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The Court of Chancery in Danenberg v. Fitracks, C.A. No. 6454-VCL (Mar. 5, 2012), addressed important issues of advancement and indemnification. After the parties met and conferred but failed to reach any agreement as to amounts, the Court on March 5, 2012, awarded $292,019.91 to petitioner Noam Danenberg as advancement from respondent Fitracks, Inc. in connection with his defense of claims asserted against him by Aetrex Worldwide, Inc., Fitracks’ parent, in the underlying litigation in the District of Delaware, and $276,332.13 as indemnification from Fitracks for the Court of Chancery proceeding.  For background on this case, see the January 3, 2012 decision that granted summary judgment in favor of Danenberg and against Fitracks as to liability with respect to advancement and indemnification.

A Fee Application — The “Reasonableness Standard”

A party making a fee application bears the burden of justifying the amounts sought with “a good faith estimate” of the fees and expenses.  In addition, the petitioning party must submit an affidavit or statement itemizing, among other things, the expenses incurred and services rendered. While the Court has a great deal of discretion in awarding a reasonable fee, Delaware precedent dictates that in evaluating the reasonableness of an advancement request, the Court must consider the factors set forth in the Delaware Lawyers’ Rule of Professional Conduct 1.5(a), (which the Court noted are “substantively indistinguishable” from the factors enumerated by the Delaware Supreme Court in Sugarland Indus., Inc. v. Thomas,  420 A.2d 142, 149 (Del. 1980)) which include:

(1)         the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2)        the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3)        the fee customarily charged in the locality for similar legal services;

(4)        the amount involved and the results obtained;

(5)        the time limitations imposed by the client or by the circumstances;

(6)        the nature and length of the professional relationship with the client;

(7)        the experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8)        whether the fee is fixed or contingent.

In addition, the Court must consider “whether the number of hours devoted to litigation was excessive, redundant, duplicative or otherwise unnecessary.”  Determining the reasonableness of amounts sought “does not require that this Court examine individually each time entry and disbursement.”  As the Court here noted “[f]or a Court to second-guess, on a hindsight basis, an attorney’s judgment . . . is hazardous and should whenever possible be avoided.” Moreover, “[i]n making a decision to advance expenses to a director or officer, the corporation is not extending the amount by which it may be legally liable, as it does when it extends indemnification rights. The right to be indemnified for expenses will exist (or will not) depending upon factors quite independent of the decision to advance expenses.  Thus, the decision to extend the advancement right should ultimately give rise to no net liability on the corporation’s part…[T]he advancement decision is essentially simply a decision to advance credit…Consequently, “[t]he function of a § 145(k) advancement case is not to inject this court as a monthly monitor of the precision and integrity of advancement requests.”

Reasonableness in an Advancement Request – The Pizza Principle

Danenberg sought $292,019.91 as advancement for fees and expenses incurred in the District Court action.  The Court noted that while Danenberg had an incentive to monitor his counsel’s actions (because he would have been liable for any fees or expenses not covered by advancement or indemnification), Danenberg’s lawyers were experienced attorneys from a reputable firm, and “they have charged what I readily recognize as rates comfortably within the market range for complex commercial litigation in this jurisdiction.”

Fitracks argued that Danenberg should only be entitled to $85,125 because its counsel only prepared three briefs and engaged in one oral argument.  The Court disagreed quoting the Chancellor in his recent decision in Auriga Capital Corp. v. Gatz Props., LLC, 2012 WL 361677 at *29 n.184 (Del. Ch. Jan. 27, 2012), and noting that Fitracks had ignored “the Pizza Principle” (“it is more time-consuming to clean up the pizza thrown at the wall than it is to throw it”).  The Court explained:

