A recent Delaware decision addressed the request for a claw-back of legal expenses that a company was ordered to advance to an LLC manager in a prior Court of Chancery decision. In the case styled: New Wood Resources, LLC v. Baldwin, C.A. No. N20C-10-231-AML-CCLD, Order (Del. Super. Aug. 23, 2021), the Complex Commercial Litigation Division of the Delaware Superior Court determined that pursuant to the terms of an LLC Agreement (for which the Delaware LLC Act allows much greater latitude than Section 145 of the Delaware General Corporation Law on this issue), the court determined that some of the amounts advanced were required to be returned.

Most noteworthy, however, about this decision, is that the court determined that the undertaking to repay the amounts advanced did not apply to the “fees on fees” that the Court of Chancery had also required that the company pay in the prior advancement action. The court explained that the undertaking only applied to “funds advanced,” but that undertaking did not apply to the repayment of “fees on fees” because the court reasoned that “such sums constitute indemnification, rather than advancement.” Order at 12. [Readers should be aware that in Delaware, court decisions issued by Order may also be cited in briefs, even if the decision is not a formal opinion.] See footnote 43 (judge explains that even though the parties did not raise the distinction between advancement and indemnification in connection with the claw-back arguments, the court determined that: it was “compelled by principles of comity to raise the issue sua sponte about the “fees on fees” that the Court of Chancery ordered the company to pay which should be considered differently from the advancement ordered by the court and governed by the undertaking.”)

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 Chancery Court recently denied as premature Stimwave Technologies Inc.’s motion to recoup $1.2 million in legal fees it had allegedly been tricked into advancing to its ex-CEO in defense of the medical device maker’s breach-of-duty charges against her and her director husband in Perryman et al. v. Stimwave Technologies Inc. No. 2020-0079-SG, opinion issued (Del. Ch. April 15, 2021).

Vice Chancellor Sam Glasscock’s April 15 letter-to-counsel opinion found that although Laura and Gary Perryman signed a joint agreement to repay any advancement that a court decided they didn’t deserve, and Vice Chancellor Glasscock had previously found Laura likely forged her advancement contract, that did not entitle Stimwave to recoup funds from joint marital assets or offset deserved payments to Gary.

The decisions should be of interest to attorneys involved with start-up companies which are often begun and run by families who may offer investors unique roles in corporate governance in return for financing.

Background

Vice Chancellor Glasscock’s Dec. 9, 2020 decision had turned on the novel issue of whether the ex-CEO and director had complied with an STI charter change that purportedly gave investors in the company’s Series D Preferred stock, voting as a separate stock class, power to nullify a director or officer’s transactions, including indemnification pacts and advancement for their actions. Perryman et al. v. Stimwave Technologies Inc. No. 2020-0079-SG, memorandum opinion issued (Del. Ch. Dec. 9, 2020).

He found that Laura apparently doctored her agreement to make it look like it predated the charter change, falsely clearing her for advancement. That prompted Stimwave’s recoupment motion.

The vice chancellor said his April 15 decision on the rare recoupment issue was guided by the Delaware Supreme Court’s seminal opinion in Kaung v. Cole Nat. Corp., 884 A.2d 500, 509 (Del. 2005) — which found that recoupment for fees improperly advanced is premature if brought before the indemnification liability is determined, and that is the case here.

Laura Perryman was a founder and CE0 of the Tucson-based marketer of wireless micro size injectable medical devices from when it was re-chartered in Delaware in 2010 until November 2019 when she was asked to step down amid a Department of Justice investigation.

Laura sent the STI board an email the next day with an attachment that she identified as her indemnification agreement dated January 1, 2018 and based on that document, the board agreed to pay for her attorney bills for the investigation.

But the next month, STI filed its own complaint against its ex-CEO claiming she breached her fiduciary duties by directing employees to alter bills to falsely make it appear they had been paid and later added a charge that she misused company funds to pay her son’s apartment rent and bonuses to favored employees.

The decision on recoupment

The court said both Stimwave’s entitlement to and practical ability to obtain disgorgement are “fraught with difficulty” since Laura has no real estate and less than $50,000 in liquid assets rendering her apparently unable to repay and Stimwave has no right to access Gary’s assets, or to offset advancement in this context.

