Pontone v. Milso Industries Corp., C.A. No. 7615-VCP (Del. Ch. Oct. 6, 2014).

Why This Case is Important:  This decision of the Delaware Court of Chancery granted interlocutory appeals requested by both parties due to the arguable inconsistency in cases applying the Delaware Supreme Court decision in Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992), regarding what types of counterclaims are subject to advancement of fees.

Bottom Line Reasoning: The Court of Chancery reasoned that the parties would benefit and it would be in the interest of justice to have greater clarity on the issue of what types of counterclaims are advanceable.  The court explained that:  “Advancement cases can be quite contentious, time-consuming, and expensive.  A decision clarifying when counterclaims are advanceable would avoid unnecessary litigation and resolve at least some potential advancement disputes before they occur.”  Slip op. at 11.

Prior decisions in this case by the Court of Chancery have been highlighted on these pages.  The prior opinions of May 29, 2014, regarding a dispute over which counterclaims were compulsory and therefore advanceable, also addressed exceptions to a Special Master Report.  On September 3rd, the court denied a motion for reargument.

The court discusses Supreme Court Rules 41 and 42 which govern interlocutory appeals.  Both parties to the case sought interlocutory appeals based on slightly different arguments that had in common that several decisions of the Court of Chancery were not consistent with the two-prong test of the Delaware Supreme Court in Roven in connection with which counterclaims are advanceable, or subject to advancement of fees.  See, e.g., Zaman v. Amedeo Holdings, Inc., 2008 WL 2168397 (Del. Ch. May 23, 2008) (Strine, V.C.).  See also cases cited at footnote 18 of the letter decision in this case with citations to cases that are arguably not consistent with Roven, or at least internally inconsistent.

Pontone v. Milso Indus. Corp., et al., C.A. No. 7615-VCP, letter op. (Del. Ch. Sept. 3, 2014).  This decision denied a motion for reargument of an opinion regarding advancement of fees pursuant to DGCL section 145 available to officers and directors. The nuance addressed in this case involves the types of counterclaims that are available for advancement and indemnification. This decision reiterates that such a counterclaim must be considered a compulsory counterclaim, and “necessarily part of the same dispute” as the affirmative claims asserted against the advancee, and be advanced to “defeat or offset those claims.” See Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992).

Rule 59(f) motions for reargument are rarely granted, and this case was no exception to that statistical probability. In essence, the court regarded the motion as a reprise of previously rejected arguments, though perhaps providing additional details or nuances.

The prior decision in this case was recently highlighted on these pages.


In Pontone v. Milso Industries Corp., C.A. No. 8842-VCP (Del. Ch. Aug. 22, 2014), the Delaware Court of Chancery addressed the rights to advancement and indemnification of attorneys’ fees for a corporate officer pursuant to both DGCL Section 145 and applicable agreements among the parties. The most notable aspect of this 65-page scholarly treatment of this recurring issue in corporate litigation is how indemnification claims will be treated when two parties have arguably overlapping obligations to indemnify, and what percentage of “fees on fees” will be awarded if a party is not 100% successful. This opinion deserves careful reading, not only by those who want to know the latest iteration of Delaware law on this topic, but also by those who want a primer on the prerequisites and nuances of Delaware law on the perennial issues presented that are of importance to directors, officers and the companies they serve. 

It remains remarkable how, despite hundreds of Delaware decisions on these issues, new cases seem to present nuances that have not been addressed before. I co-author a chapter of an annually updated multi-volume treatise on corporate litigation developments that surveys court decisions around the country on indemnification and advancement, and even though the majority of cases nationwide, by far, are decided in Delaware, subtle differences in the facts of new cases often present new complexities not previously addressed by the myriad of decisions already published.

A prior related Delaware decision in this matter was highlighted on these pages.

Pontone v. Milso Industries Corp., C.A. No. 7615-VCP (Del. Ch. May 29, 2014).

