Minn. Court of Appeals rules fraud plea precludes ex-CEO's indemnification claim.

Byline: Barbara L. Jones

In a significant ruling for white-collar crime cases, the Minnesota Court of Appeals last week ruled that a former CEO ordered to pay a $2 million fine after admitting an intentional fraud was not entitled to be indemnity from his corporation.

Because undisputed evidence indicated that the ex-CEO's intent was fraudulent, he could not have acted in good faith and therefore was not entitled to indemnification under Minn. Stat. sec. 302A.521, subd. 2 (a), said the court in an opinion written by Chief Judge Edward Toussaint Jr.

The opinion reverses a Hennepin County District Court judge who denied the company's motion for summary judgment, submitted the issue to a jury and then adopted the jury's findings that the ex-CEO should be reimbursed and awarded attorney fees.

"Because both the undisputed evidence of [the ex-CEO's] sworn admission that he acted with fraudulent intent and [the ex-CEO's] conviction conclusively establish that he did not act in good faith and because good faith is an essential element of an indemnification claim, [his] indemnification claims fail as a matter of law," wrote Toussaint.

The case is important because it is the first time a Minnesota court has ruled that intentional fraud is bad faith as a matter of law, according to Minneapolis attorney David Potter, who represented the corporation.

"Pleading guilty [to a crime] isn't enough -- it has to be [a crime involving] intentional fraud," said Potter. "But the case certainly means defendants have to have their eyes wide open [before entering a plea]."