Justin M. Forcier, an associate in the Delaware office of Eckert Seamans, prepared this overview.

The Court of Chancery recently addressed whether unclean hands may be a recognized defense to advancement actions.  Hankinson v. Pike Holdings Inc., C.A. No. 12730-CB (Del. Ch. Nov. 15, 2016) (telephonic transcript ruling).

Background:  Plaintiff was a director and CEO of Pike Holdings Inc. (“Pike”).  Pike filed an action against Plaintiff as a result of a sale of Pike’s main operating subsidiary.  Pike’s bylaws contain provisions for the advancement of legal fees and expenses.  Pike refused to advance Plaintiff the money, because its board of directors found that he acted in bad faith with respect to the sale.

After Plaintiff filed this action, Pike submitted an in camera review of recordings of telephone conversations allegedly containing evidence that Plaintiff sought to overstate the amount of fees he had incurred.

Analysis: During its ruling on the motion for summary judgment, the court noted that two issues were before it: (1) whether Plaintiff was entitled to advancement under the bylaws; and (2) the implication of the recordings on Plaintiff’s advancement rights.  The court first addressed whether Plaintiff is entitled to any advancement pursuant to the bylaws because, as the court noted, if no advancement is due, the issue of the recordings becomes moot.

Court’s Holding: First, the court looked at the language in the bylaws, which in part stated that no advancement would be made by Pike to one of its officers (except by reason of the fact such officer is or was a director of the Corporation, than this provision would not apply) if clear and convincing facts exist that such officer acted in bad faith.

The court held that all five counts in California named Plaintiff by reason of the fact that he was a director during the sale; and therefore, he is entitled to advancement of fees.

However, the court held, a separate trial is need to resolve the issue raised in the recordings regarding bad faith.  The court stated that it was unclear whether it could even consider the recordings, because Plaintiff claimed that they were improperly obtained by Pike and subject to the attorney-client privilege.  The court did not specifically rule on this issue because further inquiry was needed and the facts were vigorously disputed.

Furthermore, assuming the recordings were admissible, the court stated that even further proceedings would be needed to determine if Plaintiff engaged in fraudulent conduct that would cause his advancement–potentially–to be denied entirely under the unclean hands doctrine.

Finally, the court declined to enjoin the California proceeding because to do so would be premature.