Westar Energy Inc v. Wittig

• Decision Date: 09 July 2010
• Docket Number: No. 102,579.,102
• Citation: 235 P.3d 515
• Parties: WESTAR ENERGY, INC., Appellant/Cross-appellee,v.David C. WITTIG, Appellee/Cross-appellant.
• Court: Kansas Court of Appeals

235 P.3d 515

WESTAR ENERGY, INC., Appellant/Cross-appellee,v.David C. WITTIG, Appellee/Cross-appellant.

No. 102,579.

Court of Appeals of Kansas.

July 9, 2010.

COPYRIGHT MATERIAL OMITTED

Syllabus by the Court

1. K.S.A. 17-6305 permits a corporation to indemnify its officers and directors for all costs associated with any civil, criminal, administrative proceeding, or investigation arising from their position in the corporation.

2. A corporation may advance expenses reasonably incurred for all costs by officers and directors under K.S.A. 17-6305, including attorney fees, before the underlying investigation or legal action ends. But first the officer or director must sign an agreement to repay the corporation for any advances made on his or her behalf, in case the parties later decide the officer or director is not entitled to indemnity.

3. By contract, a corporation can make indemnity and advancement mandatory for its officers and directors.

4. The right to corporate indemnity cannot be determined until the underlying investigation or action has concluded.

5. The right of an officer or director of a corporation to be indemnified by the corporation and the right to receive advances of defense fees and expenses are distinct.

6. A court proceeding to determine advancements is a determination of the officer's or director's entitlement to the advances and the reasonableness of the requested fees and expenses. The burden is upon the party seeking advances to prove their reasonableness. The proceeding must be summary in nature in order to provide immediate interim relief for the officer or director entitled to such advances.

7. Any attempt by a corporation to recover funds already advanced to an officer or director must come after indemnity is determined. Only then can the competing rights of the parties be assessed.

8. District judges are experts on attorney fees and must use Kansas Rule of Professional Conduct 1.5(a) (2009 Kan. Ct. R. Annot. 460) as the methodology to assess the reasonableness of any request for attorney fees, including such fees requested in a corporate advancement proceeding.

9. An appellate court will review an award of attorney fees with an abuse of discretion standard.

Charles W. German, Kirk T. May, and Jason M. Hans, of Rouse Hendricks German May PC, of Kansas City, Missouri, for appellant/cross-appellee Westar Energy, Inc.

Jeffrey D. Morris, Jeremy S. Weis, Nick J. Kurt, and Kirk A. Peterson, of Berkowitz Oliver Williams Shaw & Eisenbrandt, LLP, of Kansas City, Missouri, for appellee/cross-appellant David C. Wittig.

Before HILL, P.J., GREEN and STANDRIDGE, JJ.

HILL, J.

Introduction

This appeal involves a declaratory judgment action between a corporation and one of its former officers. Westar Energy, Inc. agreed to advance attorney fees and expenses reasonably incurred by any of its officers charged with a crime that related to that officer's employment. David C. Wittig, a former officer of Westar, was charged in federal court with crimes arising from his conduct during his time as an officer of Westar. Westar is now responsible for advancing fees and expenses reasonably incurred in Wittig's defense.

Persuaded by cases from Delaware, an historical source of corporate law in Kansas, we hold that Westar must reserve any action seeking recoupment, such as setoff, until after it is determined whether Wittig must pay any of the money advanced back to Westar. To rule otherwise would destroy the right of advancement entirely and thus rewrite the parties' contract, something a court cannot do. Therefore, we uphold the district court's denial of declaratory relief to Westar on this point.

Finally, a district judge in Kansas is considered an expert on attorney fees and must use the factors found in Kansas Rule of Professional Conduct 1.5(a) (2009 Kan. Ct. R. Annot. 460) to measure the reasonableness of an attorney fee request. Here, after taking testimony on the subject and methodically considering all eight factors in Rule 1.5(a), the district court determined that the fees requested by Wittig for a Washington, D.C. law firm were unreasonable and lowered the hourly rate that Westar is to advance in Wittig's defense. The two questions that must be answered by a court in an advancement action are the entitlement of the officer to the advancement and the reasonableness of the fees and expenses requested. There is no dispute that Wittig is entitled to advancement. Even so, the district court here was obliged to determine the reasonableness of the fees Wittig requested. Because the findings of the district court were supported by substantial competent evidence, we find no abuse of discretion on this point and uphold the district court's ruling. Therefore, we deny Wittig's cross-appeal.

