The Outer Limits of LLC Indemnification: Michael Cohen v Trump Organization
December 06, 2021
Michael D. Cohen, former personal attorney and self-described “fixer” for Donald J. Trump, was ubiquitous in the national news throughout much of Trump’s administration as President of the United States. Cohen’s estrangement from Trump dominated the news cycle for years. He once publicly said he would “take a bullet” for Trump, but eventually pleaded guilty to several federal crimes and cooperated with multiple investigations into various activities surrounding Trump’s presidential campaign and administration.
A less publicized aspect of Cohen’s relationship with Trump was that he was also an employee – and according to Cohen, Executive Vice President and Special Counsel – of the Trump Organization LLC (“Trump Organization” or the “Company”).
As we’ve written often (you can read some articles on the subject here, here, and here), under certain circumstances, managers, members, officers, directors, and even ordinary employees of New York business entities can potentially recover advancement or indemnification of legal fees incurred in defense of lawsuits brought against them for actions taken for or on behalf of the business.
“Advancement” refers to a business funding a legal defense while the legal proceeding is underway. “Indemnification” refers to the business paying the defense (and any damage award) when the proceeding is concluded – including often a ratification of its prior advancement. The right to advancement and indemnity depends primarily on two things: the kind of entity involved (LLC, corporation, or partnership) and whether there is an applicable contract. For New York limited liability companies like the Trump Organization, Section 420 of the Limited Liability Company Law (the “LLC Law”) governs advancement and indemnification of legal fees, providing that the operating agreement “may” – but is not required – to provide its principals, agents, or any “other person” advancement or indemnification rights.
In March 2019, around the time Cohen’s legal problems were at their apogee, and just two months before he reported to federal prison, Cohen brought a lawsuit in Manhattan Supreme Court in his capacity as an employee and alleged officer of the Trump Organization for indemnification by the Company for millions of dollars of legal fees he incurred from a dizzying array of civil, administrative, and criminal lawsuits against him resulting from various activities he allegedly undertook on behalf of Trump. Cohen’s lawsuit culminated in a fascinating decision last week from Manhattan Commercial Division Justice Joel M. Cohen, Cohen v Trump Org. LLC, 2021 NY Slip Op 32281(U) [Sup Ct, NY County Nov. 12, 2021], exploring three limits New York law imposes upon the ability to recover LLC indemnification.
The Original Complaint and the Alleged Oral Agreement
When he filed his lawsuit, Cohen apparently did not know of the existence of a legal fee indemnification provision in the Trump Organization’s operating agreement.
Cohen’s original complaint alleged four legal claims based upon an alleged oral promise by the Trump Organization to pay his legal fees, including breach of oral contract, breach of implied covenant of good faith and fair dealing, declaratory judgment, and promissory estoppel. Cohen alleged that around May 2017, when he became the focus of numerous government investigations including of Special Counsel Robert S. Mueller, III into potential coordination during the 2016 presidential election between the Trump Campaign and the Russian government, Cohen hired the law firm McDermott Will & Emery LLP (“McDermott”). Cohen further alleged that the Trump Organization promised to pay his fees in July 2017, originally honored its agreement, funded his legal defense, and paid McDermott over $1.7 million on his behalf.
As alleged in the complaint, in April 2018, the Federal Bureau of Investigation raided Cohen’s law office, residence, and hotel room as part of a criminal investigation pending in the United States District Court for the Southern District of New York (the “SDNY”). The investigation later matured into a pair of full-blown federal criminal prosecutions (accusatory instruments available here and here), guilty pleas (plea allocations here and here), and convictions (final judgments here and here).
According to Cohen’s complaint, around June 2018, after he revealed he would cooperate with the government, the Trump Organization “ceased to pay McDermott’s invoices, without notice of justification,” as a result of which McDermott “ultimately withdrew from its representation” of Cohen, and left Cohen holding an unpaid legal tab of over $1 million. As Cohen’s legal problems continued to grow, he was forced to hire several other law firms, but the Trump Organization refused to pay his bills.
The Dismissal Motion
The Trump Organization moved pre-answer to dismiss Cohen’s complaint, arguing, among other things, that a provision of New York’s Statute of Frauds, Section 5-701 (a) (1) of the General Obligations Law, renders unenforceable any oral agreement that “[b]y its terms” cannot “be performed within one year from the making” of the alleged agreement. You can read the parties’ dismissal briefs here, here, and here.
In a written Decision and Order, the Court:
- Dismissed Cohen’s complaint in part as barred by the statute of frauds to the extent he sought indemnification of legal fees for “future matters,” which the Court described as any “open-ended obligation to pay Cohen’s legal bills for matters which did not yet exist at the time the agreement was reached”;
- Denied dismissal of Cohen’s complaint to the extent Cohen alleged an oral agreement to pay his fees for “pending matters,” which the Court defined as those which “existed at the time the parties formed their agreement in July 2017”;
- Rejected Cohen’s argument that he could rely upon the doctrine of partial performance to prove the alleged oral agreement based upon the Trump Organization’s initial payment of McDermott’s legal fees, noting that partial performance exception “applies only to the Statute of Frauds provision in § 5–703, and has not been extended to § 5–701” (quotations omitted); and
- Ruled that Cohen was entitled to discovery from the Trump Organization to ascertain whether a writing existed confirming the existence of the alleged oral agreement, noting that even “[e]mail communications can satisfy the ‘writing’ requirement” of the statute of frauds.
The Amended Complaint and Discovery of the Written Agreement
After the Court denied dismissal, discovery ensued, in which Cohen apparently learned for the first time of the indemnification agreement in the Trump Organization’s Operating Agreement.
