its employees as suspicious, and an indication of a lack of cooperation. The Thompson Memo specifically mentions the payment of attorney's fees as one indication of a lack of cooperation, although the Memo acknowledges that corporation's may have a legal obligation to make the payments. The recent deferred prosecution agreement with KPMG has resulted in the firm cutting off further payments of attorney's fees for its former partners who have been indicted.
The restraining order in the Wittig/Lake case was based on a forfeiture count in the indictment, and the theory appears to be that the the right to attorney's fees was an asset of the defendants that could be reached if it was a proceed of their illegal conduct. The logic here appears to me to be wonderfully circular: the right to attorney's fees is triggered by the allegation of illegal conduct by the officers, which makes it forfeitable because there would not have been any payment but for the prosecution, therefore any prosecution means the right to attorney's fees can be forfeited to the government. In this case, the defendants and the Association of Corporate Counsel challenged the restraining order in the Tenth Circuit, but the jury verdict found that the right to attorney's fees was not a forfeitable asset, so the appeal was moot.
This is a tactic federal prosecutors will likely pursue in the future because of the view that the payment of attorney's fees is somehow nefarious or these provisions are improper. The fact that state corporate law permits corporations to enter into such agreements seems to be lost in the effort to obtain convictions. (ph)
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