Opinion
Civil No. 02-879 AJB
March 4, 2004
ORDER AND MEMORANDUM OPINION ON MOTIONS FOR SUMMARY JUDGMENT
This matter is before the Court, Magistrate Judge Arthur J. Boylan, on motions by plaintiff and defendant for summary judgment. Hearing was held on October 2, 2003, at the U.S. Courthouse, 316 No. Robert St., St. Paul, MN. Christopher W. Madel, Esq., appeared on behalf of the plaintiff. Wallace G. Hilke, Esq., and Robert J. Hennessey, Esq., appeared on behalf of the defendant. The parties have consented to the exercise of jurisdiction by the Magistrate Judge pursuant to 28 U.S.C. § 636(c) and Fed.R.Civ.P. 73 [Docket No. 28].
It is the plaintiff attorney's claim in this action that under Wisconsin statutes, and pursuant to an assignment of claims, he is entitled to indemnification for attorney fees incurred by the defendant's employee, the plaintiff's client in an underlying criminal case. Plaintiff now moves for summary judgment on his second and third claims for relief in the first amended complaint, and alternatively moves for partial summary judgment on liability with respect to those claims. Defendant opposes plaintiff's motion and moves for summary judgment dismissing the first amended complaint on grounds that the action is dependent upon an unenforceable assignment of claims to the plaintiff attorney and that defendant has an equitable right of set-off that exceeds plaintiff's claim. Defendant further seeks leave to amend its answer to explicitly assert certain affirmative defenses which are put forth as grounds for dismissing the action. Plaintiff opposes the defendant's motions and contends that the failure to timely plead affirmative defenses regarding lack of consideration, public policy violations, and equitable set-off is fatal to defendant's summary judgment motion.
Plaintiff's four count amended complaint contains alternative grounds for relief as permitted under Fed.R.Civ.P. 8(a). Plaintiff's complete success on any single claim for relief in the amended compliant would resolve the entire action. Also, survival of each of plaintiff's separate indemnification claims in this case requires that plaintiff prevail on his allegation that he has an enforceable assignment of a client's claim for attorneys fees.
Based upon the file and documents contained therein, including affidavits, exhibits, memorandums, and oral arguments of counsel, the Court hereby makes the following:
ORDER
1. Plaintiff's Motion for Summary Judgment or, in the alternative, Partial Summary Judgment, is granted in part, denied in part, and moot in part as further provided herein [Docket No. 29].
2. Plaintiff's Motion for Summary Judgment is granted as provided in the accompanying memorandum [Docket No. 29-2]. Plaintiff is entitled to indemnification in the amount of$180,795.31.
3. Plaintiff's Motion for Partial Summary Judgment is moot, except to the extent that relief is provided on alternative motion for summary judgment as described in the accompanying memorandum [Docket No. 29-1].
4. Plaintiff's request for attorneys fees incurred in connection with the present litigation is denied.
5. Defendant's Motion for Summary Judgment and request for leave to amend the answer is denied in part and moot in part [Docket No. 34].
6. Defendant's Motion for Summary Judgment is denied [Docket No. 34-1].
7. Defendant's request for leave to amend the answer is moot in part and denied in part [Docket No. 34-2]. The motion to amend is moot with respect to public policy and lack of consideration claims and is denied with respect to an equitable set-off defense.
LET JUDGMENT BE ENTERED ACCORDINGLY MEMORANDUM
Background
Plaintiff William Mauzy is a criminal defense attorney who represented an individual named Robert Miller in regards to a state tax investigation commenced by the Office of the Minnesota Attorney General and the Dakota County Attorney in 1995. The defendant in this civil action, Edward Kraemer Sons, Inc. (EKS), is a Wisconsin corporation that owned and operated the Burnsville Sanitary Landfill and employed Mr. Miller as the general manager of the Burnsville landfill. The state tax investigation was directed towards the alleged failure to properly report the volume of solid waste being dumped at the landfill, thereby resulting in underpayment of waste abatement taxes and fees which are calculated on the basis of the volume of waste deposited at the landfill. Mr. Miller allegedly allowed garbage haulers to understate the amount of waste being dumped in order to avoid paying proportionate tipping fees. He then filed monthly waste abatement tax returns which falsely stated the volume of waste actually deposited at the landfill to avoid tax liability that would otherwise have likely exceeded the landfill's income. Miller subsequently was criminally charged in a Dakota County complaint with 24 separate felony counts of aiding, assisting or advising the preparation of fraudulent monthly reports filed with the Minnesota Commissioner of Revenue by the Burnsville Sanitary Landfill from June 1993 through May 1995. The reports are submitted for the purpose of determining solid waste landfill abatement fees for each month. A second EKS employee, Edward Ristow, was also charged.
The record does not establish that Mr. Miller personally received direct financial benefits as a result of tipping fee arrangements with haulers or as a consequence of fraudulent report filings with the Minnesota Commissioner of Revenue. However, defendant argues that Mr. Miller had previously received bribes and/or kick-backs from landfill customers; he had improperly received a commission on the sale of property to his employer; he sold EKS property and kept the proceeds; he diverted business to a company in which he had a personal interest; he converted EKS boulders for his own purposes; and he improperly kept proceeds from the sale of salvageable metals dumped at the Burnsville Sanitary Landfill.
