Edward M. Weil v. Vereit Operating Partnership, L.P. ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
EDWARD M. WEIL, WILLIAM M. )
KAHANE, NICHOLAS S. SCHORSCH, and )
PETER M. BUDKO, )
)
Plaintiffs, )
)
v. ) C.A. No. 2017-0613-JTL
)
VEREIT OPERATING PARTNERSHIP, L.P., )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: November 21, 2017
Date Decided: February 13, 2018
Kenneth J. Nachbar, John P. DiTomo, Elizabeth A. Mullin, MORRIS, NICHOLS, ARSHT
& TUNNELL LLP, Wilmington, Delaware; Attorneys for Plaintiffs.
Stephen B. Brauerman, Sara E. Bussiere, BAYARD, P.A., Wilmington, Delaware; Scott
A. Edelman, Alan J. Stone, MILBANK, TWEED, HADLEY & MCCLOY LLP, New
York, New York; Attorneys for Defendant.
LASTER, V.C.
The plaintiffs sued to enforce their advancement rights. They moved for summary
judgment on a variety of issues. This decision grants partial summary judgment in their
favor.
I. FACTUAL BACKGROUND
The facts are drawn from the pleadings and the fifty-five exhibits submitted in
connection with the motion for summary judgment. Because of the procedural posture, this
decision assumes for purposes of analysis that any disputes of fact will be resolved against
the movants.
A. Parties And Relevant Non-Parties
VEREIT, Inc. is a publicly traded real estate investment trust organized under the
laws of the State of Maryland. VEREIT conducts all of its business through VEREIT
Operating Partnership, L.P., a Delaware limited partnership (the “Partnership”). VEREIT
serves as the sole general partner of Partnership. The Third Amended and Restated
Agreement of Limited Partnership (the “Partnership Agreement”) governs the business and
affairs of the Partnership.
The four plaintiffs previously served as senior officers of VEREIT:
 Nicholas S. Schorsch co-founded VEREIT and served as its Chairman
of the Board and Chief Executive Officer from 2011 through the last
quarter of 2014.
 William M. Kahane served as President and Chief Operating Officer
from December 2010 through February 2012.
 Edward M. Weil served as an Executive Vice President beginning in
December 2010 and as Chief Operating Officer from February 2012
through February 2013.
1
 Peter M. Budko served as Chief Investment Officer and Executive
Vice President from December 2010 through January 2014.
While employed as executive officers of VEREIT, the four plaintiffs also served as
members of its board of directors (the “Board”).
From VEREIT’s founding until January 2014, non-party AR Capital, LLC provided
management services to VEREIT, primarily through a subsidiary called ARC Advisors.
During their tenure at VEREIT, the plaintiffs also held positions at AR Capital.
B. The Underlying Matters
On September 7, 2014, the Audit Committee of the Board commenced an
investigation into alleged financial reporting irregularities at VEREIT (the “Internal
Investigation”). On October 29, VEREIT filed a Form 8-K with the Securities and
Exchange Commission which announced that the Audit Committee had identified errors in
VEREIT’s securities filings. The Form 8-K warned investors not to rely on VEREIT’s
annual report for 2013 and its quarterly reports for the first and second quarters of 2014. In
March 2015, VEREIT announced that the Audit Committee had completed the Internal
Investigation and that VEREIT had restated its annual results for fiscal years 2012 and
2013, its quarterly results for the first three quarters of 2013, and its quarterly results for
the first two quarters of 2014. AR Capital and ARC Advisors provided management
services to VEREIT during certain of the restated periods.
VEREIT’s disclosures prompted a range of lawsuits. Investors filed a consolidated
class action, thirteen direct actions, and four shareholder derivative actions (collectively,
2
the “Civil Actions”). Many of the Civil Actions named the plaintiffs and AR Capital as
defendants.
Generally speaking, the complaints in the Civil Actions allege that Schorsch made
intentionally false statements about VEREIT’s financial results and internal controls. The
plaintiffs allege that Schorsch, Budko, Kahane, and Weil caused VEREIT to pay more than
$900 million to entities that they controlled, including AR Capital and ARC Advisors.
In November 2014, the SEC served a subpoena on VEREIT. The subpoena
requested information about the plaintiffs’ knowledge and activities in connection with the
subject matter of the Internal Investigation and the Civil Actions. Subsequently, the
Department of Justice and certain state regulators commenced investigations into AR
Capital. This decision refers to the SEC, DOJ, and state regulator investigations as the
“Government Investigations.” At this point, it is unclear to what extent the Government
Investigations involve the plaintiffs in their capacities as former directors and officers of
VEREIT. It is also unclear whether the plaintiffs are targets of the Government
Investigations.
This decision refers collectively to the Internal Investigation, the Civil Actions, and
the Government Investigations as the “Underlying Matters.” The Internal Investigation has
been completed. The Civil Actions and Government Investigations remain pending.
C. The Plaintiffs Request Advancement From VEREIT.
In November 2014, the plaintiffs retained counsel to represent them in the
Underlying Matters. Budko, Kahane, and Weil retained Kellogg, Hansen, Todd, Figel &
3
Frederick PLLC. For convenience, this decision calls them the “Kellogg Plaintiffs.”
Schorsch retained Paul, Weiss, Rifkind, Wharton & Garrison LLP.
The plaintiffs initially requested advancement1 from VEREIT. They did not also
request advancement from the Partnership. That decision made sense, because in
September 2011, each of the plaintiffs had entered into a detailed indemnification
agreement with VEREIT that also provided for advancement. As is customary, the
indemnification agreements contained a variety of specific provisions addressing aspects
of the indemnification and advancement process.
After providing VEREIT with the proper documentation to support their
advancement requests, both Kellogg Hansen and Paul Weiss began sending VEREIT
monthly invoices. VEREIT raised a slew of objections, delayed making payments, and paid
only parts of the amounts requested.