 [i]n the Underlying Action, Aetrex responded to a focused breach of contract action by throwing at the wall an extra-large, deep-dish pie with lots of toppings, namely a 43-page, 186-paragraph, 11-count counterclaim and third-party complaint. The six third-party counts included fraud, conspiracy to defraud, unjust enrichment, and civil violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”).  The complaint also sought injunctive relief and piercing of the corporate veil.  To respond to the complaint, Danenberg’s counsel had to investigate the wide ranging factual allegations, research the legal theories, and develop a defense. With his fellow third-party defendants, Danenberg moved to dismiss the six counts for failure to state a claim on which relief could be granted and for lack of personal jurisdiction…[in addition,] [a]fter diligently pursuing their research, Danenberg’s attorneys convinced Aetrex that the RICO claim had no merit, leading Aetrex to dismiss the RICO count voluntarily before oral argument.  It took Danenberg’s counsel far more work to clean up the RICO Count to the point of convincing Aetrex to withdraw it than it did for Aetrex to draft a pleading that recited the statutory elements.

Fitracks objected not to the rates that Danenberg’s counsel charged or the amounts billed for particular tasks (although Fitracks did unsuccessfully object to a $70K retainer paid by Danenberg), but rather to the overall “quantum of work” that Danenberg’s counsel performed.  This put the Court in the position of having to “second-guess the judgment of Danenberg’s counsel, something the Court is loath to do.”  As a result, the Court found that Danenberg had “carried his burden by showing that the services rendered were thought prudent and appropriate in the good faith professional judgment of competent counsel” and awarded Danenberg $292,019.91 for fees and expenses in advancements as well as pre- and post-judgment interest, compounded quarterly, at the legal rate beginning February 27, 2012 (the date the issue was submitted to the Court for decision.)

Reasonableness in an Indemnification Request

Danenberg sought indemnification of $276,332.13 for fees and expenses incurred in the Court of Chancery action.  While the Court characterized the total as falling “at the high end of what I would expect for a typical advancement proceeding,” the Court laid the blame at the feet of the respondent with its “serial reversals of position and general intransigence.”  For example, Fitracks sued Danenberg in the District Court on statements made by Danenberg as a Fitracks officer before the merger but then Fitracks argued to the Court of Chancery that it was not suing Danenberg for any pre-merger conduct in the District Court action.   Fitracks then contended to the District Court that the statements it made to the Court of Chancery “had no effect” on the District Court action.  As a result, the Court found for Danenberg for $276,332.13 for fees and expenses plus pre- and post-judgment interest, compounded quarterly.

Procedures for Future Requests for Advancement

After finding that the parties failed to follow the Court’s instructions about how to handle future advancement requests, the Court set out the following procedures for Danenberg’s future advancement requests emphasizing that while special masters have been used by the Court, that process adds time and expense to the advancement request which by statute is supposed to be a “summary and efficient proceeding.” The Court also reiterated the important role that Delaware counsel assumes in litigation before Delaware courts as “an officer of the Court [who] is responsible for the positions taken, the presentation of the case, and the conduct of the litigation.”

The Court then set out the following protocol:

 Going forward, the senior member of the Delaware bar representing each side will assume personal responsibility for addressing advancement requests. Unless modified by stipulation, the parties will adhere to the following procedures:

1.         Before the 10th calendar day of each month, Danenberg’s counsel will submit an advancement demand for fees and expenses incurred during the previous month.  Any fees or expenses not included in the demand are deemed waived. The advancement demand will include the following:

a.         A detailed invoice identifying the fees and expenses for which advancement is requested.  The invoice shall provide for each time entry the date, timekeeper, billing rate, task description, time incurred, and amount charged.  The invoice shall identify with detail for each expense the date of the charge, its nature, and the amount incurred.

b.         A certification signed by the senior member of the Delaware bar representing Danenberg attesting that (i) he personally reviewed the invoice, (ii) each time entry and expense falls within the scope of Danenberg’s advancement rights, (iii) in his professional judgment, the fees and expenses charged are reasonable in light of the factors listed in Rule 1.5(a), and (iv) the services rendered were thought prudent and appropriate in his good faith professional judgment.

