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An Eckert Seamans associate prepared this overview.

The Court of Chancery issued two opinions relating to a web of advancement and indemnification claims brought on behalf of multiple, separate plaintiffs: (1) Meyers v. Quiz-Dia LLC, C.A. No. 9878-VCL (Del. Ch. Jan. 9, 2017); and (2) Meyers v. Quiz-Dia LLC, C.A. No. 9878-VCL (Del. Ch. Jan. 10, 2017).  A previous blog post summarized the Chancery Court’s December 2, 2016 order to stay certain indemnification claims pending a determination as to arbitrability in the same case.

The January 9, 2017 Memorandum Opinion:

In the January 9, 2017 Memorandum Opinion, the Court concluded from an analysis of contractual drafting history that the plaintiffs were not entitled to advancement and indemnification.  This decision is important because it addresses the relatively rare instance in which the Court will consider extrinsic evidence.  Of cautionary note, draft agreements with attorney comments were discoverable under the circumstances.

Background: An in-depth overview of the background of this litigation can be found here.  The plaintiffs, previously affiliated with a non-party parent entity, Quiznos, brought suit asserting entitlement to advancement and indemnification from the defendant subsidiaries pursuant to multiple agreements.  The parties filed cross-motions for summary judgment regarding the question of whether the defendants assumed advancement and indemnification obligations.  The Court explained that the claims turned on whether the defendants assumed the obligations pursuant to a post-restructuring Assignment, Assumption, and Release Agreement (the “Assignment Agreement”).

Court’s Analysis: The Assignment Agreement was subject to New York law.  Under New York law, contracts should be construed in accordance with the parties’ intent.  To determine whether the parties intended for defendants to assume the obligations, the Court conducted an extensive analysis of the drafting history of the Assignment Agreement.

The Assignment Agreement was prepared during the restructuring negotiations and contained two separate deal points: (1) a release of any claims that the post-restructuring entities might have against the sell-side parties, and (2) the assumption and continuation of indemnification rights.  The parties drafted the Assignment Agreement late in the restructuring process after negotiating multiple contracts, including a principal restructuring agreement.

Because the Assignment Agreement was ambiguous as to which entities were to assume the obligations, the Court was permitted to consider extrinsic evidence regarding the parties’ intent.  Thus, the Court reviewed deposition testimony and considered the parties’ multiple agreements.  The Court reviewed draft versions of the agreements, including attorney comments, and it read the documents as a whole.

Conclusion: After considering drafting history, context provided by the multiple agreements, and deposition testimony, the Court held that the defendants did not assume the indemnification and advancement obligations. Therefore, the Court granted summary judgment in the defendants’ favor as to certain non-stayed claims left in the case.

 

The January 10, 2017 Memorandum Opinion:

Background: The Court’s January 10, 2017 Memorandum Opinion addressed a motion to vacate its November 30, 2016 order dismissing certain indemnification claims as premature pending related litigation in Colorado (the “Colorado Action”).  The plaintiffs had advancement claims pending simultaneously in the Delaware court.

Parties’ Arguments: The moving plaintiffs argued that because the Colorado Action had been dismissed, and the dismissal was affirmed by the appellate court, there was a final disposition in the Colorado Action.  Therefore, the plaintiffs argued that their indemnification claims became ripe in Delaware.

Court’s Analysis: The Court explained that although the federal appellate court affirmed dismissal in the Colorado Action, the deadline to petition the U.S. Supreme Court for a writ of certiorari does not pass until March 13, 2017.  As long as the decision in the Colorado Action is not final, outstanding Delaware advancement claims were ripe.  However, when the decision in the Colorado Action becomes final, the Delaware advancement claim will be moot, and the indemnification claims will become ripe.

The Court reiterated that advancement and indemnification are distinct legal concepts.  A claim for advancement is a summary proceeding, and ordinarily, the Court would not await developments in another jurisdiction before adjudicating an advancement claim.  However, in the present action, questions had been raised about the ability of the Court to rule on the plaintiffs’ advancement rights, as the plaintiffs did not produce detailed invoices in support of their claims until after the discovery cutoff.  The Court also pointed out that the plaintiffs were well-off and another plaintiff was funding their litigation efforts.  Additionally, the plaintiffs’ legal representation was not compromised by the lack of advancement to date.  Therefore, the Court determined that the plaintiffs would not suffer harm if it withheld a decision on advancement and indemnification until it was clear whether the Colorado Action would proceed to the Supreme Court.