VEREIT’s objections to the Kellogg Plaintiffs’ requests included the following:
 Kellogg Hansen’s invoices failed to identify expenses incurred solely
on behalf of AR Capital or for the Kellogg Plaintiffs in their roles as
representatives of AR Capital.
 Kellogg Hansen failed to provide adequate explanations for amounts
paid to third-party vendors.
1
Delaware decisions vary in their use of “advancement” and “advancements.” This
decision uses the singular form— “advancement”—to describe the right to have expenses
advanced. This decision uses the plural form—“advancements”— to describe a string of
payments that flows from an advancement right. In this sense, “advancements” serves as
shorthand for the phrase “amounts paid in advance for fees and expenses.” That said,
picking the right usage is sometimes difficult and at other times inconsequential. Doubtless,
there will be times when this decision lapses by using the incorrect form.
4
 The Kellogg Plaintiffs failed to account for amounts received from
one of AR Capital’s insurers when submitting bills to VEREIT.
 Kellogg Hansen failed to follow VEREIT’s billing guidelines, which
asked law firms to apply a 10% discount on all invoices.
 The Kellogg Plaintiffs sought advancement for their defense in the
derivative actions, which VEREIT claimed to have already paid.
Based on these objections, VEREIT refused to advance more than $12 million to the
Kellogg Plaintiffs.
VEREIT’s objections to Schorsch’s requests included the following:
 Paul Weiss charged excessive rates for its staff attorneys.
 Paul Weiss charged excessive fees for document review during the
first six months of 2017.
 Paul Weiss consistently overstaffed the representation.
 Paul Weiss’s invoices provided inadequate descriptions of the work
performed.
 Paul Weiss increased its billing rates during the second year of its
representation of Schorsch without receiving VEREIT’s approval.
 Paul Weiss charged for amounts that were not covered under
VEREIT’s billing guidelines.
Based on these objections, VEREIT refused to advance more than $5.9 million to Schorsch.
D. This Litigation
On August 24, 2017, the plaintiffs filed this lawsuit. Earlier that day, the Kellogg
Plaintiffs had sent advancement demands to the Partnership, invoking an advancement
provision in the Partnership Agreement. The lawsuit named both VEREIT and the
Partnership as defendants.
5
On August 29, Schorsch served the Partnership with his advancement request. That
same day, the plaintiffs filed an amended complaint, which remains the operative pleading
(the “Complaint”).
The Complaint focused primarily on VEREIT. Counts I-IV asserted claims for
breach of the indemnification agreements or sought declaratory judgments establishing
rights under the indemnification agreements. Only Count V focused on the Partnership. It
sought a declaratory judgment that the Partnership was obligated to provide advancements
under the Partnership Agreement.
On September 8, 2017, VEREIT and the Partnership answered the Complaint. The
Partnership took the same positions as VEREIT and made clear that it was asserting the
same objections to the plaintiffs’ advancement requests as VEREIT had asserted.
On September 29, 2017, the plaintiffs moved for summary judgment. VEREIT and
the Partnership cross-moved to dismiss or stay this case in deference to litigation pending
in other jurisdictions, and VEREIT moved for dismissal for lack of personal jurisdiction.
By orders dated December 13, 2017, I denied the defendants’ motion to dismiss or stay the
case and granted the motion to dismiss VEREIT for lack of personal jurisdiction.
VEREIT’s dismissal rendered moot the claims asserted in Counts I-IV.
The motion for summary judgment remained pending as to Count V. This decision
rules on particular objections raised initially by VEREIT and maintained by the
Partnership. It does not determine a specific amount to which the plaintiffs are entitled.
6
II. PROCEDURAL STANDARD
Summary judgment is appropriate when the record shows that “there is no genuine
issue as to any material fact and that the moving party is entitled to a judgment as a matter
of law.”2 On a motion for summary judgment, “[t]he moving party bears the burden of
establishing that there are no issues of material fact, and the court must review all evidence
in the light most favorable to the non-moving party.”3 “Advancement cases are particularly
appropriate for resolution on a paper record, as they principally involve the question of
whether claims pled in a complaint . . . trigger a right to advancement under the terms of a
corporate instrument.”4
III. LEGAL ANALYSIS
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act (the “LP
Act”) states that “[s]ubject to such standards and restrictions, if any, as are set forth in its
partnership agreement, a limited partnership may, and shall have the power to, indemnify
and hold harmless any partner or other person from and against any and all claims and
demands whatsoever.”5 The statute “is broadly empowering and deferential to the
2
Ct. Ch. R. 56(c).
3
Gary v. Beazer Homes USA, Inc., 2008 WL 2510635, at *3 (Del. Ch. June 11,
2008) (Strine, V.C.).
4
DeLucca v. KKAT Mgmt., 2006 WL 224058, at *6 (Del. Ch. Jan. 23, 2006) (Strine,
V.C.).
5
6 Del. C. § 17-108.
7
contracting parties’ wishes regarding indemnification and advancement.”6 “In fact, Section
17-108 defers completely to the contracting parties to create and delimit rights and
obligations with respect to indemnification and advancement of expenses.”7 “Section § 17–
108 of the [LP Act] gives limited partnerships wider freedom of contract to craft their own
indemnification scheme for a partnership’s indemnitees than is available to corporations
under § 145 of the DGCL, which creates mandatory indemnification rights for corporate
indemnitees in some circumstances and also bars indemnification in others.”8 Drafters can
“exercise[] their freedom of contract to eschew the Delaware statutory approach to
corporate indemnification and create an indemnification scheme” that uses different
requirements.9 The same is true for advancement.
Section 6.03(b) of the Partnership Agreement grants mandatory advancement rights
on the following terms:
The Partnership shall reimburse an Indemnitee for reasonable expenses
incurred by an Indemnitee who is a party to a proceeding in advance of the
final disposition of the proceeding upon receipt by the Partnership of (i) a
written affirmation by the Indemnitee of the Indemnitee’s good faith belief
that the standard of conduct necessary for indemnification by the Partnership
6
Active Asset Recovery, Inc. v. Real Estate Asset Recovery Servs., Inc., 1999 WL
743479, at *16 (Del. Ch. Sept. 10, 1999) (Strine, V.C.) (citation omitted).