2.         Before the 20th calendar day of the month, Fitracks’ counsel will respond to the advancement demand in writing.  The response shall identify each specific time entry or expense to which Fitracks objects and explain the nature of the objection.  The senior member of the Delaware bar representing Fitracks shall certify that (i) he personally reviewed the advancement demand and (ii) in his professional judgment, the disputed fees and expenses are not reasonable or otherwise fall outside the scope of the advancement right.  The response shall cite any legal authority on which Fitracks relies. Any objection not included in the response is deemed waived.

3.         Fitracks shall pay the undisputed amount contemporaneously with the response. If Fitracks disputes more than 50% of the amount sought in any advancement demand, Fitracks shall pay 50% of the amount sought and Danenberg’s counsel shall hold the amount exceeding the undisputed amount in its escrow account pending resolution of the dispute regarding such portion.

4.         Before the 25th calendar day of each month, Danenberg’s counsel will reply to the advancement response in writing and provide supporting information and authority.

5.         Before the last calendar day of the month, the senior members of the Delaware bar representing each side will meet, in person, and confer regarding any disputed amounts. Any additional advancement that results from the meet-and-confer session will be paid with the next month’s payment of undisputed amounts.

6.         Not more frequently than quarterly, Danenberg may file an application pursuant to Court of Chancery Rule 88 seeking a ruling on the disputed amounts.  Briefing shall consist of a motion, an opposition filed within fifteen days of the motion, and a reply filed within ten days of the opposition.  Danenberg and Fitracks shall not raise any new arguments not previously raised with the other side in the applicable demand, response, reply, or meet-and-confer. Danenberg and Fitracks only shall cite authorities identified in writing in the applicable demand, response, or reply.  The Court will determine if a hearing is warranted.

7.         If the Court grants an application in whole or part, then pre-judgment interest is due on the adjudicated amount from the date of the applicable advancement demand.  In addition, in parallel with the next advancement demand, Danenberg may demand indemnification for the fees and expenses incurred in connection with the granted application, proportionate to the extent of success achieved.  The parties shall address the indemnification demand in the same manner as the advancement demand. Except in connection with a successful application, Danenberg shall not seek or receive advancement or indemnification for time spent preparing invoices and advancement demands, addressing responses, or conferring regarding advancement requests.

 

Fuhlendorf v. Isilon Systems, Inc., 5772-VCN (Del. Ch. Feb. 8, 2011), read the Special Master’s Report by Lawrence Ashby here. Also, on July  22, 2011, the Court issued a letter ruling that addressed who would pay the fees of the Special Master and nuances of the procedure established to present claims to the Special Master.

This decision in an advancement case pending in the Delaware Court of Chancery was made by a veteran Chancery Court practitioner who is widely respected and who was chosen to address the minutiae and the nuances of the contested amount of fees and expenses charged in a matter where advancement was required but there was a dispute about the reasonableness of the fees and costs claimed. The Court in advancement cases does not want to be in the position of reviewing monthly bills after an initial decision to award advancement has been made, so it is not uncommon for a highly regarded member of the Bar to serve as a special master to resolve those quotidian but important details.

This is a very useful decision that provides in a practical and minute fashion the types of expenses that will be typically allowed in advancement cases, from the number of lawyers who can attend a deposition (two if actively defending or taking), to whether “working lunches” in one’s office should be included as part of the costs advanced (typically no if you would not charge the client otherwise) to the hourly rates of paralegals and associates that would be appropriate depending on the task. Extensive quotations from, and application of, the reasoning in the the Chancery Court’s advancement decisions in the DeLucca; Duthie and Fasciana cases play a prominent role in this report, that is a “must read” for anyone handling an advancement case or involved in advancement litigation in the Delaware Court of Chancery.

Another advancement case referred to in the report is Katzman v. Comprehensive Care Corp., C.A. No. 589-VCL(Del. Ch.),  which was cited at page 9 of the above linked Special Master’s Report (for a transcript ruling) for the proposition that advancement cases can be decided on the pleadings. The Final Order and Judgment in that case is available here.

