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A teleconference company is off the hook, at least for now, from paying the legal fees of a former chief executive who was sent to prison in June for securities fraud. The 10th U.S. Circuit Court of Appeals ruled on Monday that a trial judge erred in granting a preliminary injunction in favor of ClearOne Inc.’s former CEO, Frances Flood, who had an agreement with the Salt Lake City-based company to pay her legal fees. The appeals panel found that the agreement did not create an unconditional obligation for ClearOne to cover her fees and instead permitted the company to assert its own financial problems as a way to avoid payment. “The promise to advance was not unconditional, and the district court took those conditions out,” said Neil Capobianco, a partner in Seyfarth Shaw‘s New York office who represented ClearOne. Representing Flood were Max Wheeler and Rodney Parker, shareholders with Snow, Christensen & Martineau in Salt Lake City. They did not return phone calls for comment. Flood was sentenced to four years in prison for falsifying revenue of the corporations ClearOne Communications subsidiary, traded on the Nasdaq. She was convicted in 2009 of nine felony counts. Her co-defendant, former chief financial officer Susie Strohm, was convicted of one count of perjury and acquitted of seven other charges. The U.S. District Court for the District of Utah had required ClearOne to continue paying fees to Snow Christensen, pending the outcome of Flood’s lawsuit against ClearOne for the fees. ClearOne already had paid $1.8 million to defend Flood and Strohm, Capobianco said. Flood claimed an additional $625,000 in fees, some of which was placed in escrow, he said. Flood signed an indemnification contract with ClearOne in 2003. In exchange for ClearOne’s pledge to pay her legal bills, Flood agreed to resign from the company and forfeit about $675,000 in salary and another $3.8 million in stocks and options, according to court papers her attorneys filed. Following her indictment in 2007, disputes arose between Flood and ClearOne regarding some of her claimed expenses. The company eventually quit paying her bills, citing concern over its own liquidity at the time. At issue before the 10th Circuit was whether the lower court abused its discretion when it determined that the indemnification agreement was illusory because it allowed ClearOne to arbitrarily stop covering the fees. The appeals panel held that the agreement was not illusory and that it entitled ClearOne to withhold payment if it was acting in good faith. However, the court cautioned against reading too much into its decision. “None of this is to say that the implied covenant of good faith and fair dealing is a magic wand, that, once waved about, can always rescue a contractual term from being held illusory,” wrote Judge Neil Gorsuch. The court remanded the case to district court. Also on the appeals panel were judges Timothy Tymkovich and David Ebel.

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