Chancery Rejects Derivative Claim Against LLC

A recent Court of Chancery opinion is notable as a reminder that the same requirement of pre-suit demand futility in the corporate context is also required to be satisfied as a prerequisite to asserting a derivative claim in the LLC context. Dietrichson v. Knott, C.A. No. 11965-VCMR (Del. Ch. April 19, 2017).

Background: This matter involved two 50/50 members of an LLC.  One of those members filed claims alleging that an unauthorized salary was taken by the other member and that the other member misappropriated the proceeds of an asset sale.

Key Takeaways

The court explained that the claims regarding improper compensation and misappropriation of company assets were derivative in nature based on the criteria described in the Delaware Supreme Court’s Tooley decision, and that because pre-suit demand futility was not established, the claims were dismissed.  The court also referred to Section 18-1001 of the Delaware LLC Act and Chancery Rule 23.1 for the requirements of pre-suit demand applicable in the LLC context.

The court reasoned that the claims of excessive compensation and dissipation of company assets are inherently derivative, and the facts of this case did not allow them to qualify as “dual-natured.” Only in exceptional circumstances can a claim be both direct and derivative.

In addition to dismissing the claims for failure to satisfy the prerequisites of derivative claims, the court dismissed an unjust enrichment claim based on the well-known principle that when a complaint alleges an express, enforceable contract that controls the parties’ relationship, a claim for unjust enrichment will be dismissed.

Chancery Grants Section 220 Demand

The Court of Chancery issued an important decision a few days ago for those who need to understand the latest nuances of Delaware law involving DGCL Section 220.  Readers of these pages for the last 12 years have seen highlights of a plethora of rulings supporting the view that demands pursuant to Section 220 are not for the faint of heart.  Rumors of the death of Section 220, however, have been greatly exaggerated, in light of the ruling in Rodgers v. Cypress Semiconductor Corporation, C.A. No. 2017-0070-AGB (Del. Ch. April 17, 2017).

Background: A former CEO of the company involved in this case sought books and records to investigate allegedly excessive compensation paid to the executive chairman of the board, and also alleged that the chairman violated the Code of Business Conduct and Ethics of the company.  The company defended the claim based on the argument that the former CEO’s stated purpose was not the true purpose, and that the true purpose for the request was not proper.  The company also denied the Section 220 demand based on the argument that there were no claims for non-exculpated allegations.

Key Takeaways

The most noteworthy aspects of this opinion are the following:

·     The court explained that there remains a very high threshold to establish that the “true improper main purpose” of a demand is something other than the stated primary purpose.

·     The court recited the prerequisites for a demand under Section 220 such as having a proper purpose and having a credible basis for claims to support the purpose to investigate wrongdoing.  In this post-trial opinion, the court found the testimony of the claimant credible that his primary purpose was proper.  Those primary purposes included investigation of wrongdoing such as a conflict of interest in violation of the company’s Code of Business Conduct and Ethics, as well as a desire to communicate with other stockholders and attempt to persuade the board to make changes.

·     The court distinguished the decision of the Delaware Supreme Court in Southeastern Pennsylvania Transportation Authority v. AbbVie, highlighted on these pages.  Specifically, AbbVie stands for the position that when the sole purpose for a Section 220 demand is to investigate wrongdoing of an exculpated claim, a Section 220 demand will be denied.  By contrast, in this matter, derivative litigation to pursue claims of an exculpated nature were not the sole motivation to investigate wrongdoing.  The other proper purposes included communication with stockholders and evaluation of suitability of members of the board to continue to serve.

·     The court rejected the argument that the true purpose of the Section 220 demand in this matter was to pursue a personal vendetta and to assist in an ongoing proxy battle by the claimant.  The court cited to cases finding that it is a high hurdle to prevail on an argument that the primary purpose, contrary to the stated purpose of a claimant, is personal animosity or other improper motives.  See cases cited at footnotes 30 and 31.

·     The court described the importance of a confidentiality agreement to limit the use of the documents obtained, to minimize the risk that the data would be used for the purposes of a proxy contest, although application to the court could be made for seeking approval to use the information for other purposes in the future.

