BabyAge.com, Inc. v. Weiss, No. 4576-CC (Del. Ch. Oct. 1, 2009),  read opinion here.

This Chancery Court decision addressed two issues: (1) a motion for leave to amend a complaint; and (2) a motion to overturn the decision of a Special Master regarding advancement issues.
Court of Chancery Rule 15(d) permits a supplemental pleading to set forth new claims, with leave of Court, provided that the new claims relate to the original claims. The motion should be denied only if the plaintiff inexcusably delayed in making the request and the defendant is prejudiced as a result. The defendant bears the burden of proving inexcusable delay and resulting prejudice. In this case the new claim was for the advancement of legal fees incurred in pursuit of counterclaims. The original complaint made a claim for advancement of legal fees incurred in defending a declaratory judgment that was properly terminated. The new claim sufficiently related to the original claim and there was not a sufficient showing that prejudice would result from the amendment. The Court also reasoned that there was no need to engage in extensive new discovery.

Determination of Special Master

The Court made quick work of a request to reverse or overturn a determination by a Special Master about advancement of fees during May and June 2009. The Court denied that request and determined that the fees awarded by the Special Master should be paid immediately.

 

In Martinez v. Regions Fin. Corp. C.A. No. 4128-VCP (Del. Ch. Aug. 6, 2009),  read opinion here, the Court addressed a former bank executive’s claims to enforce a change of control agreement she had with her employer bank before that bank merged into a successor bank and for advancement of fees and costs with respect to this litigation.

Kevin Brady, a highly regarded Delaware litigator, provides the synopsis of this important decision on the topic of advancement rights.

Before Defendant Regions Financial Corporation (“Regions”) merged with AmSouth Bancorporation (“AmSouth”), Plaintiff Susan Martinez, who was an executive with AmSouth, had an employment agreement (the “Agreement”) that provided her with a golden parachute that would be triggered in the event of a change of control. When AmSouth and Regions merged, the change of control provision was triggered. However, instead of complying with the terms of the change of control provisions, Regions offered alternative agreements to Martinez on terms that were less favorable than the Agreement. Regions also said that any executive who declined the new offer would be terminated. In October of 2007, Martinez declined to accept the new contract. Regions therefore terminated her employment.

Despite severance benefits paid, pursuant to the Agreement, of more than $7 million, Martinez seeks additional benefits under the Agreement, “including payment of the salary she would have received had she continued to be employed by Regions for a second year in 2008, and a larger amount reflective of her bonus history and based on the annual bonus she contends she should have received for 2007.”

Martinez brought an action alleging the following: (i) breach of the Agreement by Regions for not providing Martinez with an annual bonus and salary under terms of the Agreement for the remainder of her employment period; (ii) breach of the covenant of good faith and fair dealing by failing to award a bonus for 2007; and (iii) specific performance of fee shifting and advancement provisions in the Agreement. Before the Court were Martinez’s motion for summary judgment as to Count IV and Region’s motion for summary judgment as to all counts.

It is interesting to note that the day after Regions filed an answer to the complaint, the plaintiff filed a motion for partial summary judgment on her claim for advancement. Regions thereafter “responded by seeking to preempt the advancement claim by shifting the focus of the litigation to the merits of the employee’s claims for additional compensation under the [Agreement]” and filing a motion for summary judgment on all counts in the complaint.

Court Finds That Having Received Severance Payments, Martinez Is Not Entitled To Both a Salary and Benefits for the Period After Her Termination

Martinez alleged that in addition to golden parachute payments, she is entitled to an unconditional salary and benefits through November 30, 2008 under the Agreement. The Court held that Martinez’s rights to the severance package precluded her from receiving additional salary payments and other compensation for the remainder of the employment period (a period when Martinez was no longer working for Regions). The Court looked to Gerow v. Rohm & Haas Co., 308 F.23d 721 (7th Cir. 2002), in finding that Martinez’s argument was unpersuasive in that it “makes no business sense” and would result in a windfall where “she would receive certain benefits or parts thereof twice, for no apparent reason.” Therefore, the Court granted Region’s motion for summary judgment holding Martinez’s interpretation that “she had a right to receive termination benefits, in the form of an attractive ‘golden parachute’ severance package, and employment benefits. . . .” to be untenable.

Extent of Martinez’s Bonus Raised Genuine Issues of Material Fact

Regions’ moved for summary judgment on the issue of whether Martinez was entitled to the benefit of a bonus for 2007. Under the Agreement, Martinez’s date of termination was the date she gave oral notice that she declined the new contract in October 2007. Martinez argued that she should be entitled to a bonus for the full year of 2007 because she worked through December 31, 2007. Because of the discrepancy as to dates when the actual employment ceased, the Court denied the motion for summary judgment due to factual questions as to what Martinez was entitled to in a bonus for 2007.