7
Delphi Easter P’rs Ltd. P’ship v. Spectacular P’rs, Inc., 1993 WL 328079, at *2
(Del. Ch. Aug. 6, 1993) (Allen, C.).
8
Stockman v. Heartland Indus. P’rs, L.P., 2009 WL 2096213, at *8 (Del. Ch. July
14, 2009) (Strine, V.C.); accord Delphi Easter, 1993 WL 328079, at *2 (“Section 17-108
is also broader than the statutory indemnification provision applicable to corporations . .
.”).
9
Stockman, 2009 WL 2096213, at *17.
8
as authorized in this Section 6.03 has been met, and (ii) a written undertaking
by or on behalf of the Indemnitee to repay the amount if it shall ultimately
be determined that the standard of conduct has not been met.10
The Partnership Agreement defines the term “Indemnitee,” as any person “made a party to
a proceeding by reason of its status as . . . a director, manager or member of the General
Partner or an officer or employee of the Partnership or the General Partner.11
When the events giving rise to the Underlying Proceedings took place, the General
Partner was VEREIT.12 The definition of Indemnitee thus includes both persons made party
to a proceeding by reason of their status as officers or employees of the Partnership and
persons made party to a proceeding by reason of their status as directors, managers,
members, officers, or employees of VEREIT. Critically, the definition of Indemnitee does
not include AR Capital, nor does it specifically call out persons made party to a proceeding
by reason of their roles with AR Capital.
As the term “Indemnitee” suggests, the advancement right in Section 6.03(b) builds
upon an indemnification right that appears in Section 6.03(a). It states:
To the fullest extent permitted by law, the Partnership shall indemnify an
Indemnitee from and against any and all losses, claims, damages, liabilities,
joint or several, expenses (including reasonable legal fees and expenses),
judgments, fines, settlements, and other amounts arising from any and all
claims, demands, actions, suits or proceedings, civil, criminal, administrative
or investigative, that relate to the operations of the Partnership as set forth in
this Agreement in which any Indemnitee may be involved, or is threatened
P’ship Agreement § 6.03(b). The Partnership Agreement can be found at
10
Romagnoli Aff. Ex 4.
11
Id. art. I.
12
Id. at 1 (Recitals).
9
to be involved as a party or otherwise, unless it is established that: (i) the act
or omission of the Indemnitee was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active
and deliberate dishonesty; (ii) the Indemnitee actually received an improper
personal benefit in money, property or services; or (iii) in the case of any
criminal proceeding, the Indemnitee had reasonable cause to believe that the
act or omission was unlawful . . . .13
When the two sections are read together, Section 6.03(b) provides an Indemnitee
with a right to mandatory advancement as long as (i) it is possible that the Indemnitee later
could be entitled to indemnification and (ii) the Indemnitee provides the written affirmation
and the written undertaking required by Section 6.03(b).
Setting aside the requirements of a written affirmation and undertaking, the resulting
structure establishes a series of requirements before an individual can receive
advancements. First, the proceeding must qualify for coverage. To meet this test, the
proceeding must “relate to the operations of the Partnership as set forth in this Agreement.”
This decision sometimes refers to a proceeding that satisfies this test as a “covered
proceeding.”
Second, the individual seeking coverage must qualify as an Indemnitee. For the
individuals in this case, they must be involved “by reason of [their] status as . . . a director,
manager or member of [VEREIT] or an officer or employee of the Partnership or
[VEREIT].” This decision sometimes refers to this concept as a “covered capacity” or an
“official capacity.”
13
Id. § 6.03(a).
10
Third, the Indemnitee must have a sufficient degree of involvement in the
proceeding to trigger coverage. For advancement, the Indemnitee must be “a party to” the
proceeding. The party requirement for advancement is notably stricter than the degree of
involvement that is sufficient for indemnification, where coverage extends to any
proceeding “in which any Indemnitee may be involved, or is threatened to be involved as
a party or otherwise.” For purposes of indemnification, a degree of tension exists between
this language and the definition of Indemnitee, which speaks of a person who is “made a
party to a proceeding.” This decision need not examine that tension further, because it deals
with advancement, not indemnification.14 For advancement, both the language of Section
6.03(b) and the definition of “Indemnitee” require that the Indemnitee be “a party to” the
proceeding.
For purposes of this case, the Partnership accepts that the Partnership Agreement
provides for mandatory advancement.15 The Partnership accepts that the plaintiffs have
provided the requisite written affirmations and undertakings. The Partnership agrees that
many of the Civil Actions are covered proceedings and that, for certain aspects of those
proceedings, the plaintiffs have been sued in a covered capacity.16 Nevertheless, the
Partnership has raised a series of objections to the plaintiffs’ claim for advancements. This
14
See Advanced Mining Sys., Inc. v. Fricke, 623 A.2d 82, 84-85 (Del. Ch. 1992)
(Allen, C.) (explaining that indemnification and advancement are “legally quite distinct”).
15
Defs.’ Answering Br. at 15-16, 40-41.
16
Id. at 9.
11
decision does not address the plaintiffs’ entitlement to specific amounts in dollars and
cents. Instead, it addresses the categorical objections that the Partnership has raised and,
where possible, resolves them as a matter of law. As the Partnership has recognized, many
of its objections do not require “the court to engage in a ‘granular review’” and “can be
resolved in broad strokes.”17
A. The Civil Actions
The Partnership argues that the Kellogg Plaintiffs cannot recover all of the
advancements they have sought for the Civil Actions. The Partnership contends that some
of the amounts sought relate to claims brought against the Kellogg Plaintiffs’ in non-
covered capacities. It contends that other amounts relate to work for AR Capital.
To determine whether the Kellogg Plaintiffs are entitled to advancement, the first
question is whether the Civil Actions are covered proceedings. As noted, a lawsuit is a
Covered Proceeding if it “relate[s] to the operations of the Partnership.” All of the Civil
Actions, including the aspects relating to AR Capital, clearly relate to the operations of the
Partnership.