Chancery: Creditor Has No Standing to Sue LLC Derivatively

The Delaware Court of Chancery recently addressed the attempts of a creditor to sue the controlling members of an LLC for breach of fiduciary duty and related claims in connection with allegations that those members deceived the creditor into lending money on false pretenses.  In Trusa v. Nepo, C.A. No. 12071-VCMR (Del. Ch. April 13, 2017), the court determined that the creditor had no standing for such claims – – nor did a power of attorney provide a basis for standing.

Background: The creditor involved in this matter was verbally seduced into making an investment in the LLC and was made to believe that his investments would be secured.  One of the provisions in the loan documents was a power of attorney that allowed for certain default remedies.  After the LLC defaulted on the loans, the creditor learned of various dishonest dealings and misrepresentations regarding the status of the company and what the funds were used for.

Before the Chancery suit was filed, a complaint was filed in the Delaware Superior Court and a default judgment was entered.  This Chancery suit was brought claiming that the managing members breached their fiduciary duties.  The creditor also sought a dissolution of the LLC in addition to asserting fraud and related claims.

Key Legal Principles

The most noteworthy aspect of this decision is the court’s holding that a creditor has no standing to bring derivative claims on behalf of an LLC for breach of fiduciary duty, based primarily on Section 18-1002 of the Delaware LLC Act.  Together with Section 18-1001 of the Act, it remains unambiguous that only members and assignees can assert derivative claims on behalf of an LLC.  Prior opinions by Chancery and the Delaware Supreme Court endorsed the foregoing interpretation of the Act.  See CML V, LLC v. Bax (“Bax I”) 6 A.3d 238 Del. Ch. 2010) aff’d CML V, LLC v. Bax (“Bax II”), 28 A.3d 1037, 1043 (Del. 2011), highlighted on these pages.  See also In Re Carlisle Etcetera LLC, 114 A. 3d 592, 604 (Del. Ch. 2015) (explaining that although they are barred from derivative actions, creditors have adequate remedies at law to protect their interests such as liens on assets. This case also addresses equitable dissolution.)

The court also explained that the creditor’s power of attorney does not and cannot provide standing that is otherwise denied for derivative claims attempted by him.  The court observed that such a contrary argument ignores the fact that the power of attorney is expressly limited to pursuing remedies provided in the loan agreement.

No Standing for Dissolution Either

Regarding the dissolution claims, Section 18-802 of the Act limits a request for dissolution of an LLC to either a member or a manager.  The creditor in this case likewise failed to establish standing for his request for dissolution.  Section 18-203(a) of the Act provides 7 ways that a certificate of cancellation of an LLC may be filed.  The ability to file such a certificate did not help this creditor because only after dissolution and winding up of an LLC may a creditor seek appointment of a trustee or a receiver in connection with a prior dissolution.

Regarding the extreme remedy of “equitable dissolution,” the court found insufficient facts in the record to justify such an exercise of the court’s authority.

Fraud Claim Fails

The court emphasized the truism that: a simple breach of contract cannot be bootstrapped into a fraud claim.  For example, the court quoted from prior case law holding that: “a party’s failure to keep a promise does not prove the promise was false when made, and that the plaintiff did not adduce evidence showing that the defendant intended to renege as of the time it made the promise.”  See footnote 94 (citation omitted). 

The fraud claims also failed to satisfy the particularity requirements of Rule 9(b).

Material Omission

The court found that the claim that a material omission amounted to fraud was not adequately alleged for several reasons.  The court explained that in an arm’s length negotiation: “where no special relationship between the parties exists, a party has no affirmative duty to speak and is under no duty to disclose facts of which he knows the other is ignorant even if he further knows the other, if he knew of them, would regard them as material in determining his course of action in the transaction in question.”  See footnotes 96 and 97. 

The court further reasoned that a fraud claim cannot start from an omission in an arm’s length setting.  Rather, if a party chooses to speak then he cannot lie, and “once the party speaks, it also cannot do so partially or obliquely such that what the party conveys becomes misleading.”  See footnotes 98 and 99. 

