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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Even when an indemnitee takes a circuitous path to victory, the indemnitee is entitled to indemnification under 8 Del. C. § 145(c) for litigation expenses if the indemnitee is ultimately successful “on the merits or otherwise.” Brown, an officer and director of Rite Aid, sought indemnification under § 145(c), as well as the corporate bylaws and charter, for litigation that spanned from 2002 to 2016 in Pennsylvania. Brown prevailed against Rite Aid in the Pennsylvania litigation on technical defenses. Despite this outcome, Rite Aid sought to limit the amounts to those attributable to Brown's successful technical defense and to exclude amounts attributable to several years of other unsuccessful defenses. But the Court continued its long-standing practice of "look[ing] strictly at the outcome of the underlying action" to determine whether an indemnitee is "successful on the merits or otherwise" under § 145(c). Under this "simple rubric for success," Brown avoided a "personally negative result," so he was entitled to indemnification.
This decision resolves indemnification issues that regularly arise. First, when there are two possible indemnitors and one pays up, may the indemnitee still seek indemnification from the second indemnitor? It depends on when the obligation to indemnify arose. If the indemnitor who actually paid up only assumed that duty after the underlying claim arose that led to the expense to be paid, then that indemnitor is a volunteer and its indemnitee may seek payment from the other indemnitor. Note that this decision does not foreclose suit by the actual indemnitor for equitable contribution. More ›
This is an interesting indemnification decision for its handling of subrogation rights in the indemnification context, one involving former Quiznos officers. First, it holds that, generally speaking, when a party who may be secondarily liable for indemnifiable litigation costs covers the indemnitee’s litigation costs, it may then recover those costs from the party who is primarily liable. Second, it questions whether the “volunteer” exception can apply to subrogation rights in the Section 145 indemnification context. Third, it holds that the Court will enforce fee-sharing arrangements among defendants such that the indemnitee can only recover its pro rata proportion of the fees. Fourth, it enforces such a limitation on a subrogee, such that the subrogee cannot recover more than the indemnitee could have recovered. Fifth, it holds that a subrogee has the same right to fees-on-fees that the indemnitee would have if it had been the party seeking indemnification.
HOMF II Investment Corp v. Altenberg, C.A.2017-0293-JTL (Transcript December 13, 2017)
A provision in an LLC agreement that provides for “indemnification" “as incurred” does not provide for advancement. This illustrates that the confusion between advancement and indemnification still exists. If you want advancement, you had better say “advancement.”
When an obligation to indemnify includes the fees incurred in the underlying litigation is a surprisingly frequent question. This decision works its way through a series of contractual provisions to answer that question. The lesson is that the contract needs to specifically say fees are to be included.
This officer indemnification case arises out of one of the more sordid tales to appear in a Court of Chancery opinion and a later Delaware Supreme Court affirmance. This opinion, however, focuses on the less titillating but always intriguing question of whether the officer was sued by reason of the fact that he was an officer, as required to trigger indemnification rights.
This decision confirms that the statute of limitations on a claim for indemnification does not begin to run until the underlying litigation is concluded. Indeed, equitable tolling may also extend the time when a suit may be filed.
This is possibly the best decision to read to understand how to interpret the often confusing advancement and indemnification rights contained in limited partnership agreements. The discussion of the history of those rights under Delaware law is very useful as well.
There are three basic holdings that should be noted: (1) ambiguous agreements are to be construed against the entity, be it partnership or corporation, (2) acquittal of criminal charges puts the burden on the entity to show why any conditions to indemnification have not been meet (such as the lack of good faith, etc.) by the claimant, and (3) there is no need to wait until all proceedings against a director are concluded before he is entitled to indemnification for the proceedings that he won.