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 cneff@foxrothschild.com.

In 2015, the Court of Chancery ruled upon the then novel issue under Delaware law as to what priority level advancement claims should be afforded in a receivership action.  Then Vice Chancellor Parsons held that claims for advancement are not entitled to administrative priority, and instead are considered to be pre-petition, non-priority unsecured claims.  For a link to a summary of the Court of Chancery decision, click here.  The Court of Chancery’s opinion can be found here: Andrikopolous v. Silicon Valley Innovation Company, LLC, C.A. No. 9899-VCP (Del. Ch. July 30, 2015).

On June 8, 2016, the Delaware Supreme Court, en banc, rendered an order affirming the Court of Chancery’s holding based upon the well-reasoned opinion issued by that Court.

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.

In the recent decision of James R. Thompson, et al. v. ORIX USA Corporation, et al., C.A. No. 11746-CB (Del. Ch. June 3, 2016), the Court of Chancery ruled on cross summary judgment motions in connection with an advancement action.  Notably, and consistent with the established practice in this jurisdiction, the Court granted fees on fees for the portion of the case upon which plaintiff prevailed.

See below links to review summaries of other advancement decisions as they pertain to fees on fees:

Advancement: “Fees on Fees” Do Not Accrue Until Required Undertaking Submitted

Chancery Grants Advancement in Tulum, Along with Fees on Fees

Advancement – Court Rejects Contractual Requirement that Fees on Fees be Paid Even if Claim is Unsuccessful

Court of Chancery Rejects Defenses to Advancement – Fees on Fees Granted

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.

In the recent bench ruling entered in Harrison v. Quivus Systems LLC, C.A. 12084-VCMR (April 7, 2016), Vice Chancellor Montgomery-Reeves ruled that discovery into the reasonableness of fees sought in an advancement case will be postponed until after the Court first determines that plaintiff has established a right to advancement.

This is an important ruling for any litigant to an advancement action in terms of the allowable scope of discovery prior to the Court’s determination that advancement is warranted.

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.

In a recent opinion by the Court of Chancery’s newest judicial officer, Vice Chancellor Slights, the Court considered the issue of when “fees on fees” begins to accrue in connection with an advancement proceeding.

In the decision of Wong v. USES Holding Corp., C.A. No. 11475-VCS (Del. Ch. April 5, 2016), Vice Chancellor Slights rejected a motion for reargument of a prior decision rendered by former Vice Chancellor Noble before his retirement.  (Wong v. USES Holding Corp., C.A. No. 11475-VCN (Del. Ch. Feb. 26, 2016)).  In the prior ruling, then Vice Chancellor Noble found that “fees on fees” did not accrue before such time that the plaintiff submitted an undertaking as required under Section 145 of the DGCL.

Generally, the Court will grant a plaintiff “fees on fees” in connection with a successful advancement suit.  However, that maxim is not without limitation.  In denying the motion for reargument, the Court found that no obligation existed for the corporation to advance fees prior to the submission of the required undertaking by the former officer.

The Court further distinguished the decision of Underbrink v. Warrior Energy Services Corp., C.A. No. 2982-VCP (Del. Ch. May 30, 2008).  In Underbrink, the Court granted “fees on fees” incurred prior to the delivery of the undertaking.  However, nothing in that decision suggested that the Court was asked to address whether the defendant was obligated to pay pre-undertaking fees on fees.

Vice Chancellor Slights found no fault with the prior decision issued by former Vice Chancellor Noble, and denied the motion for reargument.  Thus, plaintiff was not entitled to “fees on fees” incurred before the date on which the undertaking was submitted.

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.

In a prior post, we discussed the “by reason of the fact” requirement in Delaware advancement proceedings.  In that post, we addressed the decision of Lieberman v. Electrolytic Ozone, Inc., C.A. No. 10152-VCN (Del. Ch. Sept. 5, 2015) which qualified as a relatively uncommon finding that the claims for which advancement was sought did not qualify under the statutory “by reason of the fact” standard.

A recent Court of Chancery decision, Hyatt v. Al Jazeera America Holdings II, LLC, C.A. No. 11465-VCG (Del. Ch. Mar. 31, 2016) shed more light on this standard.  Vice Chancellor Glasscock found that the former directors seeking advancement were sued “by reason of the fact” that they were directors in connection with a lawsuit over a merger agreement escrow account.

The court held that advancement would be required when the acts alleged involved acts the former directors took in their capacity as directors, even if the underlying suit was against them as former owner representatives.  The Court focused on the acts that lead to potential liability that count, not the capacity in which defendant is being sued.

