It’s A Wonderful Life…Assuming George Bailey and Uncle Billy Can Get The Legal Bills Paid

“Where’s that money, you silly, stupid old fool? Where's that money? Do you realize what this means? It means bankruptcy and scandal and prison! That’s what it means! One of us is going to jail... well, it’s not gonna be me!”

Who doesn’t remember those words from It’s A Wonderful Life, Frank Capra’s classic 1946 movie that gives small-town building-and-loan president George Bailey (Jimmy Stewart) the chance to see what the world would have been like if he had never been born.  Throw in an angel trying to earn his wings and great performances by Lionel Barrymore and Donna Reed, soak it in so much populism J. Edgar Hoover called it communist, and you have a wonderful holiday tradition (despite the movie’s unique history in copyright law). 

Anyone who has seen this movie remembers the ending.  After Bailey’s forgetful Uncle Billy (Thomas Mitchell) loses an $8,000 bank deposit, Bailey is threatened with arrest and his small building-and-loan is out of cash and facing collapse (their search for the missing money leads George to say the lines at the top of this piece – and for an explanation of why a building-and-loan needed to deposit its money in the bank in the first place, see here).  George’s goodwill with his customers and friends, however, leads them all to answer his wife’s call for a ground-up bailout of the bank.  Impressed, the bank examiner even puts a few of his own dollars into the bailout fund, and the sheriff rips up the warrant that Old Man Potter had sworn out for his arrest. 

Over the years, of course, there have been some other suggested endings – including this one from Saturday Night Live. 

I’d like to hypothesize another alternative ending, and use it to answer some questions that executives should consider.  Even if they don’t run their business using strings tied on their fingers. 

Imagine for a minute that the townspeople and his friends didn’t respond so kindly to George Bailey’s predicament.  Maybe Bailey had been a bit stingy with his loans, and perhaps rich pal Wainwright wasn’t able to cable a large advance (accompanied by a hearty “Hee-haw and Merry Christmas”).  And let’s assume angel-trainee Clarence isn’t able to clean up the mess (this unique site looks at the hypothetical outcome).

What then?  George, and presumably Uncle Billy, would have been under arrest for bank fraud, at least, and would have had to mount a defense to the charges.  That means – in order to try to avoid “bankruptcy and scandal and [perhaps] prison” – lawyers.  Separate counsel for each of them would very likely be needed, and frankly put, that’s expensive.  The movie makes clear neither of these guys are awash in extra cash.  Without breaking into Mr. Martini’s jukebox, where do George and Uncle Billy get the money to pay for what will have to be a very vigorous defense? 

Their first resort should be their employer.  In theory, both could be indemnified, or have their legal fees advanced on their behalf, by the Bailey Building and Loan because they’re both (it appears) executive employees.  My colleague Ellen Marcus has laid out some of the basics of indemnification and advancement here and here. 

Both indemnification and advancement provide protection for officers and directors of companies, but they can have different sources.  Some rights of indemnification and advancement derive from state law, which will vary from state to state.  Often, however, companies will exceed the basic rights derived from state law and offer additional rights to their employees. There are, however, limits on how far these rights can go: as Ellen has pointed out, as a general matter, corporate indemnification and advancement can only be provided to an officer or director who acted in the best interests of the company. 

The two protections also differ in how they work.  Executives that are being indemnified by their company are, in most circumstances, being reimbursed – they spend the money to pay legal fees, and then the company pays them back.  On the other hand, advancement – as the name suggests – means that the company pays the executive’s lawyers directly.  Just a timing difference?  Perhaps, but it can have a big impact on cash flow for the executive in trouble. 

The takeaway for executives is this: the time to figure out if executives have rights of indemnification or advancement, and how those rights work, is before you’re only one step ahead of the sheriff of Bedford Falls and facing a prosecution for some form of corporate malfeasance.  Companies, too, should make sure that the way they offer their senior management such protection is up to date and in line with corporate goals and objectives.  The end of the year – or the beginning of the new one – is the perfect time to review these protections and make sure they’re adequate. 

Back to our hypothetical George Bailey and Uncle Billy.  Indemnification and advancement both assume that the Bailey Building and Loan is even financially capable of bailing out the Baileys.  George tells us, though, that the Bailey Building and Loan is broke, and that’s even before he finds out Uncle Billy has lost $8,000.   So, if the building-and-loan can’t help these two pay for their defense, where else can they turn for help?

The answer in Part Two.  Hint: it’s not Old Man Potter. 

• Indemnification and Advancement