The Court of Chancery in Danenberg v. Fitracks, C.A. No. 6454-VCL (Mar. 5, 2012), addressed important issues of advancement and indemnification. After the parties met and conferred but failed to reach any agreement as to amounts, the Court on March 5, 2012, awarded $292,019.91 to petitioner Noam Danenberg as advancement from respondent Fitracks, Inc. in connection with his defense of claims asserted against him by Aetrex Worldwide, Inc., Fitracks’ parent, in the underlying litigation in the District of Delaware, and $276,332.13 as indemnification from Fitracks for the Court of Chancery proceeding.  For background on this case, see the January 3, 2012 decision that granted summary judgment in favor of Danenberg and against Fitracks as to liability with respect to advancement and indemnification.

A Fee Application — The “Reasonableness Standard”

A party making a fee application bears the burden of justifying the amounts sought with “a good faith estimate” of the fees and expenses.  In addition, the petitioning party must submit an affidavit or statement itemizing, among other things, the expenses incurred and services rendered. While the Court has a great deal of discretion in awarding a reasonable fee, Delaware precedent dictates that in evaluating the reasonableness of an advancement request, the Court must consider the factors set forth in the Delaware Lawyers’ Rule of Professional Conduct 1.5(a), (which the Court noted are “substantively indistinguishable” from the factors enumerated by the Delaware Supreme Court in Sugarland Indus., Inc. v. Thomas,  420 A.2d 142, 149 (Del. 1980)) which include:

(1)         the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2)        the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3)        the fee customarily charged in the locality for similar legal services;

(4)        the amount involved and the results obtained;

(5)        the time limitations imposed by the client or by the circumstances;

(6)        the nature and length of the professional relationship with the client;

(7)        the experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8)        whether the fee is fixed or contingent.

In addition, the Court must consider “whether the number of hours devoted to litigation was excessive, redundant, duplicative or otherwise unnecessary.”  Determining the reasonableness of amounts sought “does not require that this Court examine individually each time entry and disbursement.”  As the Court here noted “[f]or a Court to second-guess, on a hindsight basis, an attorney’s judgment . . . is hazardous and should whenever possible be avoided.” Moreover, “[i]n making a decision to advance expenses to a director or officer, the corporation is not extending the amount by which it may be legally liable, as it does when it extends indemnification rights. The right to be indemnified for expenses will exist (or will not) depending upon factors quite independent of the decision to advance expenses.  Thus, the decision to extend the advancement right should ultimately give rise to no net liability on the corporation’s part…[T]he advancement decision is essentially simply a decision to advance credit…Consequently, “[t]he function of a § 145(k) advancement case is not to inject this court as a monthly monitor of the precision and integrity of advancement requests.”

Reasonableness in an Advancement Request – The Pizza Principle

Danenberg sought $292,019.91 as advancement for fees and expenses incurred in the District Court action.  The Court noted that while Danenberg had an incentive to monitor his counsel’s actions (because he would have been liable for any fees or expenses not covered by advancement or indemnification), Danenberg’s lawyers were experienced attorneys from a reputable firm, and “they have charged what I readily recognize as rates comfortably within the market range for complex commercial litigation in this jurisdiction.”

Fitracks argued that Danenberg should only be entitled to $85,125 because its counsel only prepared three briefs and engaged in one oral argument.  The Court disagreed quoting the Chancellor in his recent decision in Auriga Capital Corp. v. Gatz Props., LLC, 2012 WL 361677 at *29 n.184 (Del. Ch. Jan. 27, 2012), and noting that Fitracks had ignored “the Pizza Principle” (“it is more time-consuming to clean up the pizza thrown at the wall than it is to throw it”).  The Court explained:

 [i]n the Underlying Action, Aetrex responded to a focused breach of contract action by throwing at the wall an extra-large, deep-dish pie with lots of toppings, namely a 43-page, 186-paragraph, 11-count counterclaim and third-party complaint. The six third-party counts included fraud, conspiracy to defraud, unjust enrichment, and civil violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”).  The complaint also sought injunctive relief and piercing of the corporate veil.  To respond to the complaint, Danenberg’s counsel had to investigate the wide ranging factual allegations, research the legal theories, and develop a defense. With his fellow third-party defendants, Danenberg moved to dismiss the six counts for failure to state a claim on which relief could be granted and for lack of personal jurisdiction…[in addition,] [a]fter diligently pursuing their research, Danenberg’s attorneys convinced Aetrex that the RICO claim had no merit, leading Aetrex to dismiss the RICO count voluntarily before oral argument.  It took Danenberg’s counsel far more work to clean up the RICO Count to the point of convincing Aetrex to withdraw it than it did for Aetrex to draft a pleading that recited the statutory elements.

