Friday, May 18, 2007
The attorney for former Dynegy executive Jamie Olis won a civil fraud claim against the company for failing to pay the legal fees in defending Olis in a criminal prosecution arising from his work at the company. Although Olis was convicted and has now served four years in prison, the issue at the trial concerned whether Dynegy's by-laws required it to advance attorney's fees for an officer subject to judicial proceedings for conduct undertaken in the course of employment. Although it is a standard by-law provision to advance such fees, at least during an investigation and trial, the government pressured Dynegy into denying fees to Olis' counsel. A jury in Houston found Dynegy liable for $450,000 in fees and recommended $2 million in punitive damages for Olis' lawyer, Terry Yates. A Reuters story (here) discusses the verdict.
The theory here is interesting because attorney's fees claims are usually brought as a contract law action, or as an equitable proceeding under the law of the state of incorporation. Dynegy is a Delaware corporation, so that state's liberal indemnification laws would have required payment of at least a portion of Olis' attorney's fees. But, such an action could not have been the basis for punitive damages, which are limited to tort cases. Rather than a claim by Olis for reimbursement, Yates brought a fraud action in his own right, apparently claiming that the denial of fees after he undertook the representation defrauded him of the payment because of his obligation to defend Olis regardless of whether he was paid by the company. A novel theory, and one that may result in a punitive damage award, although courts tend not to give what a jury recommends. I have not seen this theory used to recover attorney's fees under a corporate by-law, and Dynegy could pursue an appeal challenging what appears to be a new application of civil fraud.
Tom Kirkendall of the Houston's Clear Thinkers blog has an interesting post (here) discussing the government's policy of pressuring organizations to deny attorney's fees for their officers and employees, including the KPMG tax shelter case in New York. The most recent iteration of the government's policy on charging corporations -- the McNulty Memo -- no longer mentions payment of legal fees for employees as a sign of a lack of cooperation, but whether there is a real change in attitude on this front remains to be seen. (ph)