The next question is whether the Kellogg Plaintiffs are Indemnitees. To qualify,
each of the Kellogg Plaintiffs must be a “party” to the covered proceeding “by reason of”
his status as an officer or employee of the Partnership or as an officer, director, manager,
member, or employee of VEREIT. The Delaware Supreme Court has explained that to
17
Id. at 50-51.
12
meet the “‘by reason of” test, there must be “a nexus or causal connection” between the
underlying proceeding and the function or capacity that the individual performed on behalf
of the entity.18 Elaborating, the high court held that “if there is a nexus or causal connection
between any of the underlying proceedings . . . and one’s official corporate capacity, those
proceedings are ‘by reason of the fact’ that one was a corporate officer, without regard to
one’s motivation for engaging in that conduct.”19
Advancement cases are summary proceedings where the only question involves the
extension of credit.20 “If it is subsequently determined that a corporate official is not
entitled to indemnification, he or she will have to repay the funds advanced.”21 “In
advancement cases, the line between being sued in [a non-covered] capacity and one’s
corporate capacity generally is drawn in favor of advancement with disputes as to the
ultimate entitlement to retain the advanced funds being resolved later at the indemnification
stage.”22 Whether an individual has been sued in an official capacity for purposes of
advancement normally turns on the pleadings in the underlying litigation.23
18
Homestore, Inc. v. Tafeen, 888 A.2d 204, 213 (Del. 2005).
19
Id. at 214 (emphasis added) (internal citations omitted).
20
See Advanced Mining, 623 A.2d at 84.
21
Homestore, 888 A.2d at 214.
22
Holley v. Nipro Diagnostics, Inc. (“Holley I”), 2014 WL 7336411, at *9 (Del. Ch.
Dec. 23, 2014); accord Mooney v. Echo Therapeutics, Inc., 2015 WL 3413272, at *6 (Del.
Ch. May 28, 2015).
23
Holley I, 2014 WL 7336411, at *8 (“[I]n this case, the ‘by reason of the fact’
analysis requires looking to the allegations in the SEC's complaint. In that regard, I note
13
The Partnership concedes that the complaints in the Civil Actions named the
Kellogg Plaintiffs as defendants by reason of their status as directors and officers of
VEREIT. The Partnership also concedes that the Kellogg Plaintiffs are entitled to
advancement in that capacity. But the Partnership contends that the Civil Actions also
involve claims against the Kellogg Plaintiffs in non-covered roles on behalf of AR Capital.
Relying heavily on Fasciana v. Electronic Data Systems Corp. (“Fasciana I”),24 the
Partnership argues that the plaintiffs cannot receive advancements for their non-covered
roles at AR Capital.
In Fasciana I, an attorney who claimed to have acted as an agent of a corporation
sought indemnification under the DGCL and the corporation’s bylaws. The case largely
turned on whether the concept of an “agent” for purposes of Section 145 of the DGCL
extended to outside counsel. Chief Justice Strine, writing while a member of this court,
held that the term “agent” for purposes of Section 145 generally did not encompass the
types of activities that the lawyer performed for the corporation in that case, and he
that courts often can determine whether the ‘by the reason of the fact’ requirement that has
been satisfied solely by examining the pleadings in the underlying litigation . . . .” (citation
omitted)); Pontone v. Milso Indus. Corp., 100 A.3d 1023, 1051 (Del. Ch. 2014) (“Having
re-examined the amended complaint in the Pennsylvania Action, I find that . . . Scott was
made a party to the Pennsylvania Action ‘by reason of’ his former corporate office.”); see
also Homestore, 888 A.2d at 207 (examining allegations in underlying proceedings);
Brown v. LiveOps, Inc., 903 A.2d 324, 328–29 (Del. Ch. 2006) (looking at complaint from
underlying litigation in conducting “by reason of the fact” analysis); Reddy v. Elec. Data
Sys. Corp., 2002 WL 1358761, at *6-7 (Del. Ch. June 18, 2002) (Strine, V.C.) (conducting
“by reason of” analysis to examine criminal and civil complaint).
24
829 A.2d 160 (Del. Ch. 2003) (Strine, V.C.).
14
therefore held that the individual had not been sued “by reason of” his activities as an
agent.25 There was one relatively limited claim, however, where the attorney had acted as
the corporation’s agent, and for this claim the individual met the “by reason of” test.26
Given the nature of the claims at issue in Fasciana I, Chief Justice Strine held that the
individual had to apportion his fees and expenses between the non-covered claims and the
lone covered claim.27
Several factors distinguish Fasciana I from this case. Fasciana I involved corporate
indemnification under Section 145 of the DGCL; this case involves contractual
advancement under the LP Act. Fasciana I largely turned on the extent to which a
corporation could indemnify an attorney on the theory that the attorney was acting as an
agent; this case involves a contractual definition of Indemnitee that encompasses
individuals acting in roles on behalf of the Partnership and VEREIT. The court in Fasciana
I could parse readily among the plaintiff’s roles and found that he was entitled to
advancement only for a particular claim that involved the plaintiff acting as an
indemnifiable agent. The claims in this case relate broadly to the plaintiffs’ actions in
multiple capacities, either on behalf of the Partnership, VEREIT, or AR Capital. Fasciana
I is not an apt precedent for the current case.
25
Id. at 167-73.
26
Id. at 173-74.
27
Id. at 175-76.
