Thursday, October 13, 2011

No Indemnification When Employee Did Not Act in Good Faith

Ridley v. Sullivan and the Obligation to Have Acted
in Good Faith in Order to Receive Indemnification

            Ridley was a registered representative of Hilliard-Lyons and as well worked as a portfolio manager at the Hilliard-Lyons Trust Company.  Ridley began dating Sullivan in 1996 and began managing her investments maintained at both Hilliard-Lyons and at the Trust Company.  They married in 1997.  Ridley and Sullivan were legally separated as early as January 2006, and in November 2004, Ridley filed for divorce.  Also in 2004, Ridley left Hilliard-Lyons.  At the time of that departure, Ridley and Hilliard-Lyons entered into an agreement providing, inter alia, he would, with respect to his actions before his departure, continue to be indemnified as if he were still an employee.  Curiously, even though they had been long separated and were in the midst of a divorce, Sullivan’s accounts were transferred from Hilliard-Lyons to Ridley’s new employer, Atlas Brown, although at some point not identified in the opinion they were transferred back to Hilliard-Lyons.
            During the separation and while Ridley was still an employee of Hilliard-Lyons, Sullivan filed an action with the NASD charging Ridley with a variety of charges including inappropriate investments and having withdrawn funds from her account for household expenses.  The NASD awarded Sullivan $100,000 “solely” from Hilliard-Lyons (this amount was paid) and $150,000 “solely” from Ridley (this amount was not paid).  
     Ridley sought to have the arbitration award against him vacated and as well sought a declaration that Hilliard-Lyons was required to provide indemnification.  The trial court determined that indemnification was not available, a decision affirmed by the Court of Appeals.  Ridley v. Sullivan, 2011 WL 1900156 (Ky. App.) (Not to be Published).
Bad Faith and Acting Outside the Course of Employment
            Being compelled to somewhat read between the lines, both the trial court and the Court of Appeals determined that the arbitration panel’s award against Ridley, that decision having been described as an obligation for which he is “solely liable,” indicated a determination that Ridley acted outside his scope of employment.  That having been both raised as an affirmative defense by Hilliard-Lyons, and this point having been within the competence of the arbitration panel and having been resolved against Ridley, the court was not going to allow the point to be re-litigated.  Having acted outside of his course of employment with Hilliard-Lyons, and indemnification being limited to activities done in the course of that employment, as a matter of contract law, indemnification was simply not available.  Although likely dicta, the court noted that the right to indemnification was, pursuant to the statutory limits of KRS § 271B.8-510, limited by the requirement that he have acted in good faith.  Mixing the deference to the arbitration panel’s findings of fact and the motion for summary judgment filed at trial court seeking to have that determination overruled, the Court of Appeals noted that:
The panel heard evidence that Ridley acted in bad faith and that his actions were not in Hilliard Lyon’s best interest, but instead were for improper personal gain.  Ridley failed to adequately refute such allegations.  Id. at *7 (footnote omitted).
            From there, the court cited the requirement that, in response to a motion for summary judgment, one cite affirmative evidenced demonstrating a genuine issue of fact. 
Timing the Claim for Indemnification
     Ridley, at the level of the trial court, to litigate the right to indemnification, asserting that until the arbitration panel found him liable the claim for indemnification was not ripe.  The trial court, again affirmed by the Court of Appeals, determined that the question should have been resolved in the underlying arbitration, it having been put in play by Hilliard-Lyons’ assertion that Ridley was acting outside his course of employment.

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