An Eckert Seamans associate prepared this overview.
Last month, in a comprehensive advancement decision captioned White v. Curo Texas Holdings, LLC, C.A. No. 12369-VCL (Del. Ch. Feb. 21, 2017), the Delaware Court of Chancery applied what has become known in Delaware as the “Fitracks Procedures” to determine the appropriate amount of an advancement award when the exact amount of fees for covered and uncovered claims is unclear. In the decision, the Vice Chancellor touches on apportionment of expenses and discourages parties from making premature objections to the details of advancement during the summary stage of the proceedings. This ruling provides practical guidance on a frequent topic of Delaware corporate litigation.
Background: The plaintiffs sued to enforce advancement rights stemming from a contractual agreement with the defendant company (“Curo”). In a prior ruling, the Court denied Curo’s motion to dismiss and granted summary judgment in the plaintiffs’ favor. The Court held that the plaintiffs were entitled to advancement, and the Vice Chancellor directed the parties to determine the appropriate advancement amounts pursuant to Danenberg v. Fitracks, Inc. (the “Fitracks Procedures”). The Fitracks Procedures have been previously outlined in detail on these pages here and here.
The Fitracks Procedures: Under the Fitracks Procedures, senior Delaware counsel for the party seeking advancement should oversee the preparation of a detailed submission and personally certify the correctness of the amount of the advancement request. The submission must meet specific requirements related to its contents and timing. Senior Delaware counsel for the opposing party may then oversee preparation of an analogous submission, objecting to the amounts requested, and including a personal certification detailing the reasons why the amounts sought are not advanceable.
Parties’ Contentions: The parties followed the Fitracks Procedures, and the plaintiffs provided the requisite submissions and certifications in support of a total advancement award of $5,121,651.73. In response, Curo argued that 83% of the amounts sought were not subject to advancement. Accordingly, Curo only paid the undisputed 17%, even though the Fitracks Procedures require a minimum payment of 50%, with the excess to be held in escrow pending a final disposition. After reviewing Curo’s objections, the plaintiffs agreed to produce additional invoices and to reduce their demand by approximately $8,500 to account for clerical errors. The plaintiffs then moved to recover the remaining amounts, plus interest.
Court’s Analysis: The Court largely granted the plaintiffs’ motion. The Court also cautioned that Curo’s “serial and multitudinous” objections could substantiate a finding of bad faith, such that Curo should bear 100% of the enforcement expenses.
In making its ruling, the Court reiterated the well-established principle of Delaware law that the party seeking advancement “bears the burden of justifying” the amounts sought. Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 823-24 (Del. 1992). With that principle in mind, the Court employed the Fitracks Procedures and factors set forth by the Delaware Rules of Professional Conduct to determine the amount of a reasonable and appropriate advancement award.
The Court advised that a detailed, granular review of fees is not warranted at the advancement stage. Thus, counsel should defer “fights about details” to the final indemnification proceeding. The Court will not “perform the task of playground monitor” at this summary stage of the proceedings to parse through bills for fees and review each line item of costs.
Despite these guidelines, Curo advanced voluminous objections to the plaintiffs’ submissions. The Court found that contrary to the teachings of Delaware precedent, Curo sought to litigate the particular details of individual expenses – without merit. The Court determined that the plaintiffs’ billing entries provided adequate detail, and because advancement is not the proper stage for comprehensive review of fees, the certification from responsible Delaware counsel was sufficient. Additionally, because there was no credible evidence of “clear abuse” in the filings, the plaintiffs had satisfied the Fitracks Procedures.
The Court further determined that although Curo was correct that some fees sought may fall outside the scope of advancement, the majority of Curo’s objections regarding scope were without merit. For example, while a question remained as to which claims out of the multiple underlying actions were advanceable, it was premature for the Court to undertake the burdensome task of apportioning those fees at the current juncture.
The Court cited prior precedent that addresses these situations where some claims in a case are subject to advancement, but others are not: “In actions where only certain claims are advanceable, the Court generally will not determine at the advancement stage whether fee requests relate to covered claims or excluded claims, unless such discerning review can be done realistically without significant burden on the Court.” Holley v. Nipro Diagnostics, Inc., 2015 WL 4880418, at *1 (Del. Ch. Aug. 14, 2015). Because the fees could not be apportioned with rough precision (with one small limited exception), the Court determined that the fees should be advanced in whole. Moreover, as there was no clear demarcation between covered and non-covered claims, the Court was required to err on the side of advancement.
The Court also rejected Curo’s interpretation of the parties’ advancement agreement, finding that in reading the parties contractual obligations as a whole, there existed no cap on the amount of awardable expenses. Even if a cap provision applied, the decision to extend advancement rights is not dependent on the amount of ultimate potential liability; rather, “the advancement decision is essentially simply a decision to advance credit.” Advanced Mining Sys., Inc. v. Fricke, 623 A.2d 82, 84 (Del. Ch. 1992).
Fees on Fees: Finally, the Court determined that the plaintiffs were entitled to “fees on fees” for their success on the merits in seeking to enforce their advancement rights. The amount of such an award should be reasonably proportionate to the level of success achieved. Therefore, the Court ordered the parties to determine the amount of advancement that should be awarded in accordance with its ruling, and to use that amount to compute the percentage of the enforcement expenses to which the plaintiffs were also entitled. Additionally, while the Court reserved an ultimate decision as to bad faith, the Court warned that a strong argument could be made that Curo should be forced to bear 100% of the plaintiffs’ costs for its extensive challenges to the plaintiffs’ motion.
Conclusion: In accordance with the Fitracks Procedures, the Court ordered Curo to advance reasonable expenses, attorneys’ fees, interest, and fees on fees to the plaintiffs. Curo was admonished for its inappropriate objections at the summary stage of the advancement proceedings.