15
More apt precedents that involve advancement explain that
in actions where only certain claims are advanceable, the Court generally will
not determine at the advancement stage whether fee requests relate to
covered claims or excluded claims, unless such discerning review can be
done realistically without significant burden on the Court . . . . If fees cannot
be apportioned with rough precision between advanceable claims and non-
advanceable claims or the work was useful for both sets of claims, then the
fees will be advanced in whole.28
To determine whether expenses incurred defending both covered and non-covered
proceedings are subject to advancement, the operative test is: “Would the [d]isputed
[expenses] have been incurred in defense of the [covered proceeding] even if there was no
[non-covered proceeding]? If the answer is yes, then the [d]isputed [expenses] are
advanceable.”29 “If . . . the fee requests relate to both advanceable claims and non-
advanceable claims, i.e., the work is useful for both types of claims, that work is entirely
advanceable if it would have been done independently of the existence of the non-
advanceable claims.”30 “[A]ny doubts should be resolved in favor of advancement.”31
28
White v. Curo Tex. Hldgs., LLC (“Curo II”), 2017 WL 1369332, at *10 (Del. Ch.
Feb. 21, 2017) (internal quotation marks and citations omitted); accord Holley v. Nipro
Diagnostics, Inc. (“Holley II”), 2015 WL 4880419, at *1 (Del. Ch. Aug. 14, 2015);
Danenberg v. Fitracks, Inc. (“Fitracks I”), 2012 WL 11220, at *6 (Del. Ch. Jan. 3, 2012);
Paolino v. Mace Sec. Int’l, Inc., 985 A.2d 392, 408 (Del. Ch. 2009).
29
Holley II, 2015 WL 4880418, at *2; accord Curo II, 2017 WL 1369332, at *10;
cf. Fitracks I, 2012 WL 11220, at *7 (using similar test for covered parties).
30
Mooney, 2015 WL 3413272, at *6.
31
Id.
16
Determining “whether work would have been incurred in the absence of the non-
covered proceeding frequently requires a degree of judgment.”32 The “attorneys who
coordinated [the] defense of the various actions are the most competent to opine as to what
would have been required for the defense of the [covered proceeding], even if the [non-
covered aspects] did not exist.”33 Absent “clear abuse,” counsel’s good faith certification
is sufficient to support an award of advancements.34
At this stage in the case, it is neither possible nor warranted to parse the Civil
Actions to determine what portions involve the Kellogg Plaintiffs acting for AR Capital
and what portions involve the Kellogg Plaintiffs acting for VEREIT and the Partnership.
AR Capital managed VEREIT, which served as the General Partner of the Partnership. The
claims and roles are too intertwined, and the business of the Partnership and VEREIT
permeates the Civil Actions. Consistent with this assessment, counsel has certified that “it
is difficult, and in certain circumstances not practicable, to differentiate precisely which
aspects of our legal services inured to the benefit of an Individual while serving in one
capacity as opposed to another.” 35
32
Curo II, 2017 WL 1369332, at *10.
33
Holley II, 2015 WL 4880418, at *2.
34
Duthie v. CorSolutions Med., Inc., 2008 WL 4173850, at *2 (Del. Ch. Sept. 10,
2008); accord Curo II, 2017 WL 1369332, at *7.
35
Figel Aff. Ex. A, ¶ 6.
17
For purposes of this summary advancement proceeding, counsel’s certification is
sufficient. A more “discerning review” of the billing records is not possible “without
significant burden on the Court.”36 Counsel’s assessment is logical and does not suggest
“clear abuse.”37 Consequently, the Kellogg Plaintiffs are entitled to advancement for all of
the work relating to the Civil Actions that Kellogg Hansen has performed on their behalf.
This conclusion does not resolve the Partnership’s objection entirely, because
Kellogg Hansen also represents AR Capital, which is not entitled to advancement. If AR
Capital had retained its own counsel, then AR Capital’s fees and expenses would not be
subject to advancement.38 When counsel represents both covered and non-covered persons,
counsel must allocate fees and expenses depending on whether the activity benefitted the
party holding the advancement right. “If a particular defense or litigation activity benefits
[the indemnitee and other defendants in the underlying action], but [the indemnitee] would
have raised or undertaken it himself if he were the sole . . . defendant, then [the entity] must
advance 100% of the related fees and expenses.”39
If a particular defense or litigation activity only partially benefits [the
indemnitee], then counsel must make a good faith allocation of the amount
of fees and expenses that [the indemnitee] would have incurred if he were
36
Holley II, 2015 WL 4880418, at *1.
37
Duthie, 2008 WL 4173850, at *2; accord Curo II, 2017 WL 1369332, at *11.
See Curo II, 2017 WL 1369332, at *8 (“When an advancement provision
38
unambiguously fails to extend rights to a particular person, that person is not entitled to
advancement.”).
39
Danenberg v. Fitracks, Inc. (“Fitracks II”), 58 A.3d 991, 997 (Del. Ch. 2012);
accord Curo II, 2017 WL 1369332, at *10.
18
the sole . . . defendant. If a defense or litigation activity only benefits third-
party defendants other than [the party entitled to advancement], then
obviously [the entity] need not advance the related fees and expenses.40
In this case, Kellogg Hansen did not allocate any fees or expenses to AR Capital,
asserting that “[m]uch of the work reflected in the Invoices benefitted one or more of the
Individuals” and that “[t]here is a significant alignment of interests among the Clients.”41
This is not sufficient. AR Capital is not a covered person under the Partnership Agreement,
so its expenses are not subject to advancement. While exact precision is not required,
Kellogg Hansen must make a good faith determination regarding the amount of fees and
expenses that the Kellogg Plaintiffs would have incurred if they were the sole defendants
in the Civil Actions. Those fees and expenses are subject to advancement. Kellogg Hansen
also must make a good faith determination regarding the amount of expenses that did not
benefit the Kellogg Plaintiffs and which only benefitted AR Capital. Those fees and
expenses are not subject to advancement. Kellogg Hansen shall explain the basis for its
allocation and re-submit the fees and expenses for the Civil Actions using the Fitracks
Procedures.
B. The Government Investigations
The Partnership makes a similar argument about the Government Investigations,
which it contends involved AR Capital, a non-covered party, and implicated the Kellogg
Plaintiffs in both covered and non-covered capacities. The analysis here is more
40
Fitracks I, 2012 WL 11220, at *7.
41
Figel Aff. Ex. A, ¶ 6.