Review Standard for Director Compensation Decisions

The important Chancery opinion styled In re Investors Bank Corp. Inc. Stockholder Litigation, Cons. C.A. No. 12327-VCS (Del. Ch. April 5, 2017), could serve as a roadmap for directors who want to know how to structure decisions they make on their own compensation based on stockholder ratification such that it will be subject to the deferential standard of the business judgment rule as opposed to the default standard of entire fairness that would generally apply to an inherently self-dealing transaction such as voting on one’s own compensation.  This 36-page decision is must reading for any director making a decision about their own compensation, and who seeks to have a deferential review standard applied if that decision is challenged.

Chancery Instructs on Best Practice for Motion to Compel and Need to be Forthcoming with Document Production

Alexandra D. Rogin, an Eckert Seamans associate, prepared this overview.

In a recent transcript ruling in the case styled Doctors Pathology Servs., PA v. Gerges, C.A. No. 11457-CB, transcript (Del. Ch. Feb, 15, 2017), Chancellor Bouchard provides additional guidance to attorneys seeking to file motions to compel discovery in the Delaware Court of Chancery.  This ruling should be considered in conjunction with the Court’s opinion last month in the In Re Oxbow case covered here, which discussed key litigation rules in connection with granting a motion to compel discovery responses.

Background: The plaintiff brought suit against a former employee and the employee’s new medical practice for tortious interference and misappropriation of trade secrets. The plaintiff filed a motion to compel and for sanctions regarding the defendants’ discovery responses.  Upon hearing oral argument, the Court detailed the proper content of a motion to compel and noted concerns over the failure to be upfront with document production.

Court’s Analysis: The Court explained that a discovery-related motion to compel should specifically identify the discovery requests at issue by number. In filing the motion with the Court, the moving party should also attach copies of the requests and the opposing party’s responses.  It is not proper to simply attach the parties’ meet and confer correspondence and ask the Court to determine exactly what the problems are without additional explanation.  Instead, the motion itself must identify the discovery requests at issue and explain the grounds for seeking the information.

Despite the Court’s concerns with the content of the motion at issue, Chancellor Bouchard did address the plaintiff’s complaint that documents expected to be in the defendants’ possession were produced by third parties, but not by the defendants. The Court explained that if true, the plaintiff’s allegations suggest that the defendants were not entirely forthcoming with document production.  Withholding discovery until information is revealed by third parties would put the defendant “in a very bad spot when this litigation is concluded.”

If documents expected to be contained in the defendant’s files were not produced until third parties revealed the information, it would “bring[] into question fundamental issues of his credibility.” Thus, counsel was advised to inform the defendant of those potential consequences.

On a related note, the parties were required to be forthcoming with access to documents that had been produced with discovery responses. Passwords should be provided expeditiously to unlock encrypted documents, or those files should be produced in hardcopy format.

The Court also reminded the parties that they are required to abide by their confidentiality agreement in producing documents to potential experts. For many reasons, it would be a bad idea to ask the client to pass on confidential documents to an expert rather than exchange confidential discovery directly between counsel and the expert.

Conclusion: The Court explained that its “bottom line” was that the parties should be forthcoming and cooperative with document production. Without more specific details in the motion to compel, such as the exact deficiencies in enumerated replies, the Court could not provide additional guidance on issues related to interrogatory responses.  Because the motion at issue was missing necessary content, although some concerns could be addressed on oral argument, sanctions were not warranted.

New Chapter on Advancement and Indemnification of Directors

As we have written on these pages for several years, in my capacity as the Chair of the American Bar Association’s Advancement and Indemnification Subcommittee of the Business Law Section’s Corporate Litigation Committee, yours truly co-authors a chapter each year that highlights the most noteworthy court decisions on advancement and indemnification of directors and officers, as part of an annual publication of the American Bar Association entitled: Recent Developments in Business and Corporate Litigation. The 2017 edition was recently published, and the chapter this year is co-authored by yours truly along with the following litigators who work with me in the Delaware office of Eckert Seamans: Gary Lipkin, Aimee Czachorowski, Justin Forcier and Alexandra Rogin. Even though we do a survey of cases on this topic from around the country, the majority of the decisions have been from Delaware and typically are highlighted on these pages as well.