Fuhlendorf v. Isilon Systems, Inc., C.A. No. 5772-VCN (Del. Ch. Nov. 3, 2010), read letter ruling here.

Issue Addressed

This 4-page letter ruling of the Delaware Court of Chancery addresses an issue involving disputed amounts of fees where advancement in principal has already been established. The Court relied on the procedure previously announced in the case of Duthie v. CorSolutions Medical, Inc., 2008 WL 4173850 (Del. Ch. Sept. 10, 2008). That case set forth an appropriate procedure to follow when advancement was established but there was a dispute about the amount of fees to be paid on a monthly basis.

Summary of Ruling

In sum, the Court described the 5-step process to be employed by the parties (in order to avoid the unseemly involvement of the Court in reviewing monthly bills), as follows: (1) Plaintiff’s counsel certifies in good faith that the fees and expenses for which advancement has been sought were incurred reasonably as a matter of sound professional judgment; (2) The opposing party will identify those fees which it asserts fall outside the standard of Delaware law for advancement, and its counsel shall certify their good faith belief that the advancement of such fees is not appropriate; (3) The fees as to which there is no dispute shall be promptly paid; (4) The fees as to which any dispute remains shall be submitted to a Special Master; (5) The costs of the Special Master will be divided equally between the parties, except that the entire cost of the Special Master will be borne by the opposing party if it turns out that its objections to payment of the fees for which advancement has been sought have been made without good cause.

The Court noted in closing that a party taking a position that provides for paying only 50% of the fees requested – – pending a determination by the Special Master – – appeared to be somewhat arbitrary and that the interim amount that should be paid must be supported by a good faith belief
 

Martinez v. Regions Financial Corp., No. 4128-VCP (Del. Ch. Sept. 9, 2009), read letter decision here. Also, an implementing Order accompanying the decision that provides for a procedure to address reasonableness of advanced fees, is available here. 

Kevin Brady, a highly regarded Delaware litigator, provides the synopsis of this case.

The Court of Chancery in this September 9 ruling issued a follow-up opinion to its August 6, 2009 decision regarding a dispute between plaintiff, Susan A. Martinez, and defendant, Regions Financial Corporation, wherein plaintiff sought to enforce a change of control agreement. In its August 6 decision, the Court had directed the parties to submit an appropriate form of order reflecting the Court’s rulings. See Martinez v. Regions Fin’l Corp., No. 4128-VCP, 2009 WL 2413858, at *15 (Del. Ch. Aug. 6, 2009), summarized on this blog here. The parties, unfortunately, could not reach agreement so they went back to the Court for guidance on two issues: (i) whether a claim voluntarily withdrawn by plaintiff after defendant moved for summary judgment and filed its opening brief should be dismissed with or without prejudice; and (ii) what procedure should be followed for submission and payment of the plaintiff’s invoices for advancement and to the extent there are disputes about those invoices, how the dispute should be resolved.

Dismissal of Purportedly Withdrawn Claim

After the Complaint was filed, there were cross motions for summary judgment. The
August 6 decision addressed defendants’ summary judgment motion as to the Counts I – IV, but did not discuss Count V, because plaintiff voluntarily withdrew that claim in a footnote in her answering brief. Plaintiff claims that “because [defendant] neither opposed withdrawal of Count V nor suggested that the withdrawal should result in dismissal with prejudice of that claim, [plaintiff] should not be barred from raising Count V in the future.” In response, defendant claims that the plaintiff “cannot voluntarily withdraw a claim in the face of a motion for summary judgment without consequence.”