We give a brief review of the facts.

In December 2003, a federal grand jury indicted David C. Wittig for allegedly defrauding Westar Energy, Inc., a Kansas corporation. The United States began his prosecution for the crimes alleged in the indictment in United States v. Wittig and Lake, 03-40142-JAR, a case that is awaiting a new (third trial). When he was indicted, Wittig was the former Chief Executive Officer and Chairman of the Board of Directors of Westar. Wittig hired two law firms to help in his defense, Piper Rudnick, LLP from Washington, D.C. and Berkowitz, Oliver, Williams, Shaw & Eisenbrandt, from Kansas City, Missouri. For purposes of brevity, we will refer to the Washington, D.C. law firm as Piper Rudnick and the Kansas City, Missouri, law firm as Berkowitz Oliver. We must point out that this prosecution was not the only legal problem Wittig was experiencing at the time, because in an unrelated case, in November 2002, he was indicted for bank fraud. In that prosecution, Wittig retained James L. Eisenbrandt of the Berkowitz Oliver firm as his defense counsel. Therefore, Wittig had already established a client-attorney relationship with Berkowitz Oliver before his second indictment.

As his prosecution continued, Wittig's legal bills mounted and he sought advances from Westar to cover these expenses. He based these claims on Article XVIII(2)(a) of Westar's Articles of Incorporation. In his view, that article amounted to a contract, a view not disputed by Westar.

“Each person who was or is made a party ... to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ... by reason of the fact that he or she ... is or was a director or officer, of the Corporation ... shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Kansas General Corporation Law ... against all expense, liability and loss (including attorneys' fees ...) reasonably incurred or suffered by such person in connection therewith .... The right to indemnification ... shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition: provided, however, that, if the Kansas General Corporation Law requires, the payment of such expenses ... in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking ... to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise.”

Therefore, Wittig signed and delivered to Westar the following “Undertaking”:

“I, David C. Wittig, hereby agree that I will immediately repay Westar Energy, Inc. (“Westar”) any payment it has advanced to me to cover my reasonable attorney's fees and other expenses in connection with cases brought against me ... in the event it is ultimately determined ... that I am not entitled to be indemnified by Westar....”

In response to the “Undertaking,” Westar paid all accrued bills to Piper Rudnick in September 2004. But that was just the beginning.

Again, in September and October 2004, Westar received a second and third round of Piper Rudnick bills. Westar did not review them but paid the bills in October and December 2004. But that did not end the matter. Soon after the next billing, Westar's counsel sent a letter in March 2005 telling Piper Rudnick that its bills were unreasonable and Westar did not want to advance further fees to the firm. By this time, Westar had paid a little more than $1.8 million to Piper Rudnick. Nonetheless, the parties explored a possibility of compromise.

Instead of going to court, Westar and Wittig settled the matter. Westar agreed to pay all Piper Rudnick bills for legal services through January 2005. Both parties agreed to not go to court over these bills and, in return, Wittig would give up his rights to any Westar assets if he was convicted. However, Westar made it clear it was not waiving any right the company had to challenge the reasonableness of any future Piper Rudnick bills:

“Therefore, and without conceding that any of the fees or expenses incurred are reasonable, the Company will advance unpaid legal fees and expenses to Mr. Wittig for your bills through January 31, 2005. Furthermore, the Company expressly reserves all of its rights to object to any future advancements requested by Mr. Wittig on any grounds, including the reasonableness of the bills, and Mr. Wittig agrees that any advancements toward his legal fees and expenses in the criminal case that have been made or may be made in the future by Westar shall not be considered a waiver of Westar's right to challenge the reasonableness of such legal fees and expenses in the future for purposes of advancement or indemnification.”

After that, Westar paid more than $1.5 million in Piper Rudnick fees. But Wittig's legal expenses kept mounting.

Westar sues Wittig for declaratory judgment and breach of contract.

After advancing more than $3.6 million for legal fees, Westar sought relief in Shawnee County District Court. In this declaratory judgment action,...