This is a case dealing primarily with two issues: 1) when does an employee’s claim for indemnification from a Delaware LLC irrevocably accrue?; and 2) if a party has a viable claim for indemnification but is on notice that the agreement providing for indemnification may be modified, could a later amendment to such agreement defeat the claim? The Court held that it must look to the operating agreement in place when the events giving rise to the employee’s claim for indemnification accrued or when the lawsuit involving the claim was filed and that if such employee was entitled to indemnification under that agreement, the employee’s claim is vested. The Court further held that, once vested, the contractual right to indemnification could not be eliminated by a subsequent amendment to the agreement.
The plaintiff in this case, Francis Branin, Jr. (“Branin”), was a principal/owner and the CEO of an investment management firm that was sold in October 2000 to a larger investment management firm, Bessemer Trust, N.A. (“Bessemer”), at which time Branin became an employee of Bessemer. Branin later began meeting with Stein Roe Investment Counsel, LLC (“SRIC”) to discuss possible employment. During those discussions, Branin explained to SRIC that the sale of his prior investment firm was governed by an implied covenant in New York restricting the seller of a business from approaching former customers to regain their patronage after he has purported to transfer their “goodwill” to the purchaser. Under this “Mohawk doctrine”, Branin could not solicit his former clients, but he would be entitled to accept the business of his former clients if they approached him. With that knowledge, SRIC decided to hire Branin in July 2002. Branin claims that he did not solicit his former clients, but less than a year after he joined SRIC he was managing 30 client accounts that he had previously managed. Branin was sued by Bessemer alleging improper solicitation of clients. After nearly ten years of litigation, Bessemer unconditionally dismissed its suit and all claims against Branin. Branin is seeking indemnification from SRIC for more than $3 million in legal fees incurred in the litigation.
When Branin joined SRIC, its LLC agreement contained a broad indemnification provision “entitling” each employee of the company indemnification “to the full extent permitted by applicable law” for any losses by reason of any act performed by the employee in good faith on behalf of the company and in a manner reasonably believed to be within the scope of the employee’s authority. A few months after Branin was sued, SRIC adopted an amendment to its LLC agreement that limited the indemnification provision by excluding losses related to claims that an employee breached any agreement, express or implied, entered into by the employee with a third party prior to the employee’s association with SRIC. The amendment further clarified that third parties in this case were meant to include prior employers. The parties do not dispute that SRIC’s LLC agreement controls, rather they differ on which version of that agreement.
The Court determined that the claim brought by Bessemer fell within the scope of claims requiring indemnification under SRIC’s LLC agreement in effect when Branin joined the firm. The Court also determined that the suit did not change in substance over time. Therefore, Branin was entitled to indemnification from SRIC for the claim despite the amendment to the LLC agreement. The Court noted that a reasonable reading of SRIC’s amendment to its LLC agreement is that SRIC was seeking to avoid liability to Branin for the claim filed against him by his prior employer. After discussing the policy justification for indemnification (i.e., to encourage them to work for or serve a particular entity) and noting that SRIC had already received most of the benefit from hiring Branin (i.e., movement of former clients attracted by him), the Court held that SRIC’s indemnification of Branin was required. The Court further justified this holding with the fact that at the time of the conduct that gave rise to the lawsuit filed against Branin, he reasonably anticipated he would have the protection of SRIC’s indemnification obligation.
As to the question of the effect of the amendment to SRIC’s LLC agreement, the Court discussed a similar fact pattern in a case dealing with indemnification by a corporation where the right to indemnification was deemed to be a vested contract right that could not be unilaterally terminated once an event triggered the indemnification obligations. The Court held that, though nothing prohibited SRIC from amending its LLC agreement on a prospective basis, the agreement created an enforceable right to indemnification that could not be amended to eliminate an indemnification obligation that had been previously incurred.
Despite finding that Branin’s claim for indemnification was governed by SRIC’s LLC agreement in effect when the lawsuit against him was brought, the Court denied his motion for judgment on the pleadings, finding that disputed issues of fact remain concerning whether he acted in good faith or in a manner reasonably believed to be within the scope of his authority, two requirements for indemnification under the prior LLC agreement.