Attorney Retainer Fees | Supreme Court Ruling That Paying an Organization's Representative's Personal Litigation Costs from the Organization's Funds Does Not Constitute Embezzlement When Business Relevance Is Recognized

The key issues in this case may be summarized as follows.

• The scope within which attorney retainer fees may be paid from an organization's funds
• The standard for determining the relevance between a representative's or officer's personal case and the organization's business
• Whether the intent of unlawful acquisition is recognized in occupational embezzlement

In particular, the distinction between a personal case and a business-related case is crucial, and this case is a leading precedent that set out that standard.

The Supreme Court made the basic principle clear.

The attorney retainer fees that may be paid as an organization's expense are, in principle, limited to cases in which the organization itself is a party to the litigation.

In other words, attorney retainer fees for civil or criminal cases in which the representative personally is a party may not, in principle, be paid as the organization's expense.

The court found, however, that payment is permitted by way of exception in the following cases.

• Where the substantive interest lies with the organization
• Where the representative has become a party as a matter of legal form
• A dispute arising in the course of the representative's performance of duties
• Where conducting the litigation is necessary for the organization's interest

In other words, where a case is a personal case in form but an organization's case in substance, the attorney retainer fees may be paid as the organization's expense.

The Supreme Court determined that the defendants' conduct was legitimate, taking the following circumstances together into account.

• The case arose in the course of the association's takeover of operations rather than for personal benefit
• The association's board of directors resolved to execute the litigation costs from the budget
• The internal regulations provided a structure of reimbursement liability in the event of a conviction
• There was past precedent of the organization bearing similar costs
• Payment was made after a review of legality through consultation with a large law firm

Taking these points together, the court determined that it was difficult to find that, in paying the attorney retainer fees, the defendants had any intent to embezzle the organization's funds for their own benefit (intent of unlawful acquisition).

Ultimately, the Supreme Court found that the crime of occupational embezzlement was not established, for the following reasons, and upheld the judgment of acquittal.

• The payment of attorney retainer fees was recognized as business-relevant
• A necessity for the organization's interest existed
• It was difficult to find the intent of unlawful acquisition

To prevent disputes related to attorney retainer fees, companies and organizations should review the following points.

• Clarify business relevance: document whether the case is directly related to the performance of duties
• Secure a board resolution: establish legitimacy through a prior or subsequent resolution
• Refine cost-payment regulations: establish standards for paying litigation costs and rules for reimbursement
• Design a reimbursement structure: clarify the structure for recovery in the event of a conviction
• Secure legal advice: obtain an opinion from outside counsel before payment
• Set the scope of payment: a defined scope is needed rather than unlimited support

This judgment set out the standard that paying attorney retainer fees from an organization's funds is not immediately assessed as embezzlement, but must be determined according to business relevance and whether the organization's interest is served.

In particular, it carries great significance for corporate and association practice in that, even where a case is a personal case in form, the organization may bear the costs if the dispute substantively arose in the course of carrying out the organization's business.

Such a determination, however, depends on highly specific circumstances, so it is important to manage the risk in advance by refining internal regulations and conducting a legal review.

Daeryun Law Firm LLP provides practice-oriented advice across the entire process on a one-stop basis, from analyzing the risk of occupational embezzlement related to attorney retainer fees, designing internal regulations, and refining the board's decision-making structure, to responding to investigations and conducting criminal litigation.

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