Conclusion: Citing its inherent authority to control its own docket, the Court denied the plaintiffs’ motion to vacate.  The Court explained that whether the plaintiffs had a right to advancement or indemnification would soon become clear pending a final determination in the Colorado Action.  Therefore, the Court stayed further outstanding advancement and indemnification claims in the interim.

The Delaware Court of Chancery in a recent opinion allocates the precise amount of fees payable, as a result of a prior indemnification ruling, in light of the total amount of fees incurred by various parties and proceedings that were not all subject to indemnification obligations. The decision in Meyers v Quiz-Dia LLC, et al., C.A. No 9878-VCL (Del. Ch., Mar. 16, 2018), needs to be read by anyone who wants to know how, according to Delaware law, the exact of amount of fees will be allocated when indemnification is owed to less than all the parties, and for fewer than all of the underlying lawsuits, for which fees have been incurred and that may not be easily separated for purposes of determining what amounts are covered by an indemnification obligation. Several of the many prior Chancery decisions in this case have been highlighted on these pages and should be referred to for detailed background facts and procedural history.

After 13 years of highlighting Delaware decisions on indemnification and advancement rights of officers and directors, and publishing an annual book chapter on those cases for several years, this is the most helpful decision that I recall for its analysis of how to determine the allocation and exact amount of fees incurred and payable among multiple parties and different lawsuits, when not all the parties and not all the underlying litigations are covered by indemnification.

Noteworthy Aspects of Indemnification Law from This Decision

  • The court addresses the rare issue of a subrogation right to indemnification pursued by one of the companies involved that paid the fees for the officers and directors based on secondary liability for indemnification. [The company with the primary indemnification obligation initially refused to pay.] This opinion explains the prerequisites that need to be satisfied for one seeking reimbursement via subrogation of fees paid pursuant to a secondary obligation to indemnify. One of the requirements for subrogation in this context is that the payor not be a “volunteer” though that term in this context is not strictly defined and may be satisfied by the desire of a company to support its management.
  • Chancery Rule 88 was the procedural mechanism that the parties resorted to, in connection with the motion to quantify the exact amount of fees, because the prior opinion in June 2017 establishing the right to indemnification, highlighted on these pages, did not determine the amount of fees due–and the parties could not agree on the amount or allocation. A total of about $552,000 (out of a total of about $785,000) was sought for the underlying litigations, and about $820,000 for “fees on fees” out of a total of about $1.9 million was sought in this latest ruling. [Yes, the “fees on fees” amount exceeded the total of fees incurred, and now sought, for the underlying lawsuits.]
  • Allocation of fees payable for the two indemnitees in this matter was  determined by the court to be controlled by a prior agreement among the parties to share the fees for the underlying litigations. See footnotes 56 to 59. The court reasoned that the two persons entitled to indemnification pursuant to the prior ruling of the court, Smythe and MacDonald, had previously agreed that they would be allocated 20% of the fees in the underlying lawsuits. The company seeking subrogation on their behalf in this instant decision, therefore, was not entitled to seek reimbursement for more than the 20% that Smythe and MacDonald had previously agreed to be apportioned to them in a separate allocation agreement. The net amount awarded in this decision was about $145, 00o, therefore, instead of the more than $700,000 sought.
  • The allocation of “fees on fees” was based on a slightly different analysis. Citing to prior decisions that applied the principle of “reasonably proportionate to the level of success” to an award of “fees on fees”, and in light of the request in this matter for about $820,000 out of the $1.9 million in “fees on fees” incurred for both covered and uncovered parties, or 39% of the total, the court explained that based on the total number of initial claims and the amount of work on the successful claims, 50% success was the appropriate starting point for allocation of fees on fees in this case. The court then used the 20% allocation explained above for the underlying litigation and: “Multiplying the two percentages results in a fees-on-fees percentage of 10%.” Applying that percentage to the “base amount”, results in a fee award of $125,000.
  • The court compared that award with what the court described as “its experience” that briefing on summary judgment in this case “likely would have cost between $100,000 and $200,000”, and because the success achieved in this case could have been achieved via summary judgment motion, the court determined that the amount awarded was reasonable.
  • Pre-judgment interest was also awarded and the discussion about the date when that interest starts is worth reading verbatim. See footnotes 67 to 70 and accompanying text.