“Delaware has, ever since 1852, repudiated the doctrine of coverture,” he noted. “Since that time—a decade, I note, before the Civil War—this Court has recognized women as juridical persons, full citizens with property rights separate from those of their husbands.”

And allowing a set-off of debt owed to an entity, even one owed directly by an indemnitee, against his advancement rights “is unwarranted and would defeat the purpose of advancement, which is to provide individuals with an incentive to provide corporate services and allow them to defend a claim that they may not be able to fund themselves, pending indemnification,” the vice chancellor ruled.

Finally, the entire issue of recoupment is premature because, “the question of indemnification has not yet been litigated, much less determined, and whether Stimwave may recoup its improperly advanced fees will depend on that determination,” he said in denying the motion without prejudice.

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 Court of Chancery recently found Delaware’s Limited Liability Company Act requires American Rail Partners LLC to reimburse the legal bills a managing member and its directors and CEO incur in defense of ARP’s unjust enrichment and mismanagement charges — even if such “first party claims” are not specifically covered, in International Rail Partners LLC et al. v. American Rail Partners LLC, No. 2020-0177-PAF, memorandum opinion issued, (Del. Ch. Nov. 24, 2020).

Vice Chancellor Paul Fioravanti, Jr.’s Nov. 24, 2020 memorandum opinion on a novel advancement issue rejected ARP’s contention that two-member limited liability company agreements, like two-party commercial contracts, provide fee-shifting in some situations but not advancement and indemnification for the company’s suit against a member.

Ruling on dueling summary judgment motions, he sided with the plaintiffs seeking advancement, finding that unlike commercial contracts, the Delaware Limited Liability Company Act Section 18-108 was designed to encourage LLC officers, directors and members to serve without worry about suits over their actions on behalf of the company.

The underlying action

ARP filed an underlying action in February in the Delaware Superior Court, spurred by non-party member Newco SBS Holdings, LLC’s complaint that the management of the other member, International Rail Partners LLC, and ARP CEO and Chairman-of-the-Board Gary Marino unjustly profited at ARP’s expense. American Rail Partners, LLC et al. v. International Rail Partners LLC et al., C.A. No. N20C-02-283 EMD complaint filed (Del. Super. Feb. 28, 2020).

When IRP, Marino and their corporate allies sought advancement, ARP claimed the type of claims in the Superior Court suit could never be indemnified despite the broad scope of Section 10.02(c)(i) of the LLC Agreement, contending that an indemnification or advancement provision may only cover first-party claims if it expressly says so.

The court said that argument is grounded in a line of decisions which established a presumption that a standard indemnification provision in a bilateral commercial contract would not automatically be presumed to provide for fee-shifting in the indemnity section of a contract. TranSched Sys. Ltd. v. Versyss Transit Solutions, LLC, 2012 WL 1415466 (Del. Super. Mar. 29, 2012).

Not like a commercial contract

That decision spawned others that barred fee shifting in a commercial contract unless specifically spelled out, and the only Chancery Court ruling on the issue, Senior Housing Capital, LLC v. SHP Senior Housing Fund, LLC, 2013 WL 1955012 (Del. Ch. May 13, 2013), followed TranSched in holding that the indemnity provision in a management agreement was not a valid fee-shifting provision between the parties because it did not contain language indicating an intent to cover first-party claims.

But Vice Chancellor Fioravanti said the parties here were unable to locate any case applying the first-party/third party distinction to an indemnification or advancement provision in a certificate of incorporation, corporate bylaws, limited partnership agreement, or limited liability company agreement.

Defendant ARP argued that there was no significant difference between those agreements and a commercial contract, but the court said, “Unlike typical commercial contracts, indemnification and advancement provisions in LLC agreements are derived from clear statutory authority and apply much more broadly.”

The LLC Act statute, 6 Del. C. § 18-108, prescribes that an LLC contract “may indemnify any person to the fullest extent possible by contract. The only restrictions are those expressly set forth in the contract,” the opinion says. Therefore, “the clarity of the provision regarding power to indemnify, located in Section 18-108, underscores an effort to avoid any uncertainty or negative implication that might exist if the statute were silent on this important point.”