Following a lengthy oral argument, and pursuant to a short Decision and Order, Cohen obtained the Court’s permission to file an amended complaint, changing his principal theory of the case to breach of a written agreement supplemented by three separate oral agreements. In his amended complaint, Cohen alleged that, post-filing of his lawsuit, the Trump Organization agreed to pay certain additional legal fees, but continued to refuse payment for nine distinct legal matters scheduled on pages 19-20 of his pleading, alleging that his damages had now ballooned into the “millions of dollars.”
The exceedingly broad indemnification provision – quoted in full in paragraph 27 of the amended complaint – provided:
Subject to the limitations . . . in the LLCL, each person . . . who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative . . . , or any inquiry or investigation that could lead to a Proceeding, by reason of the fact that he is the Member, or he, she or it was or is the legal representative of or a manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of the Company or of the Member, shall be indemnified by the Company against judgments, penalties . . ., fines, settlements, and reasonable costs and expenses (including, without limitation, attorneys’ fees) actually incurred . . . in connection with a Proceeding . . . .
The operating agreement imposed three limits upon the right to potential indemnification:
- The Indemnified Person “acted in good faith and in a manner he, she, or it reasonably believed to be in, or not opposed to, the best interest of the Company”;
- The Indemnified Person “with respect to any criminal action or proceeding, had no reasonable cause to believe his, her or its conduct was unlawful”; and
- The Indemnified Person’s conduct “did not constitute gross negligence or willful or wanton misconduct.”
The indemnification provision included language tracking the language of Section 722 (b) of the Business Corporation Law – but legislatively omitted from the much-later-enacted LLC Law § 420 – purporting to allow potential indemnification of legal fees even after “conviction” or entry of a “plea of nolo contendere” to a crime:
The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the Indemnified Person did not act in good faith and in a manner which he, she, or it reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that the Indemnified Person had reasonable cause to believe that his, her or its conduct was unlawful.
The Summary Judgment Motion
The Trump Organization moved for summary judgment dismissing Cohen’s amended complaint, advancing several defenses to enforcement of any alleged legal fee indemnification agreement (whether written or oral):
- Once Cohen pleaded guilty to dishonesty in federal court, LLC Law § 420 and case law including Bansbach v Zinn, 1 NY3d 1  and Pilipiak v Keyes, 286 AD2d 231 [1st Dept 2001] disqualified Cohen as a matter of public policy from recovering indemnification for any legal fees incurred in defense of the SDNY criminal investigation and prosecution or the Mueller investigation.
- Under cases like Tilden of New Jersey, Inc. v Regency Leasing Sys., Inc., 237 AD2d 431 [2d Dept 2007], Cohen was not sued “by reason of the fact” of his role at, or service for, the Trump Organization. Rather, when Cohen switched sides, allegedly converting from loyal defender of Trump and his business’s interests to cooperating with the federal government in hopes of a reduced criminal sentence, he was no longer “protecting corporate interests,” but “on the offensive, advancing personal interests.”
- Case law including Eujoy Realty Corp. v Van Wagner Comms., LLC, 22 NY3d 413  holds that a standard no-oral-modification provision, like one found in the Trump Organization’s operating agreement, prohibited any extrinsic or parol evidence of an alleged oral indemnity agreement regarding Cohen’s legal fees.
You can read the parties’ briefs (some portions are heavily redacted) here, here, and here.
The Summary Judgment Decision
In his Decision and Order, Justice Cohen wrote that “large swaths” of Cohen’s claims “have already been mooted by Defendant’s payment of a number of his outstanding legal bills during the course of this litigation.” In that sense Cohen’s lawsuit was a success. As to the remainder of Cohen’s lawsuit – seeking fees for (i) the SDNY criminal search warrants, (ii) the Mueller investigation, and (ii) the congressional investigations – the Court granted dismissal in full.
First, the Court ruled that Cohen “cannot, as a matter of law, seek indemnification for his legal expenses stemming from the search warrants executed as part of the criminal investigation against him,” nor for “legal fees for testimony before the Congressional committees that he later confessed was perjurious,” because LLC Law § 420 “does not permit a company to hold its employees harmless for criminal activity” (quotations omitted).
Second, the Court held that, as to fees incurred in connection with the Mueller investigation, the operating agreement “only compels Defendant to indemnify Plaintiff with regard to the business of the Trump Organization.” The Court ruled:
Plaintiff fails to tender evidence showing that his involvement in the Mueller Investigation relates directly to his capacity as a Trump Organization employee, rather than his role more generally in the Trump orbit. It is not enough to argue that but for his employment at the Trump Organization, Plaintiff would not have known some of the information that made him a target – and, later, a cooperator – in the investigation. That reasoning sweeps too broadly, permitting corporate indemnification even where it is not tied to actions on behalf of the corporation.
Third, the Court dismissed Cohen’s claims based upon the existence of any alleged oral agreement as barred by the written contract because the “only evidence of the oral agreements proffered by Plaintiff is his own testimony.” Thus, the “terms of indemnification written down in the Operating Agreement must control, and Plaintiff may not rely on the alleged oral agreements to deviate from them.”
Cohen v Trump Org. may not appear to be a classic business breakup, but it has much to offer business divorce litigants and practitioners:
- It is the first reported New York decision to deny indemnification under LLC Law § 420 based upon the prospective indemnitee’s criminal conviction; and
- It is the first reported decision to deny LLC indemnification because the prospective indemnitee flunked the “by reason of the fact” standard for determining the existence of a sufficient “nexus” between the underlying claims and one’s duties for the business.
Last week, Cohen appealed his summary judgment loss, so perhaps an appellate panel will explain the law in this important area even further in the coming year.