In Westar Energy, Inc. v. Lake, (D. Kans., June 28, 2007), read opinion here , the U.S. District Court for the District of Kansas relied almost entirely on the Delaware advancement statute, Section 145(e) of the DGCL, and the Delaware cases that interpret it, in order to resolve an issue with the Kansas advancement statute (that was modeled on the Delaware statute). The thoroughly reasoned 38-page opinion concluded that the "reasonableness" of  the amount of legal fees sought to be advanced, can be considered in connection with an advancement claim, but that the officer of Westar who sought advancement in this case (Lake), would not be limited by the rates customarily charged in Kansas. The court noted that senior partners at major firms in Kansas often charge not more than $190 per hour, compared to the New York City and Washington, D.C. firms hired by the claimant, Lake, who often charge upwards of $700 per hour. (Hat tip to Peter Lattman of The Wall Street Journal Law Blog for referencing the opinion).

The Kansas court ordered a partial payment of the advancement due, acknowledging the need expressed by the Delaware courts for a speedy decision on these issues, but reserved for a later determination the ultimate issue of reasonableness. To the Kansas court’s credit, however, it concluded that if the corporation wanted to limit the right to advancement to "local" Kansas rates, or  if it wanted the right to choose the cheapest lawyer, it should have so provided in the advancement provisions. See Chamison v. Healthtrust, Inc., 735 A.2d. 912, 916, aff’d 748 A.2d 407 (Del. 2000)(addressing corporation’s selection of counsel as condition of right to advancement).

Judge Julie Robinson of the U.S. District Court for the District of Kansas (not to be confused with Judge Sue Robinson of the U.S. District Court for the District of Delaware), quoted extensively from Delaware Chancery Court and Supreme Court decisions to support her reasoning. For example, she noted that none of the parties cited to any case supporting an absolute refusal to advance fees due to allegedly excessive rates. However, the Kansas court cited to a Chancery Court decision to the effect that Delaware law has rejected  the argument that 

 " an inquiry into the reasonableness of the fees is not appropriate at the advancement stage", but rather, that: "all contracts for advancement and indemnification are subject to an implied reasonableness term … even if the indemnifcation agreement does not expressly condition advancement on the reasonableness of the request."

(citing Kaung v. Cole National Corp. ("Kaung I"), 2004 WL 1921249  at *4 (Del. Ch. 2004) rev’d in part on other grounds 884 A.2d 500 (Del. 2005)("Kaung II")). Here is a summary on this blog of the Supreme Court’s decision and a link to the full opinion. The Supreme Court’s opinion in Kaung, however, did not directly decide or address the reasonableness issue, but the Kansas court provides the following citation for the view that the Delaware Supreme Court reads an implied reasonableness requirement in both the advancement and indemnification statutes: Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761 at *5 (Del. Ch.) (citing Citadel, 603 A.2d at 823). [Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. Supr. 1992)].This is the language that the Chancery Court in Reddy quoted from the Supreme Court’s Citadel opinion:

 "Under both the statute [Section 145(e)] and the [advancement] Agreement, the corporation’s obligation to pay expenses is subject to a reasonableness requirement."

Revised last paragraph: I invite reader commentary on whether the Kansas court properly applied Delaware law. Namely, was it correct to deny full payment of advancement rights based on an issue of reasonableness, to be decided later, in light of the more recent Supreme Court decision in Homestore, Inc. v. Tafeen, 886 A.2d 502, 505 (Del. 2005), summarized here on my blog, which made it explicit that the limited scope of summary proceedings for determining advancement rights is not the appropriate forum to address defenses that might ultimately prevail in the later and separate analysis of indemnification rights. Here also is an earlier decision in the same case by the Supreme Court denying a Motion to Stay the judgment of the Chancery Court awarding advancement, pending appeal, based in part on the same reasoning that supports prompt payment of advancement obligations. The Supreme Court in Homestore expressly endorsed the implied requirement of reasonableness as an implied condition of advancement of fees, and in footnote 30 cited with approval to the same holding in the Citadel decision. Also in Homestore, the Special Master appointed by the Chancery Court to review the fees, slightly reduced the amount requested, though not nearly as much as the corporation wanted the fees to be reduced. Thus, it appears that the Kansas court was on the mark, but does the Kansas decision make it easier for a corporation to withhold fees after making "minimum" payments, thereafter claiming that the amounts requested are unreasonable?

SUPPLEMENT: Courtesy of the WSJ Law Blog, below is an excerpt from a July 11 post about the KPMG case that Judge Kaplan is deciding, which has figures on the very high cost incurred by officers and directors who are defending a white collar crime case–and which underscores the importance to have clarity about all aspects of the advancement obligation:

The government, however, cites some other sources in its footnotes for the defense tabs involving some recent high-profile cases: Former Enron chief executive Jeff Skilling spent $70 million on a trial that lasted four months; former Tyco chief executive Dennis Kozlowski spent around $26 million for two trials; and former HealthSouth CEO Richard Scrushy spent about $21 million to attorneys billing at around $800 an hour.

Here is Judge Kaplan’s decision dismissing the cases against the KPMG execs.