In a recent Delaware Chancery opinion, the court clarified that a corporate officer who was “successful on the merits or otherwise in the defense of an action” need not show good faith in order to be entitled to mandatory indemnification.  Meyers v. Quiz-Dia LLC, C.A. No. 9870-VCL (Del. Ch. June 6, 2017). See also DGCL Section 145(c). Several prior Delaware decisions in this case, which provide background details, have been highlighted on these pages.

Key Aspects of the Decision:  Many cases highlighted on this blog have addressed the various permutations of indemnification and advancement for officers and directors, so this decision will be limited to the nuances that make this ruling noteworthy (and “blog-worthy”).

The court explained that when mandatory indemnification is provided to the fullest extent permitted by applicable law, that includes the fees incurred to investigate claims  prior to a lawsuit.  In particular, in this matter, former officers had reason to believe that they would be sued, and thus began an investigation of those potential claims in order to prepare their defense.  Fees for that investigation are included in the indemnification rights to which they were entitled.

Although the indemnification provisions in this case were in the LLC context, because the language used in the LLC documents mirrored DGCL Section 145(c), the case law and statutory interpretation approach that construed that language was applicable.

The phrase in Section 145(c) that provides mandatory indemnification when a former director or officer has been “successful on the merits or otherwise in defense of any action . . ..”, has been interpreted very broadly to include almost anything short of a complete loss.  It permits an indemnitee to be indemnified as a matter of right even if the success includes, for example, dismissal without prejudice of a federal action – – and the same claims are later asserted again in a state court action.

Notably, the good faith requirement does not apply under Section 145(c) to a director or an officer who is “successful” in defending a claim.  See footnotes 39 and 40 and accompanying text.

An Eckert Seamans associate prepared this overview.

In Meyers v. Quiz-Dia LLC, C.A. No. 9878-VCL (Dec. 2, 2016), the Chancery Court stayed indemnification claims to determine whether they were arbitrable.

Background: This matter involves the perenial issue of arbitrability.  Plaintiffs sued three Quiznos sandwich shop entities for indemnification and advancement pursuant to multiple agreements.  Plaintiffs Greg MacDonald and Dennis Smythe were officers of Quiznos’ primary operating entity, QCE LLC (“OpCo”).  MacDonald and Smythe left the company after it restructured a large amount of debt in 2012, which transferred ownership of OpCo and its subsidiaries to investors who owned the debt (the “Funds”).

In 2014, OpCo filed for bankruptcy and disclosed that the Funds would pursue litigation against various individuals, including MacDonald and Smythe.  Thereafter, the two former officers demanded indemnification and advancement for expenses incurred in connection with the threatened litigation.  The plaintiffs then filed the present action, asserting, inter alia, indemnification claims pursuant to various agreements.  The original complaint did not seek indemnification under the plaintiffs’ respective employment agreements.

Approximately two weeks later, the Funds asserted fraud and securities-related claims against MacDonald, Smythe, and other individuals, alleging that they induced the Funds to participate in the restructuring by creating financial projections that made it appear that the post-restructuring debt burden would be sustainable.  After that litigation had been pending for two years, MacDonald and Smythe amended the complaint in the present action to assert indemnification claims pursuant to their employment agreements, which contained broad arbitration provisions.

Parties’ Allegations: The defendants argued that the amended claims should be dismissed because they were subject to arbitration pursuant to the employment agreements.  In response, MacDonald and Smythe argued that the defendants waived their right to arbitrate.  Although the employment agreements were not previously explicitly raised, the original claims were rooted in the employment agreements.  Therefore, the plaintiffs argued that the defendants should have demanded arbitration sooner, as the provisions in those agreements extended to claims for indemnification and advancement under separate and distinct agreements.

Court’s Analysis: The Court first decided the threshold question of whether it or an arbitrator should decide the issue of arbitrability.  The employment agreements, which were governed by Colorado law, provided that any claims arising out of the agreements were to be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “Rules”).  The Rules provided that the arbitrator shall have the power to rule on his or her own jurisdiction.  Thus, according to the employment agreements, it was for the arbitrator to decide arbitrability.

