Delaware Business Litigation Report

Court of Chancery Interprets Indemnification Provisions as Not Permitting Indemnification by Re-Organized Company While Permitting Indemnification by Pre-Organized Company

Levy v. Hayes Lemmerz International Inc., C.A. No. 1395-N, 2006 WL 985361 (Del. Ch. Apr. 5, 2006). The plaintiffs in this case sought indemnification for a settlement of claims against them for $27.5 million, paying $7.2 million out of their own pockets. The plaintiffs were former outside directors of a public company engaged in the automobile supply trade who were sued by both stockholders and bondholders of that company for various statutory violations and breaches of fiduciary duty when the company was forced to reveal that some of its financial statements contained materially misleading information. The corporation that the plaintiffs served ("Old Hayes") entered Chapter 11 bankruptcy and emerged as the operating subsidiary of a new entity ("New Hayes"). When the plaintiffs sought indemnification for the settlement under the old corporation's bylaws, their individual indemnification plans, and the bankruptcy reorganization plan, both Old Hayes and New Hayes refused. The Court of Chancery dismissed the plaintiffs' claims as to New Hayes, which the court found as a matter of law had no obligation to indemnify its predecessors' former directors and officers; however, the court denied the motion to dismiss as to the old company because the directors had a right to proceed with their claim for indemnification against Old Hayes.

As to the claim against New Hayes, the reorganization plan made clear that the court was not to assign liabilities to New Hayes by implication. Specifically, the reorganization plan provided that New Hayes would assume only those obligations of Old Hayes that it expressly assumed. "In similar cases, and faced with similar language, our courts have required plaintiffs seeking indemnification to point to specific contractual language that actively assigns liability to the new, successor, defendant." The reorganization plan does not provide such a clear mandate. Rather, it provides only that any liability for indemnification, to the extent it exists, is capped at $10 million above Old Hayes's D&O policies. The court found that if the reorganization plan was meant to ensure that New Hayes would be responsible for indemnification, the drafters could easily have used the template provided by the rest of the reorganization agreement (i.e., the word "shall") to reach that result. Because New Hayes was not liable, the only remaining claims for indemnification were against Old Hayes by virtue of the plaintiffs' indemnification agreements with that company, as authorized by the Old Hayes bylaws. Applying contract interpretation principles to the indemnification provision, the Court of Chancery found that the provision was clear in providing for indemnification, therefore, the defendants' motion to dismiss the claims against Old Hayes was denied. 

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