In our litigious society, one of the important considerations for a business person serving as an officer or director of a corporation is the ability to be indemnified when the business person is sued in his or her capacity as officer or director. For example, the Illinois Business Corporation Act, like other state corporate laws, specifically permits a business corporation to indemnify an officer or director from costs incurred, including attorneys' fees. Many business corporations provide for indemnification to the full extent permitted by law.
But what about a limited liability company? The Illinois LLC law, like that of other states, is designed to be flexible and, therefore, has less specific provisions than the business corporation act. Rather, the administration and operation of an LLC are left to the Operating Agreement of the LLC. In Downs v. Rosenthal Collins Group, LLC (Ill. App., 1st Dist, 3rd Div, No. 1-08-036), the Illinois Court of Appeals had to determine if an LLC's operating agreement included indemnification for attorneys' fees. In Downs, the plaintiff was a member and CEO of an LLC and was sued in his capacity as member and CEO. He was successful in defending the suit, which was dismissed. He then sought recovery of his attorneys' fees from the LLC based on the following language in the Operating Agreement: "The [LLC] shall indemnify each Member for any act performed by such Member with respect to [LLC] matters permitted by this Agreement and/or Majority Approval. . ." The court held that the indemnification provision did not cover attorneys' fees, because attorneys' fees were not specifically mentioned. The disappointed, and poorer plaintiff, was left to pay his own legal fees in the suit.
This decision has surprised many Illinois practitioners. It is likely that the drafter of the indemnification provision intended to cover attorneys' fees. But the Illinois court took a narrower view. One lesson to be learned is the obvious one that, if attorneys' fees are to be included within the indemnification, they should be specifically mentioned. The broader lesson relates to LLC's in general. LLC's have become the most popular form of business entity in recent years. While the LLC law provides great flexibility, it also leaves gaps for the LLC to fill in within the language of the Operating Agreement. So drafting an Operating Agreement, and anticipating all of the events that could fall within the gaps, can be a very tricky proposition.