Westar Energy, Inc. v. Lake

• Decision Date: 21 January 2009
• Docket Number: No. 07-3219.,No. 07-3280.,07-3219.,07-3280.
• Parties: WESTAR ENERGY, INC., a Kansas corporation, Plaintiff-Counter-Defendant-Appellant, v. Douglas T. LAKE, Defendant-Counter-Claimant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

552 F.3d 1215

WESTAR ENERGY, INC., a Kansas corporation, Plaintiff-Counter-Defendant-Appellant, v. Douglas T. LAKE, Defendant-Counter-Claimant-Appellee.

No. 07-3219.

No. 07-3280.

United States Court of Appeals, Tenth Circuit.

January 21, 2009.

Kirk T. May (Charles W. German and Jason M. Hans with him on the briefs) of Rouse, Hendricks, German, May, P.C., Kansas City, MO, for Plaintiff-Counter-Defendant-Appellant.

Edward J.M. Little, Hughes, Hubbard & Reed, L.L.P., New York, NY, (F. James Robinson, Jr., Hite, Fanning & Honeyman, L.L.P., Wichita, KS, with him on the brief), for Defendant-Counter-Claimant-Appellee.

Before MURPHY, BRORBY, and HARTZ, Circuit Judges.

MURPHY, Circuit Judge.

Plaintiff-Appellant Westar Energy, Inc. ("Westar") appeals an interlocutory order requiring Westar to advance past and future legal fees incurred by Defendant-Appellee Douglas Lake for his criminal defense. The district court did not label the order a preliminary injunction, but it meets the elements of a preliminary injunction and this court therefore has jurisdiction over the appeal under 28 U.S.C. § 1292(a)(1). The retrospective relief ordering the payment of past attorneys' fees cannot be upheld as a preliminary injunction because the remedy is not necessary to prevent irreparable harm. The prospective relief ordering future advances, on the other hand, satisfies Rule 65 and the equitable standards necessary to justify a preliminary injunction, but the district court erred in effectively assigning Westar the burden of disproving the reasonableness of Lake's advancement requests. Accordingly, we affirm in part and reverse in part.

I. Background

Lake was hired by Westar in the fall of 1998 to be the company's Chief Strategic Officer and Executive Vice President. In 2001, he became a director of the company. Westar's Articles of Incorporation provide for indemnification of officers and directors for costs and liabilities, including attorneys' fees, reasonably incurred in any proceeding in which they are involved as officers or directors of Westar. The Articles refer to the right as a contract right. Officers and directors also have a right under the Articles "to be paid by [Westar] the expenses incurred in defending any such proceeding in advance of its final disposition." This right is dependent upon the officer or director delivering an "undertaking" to Westar promising to repay the amounts advanced if the individual is ultimately not entitled to indemnification.¹

In September 2002, a federal grand jury began issuing subpoenas relating to allegations of fraud and financial impropriety on the part of several Westar executives, including Lake. The grand jury ultimately indicted Lake. In 2003, two civil complaints were filed against Westar; Lake was later added as a defendant in those actions.² Lake retained counsel to defend him in the pending criminal and civil actions. To trigger Westar's obligation to advance his legal fees, Lake signed undertakings agreeing to repay the advances should he ultimately not be entitled to indemnification.

One law firm retained by Lake to represent him in the civil actions and criminal proceedings was the New York firm Hughes Hubbard & Reed, LLP ("Hughes Hubbard"). Lake hired the Kansas firm Hite, Fanning & Honeyman LLP ("Hite Fanning") to serve as local counsel in the civil and criminal matters.

Lake submitted his first request for advancement of fees to Westar in March 2004. These fees were not immediately paid, however, because on April 5, 2004, the district court in the criminal case issued a restraining order against Westar specifically preventing the distribution of potentially forfeitable assets, including attorneys' fee advances, to Lake. The restraining order was modified on August 13, 2004, to allow for the advancement of legal fees in the criminal case. Hughes Hubbard then sent Westar two invoices for fees totaling over $2 million, and Westar paid both invoices in full.

Lake's first criminal trial began on October 12, 2004. Three days later, Hughes Hubbard sent an invoice for over $800,000 in fees and expenses. This time, Westar refused to pay the full amount. Westar informed Hughes Hubbard that the amount was unreasonably high. Without conceding any of the fees were reasonable, Westar advanced $500,000. Its stated reason for advancing this amount was that it did not want to distract Hughes Hubbard from its work in the ongoing trial.