Citing various sources, Vice Chancellor Glasscock shed light on the “by reason of the fact” standard, stating that:

This Court has held that an action is brought “by reason of the fact” of a defendant’s position as an officer or director if a “nexus or causal connection” exists between the underlying proceedings and the defendant’s “official corporate capacity.”  The requisite “nexus or causal connection” exists if “corporate powers were used or necessary for the commission of the alleged misconduct,” and may be established “even if the cause of action does not specify a claim of breach of fiduciary duty owed to the corporation.”

Moreover, the court referred to Section 18-108 of the Delaware LLC Act as giving broad authority to LLCs to provide indemnification by contract. Specifically, the court in this case found that the parties “intended to import the strictures of Section 145” by using the same language in their agreement.

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.

The recent, pithy decision of Tulum Management USA LLC v. Casten, C.A. No. 11321-VCN (Del. Ch. Dec. 23, 2015) involved a request for advancement by plaintiff George Polk against RED Parent LLC (“RED Parent”).  A prior post discussing an earlier decision in the same case can be found here.

By its Operating Agreement, RED Parent agreed to:

indemnify each Manager for all costs, losses, liabilities and damages paid or incurred by such Person in connection with the business of [RED Parent] to the fullest extent provided or permitted by the [Delaware Limited Liability Company] Act and the other laws of the State of Delaware.

Polk seeks advancement for expenses incurred in the Illinois Action, a related litigation between Polk and RED Parent.  RED Parent argues that Polk was not sued in Illinois based on his status as a manager.  In that action, Polk is accused of “seek[ing] to conduct a valuation that is in contravention of the clear terms of the Operating Agreement.”  The Court disagreed with RED Parent, finding that the Operating Agreement only conditions advancement on actions “in connection with the business of [RED Parent],” and that Polk’s status as a defendant to that action stems from his efforts regarding the business of RED Parent.

The Illinois Action sought declaratory relief and not monetary damages. Thus, RED Parent argued that Polk has not suffered losses or damages, in part, because it does not seek to impose monetary liability through the Illinois Action.

The Court disagreed, finding that the legal fees incurred by Polk are fairly characterized as “liabilities”, and there is no reason to exclude such “liabilities” from the “liabilities” contemplated by Section 5.4 of the Operating Agreement.  The Court found that because Polk is burdened with liabilities, he is entitled to indemnification, and thus, advancement of “all expenses arising in connection with the defense of” the Illinois 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 cneff@foxrothschild.com.

In the recent decision of Tulum Management USA LLC v. Casten, C.A. No 11321-VCN (Del. Ch. Nov. 9, 2015), Vice Chancellor Noble declined a party’s request to stay a pending advancement case before the Delaware Court of Chancery.

In so doing, the Court provided that “in all but the most exceptional circumstances, claims under Section 145(k) for advancement of expenses should not be stayed or dismissed in favor of the prior pending foreign litigation that give[s] rise to them.”

To satisfy its burden in obtaining a stay of an advancement case, defendants “must present to the Court a particularly compelling explanation as to why [their] advancement case ought to be stayed” in favor of related pending litigation.  Having failed to do so here, the Court denied the motion to stay the advancement portion of the 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 cneff@foxrothschild.com.

Not uncommonly, a former director or officer of a Delaware corporation will bring a claim for advancement against the company to defend his or herself in a lawsuit arising “by reason of the fact” that he or she was or director of officer, under Section 145 of the DGCL.

Less commonly, however, is an advancement claim brought in order to affirmatively intervene in a case.  But that is precisely what occurred in the recent decision of In re Genelux Corporation, C.A. No. 10612-VCP (Del. Ch. Oct. 22, 2015).  There, the former CEO and Chairman of the Board intervened in a case in which the corporation was a defendant (but not the former CEO), where his actions were being challenged.

In upholding the former CEO’s claim for advancement, the Court viewed the intervention as the equivalent of a mandatory counterclaim, which prior Delaware cases have found eligible for advancement.  Notably, the court found that if the former executive had not intervened, he might otherwise be barred on collateral estoppel grounds from arguing that he had discharged his fiduciary duties properly.

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.

In the most recent advancement decision issued by the Court of Chancery, Charney v. American Apparel Inc., C.A. No. 11098-CB (Del. Ch. Sept. 11, 2015), the Court declined to grant advancement to Plaintiff, Dov Charney, who was a former director of the company at the time he sought advancement.

Below are a couple of key takeaways from this decision:

  • The Court interpreted the phrase “related to the fact” in the indemnification agreement at issue as analogous to “by reason of the fact” – language which is used under Section 145 of the Delaware General Corporation Law (“DGCL”) – “which requires a nexus or causal connection between the claims in the underlying proceeding and one’s official corporate capacity to obtain advancement.”
  • The Court also found that Charney was not entitled to advancement because the company’s corporate charter mandates advancement only for current directors or officers, which Carney was not at the time of the filing of the underlying lawsuit for which Charney sought advancement.

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.