April 9, 2013, Utah Supreme Court Case Summaries

April 9, 2013,

Utah Supreme Court Cases

Strohm v. Clearone Communications, Inc., 2013 UT 21, No. 20110569 (April 9, 2013)

JUSTICE LEE authored the opinion of the Court in Sections I–V, in which CHIEF JUSTICE DURRANT, ASSOCIATE CHIEF JUSTICE NEHRING, JUSTICE DURHAM, and JUSTICE PARRISH joined.

JUSTICE LEE authored the opinion of the Court in Sections VI and VIII, in which CHIEF JUSTICE DURRANT and ASSOCIATE CHIEF JUSTICE NEHRING joined.

JUSTICE LEE filed a dissenting opinion in Section VII as to Section I of JUSTICE PARRISH‘s opinion, in which ASSOCIATE CHIEF JUSTICE NEHRING joined.

JUSTICE PARRISH authored the opinion of the Court as to Section I of her opinion, in which CHIEF JUSTICE DURRANT and JUSTICE DURHAM joined.

JUSTICE PARRISH filed a dissenting opinion in Section II as to Section VI of JUSTICE LEE‘s opinion, in which JUSTICE DURHAM joined.

Justice Lee,

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 con-tract 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.

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.  

At ¶¶ 1-2.

[W]e first affirm the district court‘s indemnification rulings in full, except for the decision to limit indemnification for defense costs to those incurred before Strohm‘s perjury conviction. We likewise affirm the district court‘s determination that the engagement agreement between the parties does not give ClearOne the right to unilaterally terminate its payment obligation to Dorsey. And though ClearOne challenges the district court‘s fee award in the criminal case as unreasonable, we disagree and affirm. We next consider and affirm the court‘s ruling that the parties‘ engagement agreement contemplated 18 percent interest on unpaid fees and allowed Dorsey to recover fees and costs incurred in enforcing the engagement agreements. We also affirm the district court‘s decision to enforce the interest rate provision. Finally, though I would enforce the collection fee provision as well, a majority of the court, joining Section I of Justice Parrish‘s separate opinion, invalidates the collection fee provision on public policy grounds.

At ¶ 16.

Statutory Indemnification

ClearOne‘s first statutory argument is based on [Utah Code sections 16-10a-902], which allows a corporation to indemnify its director if ―his conduct was in good faith; . . . he reasonably believed that his conduct was in, or not opposed to, the corporation‘s best interests; and . . . in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful.‖ UTAH CODE § 16-10a-902(1). According to ClearOne, this statute establishes a “standard of conduct” and limits the indemnification a corporation can provide to its officers. This argument falters on the grounds that it misconstrues section 902 and ignores other sections of the code that expressly apply to officer indemnification.

By its own terms, section 902 applies only to the directors of a corporation. Id. (“[A] corporation may indemnify an individual made a party to a proceeding because he is or was a director . . . .” (emphasis added)). This section‘s title (“Authority to indemnify directors”) confirms that. Id. We can find nothing in section 902 that suggests that it extends beyond directors to encompass officers. See Olsen v. Eagle Mountain City, 2011 UT 10, ¶ 9, 248 P.3d 465 (stating that statutory interpretation often requires examination of a statute‘s structural context).

At ¶ 19-20.

Because the code contains provisions that specifically govern officer indemnification, we cannot presume that all the provisions governing director indemnification apply to officers as well.

At ¶ 21.

The district court ordered ClearOne to indemnify Strohm under sections 16-10a-903 and -907—not under section 902. Under section 907, an officer is entitled to mandatory indemnification only to the extent that a director is entitled to indemnification under 903. Id. And section 903 requires a corporation to indemnify a director who successfully defended himself in a proceeding where he was a party to the action because he was/is a director of the corporation. See id. § 16-10a-903. Thus, an officer is entitled to mandatory indemnification when he successfully defends himself in a proceeding where he was a party because he was/is an officer of a corporation. See id § 16-10a-907(1).

At ¶ 22.

Because Strohm successfully defended seven of the eight charges brought against her in her capacity as an of-ficer of ClearOne, she is entitled to indemnification from ClearOne under Utah Code sections 16-10a-903 and -907 for the reasonable expenses she incurred in doing so. We accordingly af-firm the district court‘s ruling on statutory indemnification.