The criminal trial ended in a mistrial on December 20, 2004. Between November 8 and December 13, 2004, Hughes Hubbard submitted three additional invoices to Westar, requesting advancements totaling over $1.8 million. Westar again objected to the reasonableness of the fees and advanced only $1.2 million. Additionally, Westar and Lake agreed that in the event of a criminal conviction after a final determination of guilt, Lake would relinquish his rights to any assets held by Westar to the extent necessary to repay the advancements. On March 16, 2005, Hughes Hubbard submitted an invoice for over $890,000. Westar objected to the reasonableness of the bill on several specific grounds and withheld $90,000. Westar also purported to reserve the right to offset its payment against future bills if it did not receive satisfactory explanations to its objections.

On May 23, 2005, in advance of the second criminal trial, the district court in the criminal case imposed a restraining order requiring all advances to be placed in escrow as potentially forfeitable assets. In its order, the district court noted it lacked jurisdiction to compel Westar to pay legal fees, but it was the court's intention that Westar continue making advances into the escrow account. Despite the district court's suggestion, Westar ceased making advances. When Hughes Hubbard sent Westar an invoice for $780,000, Westar refused to advance anything. It deemed the amount unreasonably high and stated its view there was no purpose in advancing the funds into escrow since they were not immediately available for Lake's defense.

On September 15, 2005, the second trial ended and Lake was found guilty on some of the counts. The jury found, however, that the attorneys' fee advances were not forfeitable assets. Accordingly, the district court lifted the restraint on the advances of attorneys' fees. Instead of advancing the attorneys' fees incurred in the second trial, Westar filed this declaratory judgment action premised on diversity jurisdiction seeking a determination of its obligation to advance. Lake brought a counterclaim for breach of contract. When Westar filed this suit in October of 2005, Lake had incurred nearly $4 million in unpaid fees and expenses.

Because Lake still needed representation in post-trial matters, the attorneys' fees continued to accrue. Lake retained another New York firm to handle his appeal, Wilmer Cutler Pickering Hale & Dorr LLP ("Wilmer Hale"). Wilmer Hale accrued fees and expenses totaling over $2.2 million pursuing Lake's appeal. Hughes Hubbard incurred over $900,000 in additional fees and expenses in connection with the criminal post-trial matters. Westar has advanced none of these fees.

In December of 2006, Lake filed a motion for summary judgment in the instant case on his breach of contract counterclaim, seeking "an order that Westar immediately advance to Lake the sum of $5,325,049.18, which constitutes 82% of the invoices for legal expenses Lake incurred against which Westar has advanced no money whatsoever."³ Lake argued that reasonableness challenges to advancement requests are permitted in very limited circumstances, and the attempt to set off the fees from the first trial with those of the second trial was unreasonable. Lake did not specifically seek a preliminary injunction. He did, however, state the relief he requested was interim because it would "in no way compromise Westar's right at the indemnification stage to recoup so much of the above amounts as are ultimately deemed unreasonable."

While Lake's motion was pending, several significant events occurred. First, this court reversed all of Lake's convictions, remanding some for a new trial. United States v. Lake, 472 F.3d 1247, 1267 (10th Cir.2007). The government intends to try Lake a third time.⁴ In response to the reversal of Lake's convictions, the district court in this matter requested expedited supplemental briefing on "the issue of Westar's liability with respect to future advancement of legal fees and expenses in the upcoming third criminal trial." In its supplemental brief, Westar stated its intention to "advance in good faith" reasonable fees and expenses for the third trial, and requested the court to "set hourly rates ... at rates customarily charged in Kansas for similar legal services, and grant such other relief as is appropriate under the circumstances." Westar indicated its understanding that this relief would be interim in nature because it was not waiving its objection to "the overall reasonableness of all fees and expenses." In his supplemental brief, Lake sought prospective, equitable relief in the form of an order requiring Westar to advance Lake's attorneys' fees as they came due.

On May 29, 2007, Hughes Hubbard and Hite Fanning moved to withdraw from representing Lake in the criminal case. As grounds for withdrawal, the firms cited Lake's inability to pay their substantial outstanding fees. While the motion to withdraw was pending in the criminal case, the district court ruled on Lake's motion for summary judgment in this case. The court first ruled Westar was only obligated to advance reasonable attorneys' fees. While disputed issues of material fact prevented the court from entering summary judgment, the court found it appropriate to grant two interim remedies: one retrospective, and one prospective. For retrospective relief, the district court noted the final resolution of the case might be "years away," and the right to advancement would be lost if payments...