HIGHLIGHT CORNER
HIGHLIGHT CORNER
ADAM RABIN
Tips for an LLC to Protect Against a Former Manager ’ s Claim for “ Advancement ” of Attorney ’ s Fees and Costs When the Former Manager Acted in Bad Faith ( Continued )
For example , if the LLC ’ s operating agreement does not provide a carefully drawn definition of what a “ manager ” means , i . e ., a manager of the LLC , a potential claimant who was a “ manager ” of a specific department or division of LLC , but not of the LLC itself , may seek advancement of his or fees and costs when that was not the LLC ’ s intent when drafting the operating agreement . Thus , it is important that the operating agreement clearly define , and narrowly tailor , key terms so as not to unintentionally broaden who qualifies as a “ covered person .”
3 . The Operating Agreement should exclude reimbursement for first-party claims
In Florida , indemnity provisions generally apply only to third-party claims , i . e ., when a party outside of the LLC brings a lawsuit . Florida law further cautions that broad indemnity language in an operating agreement that may encompass first-party claims could enable a former manager who acted in bad faith towards the LLC to use its indemnity clause to exculpate himself from liability to the LLC .
For example , in a situation where the LLC has sued its former manager for breach of fiduciary duty for usurping corporate opportunities or self-dealing , the LLC might be required to reimburse the former manager for his attorney ’ s fees and costs to defend the very lawsuit that the LLC has brought against him for damages . And while indemnity provisions are generally limited to third-party claims unless a contract “ clearly and unambiguously shows an intent to extend indemnity to first-party claims ,” certain broad language in a reimbursement provision likely would trigger a duty to indemnify a first-party claim such as : “ No Covered Person shall be liable to the Company or any other Covered Person for any losses , damage or claims incurred by reason of any act or omission performed or omitted by such Covered Person .” This is because it provides , without any limitation , that a covered person shall not be liable to the LLC for any damages , including those that
the covered person himself caused the LLC to suffer .
4 . The operating agreement should expressly disallow recovery for “ fees on fees ” for litigating the issue of advancement .
The general rule in Florida is that a prevailing party may recover its attorney ’ s fees for litigating entitlement to attorney ’ s fees , but not for litigating the amount of attorney ’ s fees owed . Florida law also provides an exception that where the parties ’ contract is so broad that it contemplates that a prevailing party shall be entitled to recover attorney ’ s fees for litigating the amount of fees the nonprevailing party owes , i . e ., “ fees on fees ,” a court ’ s award of such fees to the prevailing party is proper .
Therefore , it is important for the LLC to include language in its operating agreement ’ s reimbursement provisions that provides , in the event the LLC were to reject a demand for advancement from a former manager , the LLC shall not be required to reimburse the former manager for her attorney ’ s fees incurred in pursuing her claim against the LLC for advancement . In other words , the operating agreement should expressly provide that the former manager is not entitled to “ fees on fees ” for pursuing her advancement claim against the LLC .
5 . The operating agreement should require a party who seeks advancement to pledge security to protect the LLC if it seeks repayment of the advanced funds
One of the more significant threats that a claim for advancement presents is that the LLC may be required to advance the attorney ’ s fees and costs in favor of a former manager , later prove at the trial on the merits that the former manager was not entitled to advancement or indemnification , but the LLC would have no means to recover the unsecured “ loan ” it advanced in favor of the former manager . In other words , absent the operating agreement provision that for a party to be
PBCBA BAR BULLETIN 11 entitled to advancement of attorney ’ s fees and costs to defend a lawsuit , the party seeking advancement must “ undertake ” a pledge of adequate security in favor of the LLC . This undertaking is particularly important because absent the former manager ’ s provision of adequate security for the loan , the LLC is left with a mere unsecured claim against the former manager to recover the advanced funds and no ability to recoup such funds if the former manager is judgment proof .
Conclusion
Because an advancement claim asserted by a former manager may present a formidable threat and financial burden to an LLC , it is critical that the LLC ’ s new management take the time to review and understand the reimbursement provisions set forth in the LLC ’ s operating agreement . Taking the time up front to conduct a proactive review of the operating agreement , before an issue or claim for advancement arises , will better enable the LLC to adjust any unfavorable language that may have unintended and significant financial consequences for the LLC .
Adam Rabin is a shareholder with Rabin Kammerer Johnson in West Palm Beach and is Florida Bar board certified in business litigation . You may reach him at arabin @ rkjlawgroup . com or www . ComplexBusinessLitigation . com .