Thank You Justice Holland

The Honorable Randy Holland retired on March 31 after 30 years as a Justice on the Delaware Supreme Court. He deserves praise and gratitude for this 30 years of service on Delaware’s high court. He was the author of many important corporate law opinions, in addition to authoring many opinions, books and articles on a wide range of other topics. His Honor also has had a leadership position for many years in the American Inns of Court. This short post can’t do justice to the many accomplishments of this exemplary jurist, but the formal announcement of his retirement on the Supreme Court’s website provides an overview of his many accomplishments. A dinner last night at the Hotel duPont featured a distinguished roster of luminaries who sung the praises of Justice Holland. We join in that chorus of praise and wish him all the best in the next chapter of his life. His photo from the court’s website follows.Justice Randy J. Holland Announces Retirement

Delaware Supreme Court Addresses Contractual Fiduciary Standard

Last week the Delaware Supreme Court reversed its prior decision interpreting a master limited partnership agreement that provided what Delaware’s high court described as a contractual fiduciary standard.  The Court’s opinion is necessary reading for anyone who drafts or litigates alternative entity agreements that waive fiduciary duties but provide other contractual replacement standards.  In Brinckerhoff v. Enbridge Energy Company Inc., Del. Supr., No. 273, 2016 (Mar. 20, 2017; revised Mar. 28, 2017), Delaware’s high court was candid enough to describe the contract provisions in this case as “complex,” and the Court’s precedent on the controlling issues as “confusing.” (Four of the five members of the Court on the bench in 2013, the year of the decision reversed in this case, are no longer on the bench.  Next month, no member of the Court sitting in 2013 will still be on the bench.)

Background: There were three prior Chancery decisions involving the master limited partnership agreement (LPA) in this matter, and two prior Delaware Supreme Court rulings.  Some of these decisions, which provide more factual background, were highlighted on these pages: here, here and here. In this fifth Delaware decision in this matter, to be known hereafter as Brinckerhoff V, the Court reversed the Chancery decision which had dismissed a claim by a unitholder in a publicly traded master limited partnership (MLP).  The Court’s opinion included a chart to distinguish the alphabet soup of related entities involved, including the general partner and other entities affiliated with the master limited partnership.  For purposes of this short blog post, the important facts are that the LPA waived all fiduciary duties and substituted a contractually defined standard of conduct.  A unitholder challenged an affiliated transaction that the unitholder claimed was in violation of the contractual substitute standard, in part because it was unfair to the unitholders and favored the general partner.

The MLP in this case was involved in the oil and gas industry and the transaction related to a project for a proposed $1.2 billion pipeline.  Despite declining oil prices and a nearly 20% decrease in projected EBITDA during the intervening period, the partnership paid $200 million more for the rights in the project that it had sold several years earlier. 

Although the Court of Chancery followed the Supreme Court’s pleading standard announced in the Supreme Court’s 2013 decision in this matter, known as Brinckerhoff III, this ruling changed course and reversed the standard announced by the Supreme Court in its 2013 decision in Brinckerhoff III. 

Delaware’s high court acknowledged the confusing precedent in this area, and cited in footnote 1 to no less than ten decisions of the Delaware Supreme Court within the past few years alone, not including the several decisions by the Court of Chancery addressing similar issues, on the topic addressed in this opinion.  See, e.g., Dieckman v. Regency GP LP, Del. Supr., No. 208, 2016 (Jan. 20, 2017), highlighted on these pages. 

Legal Analysis:

In connection with its analysis, the Court noted that in light of the statutory authorization allowing expansive variations on standards of contract, the general principles interpreting such contractual standards need to be nuanced. In this writer’s view, it turns out that attorneys are often not exemplary in their drafting of clearly defined contractual standards of conduct when fiduciary duties are waived.

The high court explained that the Court of Chancery confused the general standard of care in the LPA with more specific requirements in other sections, and observed that the trial court also violated settled rules of contract interpretation requiring that courts prefer specific provisions over more general ones.