Fitracks objected not to the rates that Danenberg’s counsel charged or the amounts billed for particular tasks (although Fitracks did unsuccessfully object to a $70K retainer paid by Danenberg), but rather to the overall “quantum of work” that Danenberg’s counsel performed.  This put the Court in the position of having to “second-guess the judgment of Danenberg’s counsel, something the Court is loath to do.”  As a result, the Court found that Danenberg had “carried his burden by showing that the services rendered were thought prudent and appropriate in the good faith professional judgment of competent counsel” and awarded Danenberg $292,019.91 for fees and expenses in advancements as well as pre- and post-judgment interest, compounded quarterly, at the legal rate beginning February 27, 2012 (the date the issue was submitted to the Court for decision.)

Reasonableness in an Indemnification Request

Danenberg sought indemnification of $276,332.13 for fees and expenses incurred in the Court of Chancery action.  While the Court characterized the total as falling “at the high end of what I would expect for a typical advancement proceeding,” the Court laid the blame at the feet of the respondent with its “serial reversals of position and general intransigence.”  For example, Fitracks sued Danenberg in the District Court on statements made by Danenberg as a Fitracks officer before the merger but then Fitracks argued to the Court of Chancery that it was not suing Danenberg for any pre-merger conduct in the District Court action.   Fitracks then contended to the District Court that the statements it made to the Court of Chancery “had no effect” on the District Court action.  As a result, the Court found for Danenberg for $276,332.13 for fees and expenses plus pre- and post-judgment interest, compounded quarterly.

Procedures for Future Requests for Advancement

After finding that the parties failed to follow the Court’s instructions about how to handle future advancement requests, the Court set out the following procedures for Danenberg’s future advancement requests emphasizing that while special masters have been used by the Court, that process adds time and expense to the advancement request which by statute is supposed to be a “summary and efficient proceeding.” The Court also reiterated the important role that Delaware counsel assumes in litigation before Delaware courts as “an officer of the Court [who] is responsible for the positions taken, the presentation of the case, and the conduct of the litigation.”

The Court then set out the following protocol:

 Going forward, the senior member of the Delaware bar representing each side will assume personal responsibility for addressing advancement requests. Unless modified by stipulation, the parties will adhere to the following procedures:

1.         Before the 10th calendar day of each month, Danenberg’s counsel will submit an advancement demand for fees and expenses incurred during the previous month.  Any fees or expenses not included in the demand are deemed waived. The advancement demand will include the following:

a.         A detailed invoice identifying the fees and expenses for which advancement is requested.  The invoice shall provide for each time entry the date, timekeeper, billing rate, task description, time incurred, and amount charged.  The invoice shall identify with detail for each expense the date of the charge, its nature, and the amount incurred.

b.         A certification signed by the senior member of the Delaware bar representing Danenberg attesting that (i) he personally reviewed the invoice, (ii) each time entry and expense falls within the scope of Danenberg’s advancement rights, (iii) in his professional judgment, the fees and expenses charged are reasonable in light of the factors listed in Rule 1.5(a), and (iv) the services rendered were thought prudent and appropriate in his good faith professional judgment.

2.         Before the 20th calendar day of the month, Fitracks’ counsel will respond to the advancement demand in writing.  The response shall identify each specific time entry or expense to which Fitracks objects and explain the nature of the objection.  The senior member of the Delaware bar representing Fitracks shall certify that (i) he personally reviewed the advancement demand and (ii) in his professional judgment, the disputed fees and expenses are not reasonable or otherwise fall outside the scope of the advancement right.  The response shall cite any legal authority on which Fitracks relies. Any objection not included in the response is deemed waived.

3.         Fitracks shall pay the undisputed amount contemporaneously with the response. If Fitracks disputes more than 50% of the amount sought in any advancement demand, Fitracks shall pay 50% of the amount sought and Danenberg’s counsel shall hold the amount exceeding the undisputed amount in its escrow account pending resolution of the dispute regarding such portion.

4.         Before the 25th calendar day of each month, Danenberg’s counsel will reply to the advancement response in writing and provide supporting information and authority.

5.         Before the last calendar day of the month, the senior members of the Delaware bar representing each side will meet, in person, and confer regarding any disputed amounts. Any additional advancement that results from the meet-and-confer session will be paid with the next month’s payment of undisputed amounts.

6.         Not more frequently than quarterly, Danenberg may file an application pursuant to Court of Chancery Rule 88 seeking a ruling on the disputed amounts.  Briefing shall consist of a motion, an opposition filed within fifteen days of the motion, and a reply filed within ten days of the opposition.  Danenberg and Fitracks shall not raise any new arguments not previously raised with the other side in the applicable demand, response, reply, or meet-and-confer. Danenberg and Fitracks only shall cite authorities identified in writing in the applicable demand, response, or reply.  The Court will determine if a hearing is warranted.

7.         If the Court grants an application in whole or part, then pre-judgment interest is due on the adjudicated amount from the date of the applicable advancement demand.  In addition, in parallel with the next advancement demand, Danenberg may demand indemnification for the fees and expenses incurred in connection with the granted application, proportionate to the extent of success achieved.  The parties shall address the indemnification demand in the same manner as the advancement demand. Except in connection with a successful application, Danenberg shall not seek or receive advancement or indemnification for time spent preparing invoices and advancement demands, addressing responses, or conferring regarding advancement requests.