The Court then determined whether it was appropriate to stay or dismiss the action pending the arbitrator’s decision.  Because that question was procedural, the Court analyzed the issue under Delaware law, more specifically, the Delaware Uniform Arbitration Act, which generally incorporates the terms of the Federal Arbitration Act (the “FAA”).  Under the FAA, proceedings should be stayed when the issue involved  is referable to arbitration.  Because the issue of arbitrability was referable to arbitration, the Court stayed MacDonald’s and Smythe’s claims pending the arbitrator’s decision.  See generally, the Delaware Supreme Court’s seminal Willie Gary opinion on this topic highlighted by this blog here.

The Court noted that if the arbitrator determined that the claims were arbitrable, it would dismiss the action for lack of jurisdiction, and it would defer to the arbitrator to determine whether the defendants waived their right to arbitrate.  Finally, the Court explained that the stay was restricted solely to the claims under the employment agreements.  Although there existed some risk for overlap, because those claims were not sufficiently intertwined with other agreements at issue in the action, a broader stay was not warranted.

Conclusion: The Court issued a limited stay pending referral to an arbitrator to determine the issue of arbitrability of the indemnification claims under the employment agreements.  This decision is notable for those who may not have realized that indemnification claims are subject to arbitration provisions.

Here is a thought-provoking post by Professor Bainbridge about the partnership law issues that were raised when a partner at the Orrick firm had the audacity to exercise his personal views which apparently were too politically incorrect for one of his other partners, who found it necessary to send an email around the firm to express his outrage at the firm being affiliated with someone who had politically incorrect views. What ever happened to lawyers who respected diverse viewpoints?

UPDATE: Professor Ribstein addresses here, the partnership law issues raised by Professor B.

This post has relevance to this blog because it is based on a post from a nationally prominent corporate law professor and it is about a topic so fundamental that it should be of interest to most readers. So, here is a quote, via Professor Bainbridge, with several insights by the scholarly law professor Rick Garnett, regarding this week’s U.S. Supreme Court decision, with reference to anti-Catholicism as the "last acceptable prejudice":

A chill wind from Rome . . ."

. . . is what a number of bloggers and commentators perceive in the partial-birth-abortion decision.  I suppose I should not be surprised by this line, but — I admit — I’m disappointed.  And then there’s this, from the Philadelphia Inquirer (which characterizes as "activist" a decision that declines to invalidate a measure which has always enjoyed broad and bipartisan support or to read broadly a precedent which invalidated an earlier law which also enjoyed broad and bipartisan support):

My point here is not to vent about the "last acceptable prejudice" .  What’s irritating, to me, as a lawyer, about the cartoon is the claim that it is as Catholics — i.e., because they are Catholics, and not because they think, as intelligent and engaged lawyers, that the Constitution does not disable legislatures entirely from regulating what most people (not just Catholics, fideists, and sexists) regard as a particularly gruesome abortion procedure  — that the five Justices who voted to uphold the ban.

Not only that . . .

More striking, and sad, for me, is what the cartoon suggests, and reveals, about the state and future of debate about moral questions.  Look at the faces of the dissenting Justices — quizzical, sad, bewildered, as if to say, "what are these guys talking about?" — while the majority are smug and complacent.  And why shouldn’t they be?  They didn’t have to think or reason; only to put on their mitres!

It is, increasingly, thought to be enough to discredit an argument or position — any argument or position — merely to note that the person who makes it is a religious believer, and to write off any moral argument with which one disagrees as "religious."  (This practice, of course, does not run both ways:  arguments against torture, the death penalty, race discrimination, and income inequality are "secular"; arguments against partial-birth abortion or the creation of embryos for research are "religious.")  It appears, increasingly, that arguments whose trajectory is not in line with the standard liberal / autonomy / choice line are not only rejected, but declared not to be permissible arguments. 

And now, apparently, even words whose use suggests the embrace of certain premises are out of bounds.  In Justice Ginsburg’s dissent, she took the time to complain that there was something improper, and threatening, about the majority’s use of words like "abortion doctor" and "unborn child"; but, of course, the use of these words represents an argument.  To rule out the words is to rule out, as illegitimate, the argument they reflect.

I have long understood that many (most, probably) of my friends — decent, intelligent, thoughtful people — disagree with me about abortion (and constitutional law).  This is true, I understand, of many of my co-bloggers and Prawfsblawg readers.   I don’t think, though — at least, I try hard not to think — that their disagreement is merely a product of their funny-hat choice.

Here is more.

Continue Reading This Week’s U.S. Supreme Court Partial-Birth Abortion Opinion