Mr. Mauzy was retained to represent Miller in the Dakota County investigation pursuant to a fee agreement executed January 10, 1996, and setting a $100,000 fee which was paid by Miller. Meanwhile, Mauzy was also representing Mr. Miller in a federal criminal income tax matter which was resolved by plea agreement made in April 1996. The 24-count Dakota County criminal complaint was dated June 25, 1997. On October 9, 1997, Mr. Mauzy and Mr. Miller signed an Amendment to Retainer Agreement in which it was acknowledged that the legal representation fees would likely exceed $100,000 as a result of the Dakota County complaint. The amendment further included an assignment of indemnification rights to Mauzy, thereby authorizing the attorney to seek recovery of fees from EKS. It was anticipated that the attorney fees claim would be advanced pursuant to Wis. Stat. § 180.0851(1), providing for mandatory indemnification of attorney fees incurred by a director or officer of a corporation, to the extent that the person is successful on the merits in the defense of the proceeding and was a party to the proceeding because of the person's role as a director or officer of the corporation.
Affidavit of Wallace G. Hilke, Exh. T [Docket No. 44].
Affidavit of Christopher W. Madel, Exh. D (Depo. Exh. 24) [Docket No. 31].
Id., Exh. D (Depo. Exh. 9).
On February 24, 2000, Mr. Miller entered a guilty plea, without admission of wrongdoing, to four counts in the 24-count complaint. The remaining 20 counts were dismissed. The sentence included no period of prison or jail confinement, no fine, and a zero to five year term of probation, but imposition of sentence was stayed and Miller was immediately discharged from probation. The four felony charges were explicitly reduced to misdemeanor convictions. Plaintiff Mauzy represented Mr. Miller throughout the Dakota County criminal proceedings and seeks damages in this action consisting of attorney fees in the total amount of $337,089.21.
Affidavit of Christopher W. Madel, Exh. E (Kraemer Depo., Exh. 5, transcript of plea and sentencing). The sentencing court did not indicate that the favorable sentence was based upon the defendant's lack of culpability, but rather, was appropriate in light of the time that had passed since the offenses occurred, and giving consideration to the sentence imposed upon Miller in connection with his federal tax evasion conviction, including a federal prison sentence and substantial restitution.
Motions and Claims Plaintiff's Motion for Summary Judgment. Plaintiff Mauzy's motion for summary judgment is based upon the largely straightforward contention that he received an effective assignment of a legal right to payment from his client and that under Wisconsin statutes, defendant EKS is obligated to indemnify the client for attorney fees incurred in defense of the criminal charges brought against the client in Dakota County. Plaintiff argues that his client was an officer of the corporation, that the client was wholly or substantially successful on the merits of the Dakota County criminal action, that indemnification is mandatory pursuant to Wis. Stat. § 180.0851(1) and summary judgment on Count Two of the amended complaint is therefore appropriate. Plaintiff alternatively contends that the client is entitled to permissive indemnification, and summary judgment on Count Two of the amended complaint, pursuant to Wis. Stat. § 180.0851(2)(a), providing for indemnification except where the liability was incurred as a result of the officer's breach of a duty to the corporation. Finally, plaintiff asserts that he is entitled to summary judgment on his Count Three claim in the amended complaint in which he seeks indemnification pursuant to Wis. Stat. § 180.0854(2) and he further requests an award of attorney fees incurred in connection with the present litigation. Plaintiff contends that partial summary judgment should be granted in his favor on the issue of liability, even in the event that the Court determines that genuine issues of material fact exist with respect to damages. Defendant, of course, opposes plaintiff's motion for summary judgment and asserts the existence of facts contrary to plaintiff's position on each of the issues presented.
Wis. Stat. § 180.0851(1) provides that:
A corporation shall indemnify a director or officer, to the extent that he or she has been successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding if the director or officer was a party because he or she is a director or officer of the corporation.
Wis. Stat. § 180.0851(2)(a) provides that:
In cases not included under sub. (1), a corporation shall indemnify a director or officer against liability incurred by the director or officer in a proceeding to which the director or officer was a party because he or she is a director or officer of the corporation, unless liability was incurred because the director or officer breached or failed to perform a duty that he or she owes the corporation and the breach or failure to perform constitutes any of the following:
1. A willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the director or officer has a material conflict of interest. 2. A violation of the criminal law, unless the director or officer had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful. 3. A transaction from which the director or officer derived an improper personal benefit. 4. Willful misconduct.
Wis. Stat. § 180.0854(2) provides that:
The court shall order indemnification if it determines any of the following:
(a) That the director or officer is entitled to indemnification under s. 180.0851(1) or (2). If the court also determines that the corporation unreasonably refused the director's or officer's request for indemnification, the court shall order the corporation to pay the director's or officer's reasonable expenses incurred to obtain the court-ordered indemnification. (b) That the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, regardless of whether indemnification is required under s. 180.0851(2).
