Strohm v. Clearone Commc'ns, Inc.

308 P.3d 424

732 Utah Adv. Rep. 34

Susie STROHM and Dorsey & Whitney, LLP, Plaintiffs and Appellees,

v.CLEARONE COMMUNICATIONS, INC., Defendant and Appellant.

No. 20110569.

Supreme Court of Utah.

April 9, 2013.

Rehearing Denied Aug. 1, 2013.

Milo Steven Marsden, Cameron M. Hancock, Salt Lake City, William Michael, Jr., Minneapolis, MN, for appellees.

James E. Magleby, Christopher M. Von Maack, Jennifer Fraser Parrish, Salt Lake City, Brian S. Cousin, Neil A. Capobianco, New York, NY, for appellant.

Justice LEE, Opinion of the Court as to Sections I–VI and VIII; dissenting as to Section VII:

¶ 1 This case concerns a corporation's statutory and contractual duty to indemnify a corporate officer's criminal defense costs. Susie Strohm, the one-time CFO of ClearOne Communications, Inc., was charged with eight federal criminal counts relating to an investigation into certain accounting practices at ClearOne. She was later acquitted of all but one count. Strohm and her counsel, Dorsey, asserted that ClearOne is obligated by statute and contract to indemnify her (and, by extension, Dorsey) for her criminal defense costs and brought suit to collect those costs. The district court agreed with Strohm and Dorsey and ordered ClearOne to indemnify Strohm for her defense costs, subject to certain restrictions. It also found that a contract between the parties entitled Dorsey to charge ClearOne 18 percent interest on the amounts that were billed to ClearOne but not timely paid and to collect the costs it expended in enforcing ClearOne's contractual obligation to indemnify Strohm.

¶ 2 On appeal, ClearOne challenges the district court's decisions and its ultimate fee award. Strohm and Dorsey cross-appeal the district court's decision to place certain limitations on their indemnification and collection award. A unanimous court affirms the district court's indemnification decisions in large part, its ruling relating to contract termination rights, its reasonableness determination for fees in the criminal case, and its decision to enforce the 18 percent interest rate provision in the Dorsey letter. A majority of the court, however, joining Section I of Justice Parrish's separate opinion for the court, reverses the district court's decision to allow Dorsey to recoup its fees in the collection matter, a determination from which I dissent. We remand for further proceedings.

I. BACKGROUND

¶ 3 ClearOne is a manufacturer of video-conferencing equipment based in Salt Lake City. Susie Strohm was its CFO until her resignation in December 2003. This case arises out of civil and criminal proceedings challenging accounting practices at ClearOne during Strohm's tenure. The Securities and Exchange Commission initiated a civil securities fraud action against ClearOne, Strohm, and Frances M. Flood, ClearOne's then-CEO, to investigate these practices at ClearOne. In early 2003, while that action was pending, the U.S. Attorney for the District of Utah impaneled a grand jury to begin a criminal investigation that paralleled the SEC action. The U.S. Attorney subsequently informed ClearOne that it “had begun an investigation stemming from the complaint in the SEC action.”

¶ 4 In the wake of these actions, ClearOne and Strohm executed an engagement agreement in the form of a letter from Milo Steven Marsden, who was at that time a partner at Bendinger, Crockett, Peterson & Casey, PC, to Strohm and ClearOne. In this letter—signed by ClearOne's CEO Michael Keough—Marsden and Bendinger agreed “to represent [Strohm's] interests in connection with the SEC civil complaint ... and in connection with further related investigations and litigation.” The letter also allowed Marsden and his law firm to collect 18 percent interest on “any amount billed and unpaid” for thirty days and to recover “all reasonable costs expended in connection with collecting amounts due under this Agreement, including reasonable attorneys' fees.”

¶ 5 ClearOne and Strohm entered into two additional agreements in the following year. First, counsel for ClearOne, Strohm, and Flood executed a Joint Defense Privilege and Confidentiality Agreement in February 2003. This agreement allowed the parties to “shar[e] documents, factual material, mental impressions, memoranda, interview reports, litigation strategies, and other information.” Later, Clear One and Strohm also executed an Employment Termination Agreement to resolve “disputes regarding Strohm's demandfor indemnification.” This agreement, like the Joint Defense Agreement, acknowledges that “the SEC action has spawned, and may continue to spawn, multiple related proceedings, including ... a grand jury investigation being conducted by the United States Department of Justice.”