Not like TranSched

Even though “alternative entity agreements are a type of contract” the broad language of the LLC Agreement’s indemnification provision, and the strong public policy in favor of indemnification and advancement,” caused the vice chancellor to conclude that the first-party/third-party claim distinction applied in the TranSched line of cases is inapplicable here.

Even if there is a fee-shifting provision in the parties’ LLC agreement, it expressly applies only to members so it does not eviscerate the indemnification and advancement rights found elsewhere in the pact, the court ruled.

Defendant argued that ARP’s management agreement is the only possible source of indemnification because the claims in the Superior Court Action arise from IRP providing services to the company, but the vice chancellor held that, “because the company has asserted non-contract claims in the Superior Court Action, the court cannot determine at this stage whether the company’s claims asserted against the defendants in that action (i.e., Plaintiffs here) are exclusively governed by the management agreement.”

In granting summary judgment for plaintiffs and denying judgment to defendants, the court ruled that because the plaintiffs are entitled to advancement, they are also entitled to reasonable attorney fees and expenses to pursue advancement, commonly referred to as “fees-on-fees.”

The Court of Chancery recently refused to reconsider its decision that, pending resolution of a challenge to the validity of their indemnification agreements, Stimwave Technologies Inc. must advance defense costs to a CEO and a director in actions by the company and the U.S. Department of Justice.

Vice Chancellor Sam Glasscock’s May 13 letter-to-counsel opinion denied Stimwave’s motion to reargue his April 1 bench ruling after rejecting the medical device developer’s contention that his order to advance expenses effectively granted mandatory relief without a trial when key facts were in dispute.

The Vice Chancellor said he granted preliminary injunctive relief because of “the summary nature of, and the public policy undergirding, advancement actions” where the Court “has long recognized that a delay in recognizing advancement rights may ultimately render those rights illusory.”

The short decision is yet another example of the Court’s reluctance to let companies inject novel objections to established advancement provisions to hold up reimbursement of defense funds to eligible officers and directors in actions relating to their corporate positions.

According to its website, Stimwave is a Delaware-chartered medical technology company founded by former CEO Laura Perryman in Pompano Beach, Florida, that markets an electronic pain relief device.  In April 2018, its board adopted, and the stockholders ratified, an indemnification agreement that she would supposedly be able to immediately offer to the directors and officers.

But one year later, Stimwave had undergone management changes and filed suit against Laura and Gary Perryman in an underlying action in Chancery. When she and fellow director Gary Perryman sought legal fee reimbursement for that suit and an investigation by the U.S. Department of Justice, the request was denied.  Stimwave Technologies Incorporated v. Laura Tyler Perryman, et al., C.A. No. 2019-1003-SG, complaint filed (Del. Ch. Feb. 11, 2020).

They filed a complaint for advancement, with a motion to expedite and request for temporary restraining order February 11, 2020, claiming Stimwave violated their valid agreements.

The Vice Chancellor on February 20 granted their motion to expedite, but denied their TRO motion, and instructed the parties to proceed to a judgment on the pleadings.  Then on April 1, from the bench, he denied their motion for judgment on the pleadings but converted it into a motion for interim relief, which he granted.

When Stimwave sought reargument — arguing that the decision violated the fundamental precept that mandatory injunctive relief be ordered only after trial or on facts not legitimately in dispute, citing C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d 1049, 1071–73 (Del. 2014).  But the Court said it appeared that Stimwave’s board validly adopted the indemnification bylaw in April 2018 and the shareholders ratified it days later.

That, coupled with (a) the Perrymans’ apparent promise to repay the advanced funds if the court found them not to be entitled to advancement and (b) the bylaw’s wording that, the court found, likely referred to current officials that included the Perrymans, seemed on its face, to favor the petitioners here, the court said.

But Stimwave maintained that the wording actually only applied to an earlier designated director and not the Perryman petitioners apparently due to a problem with the timing of the board’s adoption, the stockholder ratification and when the CEO conferred the indemnification.