Defendant's Motion for Summary Judgment. In its own motion for summary judgment defendant EKS argues that the action must be dismissed because Mr. Miller's assignment of the right to indemnification to Mr. Mauzy is unenforceable as a matter of law. Defendant contends that the assignment is void for lack of consideration where the attorney had a pre-existing duty to the client under their initial fee agreement, and for public policy reasons where the assignment is actually a contingent fee agreement and also resulted in an improper business transaction between a lawyer and client. EKS also asserts that it has an equitable right of set-off which exceeds the plaintiff's claims in this case, therefore warranting dismissal of this action. Finally, defendant proposes that, in any event, plaintiff cannot recover more than the $100,000 in fees actually expended by the client or, if full indemnification is allowed, it must be reduced by the $100,000 already received by the plaintiff as attorney fees in this case. With respect to the assignment issue, plaintiff responds by arguing that EKS lacks standing to challenge the assignment agreement, and furthermore, the agreement was indeed supported by consideration and was neither a contingent fee agreement nor an improper business transaction having public policy and/or ethical implications. Plaintiff also asserts that equitable set-off was not properly alleged as a defense and is not properly before the Court on the present motion. Plaintiff also contents that set-off claims may be barred under a covenant not to sue executed by the defendant and should otherwise be reserved for determination in a separate damages adjudication.
Defendant's Motion for Leave to Amend Answer. Defendant's motion for summary judgment advances certain affirmative defenses to plaintiff's claims which were not affirmatively alleged in the answer to the first amended complaint. Though defendant contends that in any event such defenses are properly asserted, a motion to amend the answer is made to ensure the procedural viability of the defenses. Specifically, and as noted above, defendant alleges that the attorney fees assignment from Mr. Miller to Mr. Mauzy was void for lack of consideration and is contrary to public policy, and alternatively, defendant is entitled to equitable set-off. Plaintiff argues that these affirmative defenses were not pled in the answer as required under Fed.R.Civ.P. 8(c); that the motion to amend is untimely; that defendant has not shown good cause for modifying the scheduling order to accommodate the motion to amend; and that defendant should therefore be precluded from asserting those defenses. Defendant EKS contends that the motion is appropriate and should be granted pursuant to the liberal policy for amendments to pleadings under Fed.R.Civ.P. 15(a). Because defendant's motion for summary judgment voiding the assignment for public policy reasons and for lack of consideration is decided on the merits, the motion for leave to amend the answer is moot with respect to those issues. In regard to defendant's motion to amend to allege equitable set-off, the motion is denied for reasons that will be further discussed below.
Standard of Review on Summary Judgment
Plaintiff in this matter has moved for summary judgment determination that as a matter of law he is entitled to indemnification of attorney fees. Defendant moves for summary judgment dismissing plaintiffs claims. Both parties assert the absence of fact issues which would prevent summary judgment in their own favor and propound the existence of fact issues which preclude summary judgment in the opponent's favor. Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party has the initial responsibility of demonstrating that there is no genuine issue of material fact to be decided. Celotex Corp. v. Catrett, 477 U.S. 317, 322-323, 106 S.Ct. 2548, 2553 (1986). In its review of the facts the court must consider the evidence in the light most favorable to the party opposing summary judgment. Kneibert v. Thomson Newspapers, Michigan. Inc., 129 F.3d 444, 451 (8th Cir. 1997). When a motion for summary judgment has been made and supported by the pleadings and affidavits as provided in Rule 56(c), the burden shifts to the party opposing the motion to proffer evidence demonstrating that a trial is required because a disputed issue of material fact exists. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1355-56 (1986). In satisfying this burden, however, the non-moving party must do more than simply establish doubt as to the material facts. The party opposing summary judgment may not "rest upon the mere allegations or denials of the adverse party's pleading, but. . . must set forth specific facts showing that there is a genuine issue for trial." Matsushita, 106 S.Ct. at 1355, n. 11, Krenik v. County of LeSueur, 47 F.3d 953, 957 (8th Cir. 1995). Fed.R.Civ.P. 56(e). Evidence must be presented to defeat a properly supported summary judgment motion and a party may not rely upon conclusory allegations and unsupported assertions. Dunavant v. Moore, 907 F.2d 77, 80 (8th Cir. 1990). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.'" Matsushita, 106 S.Ct. at 1356 (citation omitted). As the Supreme Court has pointed out,
Rule 56 must be construed with due regard not only for the rights of persons asserting claims and defenses that are adequately based in fact to have those claims and defenses tried to a jury, but also for the rights of persons opposing such claims and defenses to demonstrate in the manner provided by the Rule, prior to trial, that the claims and defenses have no factual basis.Celotex, 106 S.Ct. at 2555.
Assignment of Indemnification Rights
Plaintiff's motion for summary judgment assumes the enforceability of the assignment from Mr. Miller to plaintiff William Mauzy as a premise for his claim that he has the right to indemnification of attorney fees under Wisconsin statutes. Plaintiff's reliance upon this legal assumption arises out his position that defendant generally lacks standing to object to the assignment as a non-party to the agreement and that defendant has further failed to assert appropriate affirmative defenses in opposition to the assignment. Defendant, for its opposition argument, stays on point by directly addressing the merits of the indemnification claim in plaintiff's motion, and thereafter focuses on perceived defects in the assignment as grounds for dismissal in its own motion for summary judgment. Under these circumstances, plaintiff must survive defendant's motion to dismiss with respect to the assignment issue before it becomes necessary to consider the merits of substantive arguments relating to indemnification.
Plaintiff Mauzy asserts that defendant EKS is not a party to the assignment agreement and has no standing challenge the agreement as a third-party beneficiary. Defendant essentially brushes aside this contention and insists that public policy considerations preclude enforcement of the assignment without regard to third-party standing. The alleged contraventions of public policy consist of claims that the assignment results in a impermissible contingent fee agreement in a criminal case and that the agreement manifests a prohibited business transaction between an attorney and client.
