In Martinez v. Regions Fin. Corp. C.A. No. 4128-VCP (Del. Ch. Aug. 6, 2009),  read opinion here, the Court addressed a former bank executive’s claims to enforce a change of control agreement she had with her employer bank before that bank merged into a successor bank and for advancement of fees and costs with respect to this litigation.

Kevin Brady, a highly regarded Delaware litigator, provides the synopsis of this important decision on the topic of advancement rights.

Before Defendant Regions Financial Corporation (“Regions”) merged with AmSouth Bancorporation (“AmSouth”), Plaintiff Susan Martinez, who was an executive with AmSouth, had an employment agreement (the “Agreement”) that provided her with a golden parachute that would be triggered in the event of a change of control. When AmSouth and Regions merged, the change of control provision was triggered. However, instead of complying with the terms of the change of control provisions, Regions offered alternative agreements to Martinez on terms that were less favorable than the Agreement. Regions also said that any executive who declined the new offer would be terminated. In October of 2007, Martinez declined to accept the new contract. Regions therefore terminated her employment.

Despite severance benefits paid, pursuant to the Agreement, of more than $7 million, Martinez seeks additional benefits under the Agreement, “including payment of the salary she would have received had she continued to be employed by Regions for a second year in 2008, and a larger amount reflective of her bonus history and based on the annual bonus she contends she should have received for 2007.”

Martinez brought an action alleging the following: (i) breach of the Agreement by Regions for not providing Martinez with an annual bonus and salary under terms of the Agreement for the remainder of her employment period; (ii) breach of the covenant of good faith and fair dealing by failing to award a bonus for 2007; and (iii) specific performance of fee shifting and advancement provisions in the Agreement. Before the Court were Martinez’s motion for summary judgment as to Count IV and Region’s motion for summary judgment as to all counts.

It is interesting to note that the day after Regions filed an answer to the complaint, the plaintiff filed a motion for partial summary judgment on her claim for advancement. Regions thereafter “responded by seeking to preempt the advancement claim by shifting the focus of the litigation to the merits of the employee’s claims for additional compensation under the [Agreement]” and filing a motion for summary judgment on all counts in the complaint.

Court Finds That Having Received Severance Payments, Martinez Is Not Entitled To Both a Salary and Benefits for the Period After Her Termination

Martinez alleged that in addition to golden parachute payments, she is entitled to an unconditional salary and benefits through November 30, 2008 under the Agreement. The Court held that Martinez’s rights to the severance package precluded her from receiving additional salary payments and other compensation for the remainder of the employment period (a period when Martinez was no longer working for Regions). The Court looked to Gerow v. Rohm & Haas Co., 308 F.23d 721 (7th Cir. 2002), in finding that Martinez’s argument was unpersuasive in that it “makes no business sense” and would result in a windfall where “she would receive certain benefits or parts thereof twice, for no apparent reason.” Therefore, the Court granted Region’s motion for summary judgment holding Martinez’s interpretation that “she had a right to receive termination benefits, in the form of an attractive ‘golden parachute’ severance package, and employment benefits. . . .” to be untenable.

Extent of Martinez’s Bonus Raised Genuine Issues of Material Fact

Regions’ moved for summary judgment on the issue of whether Martinez was entitled to the benefit of a bonus for 2007. Under the Agreement, Martinez’s date of termination was the date she gave oral notice that she declined the new contract in October 2007. Martinez argued that she should be entitled to a bonus for the full year of 2007 because she worked through December 31, 2007. Because of the discrepancy as to dates when the actual employment ceased, the Court denied the motion for summary judgment due to factual questions as to what Martinez was entitled to in a bonus for 2007.

Martinez also claimed that she was entitled to the full bonus for 2007 because of a breach of the covenant of good faith and fair dealing. The Court likewise denied that motion as well. In support of its motion, Regions argued that “a claim for breach of the implied covenant of good faith and fair dealing cannot lie where a party relies on express language of a contract, such as the definition of ‘Date of Termination’ here.” The Court held that that argument was not “entirely persuasive . . . in this context. . . . [where t]he issue involves how the defined Date of Termination relates to a different last day of employment agreed to by all parties. The . . . Agreement does not expressly address that circumstance.” Because genuine issues of material fact remained as to the parties’ agreed upon last day of employment, this motion was denied.

A Broad Advancement Fee Provision Provides Advancement Regardless of the Merits of the Claims

Finally, the Court addressed both party’s motions for summary judgment as to Martinez’s entitlement to advancement fees. On this issue, the Court stated that:

[a]dvancement disputes are particularly appropriate for decision on summary judgment, as in most cases “the relevant question turns on the application of the terms of the corporate instruments setting forth the purported right to advancement and the pleadings in the proceedings for which advancement is sought.” As this Court has noted, resort to parol evidence in cases like this one is rarely appropriate, or even helpful, as corporate instruments addressing advancement rights are frequently crafted without the involvement of the parties who later seek advancement and often with little negotiation among any of the contending parties at all. Those factors are not problematic, however, as they tend to reinforce the legal policy of this State, which strongly emphasizes contract text as the overridingly important guide to contractual interpretation. Thus, if the contractual instrument unambiguously grants advancement, summary judgment is appropriate.

Region argued that the pertinent language “all legal fees and expenses which the Executive may reasonably incur” (emphasis added) required Martinez’s litigation to be reasonable in order to receive attorney fees. In light of Martinez’s dismissed claims regarding salary and severance benefits, Regions argued that Martinez’s claims were not reasonable. The Court disagreed finding that the Agreement provides

the right to reimbursement for “all legal fees and expenses” incurred as a result of a covered contest and to advancement of those fees “to the full extent permitted by law” “regardless of the outcome” of the contest. The imposition of a requirement that Martinez’s claims be substantively reasonable either as a precondition to advancement or as a basis for recouping advanced fees and expenses relating to an unsuccessful claim would undermine the plain meaning of that provision.

Even with this broad language, Regions contended that any award of advancement should be contingent upon a determination of reasonableness. Requiring such a determination “would defeat the purpose of advancing fees altogether . . . .” Nothing in the Agreement required a limitation of advancement based on reasonableness, and rather the advancement provision was quite broad. Citing to the Court’s decision in Lillis v. AT&T Corp., 904 A.2d. 325, 332-33 (Del. Ch. 2006), the Court reasoned, “[T]here is no requirement that advancement provisions be written broadly or in a mandatory fashion. But when an advancement provision is, by its plain terms, expansively written and mandatory, it will be enforced as written.”

The only limitation on advancement rights would be through the implied covenant of good faith and fair dealing where advancement could be denied if Martinez brought her claims in bad faith. Merely failing to prevail on her claim for the 2008 salary does not mean that Martinez litigated in bad faith. Thus, Martinez was entitled to reasonable attorneys’ fees and expenses incurred to date, plus interest, future fees and expenses, and even “fees on fees” for the actual indemnification suit.