Morrison Mahoney Partner Steve Bolotin obtained a judgment in federal court on an indemnification claim for payment of legal and professional fees in excess of $550,000. The ruling is significant as it sets forth what fees may be awarded under an indemnity agreement. At issue was the enforceability of a provision in an accountant’s engagement agreement which provided that the accountant would be indemnified for reasonable costs and legal fees incurred in defending any action arising from its services unless they were the result of gross negligence or willful misconduct. The accountant was sued by its client and its sole shareholder for supposedly providing incorrect advice that certain monies taken by the shareholder needed to be classified as income.

On summary judgment, the court found that the suit against the accountant was frivolous and that the accountant had given the correct advice, a ruling which was affirmed on appeal. Thereafter, Steve sought for the accountant recovery from its client of reasonable legal fees and the value of its own time in defending the suit against it. The client refused, resulting in a separate lawsuit by the accountant against the client. The court again granted summary judgment for the accountant and the client objected to the amounts claimed. The client argued first argued that there should be no award at all as the suit against the accountant was by the client itself. Alternatively, the client argued that the accountant should not be able to recover for its own time, that it should not be awarded attorney’s fees which were paid for by insurance, and should only be awarded fees at the insurer rate. The court rejected all of these arguments, holding that given the language of the indemnity provision and the applicable law, the award of the accountant’s time was called for, the award of attorney’s fees is not precluded by the presence of insurance, and the amount of the fees is the reasonable value of the services, not what someone was willing to pay under specified circumstances.

This was not only a very significant win for the client and the insurer, but the victory has been circulated in CPA circles.