Contingent Fee Agreement. Defendant EKS first contends that the assignment in this case effectively violates Minn. R. Prof. Cond. 1.5(d)(2) because the attorney's right to payment is based upon the outcome of the underlying criminal case. However, despite defendant's insistence that the ethical purity of the attorney fee arrangement is a prerequisite to validity and enforceability of the indemnity assignment, the Court is not persuaded that a determination on whether the assignment effectively created a contingent fee agreement in the criminal action is required or appropriate in this case. Rather, the Court finds that the contingent fee issue is a collateral matter which does not warrant the per se rule that defendant is advocating. People v. Winkler, 523 N.E.2d 485, 487 (N.Y.App.Ct. 1988) (ethics violation, i.e. conflict of interest, inherent in contingent fee agreement does not justify reversal of criminal conviction on ineffective assistance of counsel grounds). Essentially, the ethics issue is more appropriately addressed in a different forum and the underlying conflict of interest which defendant fervently seeks to remedy, if such conflict in fact exists, is not". . . amenable to trial court therapy because . . . fee arrangements are confidential between lawyer and client." Id. In essence, the nature and propriety of the fee agreement is an attorney-client matter which is of equal or greater ethical concern than contingent fees and ought to be raised by a party to the agreement. Neither the plaintiff attorney nor the client have challenged the fee agreement in this instance. Dismissal of this action on grounds that the plaintiff's claims are based upon an assignment that resulted in an unenforceable contingent fee arrangement is not required.
Minn. R. Prof. Cond. 1.5(d) provides that:
A lawyer shall not enter into an arrangement for, charge, or collect:
(2) a contingent fee for representing a defendant in a criminal case.
Generally, a contingent fee is a fee that in whole or in part depends upon the outcome of a future event, typically successful resolution of the matter for which the lawyer was retained. Pamela S. Karlan, Contingent Fees and Criminal Cases, 93 Col. L. Rev. 595, 597 (1993). The prohibition against fees that are contingent upon attaining a particular result in criminal defense cases seems to be universal. People v. Winkler, 523 N.E.2d 485, 487 (N.Y.App.Ct. 1988). Ostensibly, the rationale for the prohibition is to protect the criminal defendant's interests and reduce the temptation for a lawyer to use improper or corrupt strategies to ensure payment of fees. Id. It is noteworthy, however, that there is a paucity of case law involving contingent attorney fee agreements in criminal matters. Also, the ethical justifications for the prohibition have not gone unquestioned. See Karlan at 602. This Court offers the suggestion that the ban on contingent fee agreements has little to do with ethics and nearly everything to do with the realities of private criminal defense work. The rule effectively provides lawyers with an immediately available explanation for requiring a significant retainer, without significant initial investigation and without the threat of succumbing to a potential client's compelling emotional pleas of innocence and poverty. Criminal defendants are likely more inclined than lawyers to seek a contingent fee arrangement, but as a practical matter, guilty defendants not overly inclined to make post trial payment for unsatisfactory results and innocent defendants are often disinclined to pay for services that, in their view, should not have been needed.
Business Transaction. Defendant EKS next alleges that the assignment of indemnification rights from the client to plaintiff Mauzy was actually an attorney-client business transaction and is invalid as a consequence of the failure to comply with the requirements of Minn. R. Prof. Cond. 1.8(a). EKS asserts that the criminal defendant's right to indemnification was an interest in property which was transferred to the defendant as payment for attorney services and that such a transfer of property for attorney fees requires compliance with the writing and disclosure requirements of Rule 1.8(a). See Office of Lawyers Responsibility, Receiving Client Property as a Fee or Security for a Fee, Minnesota Lawyer, January 7, 2002, Vol. 6, No. 1. In opposition to this defense plaintiff offers expert testimony to the effect that the assignment was merely a fee agreement and the rule relating to business transactions at Minn. R. Prof. Cond. 1.8(a) simply does not apply in this case.
Minn. R. Prof. Cond. 1.8(a) provides that:
A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) the client is notified in writing by the lawyer that independent counsel should be considered and is given a reasonable opportunity to seek the advice of independent counsel in the transaction; (2) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client and (3) the client consents to the transaction in a document separate from the transaction documents that specifies:
(i) whether the lawyer is representing or otherwise looking out for the client's interests in the transaction; (ii) the nature of the lawyer's conflicting interests, if any; and (iii) the reasonably foreseeable risks for the client from any conflict.
Affidavit of Wallace G. Hilke, Exh. CC. [Docket No. 44].
Again, the Court concludes that the question of whether the indemnification assignment in this matter was a violation of the Rules of Professional Conduct is a collateral issue which is not fully amenable to review in the absence of a actual dispute between the parties to the assignment. However, in this regard it is patently clear that the client's right to indemnification is a direct reflection of the attorney's right to receive attorney fees from the client and the assignment represents a transfer of procedural rights relating to fee collection rather than an arrangement involving property rights that might be construed as a business transaction under Minn. R. Prof. Cond. 1.8(a). Indeed, defendant's argument that the assignment in this case involved a transfer of property rights is wholly conclusory and entirely unconvincing. The assignment was a modification a pre-existing fee agreement which did not encompass a loan or exchange of property which would justify characterization as a business transaction. Consequently, the plaintiff attorney was not required to comply with the writing and disclosure provisions of Minn. R. Prof. Cond. 1.8(a). Defendant's contention that the indemnification assignment was an ethically improper business transaction which should not be recognized on public policy grounds is without merit and dismissal of this action on that ground is not justified.
