MD high court weighs director indemnification rights

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The Maryland Supreme Court heard arguments Tuesday over whether an employee is entitled to indemnification when there is no nexus between the employee’s wrongful conduct and use of corporate powers bestowed on him as an officer or director.

Hyperheal Hyperbarics, a corporation providing hyperbaric oxygen therapy to Maryland patients, appealed to the high court after the Maryland Appellate Court found the company’s former director should have been indemnified for the expenses he incurred in successfully defending a fraud suit against the company.

Donald Walsh, counsel for Hyperheal Hyperbarics, argued Tuesday that Eric Shapiro — the former director, majority shareholder, corporate officer and employee of Hyperheal Hyperbarics — went beyond the scope of his employment when he provided unauthorized medical services to a patient. As such, Walsh argued Shapiro should not be indemnified.

“The reasons why we pursued him was because of his actions, not as a director, not as an officer of the corporation,” Walsh said during oral argument. “In fact, he didn’t use any of his powers that he has as director … in order to provide the medical services that he did in this case.”

Walsh contended that all of Shapiro’s actions were undertaken as an employee, not as a director and officer of the company.

During argument, Justice Peter Killough asked Walsh about when indemnification applies.

“Shouldn’t indemnification be based on who you are in the [organization] chart, regardless of what you were doing at any particular time for that organization?” Killough asked.

Walsh answered in the negative.

“His underlying wrongful conduct was not something he did to the board, not something he did as an officer; it was because he provided medical services that he never should have,” Walsh said of Shapiro treating a patient of Hyperheal Hyperbarics even though the patient did not have a prescription for hyperbaric oxygen therapy.

Jan Berlage, counsel for Shapiro, said the case deals with mandatory indemnification, not permissive indemnification.

“The question is not whether the individual was doing a particular task, but whether he or she was acting in service of the corporation,” Berlage said. “Moreover, this inquiry is to be made without regards to the individual’s motivation for engaging in that conduct.”

Berlage argued the case should have been decided on summary judgment, where Shapiro was an officer and director during the time alleged.

Under Maryland Corporations and Associations § 2-418, a corporation may indemnify any director who is made a party to any proceeding by reason of service in that capacity, with certain exceptions, including if the director received an improper personal benefit or had reasonable cause to believe the act was unlawful.

Berlage said that although Maryland has not addressed the issue of mandatory indemnification, the high court now has the opportunity to interpret the statute so that other directors and officers can have reassurance that their corporation will indemnify them if they prevail against false allegations.

Justice Steven Gould asked Berlage if there could be a situation where an officer was able to engage in a scheme because of the powers the individual enjoyed as an officer of the corporation, in comparison to a regular employee not using an officer’s powers.

Berlage said there is no distinction because the analysis is whether the individual was a director at the time and whether they were in service of the company.

“When it comes to mandatory [indemnification], it doesn’t matter what the allegation is,” Berlage said. “If they’re successful, they get reimbursed as long as it’s related to the company.”

On rebuttal, Walsh said Shapiro sought indemnification solely because he was a director.

“Mr. Shapiro’s actions, in ultimately providing medical care that he wasn’t authorized to do … was not in his official capacity as a director,” Walsh said. “Directors can’t put people in hyperbaric chambers. Directors can’t write up all of the plan care that went in for this particular patient.”