The vice chancellor said on its face, the indemnification more likely applied to the then-current officers and directors.  He found that under the circumstances, since the Perrymans had apparently made the required commitment to repay the advance funds if they were for any reason not entitled to them, the court’s practice was to require payment until the validity of the pacts was resolved.

“Litigating a defense attacking the validity of a contract for advancement before providing advancement might leave the petitioners unable to effectively vindicate their contractual advancement rights, assuming they exist, as well as to defend the underlying substantive action and investigation, threatening imminent irreparable harm,” the opinion said

However, he limited the advancement order to legal costs incurred from the date of the opinion forward, excluding legal fees the Perrymans had already incurred in responding to the DOJ’s investigation.

The vice chancellor reasoned in support of his holding that: “the unusual procedural posture of this matter, the nature of the respondent’s defense that the indemnification agreements are void, and the fact that the forgoing defense will be addressed promptly,” and because the petitioners could seek to recover those amounts once the validity of the indemnification agreements is resolved.

 

A recent letter ruling from the Court of Chancery on a nuance of the law of advancement deserves to be remembered. The Court’s decision in Day v. Diligence, Inc., C.A. No. 2020-0076-SG (Del. Ch. May 7, 2020), is short but important due to its clarification of a finer point regarding the duty of a company to advance fees prior to the date of the undertaking required under DGCL Section 145(e).  The Court reasoned that an advancement obligation may cover fees incurred prior to the receipt of a requisite undertaking.

The multitude of highlights of advancement decisions that have appeared on these pages over the last 15 years provide extensive details about the intricacies of Section 145(e), as do the several book chapters I have written on the topic. This cursory post assumes a basic understanding of the Delaware law of advancement of fees for directors and officers pursuant to Section 145(e), and based on that assumption this pithy post provides the following quote from the Day case, that should be in the toolbox of every corporate litigator.

The Court held, after reciting DGCL Section 145(e), that:

Nothing in the language of the statute, or the policy implicit therein, limits advancement to sums incurred post-undertaking, to my mind. The Defendant, I note, has pointed to none. Nor has it cited to precedent….

Adding to the multitude of Delaware decisions featured on these pages involving the right of corporate directors and officers to advancement of their fees incurred to defend claims against them, pursuant to DGCL Section 145, or by agreement, we offer highlights of Sider v. Hertz Global Holdings, C.A. No. 2019-0237-KSJM, Order (Del. Ch. June 17, 2019), a recent Delaware Court of Chancery ruling. Our highlights appear in the form of an article published in the current edition of The Delaware Business Court Insider, co-authored by yours truly and my colleague Chauna Abner. This decision comes in the form of an Order, but regular readers know that Orders and transcript rulings from the bench may be cited in Delaware briefs as authority.

In Sider, the Court denied a motion for interlocutory appeal of a decision granting advancement, reasoning that one of the requirements for such an appeal was not met: “that there is no just reason for denying the appeal.” Other basic but important advancement principles, and nuances, are recited by the court, with copious citations in robust footnotes.

A recent transcript ruling by the Delaware Court of Chancery in Gasgarth v. TVP Investments, LLC, C.A. No. 2018-0621-JTL, (transcript ruling)(Del. Ch. Dec. 7, 2018), explained that the right to advancement was not extinguished by an amendment of a counterclaim to specifically withdraw breaches of fiduciary duty counterclaims and remove factual allegations relating to the service of the plaintiffs (counterclaim defendants) as directors and officers.

The court reasoned that it is not bound by the four-corners of a pleading, but rather will view the context of the litigation as a whole to determine if advancement is warranted in light of all the facts and circumstances of the case and the role that the directors and officers played in connection with the claims against them.

Relying on Delaware precedent, the court in this transcript ruling also included as part of the “fees on fees” awarded, a success bonus, which was part of the engagement letter with counsel.

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.

A recent decision by the Delaware Court of Chancery contrasted the difference between advancement rights based on an L.P. agreement as compared to the right of a corporate director or officer to receive advancement of fees and costs to defend a lawsuit. In Weil v. VEREIT Operating Partnership, L.P., C.A. No. 2017-0613-JTL (Del. Ch. Feb. 13, 2018), the court also distinguished between the different procedural and substantive aspects of an indemnification claim as compared to an advancement claim. This opinion provides important statements of the law and nuances of practical value to those engaged in this frequent subject of Delaware corporate and commercial litigation.