At ¶ 24.

It is true that Utah Code section 16-10a-907 allows a corporation to limit its duty to indemnify its officers. But, by the terms of that statute, a corporation must place such limitation in its articles of incorporation. Id. Nowhere does section 907 allow a corporation to place limitations on indemnification in its bylaws. Because ―articles of incorporation‖ is unambiguous and on its face does not encompass bylaws, ClearOne‘s attempt to limit indemnification in its bylaws is of no consequence under the controlling stat-ute in this case. We refuse to dismiss the statutory terminology as insignificant. Bylaws are not articles of incorporation, and a statute contemplating the latter is not satisfied by the former.

At  26.

The Court rejects ClearOne’s argument that section 902 “establishes a Utah public policy prohibiting the use of corporate funds unless the corporate director or officer has satisfied the requisite standard of conduct.”

At ¶¶ 29-32.

Contractual Indemnification

The Court interprets the terms of the contractual agreements and holds that “the engagement letters unambiguously required ClearOne to indemnify Strohm for her criminal defense . . . .”

At ¶¶ 33-39.

In its ruling and order dated January 24, 2011, the district court held that “from the date of [the perjury] jury verdict ClearOne shall not be held liable . . . to pay [Strohm‘s] fees and expenses in the criminal case post-February 27, 2009, all of which must be attributed to the perjury count.” Based on this language, it appears that the district court assumed that Strohm could not recover defense fees related to charges for which she was convicted. This would have been true if Strohm‘s—and Dorsey‘s—claims were limited to statutory indemnification. The statute under which Strohm qualifies for indemnification states that “a corporation shall indemnify a director [or, by operation of subsection 907, an officer] who was successful, on the merits or otherwise, in the defense of any proceeding, or in the defense of any claim . . . against reasonable expenses incurred by him in connection with the proceeding or claim with respect to which he has been successful.” UTAH CODE § 16-10a-903 (emphasis added). Because Strohm was convicted of one count of perjury, this statute would operate to save ClearOne from indemnifying her for fees related to that charge.

¶42 But the district court did not limit Strohm and Dorsey‘s indemnification right to statutory indemnification. Rather, it held that the engagement letters “provid[ed] an alternative basis to require [ClearOne] to pay [Strohm‘s] reasonable legal fees incurred in her defense of federal criminal proceedings . . . or to reimburse her for fees paid to her counsel and co-plaintiff.” So, Strohm and Dorsey can require indemnification for the perjury charge if the letter agreements contemplated that ClearOne would indemnify

Strohm for fees related even to unsuccessfully defended charges. We read the letters that way and accordingly reverse.

At ¶¶ 41-42.

Termination of Engagement Agreement

The Court interprets that Engagement Agreement and holds that it did not allow ClearOne to unilaterally terminate the attorney-client relationship.  Rather, it required both ClearOne and Strohm to request termination of the relationship.

At ¶¶ 45-49.

Reasonableness of the Attorney Fees

 The Court reviews ClearOne’s challenges to the district court’s determination that the attorney fees awarded were reasonable.  The Court holds that the district court’s finding was not an abuse of discretion.

At ¶¶ 50-63.

Inclusion of Interest on Unpaid Fees

ClearOne argues that the engagement letter with Dorsey, the law firm representing Strohm, did not contain a provision allowing Dorsey to change 18 percent interest on unpaid fees.  The Court reviews the engagement letter and finds that unambiguously incorporates a previous engagement letter’s interest rate and collection fee provisions.

At ¶¶ 64-68.

Reasonableness of the Interest Rate on Unpaid Fees

The Court rejects ClearOne’s argument that the interest rate changed on unpaid fees is unreasonable.  It specifically notes that the higher standard regarding the reasonableness of an attorney fee imposed by the rules of professional conduct do not apply to interest on unpaid fees, stating: “we fail to see how a rule that on its face sets standards for fees has any impact on interest that accrues on un-paid fees. Interest charged after a lawyer has assessed a fee does not become part of the fee itself. “

At ¶¶ 69-75.