Although the general partner was exculpated for actions taken in good faith, good faith was not a defined term in the LPA.  Rather, a general standard of conduct allowed actions to be taken by the general partner if the general partner reasonably believed that its action was in the best interest of, or not inconsistent with, the best interest of the partnership.  The Supreme Court treated this standard as a contractual fiduciary standard similar to the entire fairness standard.

In explaining the reversal of its decision in the 2013 Brinckerhoff III decision, the Court in this opinion announced the following pleading standard:  In order to plead a claim that the general partner did not act in good faith, the facts must support an inference that the general partner did not reasonably believe that the [challenged] transaction was in the best interest of the partnership.  Importantly, the Court emphasized that:  “as our prior cases established, the use of the qualifier ‘reasonably’ imposed an objective standard of good faith.”  See footnote 63 (citing the cases referring to a subjective good faith standard where the LPA at issue did not require a “reasonable” belief).

The Court provided seven specific reasons why the claims challenging the transaction at issue in this matter were sufficient at the pleading stage.  The Court also explained why a claim that the fairness opinion used should not be entitled to a conclusive presumption of good faith, also satisfied pleading standards.  For example, the Court found that the “financial terms were fully baked” by the time the author of the fairness opinion appeared on the scene. 

Equitable Remedies:

An important principle reiterated in this opinion was that even if the LPA exculpated a general partner from monetary damages based on good faith behavior, that language did not insulate the general partner from equitable remedies for breaches of the contract.  A key ruling in this matter was that based on what the Court regarded as a “contractual fiduciary standard similar if not identical to entire fairness,” the general partner was subject to equitable remedies if the trial court, after remand, found contractual violations even if such actions were take in good faith.

Supreme Court Defines “Commercially Reasonable Efforts”

The Delaware Supreme Court recently analyzed, for the first time, a common contractual standard in business agreements.  The legal meaning of the phrase “commercially reasonable efforts” does not enjoy clarity in the law. Lawyers and jurists alike should be excused if they view the law on this topic as not entirely self-evident.  The split decision of the Delaware Supreme Court in the case styled The Williams Companies, Inc. v. Energy Transfer Equity, L.P., Del. Supr., No. 330, 2016 (Mar. 23, 2017), proves the point. The Delaware high court decision in this matter featured a vigorous dissent from the Chief Justice in opposition to the majority’s affirmance of the Court of Chancery’s decision. The majority opinion was based on different reasoning than the trial court applied.

The background facts were included in the Court of Chancery’s opinion in this matter that was highlighted on these pages previously. The foregoing hyperlink also features links to scholarly commentary on this topic by the esteemed Professor Stephen Bainbridge. (The dissent of the Chief Justice will not be covered in this modest blog post, although those interested in this topic may want to read it, because it may provide ideas for opposing arguments on the topic, and in the future when a new majority exists on the Delaware Supreme Court, perhaps the reasoning in the dissent will garner a majority of votes.)

For now, the majority’s restatement of the latest Delaware law in connection with interpreting the meaning of the phrase “commercially reasonable efforts” includes the following important principles.  

Important Legal Principles Explaining the Legal Meaning of “Commercially Reasonable Efforts”:

Although the Delaware Supreme Court affirmed the post-trial opinion of the Court of Chancery, based on different reasoning, Delaware’s high court explained three errors in the Chancery decision, and in doing so the Supreme Court elucidated the correct principles of law applicable to an understanding of the phrase “commercially reasonable efforts.”

First, the Supreme Court explained that the Court of Chancery took an “unduly narrow view” of the decision in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008).  The Delaware Supreme Court emphasized in this opinion that it agreed with Chancery’s Hexion decision, which was highlighted on these pages. The Supreme Court quoted extensively from the Hexion opinion, and described that the buyer in the Hexion case required financing to complete a transaction.  The Court of Chancery in Hexion held that the agreement required action to the extent that such action was “both commercially reasonable and advisable to enhance the likelihood of consummation of the financing . . ..”  (Hexion, 965 A.2d at 749.) The Supreme Court in Williams quoted with approval the reasoning in the Hexion case even though the Hexion case involved a standard of “reasonable best efforts”–and not commercially reasonable efforts. See footnote 16 and accompanying text in the Williams decision for related analysis.

