In the recent post-trial memorandum opinion of Dore v. Sweports, Ltd., C.A. No. 10513-VCL (Del. Ch. Jan. 31, 2017), Vice Chancellor Laster addressed indemnification for fees incurred in pursuing affirmative claims brought by an indemnified individual. The underlying lawsuits giving rise to this indemnification action were substantially premised on the attempts of a law firm to collect legal fees. A partner of the firm was also a director of the company, and had to defend himself when the company filed counterclaims against the plaintiffs that were unsuccessful. This Delaware indemnification action was commenced after the lawyers substantially succeeded in collecting their fees, and in defending counterclaims brought by the company in the underlying litigation.
Of significance, the Delaware Court of Chancery addressed situations in which an affirmative claim is indemnifiable, in comparison to claims for indemnification for fees incurred to defend a claim brought against an individual “by reason of the fact” that they are a director or officer.
Vice Chancellor Laster explained:
[I]t is conceivable that indemnification might be warranted for preemptive litigation involving personal claims that sought to negate a threatened breach of fiduciary duty claim . . . . indemnification might be available if disposition of the personal claims would determine definitively whether the plaintiffs had breached their fiduciary duties.
Here, because the plaintiffs asserted breach of contract claims not related to their conduct as fiduciaries of the company, the Court declined to indemnify such claims. The Court found that the contract claims were personal to the plaintiffs in their capacity as lenders, creditors and guarantors, claims which did not have a sufficient nexus to plaintiffs’ corporate duties.
However, the Court permitted indemnification of a portion of the fees incurred to defend against counterclaims that were successfully defended. Finally, because the plaintiffs did not substantially prevail in their claims seeking indemnification, the court granted a small percentage of the “fees for fees” incurred in connection with this indemnification action.
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 email@example.com.