Consideration for Assignment. Defendant's direct attack on the validity of the indemnification assignment is its claim that the agreement was not supported by consideration. EKS argues that the plaintiff attorney was already obligated to provide legal services pursuant to the initial flat fee retainer agreement between himself and Mr. Miller, and that the modified agreement as represented by the assignment provided for no new consideration. Plaintiff contends that EKS is not a third-party beneficiary to the indemnification assignment and lacks standing to challenge the attorney-client fee arrangement. Mauzy also insists that, in any event, the assignment was supported by consideration. Defendant essentially ignores the contractual standing issue.
Defendant EKS, as the potential source for indemnification in this matter, is not entirely without an interest in the validity of the assignment and does have a justification for obtaining a determination on assignment validity. To be sure, EKS might have legitimate concerns with respect to whether the assignment is enforceable to protect itself from the possibility of indemnifying the wrong party, but in this instance EKS denies any obligation to indemnify either the client or the attorney. The client has not been made a party in the case. In effect, with respect to the assignment, EKS has a legitimate interest in the outcome of any dispute regarding validity of the agreement, but has no legally protectible stake in a particular position on the issue and therefore has no standing to contest the assignment on consideration grounds or otherwise. Importantly, there is no evidence whatsoever to support a conclusion that EKS was a third-party beneficiary with an interest in the attorney fees arrangements in this matter. Mears Park Holding Corp. v. Morse/Diesel. Inc., 427 N.W.2d 281, 285 (Minn.App. 1988). In addition, the fee agreement and assignment did not otherwise create any duty or obligation whereby the attorney was required to act for the benefit of EKS. Id. In Minnesota, strangers to a contract have no rights under the contract, Wurm v. John Deere Leasing Co., 405 N.W.2d 484, 486 (Minn.App. 1987) (citing Anderson v. First Northtown Nat'l Bank, 361 N.W.2d 116, 118 (Minn App. 1985)), and unless the contract expresses some intent to benefit a third party through performance, the third party is at most a third-party beneficiary having no claims which it can enforce under the contract. Id. (citing Cretex Companies v. Construction Leaders. Inc., 342 N.W.2d 135, 139 (Minn. 1984)). Neither the initial fee agreement nor the assignment in the case express any intent by either party that defendant EKS would have any interests or claims under the agreements and EKS is therefore without standing to contest them. Meanwhile, because Mr. Miller is not a party contesting the assignment in this case, the Court must conclude that the assignment is indeed enforceable and grants the plaintiff attorney the indemnification rights under Wisconsin statutes which might otherwise have been exercised by the client.
In any event, the Court does not find that as a matter of law there was no consideration for the assignment. Where a contract is ambiguous or incomplete, parol and extrinsic evidence is admissible to show the intent of the parties. MTS Company v. Taiga Corp., 365 N.W.2d 321, 325 (Minn.App. 1985) (citing Flynn v. Sawyer. 272 N.W.2d 904, 908 (Minn. 1978)). While the initial $100,000 flat rate fee agreement dated January 10, 1996, could be interpreted as a comprehensive agreement for total payment of fees through trial, the retainer agreement can also be construed to provide only that the total $100,000 payment is nonrefundable, and was essentially only a minimum fee for legal services relating only to an investigation, without reference to payment of additional fees which were not yet anticipated. In this regard plaintiff Mauzy offers his own deposition testimony, as well as the testimony of the client, Robert Miller, to support his position that the initial fee agreement did not preclude additional attorney fees. Defendant EKS is not entitled to summary judgment in this action on grounds that the assignment of the indemnification claim was unenforceable as being contrary to public policy or for lack or consideration.
Affidavit of Anne M. Lockner, Exh. 3, Mauzy Depo. pp 53-62 [Docket No. 46].
Affidavit of Anne M. Lockner, Exh. 6, Miller Depo., page 50.
Indemnification under Wisconsin Statutes Wis. Stat. § 180.0851(1). Plaintiff Mauzy's motion for summary judgment under Wis. Stat. § 180.0851(1) is based upon the relatively straightforward position that indemnification of defense attorney fees incurred by a corporate officer is mandatory if the officer was a party in the action because he was an officer or director of the corporation. Defendant EKG challenges this argument from the onset with an ad hominem attack on the employee/client whose right to indemnification the plaintiff attorney now seeks to enforce. The parties do not dispute that EKS is a Wisconsin corporation and that indemnification under the Wisconsin statute is the matter appropriately before the Court.
The opening sentence of defendant EKS's Memorandum of Law in Opposition to Plaintiff's Motion for Summary Judgment is: "Plaintiff William J. Mauzy ("Mauzy") comes before this Court seeking to assert the rights of a scoundrel." Without regard to the accuracy of the statement, it was clearly designed to set a tone for the argument that was not necessary to reasoned discussion on statutory interpretation issues and is not pertinent to the Court's decision.