19
straightforward, because the Kellogg Plaintiffs have not shown at this stage that they were
“parties” to the Government Investigations for purposes of receiving advancements.
Once again, the first question for analysis is whether the Government Investigations
are covered proceedings. There is no dispute that the Government Investigations related to
the operation of the Partnership, and the definition of a “proceeding” in the Partnership
Agreement extends to “any and all . . . proceedings, civil, criminal, administrative or
investigative.” As “proceedings” that are “investigative,”42 the Government Investigations
can trigger advancement rights.
The problem for the plaintiffs is that for an individual to receive advancements, the
individual must be a “party” to the covered proceeding. Unlike a civil or criminal case, it
may not always be clear when an individual is a “party” to an investigative proceeding.
The requirement is clearly met if the party conducting the investigation has said that the
individual is a target of the investigation. In my view, it also is met if the party conducting
the investigation seeks documents or other information from the individual or interviews
the individual. But for purposes of the advancement right in this case, it is not met if an
individual only believes, however reasonably, that the individual could become a target of
the investigation. The language of the Partnership Agreement supports this interpretation
because it distinguishes between coverage for advancement, which requires that the
42
P’ship Agreement at 51.
20
Indemnitee be a party to the proceeding, and coverage for indemnification, which extends
to situations where the Indemnitee is “threatened” with being made a party.
The Partnership contends that the Kellogg Plaintiffs cannot receive advancements
for amounts incurred by Kellogg Hansen for reviewing documents in response to
subpoenas issued to AR Capital. The Kellogg Plaintiffs have shown that the SEC subpoena
was issued in connection with the investigation of VEREIT and inquired into the Kellogg
Plaintiffs’ activities at VEREIT.43 The plaintiffs also have explained why the subpoenas
threatened the Kellogg Plaintiffs with being made party to the investigations.44 But for
purposes of advancement under the Partnership Agreement, that is not enough. The
Kellogg Plaintiffs must also show that they are parties to the investigation, which they have
not done.
Summary judgment on this issue is denied. The Kellogg Plaintiffs may be able to
show at a later stage that they were parties to the Government Investigations such that
advancements should be provided.
C. The Partnership’s Unilateral Imposition Of Terms
The Partnership has sought to impose additional terms on the plaintiffs’
advancement rights. “Advancement is a contractual right governed by the terms of the
operative agreement.”45 When a company has provided a covered person with a mandatory
43
Brauerman Aff. Ex. F.
44
See Curo II, 2017 WL 1369332, at *7.
45
Id.
21
advancement right that is conditioned only on specific contractual requirements, such as
an undertaking to repay, the company “does not have the right to impose any terms or
conditions on . . . advancement other than an undertaking to repay.”46 An entity cannot, for
example, later demand that the covered person show “proof of an ability to repay, or even
the posting of a secured bond.”47
In this case, the Partnership sought to require compliance with a set of billing
guidelines, including an obligation to create and adhere to a litigation budget. Section
6.03(b) of the Partnership Agreement does not mention billing guidelines or litigation
budgets. Having a party who is entitled to advancement comply with billing guidelines
might be a good idea, and the Partnership could have built that obligation into the
advancement provision. But Section 6.03(b) is silent on the issue. Instead, it grants
mandatory advancement conditioned only on a written undertaking and written
affirmation. The Partnership cannot now impose different obligations on the plaintiffs
unilaterally.48
46
Blankenship v. Alpha Appalachia Hldgs., Inc., 2015 WL 3408255, at *26 (Del.
Ch. May 28, 2015).
47
Reddy, 2002 WL 1358761, at *4; accord In re Cent. Banking Sys., Inc., 1993 WL
183692, at *4 (Del. Ch. May 11, 1993) (“The only condition imposed by the By-laws is
that the recipient furnish an undertaking to repay the amounts advanced . . . . That condition
has been satisfied. Neither that provision nor any provision of Delaware law requires that
the undertaking be secured or be accomplished by a showing of the indemnitee’s financial
responsibility.”).
48
Curo II, 2017 WL 1369332, at *7-8 (rejecting attempt by entity to condition
advancement on counsel providing a budget and a work plan).
22
The Partnership also has demanded an across-the-board, 10% discount from all law
firms involved in the litigation. It subsequently withheld advancements from the Kellogg
Plaintiffs because many of Kellogg Hansen’s invoices did not reflect the 10% discount.
Section 6.03(b) does not give the Partnership the power to impose the 10% discount, nor
the ability to condition payment on an Indemnitee agreeing to the discount.
In another variant of the same issue, the Partnership withheld advancements on the
grounds that Paul Weiss increased its rates during the second year of Schorsch’s
representation. The Partnership has claimed that law firms generally do not increase rates
in multi-defendant actions during the second year of litigation. Perhaps that is true, but that
is not something contemplated by Section 6.03(b). The Partnership cannot impose this
condition unilaterally on an Indemnitee.
Summary judgment on these issues is granted in favor of the plaintiffs.
D. The Reallocation Of Amounts To The Derivative Actions
The Partnership argues that the Kellogg Plaintiffs are seeking advancements for fees
in the Derivative Actions that have already been paid. During discussions concerning the
advancement disputes, the Partnership advised Kellogg Hansen that a payment of $312,000
that the Partnership made in December 2015 should be considered as applied against the
Derivative Actions, which would cover “nearly all” of the costs for the Derivative Actions.
The Partnership cannot reallocate previously advanced funds under the terms of the
Partnership Agreement. Even if it could, arguing that it satisfied its payment obligation by
paying “nearly all” of the fees and expenses for the Derivative Actions is no defense.
Summary judgment is granted for the plaintiffs on this issue. The Partnership shall advance
23
the total amount of fees and expenses for the Derivative Actions. Absent agreement of the
parties, the $312,000 shall remain attributed to its original purpose.
