The case of Branin v. Stein Roe Investment Counsel, LLC, 2014 WL 2961084 (Del. Ch. June 30, 2014) raised the interesting question of whether the operating agreement in effect at the time the suit was filed or the operating agreement in effect at the time the indemnification claim was made will control the right to indemnification.  The first operating agreement had a broad indemnification provision, but was amended after suit was brought against an indemnified person to intentionally preclude indemnification for that particular claim.  The amended operating agreement clearly excluded indemnification for that claim, and the claim for indemnification was not made until after the operating agreement was amended.[1]

On cross-motions for judgment on the pleadings, the Chancery Court determined that the LLC’s liability for the indemnification claim was fixed upon the filing of the action; before the operating agreement was amended.  The Court noted that it generally looks to the operating agreement in place when the lawsuit is filed or the events giving rise to the suit occurred.  The decision was limited only to a denial of both motions for judgment on the pleadings; the court determined that a factual inquiry into whether Branin’s actions were in good faith was necessary before determining his entitlement to indemnification.

Interestingly, nothing in the LLC agreement prohibited the LLC from amending its operating agreement on a prospective basis, and a notable question, which was not argued by the parties, was whether the operating agreement could have been amended to eliminate liability from the date of the amendment forward, limiting the LLC’s exposure to legal fees already accrued as of the date of the amendment.

[1] Note that 8 Del. C. §145(f) explicitly prohibits an amendment to the certificate of incorporation or the bylaw providing for advancement and indemnification which eliminates or impairs the right to advancement or indemnification after the occurrence of the act or omission giving rise to the action for which advancement or indemnification is sought, unless the provision in question explicitly authorizes such amendment.