Also, unlike the claims in the context of an alternative entity such as an L.P. agreement, Delaware General Corporation Law (DGCL) Section 145 provides certain “default boundaries” that are not necessarily applicable to an advancement claim based on pure contract terms in the L.P. context. Unlike rights based on an L.P. agreement, generally speaking, once there is an advancement right in the corporate context, DGCL section 145 imposes certain restrictions on the corporation that attempts to deny those rights. See, e.g., one of the three decisions in the Holley v. Nipro cases highlighted on these pages. The Holley decisions provide helpful basic and nuanced principles on this topic.

For those who need to know the latest iteration of Delaware law on advancement and how it differs from indemnification in the L.P. context, this 37-page opinion with over 70 footnotes is required reading. For purposes of this short blog post that is intended for busy corporate litigators, I provide highlights of the decision:

Background:

  • The procedural context of this case was a motion for summary judgment which featured 55 exhibits. There were multiple parties involved and several different entities–only some of whom were entitled to advancement or indemnification under the applicable alternative entity agreements.
  • Because this advancement claim was based on an alternative entity agreement, as opposed to corporate documents that were subject to the default constraints of DGCL section 145, the primary framework of the analysis was contractual and not statutory. The court provides a comprehensive review of the detailed factual setting which is necessary to grasp for a complete understanding of the case.

Key Legal Principles:

  • The court referred to Section 17-108 of the Delaware Revised Uniform Limited Partnership Act which gives a limited partnership the power to indemnify any partner or other person, and also includes an empowerment to provide for advancement. Section 17-108 defers completely to the contract of the parties to create rights and obligations with respect to indemnification and advancement of expenses.
  • Importantly, Section 17-108 of the LP Act gives limited partnerships wider freedom of contract to draft their own framework for indemnification and advancement than is available to corporations under Section 145 of the DGCL, which creates mandatory indemnification rights for corporate indemnities in some circumstances–and also bars indemnification in others. See footnote 8 for supporting cases.
  • The court provided a thorough contractual analysis of the advancement and the indemnification provisions in the LP agreement. The court noted the tension and lack of consistency in the LP agreement between the provisions for advancement and the legally quite distinct conceptual analysis of indemnification. The agreement here appeared to describe differently those covered by advancement and indemnification.
  • The court emphasized the important distinctions between an analysis for advancement, which is a summary proceeding where the only question involves the extension of credit, and a completely separate procedural and substantive analysis of indemnification.
  • In advancement cases, when there is an issue whether someone is sued in a covered or non-covered capacity, the court will generally resolve the doubt in favor of advancement, and defers until the subsequent indemnification analysis whether or not the advanced funds might later be subject to disgorgement if a party is later determined to be ineligible for indemnification. See footnotes 20 through 23.
  • The court distinguished the case of Fasciana v. Electronic Data Systems Corp. (“Fasciana I”) 829 A.2d 160 (Del. Ch. 2003), because that case dealt with the determination of who was a “agent” for indemnification purposes under Section 145, but this case focuses on advancement.
  • Based on the contractual basis on which the advancement claims were made in this case, the court analyzed and applied the defined terms, whose definitions were not the model of clarity. See footnotes 28 and 29 and accompanying text.

Specific Disputes About Allocation of Which Fees are Covered

  • Although the parties seemed to acknowledge that there was a right to some advancement, the challenges were based on whether or not all of the fees demanded were properly allocated among covered and non-covered proceedings, as well as covered and non-covered persons.
  • Consistent with prior case law, the court explained that the court will not engage in a line by line review of bills to determine if allocation was proper between covered and non-covered persons or proceedings, and will rely on the certification of senior counsel involved at the advancement stage of the proceedings.
  • The court will wait for the indemnification stage to determine a more specific allocation of what fees were incurred for covered parties and which would be allocated to non-covered parties. See footnotes 33 to 39 and accompanying text.
  • Nonetheless, the court emphasized that an effort must be made to allocate fees, to the extent possible, between those incurred for covered persons and underlying covered proceedings, and those fees incurred for persons or proceedings that are not covered by advancement. See footnote 40.