ClearOne must offer more than its bare assertion of unreasonableness to convince us to override the already-determined intentions of the parties to a contract. At base, ClearOne‘s position is simply that it shouldn‘t have to pay 18 percent interest because that rate is high. But it is not enough to assail a contract term on the grounds that it seems unfavorable to your interests. And if ClearOne thought that 18 percent interest was truly outside the bounds of acceptable rates—unconscionable as a matter of public policy—it was obligated to present expert testimony and/or established caselaw to that effect. It offered neither.

At ¶ 70.

Enforceability of the Collection Fee Provision

ClearOne . . . challenges the collection fee provision, arguing that the district court ran afoul of state public policy when it allowed Dorsey to collect attorney fees on its own engagement agreement. Specifically, ClearOne contends that our decision in Jones, Waldo, Holbrook & McDonough v. Dawson, 923 P.2d 1366, 1374 (Utah 1996), articulates a public policy basis for disallowing pro se lawyer-litigants from recovering their own attorney fees. Unlike the majority, I disagree and would hold that Jones, Waldo applies only in situations involving a true pro se lawyer-litigant. Because Dorsey is not such a litigant, Jones, Waldo is inapplicable, as the district court correctly concluded.

At ¶ 76.

I find Jones, Waldo distinguishable and inapplicable here. Unlike the law firm in Jones, Waldo, Dorsey is not purely a pro se litigant. See id. at 1369; see also Smith v. Batchelor, 832 P.2d 467, 473–74 (Utah 1992) (holding that a pro se attorney-litigant is not entitled to recover attorney fees for successful litigation). As a signatory to the engagement agreements, Strohm is “jointly and severally responsible” for fees owed to Dorsey, including those incurred in the collection action. Thus, Dorsey seeks in this case to vindicate not only its rights, but Strohm‘s as well.

¶80 This is an important difference in my view—one that Justice Parrish‘s separate opinion for the court dismisses too quickly. Dorsey has a client in this case. And the presence of a client interest largely alleviates the public policy and incentive concerns raised in Jones, Waldo. With Strohm on board, Dorsey cannot be seen to operate without client control because it is bound by rule and by agreement to represent Strohm professionally and ethically.

At ¶¶ 79-80.

That does not mean, however, that my preferred approach would give Dorsey and firms like it an unfettered and ungoverned right to collect these kinds of fees. In circumstances like the-se, this court has always entrusted the calculation of fees and assessment for reasonableness to the discretion of the district court.

At ¶ 84.

JUSTICE PARRISH, Opinion of the Court as to Section I; dissenting as to Section II:

Enforceability of the Collection Fee Provision

Even though this case does not involve a purely pro se lawyer-litigant, see supra ¶¶ 79–80, Strohm had no incentive to rein in Dorsey, who was therefore unconstrained by costs. Our prohibition on fee collection by lawyer-litigants was designed to protect against this precise type of behavior.

At ¶ 87.

Though the lead opinion correctly concludes that Dorsey has a client in the formal sense, by distinguishing between the purely pro se setting of Jones Waldo and the facts here, it eviscerates the underlying principles of Jones Waldo—protecting captive clients and curbing improper incentives. Particularly where, as here, the client has little or no incentive to act as a check on the behavior of her attorneys and there are few, if any, external incentives for the attorneys to control costs, the policies driving our holding in Jones Waldo are implicated.

At ¶ 91.

Though Dorsey technically has a client in Strohm, the public policy concerns motivating the general prohibition against the collection of attorney fees for pro se attorney-litigants are directly implicated by the facts here. ClearOne, as the entity underwriting the cost of Strohm‘s litigation, is the captive client that ―has no control over the amount of time the attorney will spend or how it will be spent.‖ Id. Dorsey had no incentive to limit the hours it expended or the costs it incurred to prosecute its collection action against ClearOne. Nor was Strohm motivated to limit Dorsey‘s expenditures in the collection action. Because ClearOne was jointly and severally liable under the Agreements for the underlying fees and was statutorily required to indemnify Strohm for her fees in both the underlying criminal and the subsequent collection action, Strohm had almost nothing to lose by support-ing Dorsey‘s attempt to prevail against ClearOne.

At ¶ 96.