The Court noted that dismissal of a claim may be treated as an attempt to amend the complaint and that the Court, as a matter of discretion, typically grants such a motion to amend “‘if justice so requires,’ unless the moving party has been guilty of undue delay, bad faith, or dilatory conduct.” The plaintiff neither sought leave of Court nor the consent of defendant before withdrawing the claim after defendant moved for summary judgment on all claims. Moreover, plaintiff failed to explain any reason for withdrawing the claim or show good cause as to why that claim should be dismissed without prejudice. As a result, the Court dismissed Count V with prejudice.

Procedure for Payment of Attorneys’ Fees and Expenses Pursuant to Advancement Ruling

Since the parties could not come to any agreement as to a form of order, the Court determined that the plaintiff must submit copies of invoices for fees and expenses incurred by plaintiff to defendant and file a notice of such submission with the Court. Defendant then has thirty days to make payment. If defendant disputes the reasonableness of any of the submitted invoices, defendant “shall (i) remit the undisputed amount plus prejudgment interest within thirty days of submission of the invoices to [defendant], (ii) advise [plaintiff] in writing with specificity of any and all disputes respecting the reasonableness of the invoices (“Objections”) within twenty days after the date the invoices were submitted to it, and (iii) simultaneously file those Objections with the Court” and the Court will schedule a telephone conference to resolve them
 

We have summarized many Delaware decisions on this blog regarding the issue of advancement of fees for the benefit of officers and directors of companies who have  been given that right by either contract or bylaws or corporate charter, as authorized by the Delaware General Corporation Law–and as distinguished from indemnification, which generally is not triggered until after the litigation is concluded, and after potentially millions of dollars in fees have been incurred.

Kevin LaCroix on his highly regarded blog, The D & O Diary, here,  provides a current example and analysis regarding the former CEO of Countrywide, who is presumably entitled to advancement by Bank of America, the new owner of Countrywide, contrary to what the average person not well-versed on the topic might initially think based on the mass media’s insinuations of the CEO’s culpability–which is not terribly relevant at the advancement stage, as compared to the indemnification stage. Thus, hypothetically, an officer accused of embezzlement from his company may be entitled to advancement by that company of the reasonable defense costs of the officer who is defending a suit regarding the alleged embezzlement. Kevin explains why the law may require a result that sounds strange to the average person.

UPDATE: Kevin LaCroix provides a contrasting post here regarding a recent decision (from yesterday), of the U.S. Court of Appeals for the Eleventh Circuit that upheld a trial court ruling that denied advancement rights to former CEO of HealthSouth, Richard Scrushy, (apparently despite Delaware law), as part of a class action settlement on the theory that the public policy in favor of settlements was more important than upholding advancement rights. Now I readily acknowledge that the preceding sentence may be an oversimplification of the court’s decision, so I encourage you to read the entire decision and Kevin’s insightful and thoughtful summary at the above link. Bottom line: the court gave short shrift to the importance of advancement rights–and the reality that such rights are in many cases the only thing that stands between a person’s ability to defend themselves in court and not allowing any meaningful defense whatsoever.

In Duthie v. CorSolutions Medical, Inc., 2008 WL 4173850 (Sept. 10, 2008), read opinion here, the Delaware Chancery Court addressed three issues in  a case in which it had previously ordered advancement.

  1. Are the plaintiffs entitled to advancement of fees incurred in affirmatively asserting defamation claims regarding statements made in connection with the litigation about which the initial advancement suit was filed?
  2. Were plaintiffs entitled to fees for securing parallel counsel to "get up to speed on the file" in case of a potential conflict (that never materialized)?
  3. Are various fees for which advancement has been sought reasonable?

The court’s answer to the first and second question is yes. As to the third question, the court set up a procedure for a Special Master to be appointed if the parties could not resolve the amount of fees to be paid–after each counsel submitted an affidavit about the reasonableness of their fees.