Martinez also claimed that she was entitled to the full bonus for 2007 because of a breach of the covenant of good faith and fair dealing. The Court likewise denied that motion as well. In support of its motion, Regions argued that “a claim for breach of the implied covenant of good faith and fair dealing cannot lie where a party relies on express language of a contract, such as the definition of ‘Date of Termination’ here.” The Court held that that argument was not “entirely persuasive . . . in this context. . . . [where t]he issue involves how the defined Date of Termination relates to a different last day of employment agreed to by all parties. The . . . Agreement does not expressly address that circumstance.” Because genuine issues of material fact remained as to the parties’ agreed upon last day of employment, this motion was denied.

A Broad Advancement Fee Provision Provides Advancement Regardless of the Merits of the Claims

Finally, the Court addressed both party’s motions for summary judgment as to Martinez’s entitlement to advancement fees. On this issue, the Court stated that:

[a]dvancement disputes are particularly appropriate for decision on summary judgment, as in most cases “the relevant question turns on the application of the terms of the corporate instruments setting forth the purported right to advancement and the pleadings in the proceedings for which advancement is sought.” As this Court has noted, resort to parol evidence in cases like this one is rarely appropriate, or even helpful, as corporate instruments addressing advancement rights are frequently crafted without the involvement of the parties who later seek advancement and often with little negotiation among any of the contending parties at all. Those factors are not problematic, however, as they tend to reinforce the legal policy of this State, which strongly emphasizes contract text as the overridingly important guide to contractual interpretation. Thus, if the contractual instrument unambiguously grants advancement, summary judgment is appropriate.

Region argued that the pertinent language “all legal fees and expenses which the Executive may reasonably incur” (emphasis added) required Martinez’s litigation to be reasonable in order to receive attorney fees. In light of Martinez’s dismissed claims regarding salary and severance benefits, Regions argued that Martinez’s claims were not reasonable. The Court disagreed finding that the Agreement provides

the right to reimbursement for “all legal fees and expenses” incurred as a result of a covered contest and to advancement of those fees “to the full extent permitted by law” “regardless of the outcome” of the contest. The imposition of a requirement that Martinez’s claims be substantively reasonable either as a precondition to advancement or as a basis for recouping advanced fees and expenses relating to an unsuccessful claim would undermine the plain meaning of that provision.

Even with this broad language, Regions contended that any award of advancement should be contingent upon a determination of reasonableness. Requiring such a determination “would defeat the purpose of advancing fees altogether . . . .” Nothing in the Agreement required a limitation of advancement based on reasonableness, and rather the advancement provision was quite broad. Citing to the Court’s decision in Lillis v. AT&T Corp., 904 A.2d. 325, 332-33 (Del. Ch. 2006), the Court reasoned, “[T]here is no requirement that advancement provisions be written broadly or in a mandatory fashion. But when an advancement provision is, by its plain terms, expansively written and mandatory, it will be enforced as written.”

The only limitation on advancement rights would be through the implied covenant of good faith and fair dealing where advancement could be denied if Martinez brought her claims in bad faith. Merely failing to prevail on her claim for the 2008 salary does not mean that Martinez litigated in bad faith. Thus, Martinez was entitled to reasonable attorneys’ fees and expenses incurred to date, plus interest, future fees and expenses, and even “fees on fees” for the actual indemnification suit.

 

An associate in the Delaware office of Eckert Seamans prepared this overview.
The Court of Chancery recently granted advancement of fees in Harrison v. Quivus Sys., Inc., C.A. No. 12084-VCMR (Del. Ch. Aug. 5, 2016) (TRANSCRIPT), based on the more flexible language of the Delaware LLC Act as compared with the more rigid structure of the Delaware General Corporation Law.

Background: Plaintiff John E. Harrison formed a joint venture with Prince Bander Bin Adbulla Bin Mohammed Al-Saud of Saudi Arabia in 2007. The name of the entity was Quivus Systems, Inc. (“Quivus”). Quivus was formed under the Delaware LLC Act and included advancement rights to members or managers of the company (and their heirs, estate, personal representative, or administrators) to the fullest extent allowed under Delaware law.
After the business relationship between Harrison and Prince Bander broke down, Harrison was removed from his position as CEO in 2014. One year later, Prince Bander filed a lawsuit against Harrison in Washington, D.C., alleging claims of mismanagement, incompetence, and corporate malfeasance while Harrison was serving as the CEO. Harrison sent a letter to Quivus demanding advancement of fees to defend the charges against him and Quivus refused. Harrison then filed this action in the Delaware Court of Chancery.
Analysis: The court began its analysis by observing that this case was not a normal, run-of-the-mill advancement action because it was being brought under the more flexible Delaware LLC Act and not under § 145 of the Delaware General Corporation Law. The significant difference between the two statutes is that advancement under the DGCL normally hinges on whether the defendant is being sued “by reason of the fact” that he took action in his official corporate capacity. Under the Delaware LLC Act, however, advancement and indemnification is available for “any and all claims and demands whatsoever.”
Defendants asserted that notwithstanding this broad language, Harrison did not have advancement rights because he was sued a year after being removed as the CEO. The court rejected that argument because it stated, “If nothing else, Harrison was a present manager when he was CEO of the company and when the events underlying the . . . action occurred.”
The court also found that the defendants’ interpretation improperly ignored the advancement clause’s language that future managers are owed rights. The court found that this rejected logic of the company was reminiscent of the movie Spaceballs, in that the company argued Harrison “could be a present manager in the past, but not in the present,” for the purpose of advancement. The court also reiterated Delaware’s public policy of respecting advancement rights to encourage qualified persons to serve as corporate directors without the ever-present threat of having to fund a lawsuit to defend themselves.
Finally, the court held that in light of Harrison’s success, he was entitled to attorneys’ fees on top of his advancement fees, more commonly known as fees on fees.