The Supreme Court in Williams also observed that in the Hexion case, after the buyer developed a more substantial concern about the solvency of a combined entity after the deal closed, the buyer “was then clearly obligated to approach the seller’s management to discuss the appropriate course to take to mitigate the solvency concerns.” Instead, the buyer in Hexion chose not to approach the seller’s management, and the court in Hexion reasoned that such a “choice alone would be sufficient to find that the buyer had knowingly and intentionally breached its covenants under the merger agreement.”  Hexion, 965 A.2d at 750.

The second error that the Supreme Court determined that the Court of Chancery made in the Williams case was the trial court’s focus on the absence of any evidence to show that Energy Transfer Equity, L.P. (ETE) caused the law firm to withhold the opinion that was a condition precedent to closing.  This is so, explained the Supreme Court, because there was evidence recognized by the Court of Chancery from which it “could have concluded that ETE did breach its covenants,” including evidence that ETE did not direct the law firm to engage more fully with counsel for the opposing party in the transaction in an attempt to negotiate any issues.

The third error the Supreme Court found with the Chancery opinion involved shifting of the burden of proof.  The Supreme Court in Williams ruled that “once a breach of a covenant is established, the burden is on the breaching party to show that the breach did not materially contribute to the failure of a transaction.”  See footnote 54. (Of course, one might note that an adjudication that a party was in breach is not usually made until after trial).  Moreover, the Supreme Court emphasized that a plaintiff “has no obligation to show what steps the breaching party could have taken to consummate the transaction.”

Nonetheless, the Supreme Court affirmed the decision of the Court of Chancery (just barely), because the end result in its post-trial opinion would have been the same even if the Court of Chancery applied the proper burden of proof – – in light of a footnote in the Chancery opinion noting that Williams did not present sufficient facts at trial to prevail even if the burden of proof were correctly applied.

Bottom Line: If you have a case that involves an issue of the meaning or application of the phrase “commercially reasonable efforts,” your first step is to read this opinion.  The next step is to determine how the facts of your case compare to the facts in this decision.

SUPPLEMENT: Scholarly commentary on this decision and the topic of “commercially reasonable efforts” in general, is provided by friend of the blog, Professor Stephen Bainbridge, whose scholarship is often cited in Delaware court opinions.

Chancery Applies Fitracks Procedures to Challenged Advancement Award

Alexandra D. Rogin, an Eckert Seamans associate, prepared this overview.

Last month, in a comprehensive advancement decision captioned White v. Curo Texas Holdings, LLC, C.A. No. 12369-VCL (Del. Ch. Feb. 21, 2017), the Delaware Court of Chancery applied what has become known in Delaware as the “Fitracks Procedures” to determine the appropriate amount of an advancement award when the exact amount of fees for covered and uncovered claims is unclear.  In the decision, the Vice Chancellor touches on apportionment of expenses and discourages parties from making premature objections to the details of advancement during the summary stage of the proceedings.  This ruling provides practical guidance on a frequent topic of Delaware corporate litigation.

Background: The plaintiffs sued to enforce advancement rights stemming from a contractual agreement with the defendant company (“Curo”).  In a prior ruling, the Court denied Curo’s motion to dismiss and granted summary judgment in the plaintiffs’ favor.  The Court held that the plaintiffs were entitled to advancement, and the Vice Chancellor directed the parties to determine the appropriate advancement amounts pursuant to Danenberg v. Fitracks, Inc. (the “Fitracks Procedures”).  The Fitracks Procedures have been previously outlined in detail on these pages here and here.

The Fitracks Procedures: Under the Fitracks Procedures, senior Delaware counsel for the party seeking advancement should oversee the preparation of a detailed submission and personally certify the correctness of the amount of the advancement request.  The submission must meet specific requirements related to its contents and timing.  Senior Delaware counsel for the opposing party may then oversee preparation of an analogous submission, objecting to the amounts requested, and including a personal certification detailing the reasons why the amounts sought are not advanceable.