Here are what I regard as a few key points of the decision corresponding to the above issues:

  • Although advancement is usually raised in the context of defending claims, there are instances where a defensive strategy appropriately includes asserting affirmative claims, especially where, as here, the certificate of incorporation broadly allows for it. (citing Citadel Holding Corp.  v. Roven, 603 A.2d 818, 824 (Del. 1992)). 
  • Having new counsel ready to "hit the ground running" in the event of a potential conflict (even if it did not materialize) was prudent and it was reasonable to incur such fees–thus, they also are included with the advancement right.
  • Money quote, regarding dispute over fees: "Advancement  is not the proper  stage for a detailed analytical review of the fees, whether in terms of the strategy involved or the staffing and time committed. Typically, a good faith certification from counsel  should  suffice."  But note that the court did establish a procedure in this case to address that issue.

In Sun-Times Media Group Inc. v. Black, 2008 WL 2933093 (Del. Ch., July 30, 2008), read opinion here, the Delaware Chancery Court once again was called upon to address issues involving Lord Conrad Black and his onging legal battles related to his publishing empire and affiliated entities. In this latest iteration, the issue was whether Lord Black:

 was entitled to advancement  of the millions in legal fees he has incurred, in light of the particular factual and procedural posture presented,  pending his appeal of a conviction by a federal court in Chicago. Here is a link to posts about prior court decisions and factual background–as well as a video clip on this blog of part of the oral argument leading up to this instant decision. ( Hollinger, a  corporate party in several of the prior court decisions, was the former name of the entity now known as Sun-Times.)

The court’s own pithy  formulation of the issue, and the holding, is as follows:

The crux of this dispute is the meaning of the words “the final disposition of such action, suit or proceeding” in the Sun-Times bylaws and § 145(e) of the Delaware General Corporation Law (the “DGCL”). Those words describe the point after which the Sun-Times is no longer obliged to continue advancing fees and expenses to the defendants under the advancement provision in its bylaws. The Sun-Times argues that the final disposition of a criminal proceeding occurs at the time of sentencing at the trial court level. The defendants argue that the final disposition of a proceeding FN2  does not occur until the final, non-appealable conclusion to that proceeding. After considering the language of the bylaws and § 145, the parties’ course of performance under the Sun-Times bylaws, and the practical and policy considerations related to the definition of that language, I conclude that the final disposition of a proceeding in this context is the final, non-appealable conclusion to that proceeding.

 This thorough decision (over 70 pages in its original format) could be the subject of a law review article instead of a short blog post. For now, I can only whet your appetite to read the whole magnum opus at the above link.  In technical terms, this is red meat for the cage of anyone who has reason to (or wants to) keep up to date on the cutting edge developments in the law relating to the rights (and defenses) to advancement of legal expenses for former directors of a company.

The court referred to the far-ranging importance of the specific issue decided, with the following description of what it was called upon to decide:

The core dispute between the Sun-Times and the defendants is over an issue that is relevant to virtually all corporations, directors, and officers who are affected by the advancement and indemnification provisions of § 145 of the DGCL. Although cast in terms of the specific Sun-Times’ Advancement Provision, the parties’ disagreement about the meaning of “final disposition,” “action, suit or proceeding,” and “defending” are a dispute over § 145 because the use of those terms in the Advancement Provision parallels the use of those terms in § 145(e). FN37  The Sun-Times Certificate makes clear that this dispute is a dispute about the extent of § 145 because it grants advancement and indemnification rights to its officers and directors “to the fullest extent permitted by applicable law.”FN38 Reduced to its core, the question is whether advancement and ultimate indemnification rights turn on every provisional ruling at various stages of the underlying action, suit or proceeding or whether they turn on only the final, non-appealable resolution of the underlying action, suit or proceeding.

A key part of the factual terms interpreted by the court include the following provisions:

"… The Sun-Times’ Bylaws (the “Bylaws”) also provide for mandatory advancement of attorneys’ fees and expenses to directors and officers upon the receipt of an undertaking. 

Under the Advancement Provision, advanced funds must be repaid to the Sun-Times if it is “ultimately determined” that the director or officer who received those funds is not entitled to be indemnified. The Bylaws condition indemnification on the state of mind of the director or officer and make clear that, among other things, the mere fact of a conviction of any kind does not create a presumption that the director or officer acted with a non-indemnifiable state of mind. …."