Plaintiff correctly asserts that the essential fact issues with respect to application of Wis. Stat. § 180.0851(1) are whether Robert Miller was a party in the proceeding because he was a director or officer of the corporation, EKS, and whether Miller was successful on the merits or otherwise in the defense of the proceeding. Plaintiff contends that as general manager and vice president in charge of the Burnsville Sanitary Landfill, Miller was undisputably an officer in the company. Plaintiff further asserts that since Miller was explicitly charged in his capacity as an EKS employee in the Dakota County criminal complaint, he was indeed "a party in the proceeding because [he was an] officer of the corporation." Finally, plaintiff insists that Miller was fully successful in his criminal defense as an result of the dismissal of 20 of 24 felony counts and the virtually inconsequential misdemeanor convictions on the remaining four counts, or, at the least, was successful to the proportionate extent to which charges were dismissed. Defendant EKS does not allege that Miller was not a officer in the company. Furthermore, though EKS does present a litany of claims to the effect that Miller had violated company standards of conduct; that his actions had manifested a conflict of interest with his duties as an employee and officer; that his schemes deprived EKS of income; and that Miller otherwise acted to the detriment of EKS by accepting bribes and lack-backs, arranging unfavorable sub-contracts, improperly receiving a commission in a real property transaction involving EKS, selling company property, diverting business to a trucking business in which he had an interest, taking landscape boulders from EKS property, participating in the taking and selling of scrap metal delivered to the Burnsville landfill, and misrepresenting the volume of waste delivered to the landfill, defendant does not clearly argue that Miller was not a party to the prosecution because of his employment status. Rather, EKS chooses to challenge the plaintiff's reliance upon foreign indemnification law, argues that Miller was not successful in the defense in the criminal matter, and insists that indemnification is not required under the circumstances in this case.
A reasonable reading of the plain and express language of the mandatory indemnification provision at Wis. Stat. § 180.0851(1), further considered in light of the indemnification statute taken in its entirety, compels the Court to conclude that partial indemnification of attorney fees is required in this matter. Moreover, the Court's interpretation and conclusion is supported by the decisions and reasoning in cases arising in Delaware and involving the interpretation of a statutory provision materially the same as the one at issue here.
The Wisconsin legislature obviously recognized that the defense in a legal proceeding is certainly not always, and perhaps rarely, a 100% proposition for either success or failure, and therefore provided that corporate indemnification shall be provided "to the extent that [an officer or director] has been successful on the merits . . . " Wis. Stat. § 180.0851(1). Moreover, the term "proceeding" is explicitly defined to include threatened, pending or completed criminal matters. Wis. Stat. § 180.0850(6). There is no basis in the language of subsection (1) to preclude officer indemnification on grounds that the officer was less than entirely successful in the defense of a criminal proceeding. In addition, although one can easily perceive alternative causes for a corporate officer being a party in a proceeding, the Court finds that as a matter of law Mr. Miller was a party because he was an officer in the company and the alleged wrongdoing involved performance of duties within the scope of employment and undertaken on behalf of the corporation. Despite the reasonable assertion that the alleged actions of Miller which led to 24 separate felony charges against him were not intended to benefit EKS, the submission of the monthly reports which were the basis for the charges was clearly an employment responsibility, unlike several of the examples of activities in breach of duties to corporate interests which are alleged by the defendant, i.e. accepting bribes and commissions, selling boulders and scrap metal, and diverting business. Under these circumstances there is no justification for determining that the indemnification request in this instance involves a case not included under sub. (1), thereby requiring to the Court to examine Miller's activities more expansively and with greater discretion in the context of Wis. Stat. § 180.0851(2)(a).
Importantly, the Court notes that the application of quasi-strict liability for corporate indemnification under subsection (1) has the distinct advantage of permitting a determination on the propriety and extent of indemnification without broad inquiry into a prosecutor's charging and plea bargaining practices, a criminal defendant's view of success on the merits, or a judge's sentencing motivations. There is no inherent unfairness in such liability where the activities at issue were presumably subject to corporate oversight, despite allegations of breach in trust. Furthermore, such application of the statute allows the Court to examine the pleadings to determine the appropriate extent of indemnification in a particular matter, civil or criminal, and thereby exercise appropriate discretion without essentially trying the underlying case on an attorney fees indemnification claim. In discussing entitlement to mandatory indemnification to the extent of success on the merits under equivalent Delaware statutory language, the court in Merritt-Chapman Scott Corp. v. Wolfson, 321 A.2d 138, 141 (Del.Super.Ct. 1974), specifically found that the statute does not require complete success and claimants are entitled to partial indemnification on a count of a criminal indictment which is an independent charge, even if unsuccessful on another, related count. Id. Furthermore, it is not the court's role go behind the result to determine why the particular outcome was reached or whether the success was deserved in a substantive sense. Waltuch v. Conticommodity Services. Inc., 88 F.3d 87, 96 (2d Cir. 1996).
Title 8 Delaware Code's 145 provides in pertinent part:
(c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding . . . or in defense of any claim issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually paid and reasonably incurred by him in connection therewith.Merritt-Chapman Scott Corp. v. Wolfson, 321 A.2d 138, 141 (Del.Super.Ct. 1974).