¶ 6 These agreements governed the parties' relationship until Marsden left Bendinger for Dorsey & Whitney, LLP in 2004. On that occasion, he wrote to ClearOne and Strohm to “update” their engagement letter “to reflect this move.” Like the Bendinger letter, the Dorsey letter confirms that ClearOne and Strohm had engaged Marsden and Dorsey “to represent [Strohm] in connection with the SEC civil complaint ... and in connection with further related investigations and litigation.” But the Dorsey letter differs from the Bendinger letter in several respects. Most importantly for the matter before us, it does not repeat the Bendinger letter provisions allowing 18 percent interest and collection costs and attorney fees. It also lists three by-then-instituted civil matters as being “includ[ed]” in “further related investigations and litigation.” But, like the Bendinger letter, the Dorsey letter makes Strohm and ClearOne “jointly and severally responsible for payment of all amounts billed” which are “due on receipt.”

¶ 7 Despite these early internal maneuverings, it wasn't until May of 2007 that the U.S. Attorney informed Marsden that Strohm was the target of a grand jury investigation. Strohm was indicted months later with one count of conspiracy, two counts of making materially false and misleading statements to auditors, and two substantive counts of securities fraud. Two subsequent indictments added a charge of making material misrepresentations to auditors and two perjury counts.

¶ 8 Work on Strohm's criminal defense began in earnest in May 2007, with ClearOne appearing to recognize an indemnification obligation for her defense costs. Indeed, ClearOne paid Dorsey's bills for the first nine months. By March 2008, however, ClearOne expressly refused to pay any further defense costs and denied that its engagement agreements with Marsden required it to do so.

¶ 9 In response, Dorsey and Strohm initiated the instant collection action against ClearOne, seeking—among other things—to enforce the engagement agreements and to require ClearOne to indemnify Strohm for her defense costs. Meanwhile, Strohm's criminal trial commenced in early 2009, with Dorsey representing Strohm. Of the eight counts for which she was indicted, Strohm was convicted of only one count—perjury related to testimony given in the SEC action.¹ Following Strohm's near complete acquittal, Strohm and Dorsey amended their complaint against ClearOne to remove now-moot claims and to add a claim for mandatory statutory indemnification under Utah Code section 16–10a–903 and –907.

¶ 10 Both before and after Strohm's criminal trial and limited conviction, the parties engaged in contentious litigation over Strohm's and Dorsey's statutory and contract claims. As to the statutory claims, Strohm and Dorsey filed a motion for summary judgment just after Strohm's conviction, basing their claim for relief on the grounds that Strohm had been acquitted on seven of the eight counts against her. The district court granted the motion, stating that Utah Code sections 16–10a–903 and –907 required ClearOne to indemnify Strohm for “the reasonable expenses incurred by her in connection with the proceeding or claim[s] with respect to which she has been successful.” It also ordered ClearOne to pay for Strohm's “reasonable expenses incurred in order to obtain court-ordered indemnification pursuant to” Utah Code sections 16–10a–903 and –907(1).

¶ 11 Resolution of Strohm's and Dorsey's contract claims was somewhat more complicated. Both parties filed early motions for partial summary judgment relating to Dorsey's claim that its engagement agreement with ClearOne required ClearOne to reimburse it for Strohm's criminal defense costs. But the district court ultimately determined that “facial ambiguity concerning the scope and purpose of the agreements” prevented it from ruling on the motions. It accordingly ordered discovery regarding the intentions of the parties to the engagement letters.

¶ 12 Discovery ensued over the following months, the most important development being the deposition of ClearOne's 30(b)(6) designee, Keough. ² In that deposition, Keough testified that when he signed the first engagement letter, he understood that a federal criminal investigation was underway that could result in criminal litigation and claims brought against Strohm. He also testified that when he signed the engagement letters, he understood that Marsden would represent Strohm in both the SEC action and in any related federal criminal investigation. Further, he clarified that he and ClearOne understood the engagement agreements to make ClearOne liable for 18 percent interest and for collection costs necessary to enforce the agreements.

¶ 13 Strohm and Dorsey thereafter renewed their motion for summary judgment, and ClearOne filed its own cross-motion. The district court granted summary judgment in favor of Strohm and Dorsey based largely on Keough's uncontradicted deposition testimony concerning the intentions of the parties combined with recitals in the Joint Defense Agreement and the Employment Termination Agreement. Specifically, the court held that the engagement agreements “together form an enforceable contract, providing an...