Issue Addressed: The appropriate standard to apply to determine whether counterclaims are covered for purposes of a former director’s entitlement to advancement of attorneys’ fees.

Short Background

The Delaware Court of Chancery previously determined in a motion for partial summary judgment in this case that the former officer and director was entitled to advancement for certain counterclaims.  The court directed the parties to follow the procedures set forth in Fuhlendorf v. Isilon Systems, Inc., 2010 WL 4570225 (Del. Ch. Nov. 9, 2010), to process the request for advancement.  The court also previously appointed a Special Master to resolve any disputes between the parties regarding the amount of fees subject to advancement.  This memorandum opinion is a ruling on exceptions to the second report of the Special Master.

Key Rulings

The court observed some inconsistency between decisions of the Delaware Supreme Court and the Delaware Court of Chancery regarding the types of counterclaims eligible for advancement.

The court in this decision determined that the governing standard is the one established in Roven, under which compulsory counterclaims “advanced to defeat, or offset affirmative claims may be subject to advancement” (citing 603 A.2d at 824 (emphasis in original)).

The Court of Chancery concluded that the following two-part test would control:

A counterclaim will be considered to be ‘defending’ and thus advanceable, if it is: (1) ‘necessarily part of the same dispute,’ in the sense that it qualifies as a compulsory counterclaim under the prevailing Delaware and federal procedural standard; and (2) ‘advanced to defeat, or offset’ the affirmative claims.

Procedure to Determine Which Particular Fees from Among Multiple Claims Are Subject to Advancement (When Bills Are Not Clear On the Point)

The court also determined that when not all claims are subject to advancement, the procedure to follow in order to determine which time charges apply to only those claims that are subject to advancement, should be the procedure utilized by the Court of Chancery in Fasciana v. Electronic Data Systems Corp., 829 A.2d 160 (Del. Ch. 2003).

That methodology will determine what portion of the fees and expenses incurred by the parties seeking advancement relate to matters that were subject to advancement.  In that decision, the court directed the plaintiff to:  “Submit a good faith estimate of expenses incurred to date” that relate to the precise allegations that triggered advancement.  Id. at 177.

The court in that case also required the attorneys to provide a sworn affidavit certifying their good faith belief that the identified litigation expenses relate solely to “defense activity” undertaken in response to allegations for which advancement was owed.

Noting that “some level of imprecision will be involved in the retrospective accomplishment of this task,” the court nevertheless found that the procedure put in place provided adequate protection so that the defendant can reserve any ultimate fight about the precise amounts until a later notification proceeding.

The Fasciana decision provides a methodology, and accounts for different work required for various counterclaims.

The court addressed the concern that time entries that were redacted to avoid the revelation of work product or mental impressions created a problem to the extent that redacted time entries lacked meaningful indication of, for example, what general legal issues the billing individuals were researching or working on as a result of the heavy redactions.

The court emphasized that the company making the advancement payments was entitled to information “sufficient to indicate that the claimed expenses do not relate to counterclaims for which advancement has been disallowed, to the extent such information can be provided without revealing attorneys’ work product or mental impressions.”

The court resolved this concern by requiring counsel for the plaintiff to “indicate, under oath, whether any of those time entries [which were inadequately described] relate to those counterclaims [that were non-advanceable], and Milso’s advancement obligations shall be offset accordingly.” See generally, Paolino v. Mace Security International, No. 4462-VCL (Del. Ch., revised December 14, 2009), read opinion here. (In Paolino, the court bound the company by its attorney’s representation that the former director should not be entitled to advancement because the work on his complaint could not be distinguished from the counterclaim as the issues were so interwined. Based on that representation in that case, the court held that the former director was entitled to all the fees incurred and not just those for defending a counterclaim.)

The court also observed that the person seeking advancement needs to present a specific bill for a specific amount demanded in order to trigger the clock for pre-judgment interest, but in this case the court found that a blanket denial made that requirement futile.