Unilateral Imposition of Conditions to Payment Rejected:  

  • This is an important principle that should have widespread application even outside the alternative entity context: A company cannot unilaterally impose conditions on advancement that are not contained in the underlying documents on which advancement is based. For example, in this case the court rejected efforts by the company to impose a litigation budget or impose billing guidelines as a condition for advancement because those conditions were not included in the advancement provision of the LP agreement. See footnotes 46 to 48 and accompanying text.
  • Likewise, the court rejected an argument that a company could refuse to pay for annual increases in hourly rates. No such limitation was in the L.P. Agreement.
  • Regarding invoices from third-parties, the court determined that at the advancement stage, it was sufficient to rely on the verification of a senior attorney involved that those invoices were necessary and reasonable.

Reasonableness of Total Fees:

  • The limited partnership agreement allowed for advancement of “reasonable expenses.” Consistent with Court of Chancery Rule 88, as well as Delaware Lawyers’ Rule of Professional Conduct 1.5(a), the court explained that the fees requested must be reasonable in amount based on the eight factors applied under Rule 1.5(a) to make that determination.
  • Nonetheless, the court will not review each line item or time entry and disbursement, nor will it second-guess the judgment of lawyers on the appropriate staffing of the case at the advancement stage.
  • The parties do not have a blank check in this context, however, and the amount of fees are subject to review again at the indemnification stage. The court also observed that the client should also serve as a level of review because until indemnification is decided, that person incurs the risk that the fees may need to be paid back.
  • Regarding the challenge to the rates charged by staff attorneys, the court found that there were factual issues that could not be resolved at summary judgment stage.
  • Regarding allegations that the hours worked on the case were excessive and that the Paul Weiss firm overstaffed the matter, the court determined that it would rely on a certification from a senior partner of Paul Weiss by sworn affidavit that the amount of fees and expenses were reasonable under the circumstances.
  • The court emphasized however that the firm does not have a blank check and that the person receiving the advancement has an incentive to monitor those bills in the event that it may be ultimately determined that the advancement was improvidently granted and may later need to be disgorged. Thus a more detailed review of fees alleged to be excessive is deferred until the indemnification stage, at which time levels of staffing and number of hours worked and rates can be reviewed.

Procedure for Determining Advancement Due on Future Invoices:

  • The court described at pages 32 through 37 of the slip opinion the detailed procedure that the court required to be followed going forward based on the very specific methods described in the Fitracks case which is a very comprehensive procedure designed to minimize the amount of disputes about monthly bills that the court will need to address going forward.

Regarding Fees on Fees:

  • The court determined that because only some of the claims were successful, only a partial amount of fees on fees would be awarded and that the parties should use the same Fitracks procedure to determine those amounts.

The most noteworthy point of this short letter ruling in which a former corporate officer is granted advancement pursuant to Section 145 of the Delaware General Corporation Law, in Kolokotrones v. Ninja Metrics, Inc., C.A. No. 12413-VCS (Del. Ch. Dec. 18, 2017), is that the court rejected an argument based on the fact that the underlying litigation for which advancement was sought had been concluded by the time that a formal order granting advancement was entered on the docket.  Although in theory, when the underlying claim that gave rise to any advancement right was dismissed or finally concluded, arguably that claim for advancement then became a claim for indemnification, assuming that the party seeking advancement prevailed, the court found that argument unpersuasive based on the procedural posture of this case.

The court explained that otherwise it would be placing form over substance and benefiting the defending party for its procedural “machinations.” In addition, the court did not want to reward the delay of the defending party to the detriment of the party seeking advancement.

Moreover, the original decision in this case was rendered as a bench ruling, and the letter ruling that denied a motion for reargument explained that the original decision had granted fees on fees. Thus, notwithstanding a prior final resolution of the underlying litigation that gave rise to the advancement claim, because fees on fees were granted for the advancement claim, simply because the underlying litigation concluded, does not, in the court’s words:  “under any view of the world, moot that claim.”