"Course of performance" as a contract interpretation tool was an important part of the court’s analysis. In particular, the court observed that:

When the terms of an agreement are ambiguous, “any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.”FN71 Here, the course of performance of the Advancement Provision is compelling and suggests that the Sun-Times interpreted that Provision as providing advancement through the appellate process. Directly on point is that the Sun-Times advanced funds to Black for his appeal of this court’s “Order and Final Judgment” awarding injunctive, declaratory, and monetary relief against Black.

The court also discussed at length the policy implications of its decision, and reasoned, in part, as follows:

As an interpretive matter, it is also important to consider the practical implications of the Sun-Times’ position. The system of advancement and indemnification that would result from the Sun-Times’ interpretation of final disposition as the final judgment at the trial court level would be odd, complex, inefficient, and capricious. Moreover, it is difficult to grasp completely because the Sun-Times is not entirely clear in explaining how that system would work. Nevertheless I attempt to explain that system and its consequences to show why it is that the final disposition of a proceeding must be the final, non-appealable conclusion of that proceeding

There is much more than can be said and that should be said about this decision of far-reaching importance, but on this Sunday summer afternoon, duty calls me to other obligations, though I hope to return to this case later.

In Schoon v. Troy Corp., (Del. Ch., March 28, 2008), read opinion here, the Delaware Chancery Court granted advancement rights to one of the plaintiffs, but denied it to the other, based primarily on the wording of the relevant bylaws as construed through the applicable statute and case law. Moreover, although "fees on fees" are allowable to reimburse the party who sought advancement for the fees incurred to obtain that relief, in this case only one of the parties seeking advancement was awarded it, so the court discounted the fees granted to that effect.

Some or all of the parties in this case have been the subject of a least four (4)  prior written decisions by either the Delaware Supreme Court or the Delaware Chancery Court and the blog summaries for those cases are available at  this link.

The money quote from the instant case follows:

Troy argues that under Fasciana v. Electronic Data
Systems FN87, indemnification in the circumstance must
be proportionate to the plaintiffs’ success,
notwithstanding the terms in the bylaws. According
to the plaintiffs, the language in the bylaws providing
for indemnification “if successful in whole or in part”
distinguishes Fasciana and requires full
indemnification regardless of their success.

FN87. 829 A.2d 178.

In Fasciana, the controlling provision generally
established indemnification “to the fullest extent,
permitted by Section 145 of the [Delaware General
Corporation Law]….”FN88   Significantly, based on this
language the plaintiff in Fasciana made a
substantially similar argument as Schoon and Bohnen
do here, that they are entitled to all fees incurred in
enforcing the advancement provision, regardless of
success. The Fasciana court responded:
FN88.  Id. at 182.
 

Fasciana’s rule would encourage attorneys for
parties seeking advancement to raise any
conceivable argument that can pass Rule 11 muster
knowing that any level of ultimate success would
warrant a full fees on fees award. Limiting fees on
fees awards by imposing a proportionality
requirement encourages parties seeking
advancement or indemnification to raise only
substantial claims and encourages corporations to
compromise worthy claims … and resist less
meritorious claims….FN89
FN89. Id. at 184.

This makes clear that the plaintiffs here are restricted
to an award that is proportionate to their success in
this action.
This award must adhere to the recognized principle in
Fasciana, that courts “should only award that amount
of fees that is reasonable in relation to the results
obtained.”FN90  Therefore, this court will discount the
plaintiffs’ costs in prosecuting this action by half to
account for the result concerning Bohnen.

UPDATE: Here on Kevin La Croix’s D & O Diary is a characteristically thorough analysis of another aspect of the case that I did not focus on but that is also important. Namely, the Chancery Court confirmed that companies may terminate advancement rights, even after an officer or director leaves the company (assuming no contractual right is violated), as long as the advancement right was not triggered prior to the termination of that benefit by the company. Note to officers and directors: Make sure your advancement rights are protected by a contract that does not allow the company to terminate them unilaterally.