By the same rationale regarding extrinsic evidence, under Wis. Stat. § 180.0851(1) a conviction cannot be construed as success despite the apparent absence of punishment, and the officer therefore is not entitled to indemnification with respect to charges on which he was convicted. See Waltuch. 88 F.3d at 96, n. 12. Essentially, a mathematical approach works well in this case because the underlying criminal complaint alleged discrete counts of equal culpability rather than alleging separate charges of varying severity or alternative counts regarding the exact same conduct or incident. For purposes of indemnification Miller was successful in the defense of 20 of the 24 offenses on which he was charged in Dakota County and he was not successful on the remaining four counts for which he was convicted. Pursuant to the assignment Mauzy may not exercise his client's indemnification rights in a proportion greater than 20/24 of the amount of the claim. Plaintiff is entitled to summary judgment on Count 2 of the complaint as provided herein.
Wis. Stat. § 180.0851(2) and Wis. Stat. § 180.0851(1)(b). Plaintiff Mauzy next moves for summary judgment on Count 2 of his amended complaint based upon the permissive indemnification provision at Wis. Stat. § 180.0851(2)(a) which permits officer indemnification unless liability was incurred because the officer breached a duty owed to the corporation and such breach met any one of four particularly described criteria. Mauzy also moves for summary judgment on Count 3 of the amended complaint based upon discretionary indemnification as allowed under Wis. Stat. § 180.0854(2)(b). Because these counts relate to statutory provisions which constitute alternative grounds for the requested relief, a determination on the merits of the claims is not required to establish that plaintiff is entitled to indemnification of attorney fees. Nonetheless, and despite plaintiff's conclusory arguments to the contrary, defendant has presented facts which, viewed in the light most favorable to the party opposing the motion, establish the existence of genuine issues material fact, thereby precluding summary judgment on plaintiff's § 180.0851(2)(a) claim. In particular the Court concludes that disputed material fact issues exist with respect to whether Miller breached or failed to perform duties regarding matters in which he had a conflict of interest, whether Miller had reasonable cause to believe that his conduct was not in violation of criminal law, or whether Miller willfully breached duties owed to the corporation. Wis. Stat. § 180.0851(2)(a)l, 2, and 4. Finally, on motion for summary judgment on Count 3 of the amended complaint, the Court declines to exercise discretion to order indemnification under Wis. Stat. § 180.0854(2)(b) where it has not been unequivocally shown that the officer is without fault in this matter or is otherwise fairly and reasonably entitled to indemnification.
Damages
Plaintiff Mauzy alleges in his motion that he is entitled to summary judgment on a claim for indemnification of attorney fees in the total amount of $337,089.21. Defendant EKS denies liability and asserts that it has no obligation to indemnify in any amount, but further contends that, in any event, the corporation should not be compelled to indemnify with respect to matters on which Miller's defense was not successful, and should not be required to pay the initial $100,000 amount which the client paid to the plaintiff prior to execution of the assignment. EKS also insists in its own motion for summary judgment that it is entitled to an equitable right of set-off on amounts that Miller owes the company on account of his wrongdoings resulting in losses to the corporation, and that those losses exceed the indemnification claim in this case. The plaintiff attorney submits an statement of fees and expenses to support his claim for the amount of $337,089.21, and despite its objections to indemnification, defendant does not directly argue that amounts represented on the statement are unreasonable or improper.
Affidavit of Christopher W. Madel, Exh. P, Plaintiff's Second Supplemental Answers to Defendant Edward Kraemer Sons, Inc.'s Interrogatories — First Set. page 21 [Docket No. 46]
To the Extent of Success. As previously discussed in this memorandum, the Court finds that Miller was successful in his defense of 20 of 24 independent felony charges and that he is entitled to indemnification to the proportionate extent of success. The Court therefore concludes that plaintiff may not recover an amount greater than 20/24, or 83.3%, of $337,089.21. Plaintiffs indemnification claim is limited to $280,795.31 on the basis of the success of defense.
Payment Received. Plaintiff Mauzy's initial representation of Miller with respect to Dakota County criminal charges commenced with the execution of a retainer agreement dated January 10, 1996, pursuant to which Mauzy was paid $100,000. Mauzy acknowledges that his total present claim includes this amount previously paid, but contends that the right to seek indemnification for the initial $100,000 attorney fees payment was expressly assigned to the attorney under the Amendment to the Retainer Agreement date October 9, 1997, which further provided that Miller would make no claim for fees recovered by Mauzy.
Though an indemnification payment which included the previously paid $100,000 amount would not constitute an overpayment by defendant EKS, the receipt would result in a double recovery windfall to the attorney and any claim for indemnification of that amount is therefore denied. See Wirig v. Kinney Shoe Corp., 461 N.W.2d 374, 379 (Minn. 1990). To the extent that the assignment granted the plaintiff attorney the right to seek indemnification for the $100,000 payment without requiring reimbursement of that amount to the client, the attorney received a windfall. On equitable grounds the Court declines to permit plaintiff to recover damages for a loss which he has not suffered. Plaintiff's claim for indemnification of attorney fees is further reduced by the amount of $100,000.
Equitable Set-off. In its motion for summary judgment defendant EKS alleges that as a matter of law the corporation is entitled to a complete set-off for losses suffered by EKS as a result of Miller's criminal conduct and breaches of duty to the company. Examples of losses cited by the defendant include a claim for $1.5 million in losses resulting from the officer's under reporting waste volumes and under charging haulers, at least $180,000 in bribes accepted by Miller which deprived the company of his honest services, and salary and bonuses paid to Miller. From a substantive perspective the Court observes that to the extent that proposed set-off amounts are stated at all, those amounts are clearly estimates and the Court is not directed to undisputed facts which would establish a right to complete set-off on motion for summary judgment. Defendant's dispositive motion must therefore be denied because it has not been shown that there no genuine issues of material fact relating to equitable set-off which would entitle defendant to judgment as a matter of law. More critically in this instance, however, the Court concludes that equitable set-off has not been expressly or implicitly pled as a defense in this action; under the circumstances in this litigation defendant should not be permitted to amend its answer to allege the defense at this time; and defendant therefore is not entitled to trial on the matter of equitable set-off.
