This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware  Court of Chancery recently refused most of B. Riley Financial, Inc.’s motion to dismiss an ex-officer and director’s complaint for indemnification for his settlement of underlying breach-of-duty and fraud charges against him and companies he had founded and later sold to Riley in Wunderlich v. B. Riley Financial, Inc., et al., No. 2020-0453-PAF (Del. Ch. March 24, 2021).

In a March 24 letter ruling, Vice Chancellor Paul Fioravanti Jr. ruled that Riley’s dismissal bid cannot rely on the limits in its interpretation of an indemnification contract plaintiff Gary Wunderlich signed as part of his companies’ 2017 merger with that financial services firm, since it is not the only reasonable reading.

In addition, Wunderlich makes a plausible argument that Riley took over his investment and securities companies’ indemnification obligations when it made them subsidiaries, and Riley had been paying Wunderlich’s legal costs until the two parted ways in Nov. 2018 and Wunderlich was hit with a $10.5 million arbitration award, the vice chancellor said. The Chancery Court let Wunderlich continue to pursue his indemnification claim but dismissed as unripe a declaratory judgment count seeking to hold Riley separately liable for any judgment in the arbitration action.

The opinion could be of value to advancement and indemnification specialists in how it employs Delaware contract law principles to determine the scope of rights and responsibilities in the various indemnification agreements.

Gary Wunderlich founded Wunderlich Investment Company, Inc. and parent Wunderlich Securities, Inc. in 1996 and sold them to Riley in May 2017 but two months later investment and merchant banking firm Dominick & Dickerman LLC brought an arbitration proceeding against Wunderlich and his two companies in the Financial Industry Regulatory Authority. At the time, he was an officer and director of his companies and Riley; Riley initially took over attorney selection and payment, the vice chancellor said.

After the April 2020 award of $10.5 million jointly and severally against Wunderlich and his companies, the claimants filed a petition to confirm the award in May and Riley petitioned to vacate it the next day in the U.S. District Court for the Southern District of New York. Meanwhile, Wunderlich, in April 2020, formally demanded that B. Riley “confirm” that it would indemnify him for “all costs, expenses, awards, losses and liabilities incurred by reason of the fact that he was an officer or director” of B. Riley, WIC, and WSI.

Riley threatened to pursue claims against Wunderlich for actions relating to the Arbitration and to recover from Wunderlich amounts Defendants paid in the Settlement Agreement, and Wunderlich filed this indemnification action in June seeking indemnification from his two companies, and Riley under the merger agreement.

The suit includes claims for:
•Reasonable attorneys’ fees and other expenses incurred in connection with defending against and pursuing vacatur of the Award and negotiating the terms of the Settlement
•Wunderlich’s fees and expenses incurred in this action, or “fees-on-fees.”
•A declaratory judgment obligating Defendants to indemnify Wunderlich for any contribution claim that Defendants “may seek to assert against him in connection with the Arbitration
•B. Riley’s alleged failure to tender payment in response to Wunderlich’s indemnification demand breached the Indemnification Agreement.

Declaratory judgment on contribution
The vice chancellor said “our courts will decline ‘to enter a declaratory judgment with respect to indemnity until there is a judgment against the party seeking it.’” quoting Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 572 A.2d 611, 632 (Del. Ch. 2005). He said, “Defendants have not asserted a contribution action against Wunderlich, and Wunderlich does not presently owe any amounts to be paid in connection with the Settlement Agreement.” If the defendants do not assert a contribution claim against Wunderlich “judicial intervention may be unnecessary.”

Breach of the Indemnification Agreement
“Defendants principally argue that Wunderlich waived his indemnity rights when he executed the Severance Agreement,” the court said. “Central to this decision is whether the indemnification provisions in the bylaws are preserved through a carve-out in the Severance Agreement, which, in turn, requires the construction of the terms of the Merger Agreement.”

But ‘[d]ismissal, pursuant to Rule 12(b)(6), is proper only if the defendants’ interpretation[s] [are] the only reasonable construction[s] as a matter of law” and that is not the case here the court said. “Wunderlich has stated a claim for indemnification…because he has advanced a reasonable interpretation of the WIC Bylaws, the Merger Agreement, and the Severance Agreement.”

Defendants rely on Julian v. Julian for the proposition that the only rights that “arise under” a contract are those that exist within its four corners,” Vice Chancellor but “Julian is factually inapposite because the relevant language in the Merger Agreement and the Severance Agreement are different from the arbitration provision at issue in Julian. Julian v. Julian, 2009 WL 2937121 (Del. Ch. Sept. 9, 2009).

He said he cannot determine as a matter of law that the Severance Agreement only released the indemnification rights listed in the Merger Agreement to the exclusion of any indemnification rights but he doesn’t need to at this stage.

Fees on Fees
Wunderlich’s claim for fees-on-fees in enforcing his indemnification rights, need not be dismissed just because he has not identified any applicable indemnification provisions, the court said, because under Section 145 of the DGCL, “without an award of attorneys’ fees for the indemnification suit itself, indemnification would be incomplete” and Wunderlich’s indemnification requires WIC to provide indemnification “to the fullest extent permitted by the Delaware General Corporation Law”.