Attorney’s Ethical Obligations Regarding Attorney Fees

I disagree with the lead opinion‘s analysis regarding the standard to be applied to attorneys entering into fee agreements. Supra ¶ 64. While I agree that the Dorsey letter incorporates the provisions of the Bendinger letter, the interest rate and collection provisions contained in the letters raise concerns about a lawyer‘s ethical role when drafting such engagement agreements and I believe the issue should not be resolved on summary judgment.

At ¶ 100.

In this case . . . the communication between Dorsey, Strohm, and ClearOne is anything but explicit.

For example, Dorsey‘s decision to bring in what the district court determined to be overpriced out-of-state counsel was not adequately communicated. See supra ¶ 54. Because the Dorsey letter did not explicitly contemplate the use of expensive outside counsel, neither Strohm nor ClearOne were on notice that Dorsey would hire such counsel and bill them at rates hundreds of dollars higher than those in the local area. Such exorbitant fees were in contrast to the language of the letter stating that Dorsey‘s “fees are ordinarily based on our usual and customary hourly rates [of approximately $255].” And though the Dorsey letter stated that “[o]ur hourly rates are subject to adjustment from time to time,” hiring high-priced out-of-state counsel surely cannot constitute an “adjustment” to Dorsey‘s typical hourly rates.

The lack of clarity in agreements such as those at issue here is entirely within the control of the attorneys drafting the agreements. And when lack of clarity leads to issues of notice or misplaced expectations, it is the clients, rather than the drafting attorneys, who are negatively impacted. I believe that attorneys should be held to a higher standard. They should not just strive for “great[] clarity” in their agreements, but should not be benefitted when they neglect to draft agreements that lack such clarity.

At ¶¶ 103-105.

Penunuri v. Sundance, 2013 UT 22, No. 20110565 (April 9,2013)

CHIEF JUSTICE DURRANT authored the opinion of the Court, in which ASSOCIATE CHIEF JUSTICE NEHRING, JUSTICE DURHAM, and JUSTICE PARRISH joined.

JUSTICE LEE filed a concurring opinion.

Justice Durrant,

Ms. Penunuri was injured while participating in a guided horseback ride near Sundance Resort. Before the ride, she signed a release (Waiver), in which she waived her right to sue Defendants

(collectively, Sundance) for injuries caused by Sundance’s ordinary negligence. In this appeal, Ms. Penunuri asks us to find that the Waiver is unenforceable under the Limitations on Liability for Equine and Livestock Activities Act (Equine Act)1 and that it violates the public policy expressed in the Equine Act.

We first consider whether the Waiver is unenforceable under the Equine Act. We conclude that the Equine Act establishes no public policy that invalidates preinjury releases for ordinary negligence. Second, we consider whether the Equine Act is sufficiently similar to Utah’s Inherent Risks of Skiing Act (Skiing Act) such that the “public policy bargain” we inferred from the language of the Skiing Act in Rothstein v. Snowbird Corp.  similarly invalidates preinjury releases under the Equine Act. Because the Equine Act lacks the discussion of public policy contained in the Skiing Act, we decline to infer that the Equine Act was the result of a public policy bargain. Accordingly, we conclude that the Waiver is enforceable and does not violate public policy.

At ¶¶ 1-2.

The Equine Act

Section 202 of the Equine Act provides that equine activity sponsors9 are not liable for injuries caused by the “inherent risks” associated with equine activities. “Inherent risk” is defined under the Equine Act as “those dangers or conditions which are an integral part of equine or livestock activities,” including, among other things, “the propensity of the animal to behave in ways that may result in injury” and “the unpredictability of the animal’s reaction to outside

stimulation.”

But section 202 does not completely eliminate an equine sponsor’s liability. In relevant part, section 202 provides as follows:

(2) An equine activity sponsor, equine professional, livestock activity sponsor, or livestock professional is not liable for an injury to or the death of a participant due to the inherent risks associated with these activities, unless the sponsor or professional:

(a)(i) provided the equipment or tack;

(ii) the equipment or tack caused the injury; and

(iii) the equipment failure was due to the sponsor’s

or professional’s negligence;

(b) failed to make reasonable efforts to determine whether the equine or livestock could behave in a manner consistent with the activity with the participant;

(c) owns, leases, rents, or is in legal possession and control of land or facilities upon which the participant sustained injuries because of a dangerous condition which was known to or should have been known to the sponsor or professional and for which warning signs have not been conspicuously posted;

(d)(i) commits an act or omission that constitutes negligence, gross negligence, or willful or wanton disregard for the safety of the participant; and

(ii) that act or omission causes the injury; or 

(e) intentionally injures or causes the injury to the participant.

