In a recent opinion issued by the Delaware Court of Chancery, Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. Apr. 30, 2019), Vice Chancellor Montgomery-Reeves granted advancement to a member of a Delaware LLC.  In the case, plaintiff Freeman Family LLC (“Plaintiff”), a member of defendant Park Avenue Landing LLC (“LLC” or “Defendant”), requested advancement under the terms of the LLC’s operating agreement.  The operating agreement provides that members shall receive advancement if they are made party to an action by reason of their status as a member.  Plaintiff, a member of the LLC, is defending a federal lawsuit in New Jersey brought by the LLC’s managing member, relating to the Plaintiff’s call right under the operating agreement.

After Defendant answered the complaint, Plaintiff filed a motion for judgment on the pleadings pursuant to Court of Chancery Rule 12(c), and Defendant followed with its own cross-motion for judgment on the pleadings.  As a preliminary note, the Court observed that “[a]dvancement cases are particularly appropriate for resolution on a paper record, as they principally involve the question of whether claims pled in a complaint against a party . . . trigger a right to advancement under the terms of a corporate instrument.” Slip op. at 7 (citing DeLucca v. KKAT Mgmt., LLC, 2006 WL 224058, at *6 (Del. Ch. Jan. 23, 2006)).

Turning to the substance of the dispute, the Court noted that the cross-motions at issue center on the interpretation of the LLC’s operating agreement.  In addition, the Court also found that corporate case law, interpreting D&O’s rights to advancement from a Delaware corporation under Section 145 of the Delaware General Corporation Law (“DGCL”), applied to the Court’s analysis.  This is because the language in the advancement provision of the LLC’s operating agreement was substantially similar to the language of 8 Del. C. § 145.

Under Section 145 of the DGCL, claims for indemnification or advancement by a director or officer of a corporation must relate to lawsuits or proceedings “by reason of the fact” that such person was or is serving in such capacity.   The Court examined Delaware case law in the corporate context addressing whether suit is brought against a party “by reason of the fact” that the party was acting in an official capacity on behalf of the company.  Vice Chancellor Montgomery-Reeves noted that under Delaware case law, the “by reason of the fact” standard is broadly interpreted, “requir[ing] a causal relationship between the official capacity and the lawsuit.” Slip op. at 18.

In this action, the Court held that the underlying action implicated Plaintiff’s performance of its official duties under the operating agreement.  Accordingly, the Court granted Plaintiff’s motion for judgment on the pleadings granting Plaintiff advancement, and denied Defendant’s cross-motion.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.