E. Claims of Partial Payment From Other Sources
The Partnership withheld advancements to Kellogg Hansen and Paul Weiss on the
grounds that the plaintiffs received payments from other sources. According to the
Partnership, the plaintiffs entered into settlement agreements with one of AR Capital’s
insurers that resulted in the insurer paying a portion of their defense costs. The Partnership
alleges that it asked about the terms of the settlements, but the plaintiffs refused to provide
any details. In response, the Partnership took a blanket deduction from the plaintiffs’
advancement requests.
This incident exemplifies how a working relationship can break down. The parties
should have shared information and reached agreement on a path forward. Instead, both
sides took unreasonable positions. This aspect of the dispute cannot be resolved on a
motion for summary judgment because there are disputed issues of material fact.
F. The Reasonableness of the Plaintiffs’ Fees
Section 6.03(b) of the Partnership Agreement requires that the Partnership advance
“reasonable expenses.”49 The Partnership contends that Schorsch’s expenses are not
reasonable because Paul Weiss overstaffed his defense and charged unreasonable rates for
staff attorneys. The Partnership also contends that both Paul Weiss and Kellogg Hansen
49
P’ship Agreement § 6.03(b).
24
submitted invoices with vague descriptions of work that do not allow the Partnership to
decipher whether the hours were billed for the benefit of the plaintiffs in their covered
capacities at VEREIT as opposed to their non-covered capacities at AR Capital.
The party seeking advancement “bears the burden of justifying” the amounts
sought.50 Rule 88 provides that
[i]n every case in which an application to the court is made for a fee or for
reimbursement for expenses or services[,] the Court shall require the
applicant to make an affidavit or submit a letter, as the Court may direct,
itemizing (1) the amount which has been received, or will be received, for
that purpose from any source, and (2) the expenses incurred and services
rendered, before making such an allowance . . . .51
The court has discretion in determining the extent of the submissions required under Rule
88.52
Advancement is a form of contractual fee-shifting.53 When determining what
constitutes a reasonable amount under a contractual provision, the Delaware Supreme
Court has instructed the trial courts “to consider the factors set forth in the Delaware
Lawyers’ Rules of Professional Conduct.”54 They are:
(1) the time and labor required, the novelty and difficulty of the questions
involved, and the skill requisite to perform the legal service properly;
50
Fitracks II, 58 A.3d at 995.
51
Ct. Ch. R. 88.
52
Cohen v. Cohen, 269 A.2d 205, 207 (Del. 1970).
53
See Fitracks II, 58 A.3d at 996.
54
Mahani v. EDIX Media Gp., Inc., 935 A.2d 242, 245–46 (Del. 2007).
25
(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.55
Trial courts also should consider “whether the number of hours devoted to litigation was
excessive, redundant, duplicative or otherwise unnecessary.”56 “These factors provide the
framework for evaluating the reasonableness of the amounts for which advancement is
sought.”57
Determining the reasonableness of the amounts sought, however, “does not require
that this Court examine individually each time entry and disbursement.” 58 Analyzing
specific invoices typically “would neither be useful nor practicable.”59 “[A]n arm’s-length
55
Del. Lawyers’ R. Prof’l Conduct 1.5(a).
56
935 A.2d at 247-48 (internal quotation marks omitted).
57
Curo II, 2017 WL 1369332, at *5; accord Fitracks II, 58 A.3d at 996-97; Tafeen
v. Homestore, Inc., 2005 WL 789065, at *2 (Del. Ch.), aff’d, 888 A.2d 204 (Del. 2005).
58
Aveta Inc. v. Bengoa, 2010 WL 3221823, at *6 (Del. Ch. Aug. 13, 2010); accord
Blank Rome, LLP v. Vendel, 2003 WL 21801179, at *8-10 (Del. Ch. Aug. 5, 2003)
(rejecting alleged requirement of line-item review).
59
Weichert Co. of Pa. v. Young, 2008 WL 1914309, at *2 (Del. Ch. May 1, 2008).
26
agreement, particularly with a sophisticated client, . . . can provide an initial ‘rough cut’ of
a commercially reasonable fee.”60 If a party cannot be certain that it will be able to shift
expenses at the time the expenses are incurred, the prospect that the party will bear its own
expenses provides “sufficient incentive to monitor its counsel’s work and ensure that
counsel [does] not engage in excessive or unnecessary efforts.”61
“Determining reasonableness of amounts sought also does not require the Court to
assess independently whether counsel appropriately pursued and charged for a particular
motion, line of argument, area of discovery, or other litigation tactic.”62 “For a Court to
second-guess, on a hindsight basis, an attorney’s judgment . . . is hazardous and should
whenever possible be avoided.”63 A party’s expenses are reasonable if they were “actually
paid or incurred[,] . . . were . . . thought prudent and appropriate in the good faith
professional judgment of competent counsel[,] and were charge[d] . . . at rates, or on a
basis, charged to others for the same or comparable services under comparable
circumstances.”64
60
Wis. Inv. Bd. v. Bartlett, 2002 WL 568417, at *6 (Del. Ch.), aff’d, 808 A.2d 1205
(Del. 2002).
61
Aveta, 2010 WL 3221823, at *6; accord Arbitrium (Cayman Islands) Handels AG
v. Johnston, 1998 WL 155550, at *2 (Del. Ch.) (considering, when evaluating
reasonableness, that client faced prospect of bearing full cost of litigation), aff’d, 720 A.2d
542 (Del. 1998).
62
Fitracks II, 58 A.3d at 997.
63
Arbitrium, 1998 WL 155550, at *4.
64
Delphi Easter, 1993 WL 328079, at *9.
27
The summary nature of an advancement proceeding further counsels against
granular review. “[D]etailed analysis . . . is both premature and inconsistent with the
purpose of a summary [advancement] proceeding.”65 “The function of [an] advancement
case is not to inject this court as a monthly monitor of the precision and integrity of
advancement requests.”66 Consequently, the advancement stage “is not the proper stage for
a detailed analytical review of the fees, whether in terms of the strategy followed or the
staffing and time committed.”67 Nor is it a vehicle for a party that committed to provide
advancements to manufacture “persnickety disputes over the reasonableness of the
attorneys’ fees sought.”68 “Unless some gross problem arises, a balance of fairness and
efficiency concerns . . . counsel[s] deferring fights about details until a final
indemnification proceeding.”69
Just because the court will not review each line item individually at the advancement
stage does not mean that the party seeking advancements can play fast and loose with its
65
Kaung v. Cole Nat’l Corp., 884 A.2d 500, 510 (Del. 2005).