Parties’ Contentions: The parties followed the Fitracks Procedures, and the plaintiffs provided the requisite submissions and certifications in support of a total advancement award of $5,121,651.73.  In response, Curo argued that 83% of the amounts sought were not subject to advancement.  Accordingly, Curo only paid the undisputed 17%, even though the Fitracks Procedures require a minimum payment of 50%, with the excess to be held in escrow pending a final disposition.  After reviewing Curo’s objections, the plaintiffs agreed to produce additional invoices and to reduce their demand by approximately $8,500 to account for clerical errors.  The plaintiffs then moved to recover the remaining amounts, plus interest.

Court’s Analysis: The Court largely granted the plaintiffs’ motion.  The Court also cautioned that Curo’s “serial and multitudinous” objections could substantiate a finding of bad faith, such that Curo should bear 100% of the enforcement expenses.

In making its ruling, the Court reiterated the well-established principle of Delaware law that the party seeking advancement “bears the burden of justifying” the amounts sought.  Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 823-24 (Del. 1992).  With that principle in mind, the Court employed the Fitracks Procedures and factors set forth by the Delaware Rules of Professional Conduct to determine the amount of a reasonable and appropriate advancement award.

The Court advised that a detailed, granular review of fees is not warranted at the advancement stage. Thus, counsel should defer “fights about details” to the final indemnification proceeding.  The Court will not “perform the task of playground monitor” at this summary stage of the proceedings to parse through bills for fees and review each line item of costs.

Despite these guidelines, Curo advanced voluminous objections to the plaintiffs’ submissions. The Court found that contrary to the teachings of Delaware precedent, Curo sought to litigate the particular details of individual expenses – without merit.  The Court determined that the plaintiffs’ billing entries provided adequate detail, and because advancement is not the proper stage for comprehensive review of fees, the certification from responsible Delaware counsel was sufficient.  Additionally, because there was no credible evidence of “clear abuse” in the filings, the plaintiffs had satisfied the Fitracks Procedures.

The Court further determined that although Curo was correct that some fees sought may fall outside the scope of advancement, the majority of Curo’s objections regarding scope were without merit. For example, while a question remained as to which claims out of the multiple underlying actions were advanceable, it was premature for the Court to undertake the burdensome task of apportioning those fees at the current juncture.

The Court cited prior precedent that addresses these situations where some claims in a case are subject to advancement, but others are not: “In actions where only certain claims are advanceable, the Court generally will not determine at the advancement stage whether fee requests relate to covered claims or excluded claims, unless such discerning review can be done realistically without significant burden on the Court.”  Holley v. Nipro Diagnostics, Inc., 2015 WL 4880418, at *1 (Del. Ch. Aug. 14, 2015).  Because the fees could not be apportioned with rough precision (with one small limited exception), the Court determined that the fees should be advanced in whole.  Moreover, as there was no clear demarcation between covered and non-covered claims, the Court was required to err on the side of advancement.

The Court also rejected Curo’s interpretation of the parties’ advancement agreement, finding that in reading the parties contractual obligations as a whole, there existed no cap on the amount of awardable expenses.  Even if a cap provision applied, the decision to extend advancement rights is not dependent on the amount of ultimate potential liability; rather, “the advancement decision is essentially simply a decision to advance credit.”  Advanced Mining Sys., Inc. v. Fricke, 623 A.2d 82, 84 (Del. Ch. 1992).

Fees on Fees: Finally, the Court determined that the plaintiffs were entitled to “fees on fees” for their success on the merits in seeking to enforce their advancement rights.  The amount of such an award should be reasonably proportionate to the level of success achieved.  Therefore, the Court ordered the parties to determine the amount of advancement that should be awarded in accordance with its ruling, and to use that amount to compute the percentage of the enforcement expenses to which the plaintiffs were also entitled.  Additionally, while the Court reserved an ultimate decision as to bad faith, the Court warned that a strong argument could be made that Curo should be forced to bear 100% of the plaintiffs’ costs for its extensive challenges to the plaintiffs’ motion.

Conclusion: In accordance with the Fitracks Procedures, the Court ordered Curo to advance reasonable expenses, attorneys’ fees, interest, and fees on fees to the plaintiffs.  Curo was admonished for its inappropriate objections at the summary stage of the advancement proceedings.

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