Tuesday, January 2, 2007

Kreter v. HealthStar Communications, Inc. (Ct. of Special Appeals)

Decided January 2, 2007-Opinion by Judge Sally D. Adkins.

This case deals with the validity and enforceability of an indemnification agreement indemnifying an indemnitee against its own fraud. Under existing Maryland law, there is a presumption against enforcement of an agreement to indemnify a person against his own negligence unless the intent to do so is expressed in unequivocal terms (the "Presumption"). In this case, the Court, after examining the history and rationales for the Presumption, held that it was inapplicable to the indemnification agreement which is the subject of this decision.

The relevant facts are as follows: Kreter was an officer, director, and controlling stockholder of two closely-held corporations, and her husband was an officer, director, and minority stockholder of the corporations. Several months after Kreter and her husband separated, she fired him, and several months later she began negotiating the sale of all of the stock in the two corporations to HealthStar.

Kreter, her estranged husband, and several other minority stockholders ultimately approved the sale of the stock to HealthStar for $20,000,000, but unbeknownst to Kreter's husband and the other minority stockholders, Kreter had entered into a separate employment contract pursuant to which HealthStar agreed to pay Kreter an additional $1,000,000.

Foreseeing the possibility that Kreter's husband might sue, Kreter and HealthStar entered into an agreement pursuant to which Kreter agreed to indemnify HealthStar for any damages or costs, including defense costs, arising out of any such lawsuit.

Kreter's husband sued both Kreter and HealthStar for fraud, but his claim against Kreter was held to be barred under the doctrine of res judicata due to the judgment entered in their divorce. He ultimately prevailed in his claim against HealthStar, which then sought to recover its damages and attorney's fees from Kreter. When Kreter refused to honor her obligations under the indemnity agreement, HealthStar commenced an action seeking a declaratory judgment that the agreement was valid and enforceable.

The circuit court ruled that the agreement was valid and enforceable, and Kreter appealed.

In affirming the circuit court's decision, the Court of Special Appeals examined the history and rationale for the Presumption. One rationale for the Presumption is that it is designed to protect the "unwary and uninformed promissor." A second rationale is to avoid encouraging indemnitees to engage in negligent conduct.

The Court rejected the first rationale not only because Kreter was a sophisticated businessperson, but also because she was represented by counsel. The Court rejected the second rationale, because, unlike the typical exculpatory agreement which is designed to protect a party against its future wrongful conduct, the wrongful conduct had already occurred, therefore enforcement of the agreement would not tend to encourage wrongful conduct.

The full opinion is available in WordPerfect and PDF.

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