SUPPLEMENT:  On Nov. 13, 2008, the Delaware Supreme Court issued an Order, here, denying a request by the National Association of Corporate Directors, as an amicus curiae, to submit arguments on the appeal–after the case was settled and the Court had already dismissed the case due to the settlement. They argued that due to the public policy issues involved, the court should still allow the case to be argued anyway, but there was no procedural basis for the court to retain any type of jurisdiction after the case had already been dismissed and settled.
 

Courtesy of The Wall Street Journal Law Blog, comes the announcement that the Department of Justice will no longer take punitive measures, as a general rule, when a corporate defendant facing criminal investigation advances fees to its officers pursuant to pre-existing advancement rights. The former DOJ position was outlined in what was notoriously known as the Thompson Memo. The new position is outlined in what is referred to as the McNulty Memo. My blog has addressed the DOJ’s prior position  which in my view was plainly wrong and clearly at odds with the basic right of advancement under Delaware law. See, e.g., here and here. I quote from the WSJ Blog for a quick summary of the new  DOJ position (what took the DOJ so long to see the light?):

"The new memorandum also instructs prosecutors that they cannot consider a corporation’s advancement of attorneys’ fees to employees when making a charging decision. An exception is created for those extraordinary instances where the advancement of fees, combined with other significant facts, shows that it was intended to impede the government’s investigation. " Here is the link to the WSJ Blog post on the matter: Law Blog Thompson Memo Out, McNulty Memo In .

UPDATE: Prof. Larry Ribstein quotes further from the memo but cautions that the new memo may not be as clear as it should be if it still "more subtly" pressures corporations to either waive privilege and/or restrict the advancement rights previously given to officers. Here is the fuller quote from the memo:

"Prosecutors generally should not take into account whether a corporation is advancing attorneys’ fees to employees or agents under investigation and indictment. Many state indemnification statutes grant corporations the power to advance the legal fees of officers under investigation prior to a formal determination of guilt. As a consequence, many corporations enter into contractual obligations to advance attorneys’ fees through provisions contained in their corporate charters, bylaws or employment agreements. Therefore, a corporation’s compliance with governing state law and its contractual obligations cannot be considered a failure to cooperate…."  See this link to Prof. Ribstein’s post on the matter. Here is the DOJ’s Press Release.

 

In Citrin v. International Airport Centers LLC, read opinion here , the Chancery Court granted prejudgment interest on a successful claim for advancement of fees.  The interest was calculated to start ten days after the date of the first demand for expenses incurred, and for later expenses interest would start on the date the expenses were paid.  The court engages in a careful analysis of the reasons for the decision which at least in part were based on the remarkable level of mockery that the corporation employed in its rejection of the demand, without explanation (other than belittling the demand).  The opposition to the grant of prejudgment interest in this context was based on case law indicating that the party against whom prejudgment interest was imposed should have had an opportunity to ascertain the quantifiable amount against which interest would be imposed, but in this case–due to the cavalier attitude of the entity involved, there was no opportunity for the demand to be quantified.

  Also important was a reference in footnote 7 to a decision by the U.S. Court of Appeals for the 7th Circuit involving the same parties, and which the Chancery Court waited for before rendering its own decision.  That 7th Circuit decision is International Airport Centers LLC v. Citrin, 455 F.3d 749, 751-52 (7th 2006).  The 7th Circuit decision drew somewhat humorous commentary from the court in connection with the 7th Circuit’s predictable decision that:

 Simply because the advancement claim is based on litigation in federal court (or any other foreign jurisdiction) the claimant need not present the advancement claim in that proceeding–as opposed to the well recognized procedure of presenting the advancement claim in a summary proceeding before the Delaware Court of Chancery.