Chancery Denies Claim For Advancement and Indemnification From Successor Entity

Grace v. Ashbridge LLC, C.A. No. 8348-VCN (Del. Ch. Dec. 31, 2013).

Issue Addressed:  Whether a successor entity was liable for advancement and indemnification claims based on the operating agreement of a successor entity LLC even though the sole allegations involve a predecessor entity and a related entity. Short Answer:  No.

Brief Overview:  An understanding of this case requires a review of the some of the entities involved for background purposes.  The plaintiff is a co-trustee of a family trust.  The trust owned shares of a company that was renamed Ashbridge Corporation in 1981.  That entity later merged into Ashbridge Partners LLC which was later renamed to Ashbridge LLC, a Delaware entity.  The court refers to another entity named Ashbridge Investment Management LLC (“AIM”) which the complaint did not explain in terms of its affiliation with the other entities.  The plaintiff was a member of Ashbridge LLC (the defendant) and a shareholder of Ashbridge Corporation before its merger.  He also serves on the Board of Managers and is chairman of the defendant.  He was previously chairman and a member of the board of the predecessor Ashbridge Corporation.

Beneficiaries of the trust for which the plaintiff is a co-trustee filed objections to accountings that were filed by the trust in the Court of Common Pleas of Chester County, Pennsylvania.  The objections filed by those beneficiaries merely refer to the actions of the plaintiff in the instant case, whose last name is Grace, as well as Ashbridge Corporation and AIM.  The defendant entity in this case is not mentioned once in the objections of the beneficiaries filed in the Pennsylvania trust matter, which is the pending underlying litigation in Chester County about which Grace seeks advancement and indemnification.

However, the complaint seeks advancement and indemnification under the operating agreement of the defendant Ashbridge LLC.

The defendant seeks to dismiss the claims for advancement because Grace was made a party to the proceedings in Pennsylvania “by reason of a fact” that Grace is a co-trustee of a trust (not a party in this case), and, moreover, the operating agreement of the defendant LLC does not extend advancement or indemnification rights to predecessor entities or affiliates.  Moreover, the underlying suit in Pennsylvania does not allege actions taken by Grace in his official capacity.  Defendant also argues that certain expenses for which Grace seeks advancement have not been adequately described in the amended complaint.

Analysis:  The court describes that the Delaware LLC Act broadly authorizes the grant of indemnification rights in operating agreements.  See 6 Del. C. § 18-108.  When interpreting advancement provisions in an LLC agreement, the court will ordinarily following contract interpretation principles.  See fn. 27.

The objections by the beneficiaries in the underlying Pennsylvania action only involve Ashbridge Corporation and AIM.  Therefore, Grace must demonstrate that the advancement provisions in the LLC Agreement retroactively apply to a predecessor entity or an affiliate.  This he was not able to do.

In addition to the fact that the allegations in the underlying Pennsylvania case do not mention the defendant entity, it is well settled in Delaware that successor corporate entities are generally not liable for the actions of the corporate officers of predecessor entities or affiliates when a fundamental change in identity has occurred.  For purposes of advancement and indemnification, Delaware law considers a conversion, as here, from a limited liability company to a corporation to be a “fundamental change in identity”.  See fn. 33 (citing Bernstein v. TractManager, Inc., 953 A.2d 1003, 1009 (Del. Ch. 2007).