Advancement of fees to corporate directors has been the focus of many decisions of Delaware’s Supreme Court and Court of Chancery that have been highlighted on these pages over the last ten years. Both the statute and the cases that interpret them are often counterintuitive and one of the more vexing aspects of corporate litigation.

The point of this post is to feature a recent Order from the Court of Chancery that presented a novel approach to advancement disputes which one member of the Court referred to as the bane of his existence. Courtesy of The Chancery Daily, a highly respected subscription service that covers every aspect of activity in the Delaware Court of Chancery in an unparalleled manner, we have an Order in the matter of Colaco v. Cavotec Inet US, Inc., C.A. No. 10925-VCL, Order (June 1, 2015), which required counsel to meet and confer over “lunch or dinner” in order to try to resolve any disputes regarding the fees to be advanced. Brilliant idea in my view. That Order also provides for a procedure that the lawyers and parties need to follow to “tee up” and otherwise refine and clarify issues that arise in connection with the amount of fees that are payable.

A major issue that often arises, even when advancement has been ordered, is what fee amounts are payable when work performed may not be easily allocated, for example when some parts of litigation are covered by advancement and some are not.

The Chancery Daily reported today that the Court entered another Order in this case on June 29, 2015, requiring the parties, if they could not agree on the amount of fees to be paid, to follow the procedure outlined in the June 1 Order (including meetings over a meal), and failing that, to submit the dispute over the amount of fees to a Special Master to be suggested by the parties.

In addition to the court rulings that I have outlined on this blog, and the chapter I recently wrote on the topic for a book published by the ABA, last year I presented a PowerPoint on the topic at the American Bar Association’s Business Law Section meeting in Los Angeles, as the Chair of the Indemnification and Advancement Committee.

Supplement: In reply to this post, Kevin LaCroix, author of the highly-regarded and widely-read blog called The D & O Diary, sent me the following anecdote about the value of a “meet and confer over a meal” that a federal judge he clerked for often “ordered” in business disputes before him, which often resulted in a negotiated resolution:

… a lot of things could be worked out if people just talked to each other. I clerked for a federal district court judge after law school, Richard L. Williams in the Eastern District of Virginia, based in Alexandria, Virginia. Whenever he had a business case in his court, he would ask the parties whether the principals had spoken to each other about the case without their lawyers present. Everyone would look stunned and say no. He would then order the principals to go around the corner to Portner’s, a local restaurant, to tell the hostess that they had been sent there by Judge Williams to meet there, and that they required a private room. (The people at Portner’s were very accustomed to this.). The judge would then adjourn the court until after lunch. Nine times out of ten the principals would come back after lunch with big smiles on their faces and with the news that they had managed to settle the case. The lawyers hated it but everyone else, including the principals (and the folks at Portner’s) loved it.

 

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 3^rd, 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 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.

Fillip v. Centerstone Linen Services, LLC, C.A. No. 8712-ML  (Del. Ch. April. 14, 2014).

Why This Master’s Report is Highlighted: This 23-page letter ruling includes a thoughtful analysis about why the former officer of a company should be entitled to advancement for the fees he incurred in order to respond to affirmative defenses asserted by the company in response to a claim by the former officer–which defenses raised issues about his performance as a corporate officer.

This Master’s Final Report is subject to exceptions and de novo review by Vice Chancellor Glasscock, whose previous review, and affirmance, of a prior Master’s Report in this case was highlighted on these pages. Similar to the frustration experienced in proceedings pursuant to DGCL section 220, this decision features an eminently quotable introduction that reflects the frustration over the duration of matters that are supposed to be summary in nature:

Anecdotally, it often seems that a company challenging a former official’s right to advancement faces the same odds as a gambler placing a large bet on a long-shot at the racetrack. Although rational heads frequently prevail in business litigation, advancement cases rarely boast that feature, and this case is no different. This advancement proceeding has been pending for more than nine months and the company has pressed its arguments at length before two different judicial officers, but has yet to achieve anything more than a pyrrhic victory that likely was erased by the fees it has paid its own attorneys and the fees it has been ordered to pay on behalf of the plaintiff. That trend continues in this latest iteration of the parties’ dispute. Unfortunately, Centerstone has been victorious in delaying the inevitable and this case has tested the outer limits of any reasonable definition of a “summary proceeding.”