The same procedural grounds would justify denial of defendant's motion to dismiss based upon defenses that the assignment violated public policy and failed for lack of consideration. The Court went to the substance of those defenses because of the general preference that matters be decided on the merits and the claims essentially involved questions of law. To the extent that review of extraneous materials, i.e. the fee agreement and assignment, was necessary to the decision, the documents are in the record and are embraced by the pleadings. Vizenor v. Babbitt. 927 F. Supp. 1193, 1198 (D.Minn. 1996)(Kyle, J.).
In its motion for leave to amend defendant EKS cites the liberal amendment policy under Fed.R.Civ.P. 15(a) and argues that untimeliness under a scheduling order is not sufficient basis for denying a motion to amend. Dennis v. Dillard Dept. Stores. Inc., 207 F.3d 523, 525 (8th Cir. 2000). The trial court can refuse a motion to amend a pleading only where "it will result in undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [or] futility of amendment. Id. (quotingFoman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227 (1962). Delay alone is insufficient grounds to deny a motion to amend and the opposing party must show that it will be unfairly prejudiced. Id. In Dennis the court concluded that even though the discovery deadline had passed the opposing party could not show unfair prejudice where the court had discretion to reopen discovery for the limited purpose of exploring the additional defense.
Defendant filed its answer to the initial complaint in this action on April 29, 2002. As affirmative defenses the pleading alleged that the complaint failed to state a cause of action and that the claims were barred by the plaintiff's on wrongful conduct. An answer to the first amended complaint was filed on June 13, 2002, and recited the same affirmative defenses. A pretrial scheduling order dated June 26, 2002, established August 1, 2002, as the deadline for amending pleadings. Following a substitution of attorneys for the defendant on November 6, 2002, the parties stipulated to an amendment to the scheduling order, thereby extending the discovery and non-dispositive motions deadlines to March 1, 2003, changing the dispositive motion deadline to May 1, 2003, and setting the ready for trial date at July 1, 2003, but not stating a new amendment deadline date to replace the one which had already passed.
The inadvertent failure to plead an affirmative defense because of mere oversight is not in itself fatal to the defense and does not preclude the need to consider other factors in determining whether to permit the amendment. Dennis v. Dillard Dept. Stores. Inc., 207 F.3d 523. In this instance EKG cites the substitution of counsel in November 2002, as a reason, in part, for the failure to plead all affirmative defenses. However, this event should appropriately be viewed as an opportune time for re-examination of critical pleadings. Furthermore, initial defense counsel had not only filed an answer to an original complaint on May 29, 2002, but had also filed an answer to the first amended complaint on June 18, 2002, another opportunity to review the pleading. Under these circumstances, the failure to allege defenses cannot be characterized as mere oversight. Defendant also asserts that the need to amend the answer to allege additional defenses did not become apparent until facts were revealed in depositions which took place after August 1, 2002, well after the period for amending had lapsed. Neither the critical new facts themselves nor the nature of those facts is presented to the Court in this motion. In this respect the Court is at a loss to understand why essential facts relating to a set-off defense are not within the knowledge and possession of defendant, rather than a source of discovery. The claim is essentially in the nature of a counterclaim and the damages or losses at issue are certainly available to the defendant without recourse to discovery from the plaintiff in this matter, especially in light of EKG's explicit representation that set-off damages exceed the indemnification demanded by plaintiff. Under these circumstances the Court is not persuaded that defendant has pursued its investigation on the issue of equitable set-off to an extent that the Court could find good cause to reset the deadline for amending pleadings to permit EKS to allege the defense. Bradford v. Dana Corp. 249 F.3d 807, 809 (8th Cir. 2001), see Archer Daniels Midland Co. v. Aon Risk Services. Inc. 187 F.R.D. 578, 581-83 (D.Minn. 1999). Finally, the Court concludes that plaintiff has indeed been prejudiced in his ability to timely prosecute his indemnification claim with fair knowledge of and appreciation for the defenses he would be facing. Defendant's motion for summary judgment on equitable set-off is denied with regard to both liability and the amount of losses which could be set-off.
Attorney Fees in the Present Litigation. Plaintiff Mauzy moves for an order pursuant to Wis. Stat. § 180.0854(2)(a) requiring defendant to pay attorney fees and costs incurred in connection with the present litigation. The statutes provides that indemnification of such fees shall be ordered if the court find that the corporation's refusal to accede to the underlying indemnification request was unreasonable. Although the Court concludes that indemnification is required for attorney fees incurred in the corporate officer's criminal matter, the damages award is substantially less than the amount claimed, and the opposition was therefore justified and significantly successful. Furthermore, under the circumstances in which this case arose, as fully discussed in this memorandum, the Court finds that as a matter of law the defendant's refusal to indemnify was not unreasonable. Plaintiff's request for attorney fees incurred in the present civil litigation is denied.