While section 202 eliminates liability for the inherent risks of equine activities, section 203 requires sponsors to provide notice to participants that the sponsor is not liable for those risks. Section 203 requires that the “[n]otice shall be provided” either by “posting a sign in a prominent location within the area being used for the activity” or by “providing a document or release for the participant, or the participant’s legal guardian if the participant is a minor, to sign.”

At ¶¶ 9-11.

The Equine Act Does NOT Invalidate Preinjury Releases of Liability for Ordinary Negligence

[Petitioner] asserts that by protecting equine activity sponsors from liability arising out of the inherent risks associated with equine activities, the Legislature impliedly intended that they remain liable for all other claims.

At ¶ 13.

[T]he fact that the Equine Statute does not eliminate a sponsor’s liability for negligence does not mean that the Legislature intended to invalidate preinjury waivers for ordinary negligence. In other words, “[n]owhere does the text suggest that [equine sponsors] may not contractually further limit their liability for risks that are not inherent” to equine activities.

At ¶ 18.

Petitioner's Public Policy Argument

Ms. Penunuri argues that the Waiver is unenforceable as a violation of public policy. Specifically, she argues that the Equine Act was modeled after—and enacted for the same purpose as—the Skiing Act.  Relying on Rothstein v. Snowbird Corp., in which we invalidated a preinjury release as a violation of the public policy expressed in the Skiing Act, Ms. Penunuri argues that preinjury releases are similarly unenforceable under the Equine Act.

At ¶ 23.

In this case, the Equine Act is silent regarding public policy. Indeed, neither “public policy” nor any similar phrase appears in any section of the Act. Accordingly, because a public policy is not “deducible . . . from constitutional or statutory provisions,” we may infer a public policy in the Equine Act “if at all, only with the utmost circumspection.” But unlike the Skiing Act, the Equine Act does not explain the motivation behind the Legislature’s decision to eliminate liability for inherent risks for equine activities. Further, the Equine Act contains no statement regarding the importance of equine activities on the tourism industry or the difficulty equine sponsors face in purchasing insurance at affordable rates.

Thus, we cannot conclude that the “central purpose” of the Equine Act was to permit equine sponsors “to purchase insurance at affordable rates.” And as discussed above, it was that “central purpose” of the Skiing Act, as expressed by the Legislature, that led us to infer that the Legislature had struck a “public policy bargain” when it eliminated liability for the inherent risks of skiing. But there is not a similar expression of purpose in the Equine Act, and we “resist the temptation to add language or meaning to the Act where no hint of it exists in the text.” We cannot infer that, by removing liability for the inherent risks of equine activities, the Legislature intended that equine sponsors be precluded from escaping liability for their negligent acts. We therefore conclude that preinjury waivers for ordinary negligence do not violate public policy under the Equine Act.

At ¶¶ 32-33.

Justice Lee, concurring,

I write separately only to note my disagreement with Rothstein v. Snowbird Corp., 2007 UT 96, 175 P.3d 560, which the majority restates and then distinguishes. I see no logical or legal basis for Rothstein’s conclusion that enforcement of a ski resort’s release waiving liability for negligence “breached [the] public policy bargain” struck by the Inherent Risks of Skiing Act, UTAH CODE §§ 78B-4-401 to -404. Rothstein, 2007 UT 96, ¶ 16. Even if the “central purpose” of that statute was to “permit ski area operators to purchase insurance at affordable rates,” it could hardly follow that “the Legislature [thereby] authoritatively” renounced the enforceability of written waivers of liability for negligence. Id. ¶¶ 15–16. Enforcement of such releases could only further advance the stated goal—making insurance even more affordable. I would therefore repudiate Rothstein instead of distinguishing it in a manner that tends to reinforce it.

At ¶ 35.