66
Fasciana I, 829 A.2d at 177.
67
Duthie, 2008 WL 4173850, at *2.
68
Blankenship, 2015 WL 3408255, at *28.
69
Fasciana I, 829 A.2d at 177; see Reinhard & Kreinberg v. Dow Chem. Co., 2008
WL 868108, at *5 (Del. Ch. Mar. 28, 2008) (“[T]his Court does not relish and will not
perform the task of playground monitor, refereeing needless and inefficient skirmishes in
the sandbox [over advancements].”).
28
requests or treat the advancement right as a blank check. Plaintiffs’ counsel must make a
good faith determination regarding the fees and expenses to which its clients are entitled.70
1. Rates Charged for Staff Attorneys
The Partnership objects that Paul Weiss charged hourly rates for its staff attorneys
that substantially exceeded the rates charged by other law firms involved in the Underlying
Matters. Fees and expenses should be charged “at rates, or on a basis, charged to others for
the same or comparable services under comparable circumstances.”71 The discrepancy
between the rates Paul Weiss charged for its staff attorneys and the rates that other firms
charged is sufficient to raise a question of fact regarding the reasonableness of this aspect
of Paul Weiss’s fees. The record does not contain other evidence regarding the rates
charged for staff attorneys that might support a finding of reasonableness at this stage.
Summary judgment is denied to the extent the plaintiffs seek to recover amounts that Paul
Weiss charged for staff attorneys. The parties will have to develop the record further on
this issue.
2. Alleged Overstaffing and Hours Worked
The Partnership withheld advancements on the grounds that Paul Weiss allegedly
overstaffed its matters. In support of its objection, the Partnership cites both the number of
attorneys that Paul Weiss staffed on the matters and the number of hours those attorneys
incurred. The Partnership argues that the amount of work that Paul Weiss performed
70
Fitracks I, 2012 WL 11220, at *7.
71
Delphi Easter, 1993 WL 328079, at *9.
29
exceeded both the firm’s internal projections and the total resources expended on the
defense of Brian Block, another defendant.
At this stage, the Partnership has not raised sufficient questions about Paul Weiss’s
staffing and hours to support an inference of gross abuse. A senior partner from Paul Weiss
submitted a sworn affidavit attesting to the reasonableness of the fees and expenses sought.
The Partnership’s objections would require this court to second-guess the judgment of the
senior attorneys at Paul Weiss who oversaw the matters and are best positioned to
determine whether the work was necessary.
The Partnership’s reference to the fees and expenses that Block incurred does not
raise a question of material fact. Block primarily defended against criminal charges; his
role in the Civil Actions was limited, and he largely relied on the efforts of other counsel.
Block’s situation is sufficiently different from Schorsch’s that comparing their respective
fees does not raise questions about Paul Weiss’s approach.
Paul Weiss does not have a blank check. If Schorsch ultimately is not entitled to
indemnification, then he will have to repay the amounts that Paul Weiss has charged, which
gives him an incentive to monitor Paul Weiss’s bills. It is also possible, as with the staff
attorney rates, that the Partnership could point to certain practices that would raise
questions and potentially result in Schorsch bearing fees and expenses personally. In the
context of a summary advancement proceeding, the attorney certification is sufficient on
the question of staffing. A more detailed parsing of Paul Weiss’s work is deferred to the
indemnification stage. Summary judgment is granted in favor of the plaintiffs on the
Partnership’s objections to Paul Weiss’s levels of staffing and hours worked.
30
3. Descriptions Of Work
The Partnership also withheld advancements on the grounds that the attorneys’
invoices failed to provide sufficient detail to support the work performed. The Partnership
similarly objects to invoices from third-party vendors. Reasonableness is the standard for
measuring the sufficiency of both attorney invoices and third-party invoices. The
Partnership argues that when parties are submitting invoices for a third party to pay, they
should have to provide more detail, but that is not a step that Delaware law requires. If
parties want particular levels of detail or a standard other than reasonableness, they can
build those terms into their advancement provisions.
The court has reviewed the invoices that plaintiffs’ counsel submitted. The
descriptions of the work performed on the attorney invoices are customary and reasonable.
The Partnership cannot withhold advancements by broadly alleging that the descriptions
are vague. Summary judgment is granted in the plaintiffs’ favor on this issue.
With respect to the third-party invoices billed by Kellogg Hansen, the Partnership
produced certain invoices for discovery services that contained basic descriptions of the
services performed and a case name and matter number.72 The matter names provide
enough information for the parties to categorize whether the work was performed for an
advanceable matter, such as the Civil Matters, or a non-advanceable matter, such as the
72
See, e.g., Defs.’ Answering Br. Exs. C, O-P.
31
Government Investigations.73 The third-party invoices also describe the work performed,
such as deduplicating, transferring data, and culling.74 A senior partner at Kellogg Hansen
submitted a sworn affidavit testifying to the reasonableness of the third-party invoices. At
this stage of the proceedings, the Partnership has not raised a sufficient question about
Kellogg Hansen’s third-party vendor invoices to support an inference of gross abuse.
Summary judgment is granted in favor of the plaintiffs on the Partnership’s objection to
third-party vendor invoices for matters in which the Kellogg Plaintiffs are entitled to
advancement.
G. Procedures Going Forward
Going forward, the senior member of the Delaware bar representing each side will
assume personal responsibility for overseeing the advancement process. Unless modified
by stipulation, the parties will adhere to the Fitracks Procedures in order to determine the
amount of advancements presently due. The Fitracks Procedures contemplate the
following steps:
1. Before the 10th calendar day of each month, the plaintiffs’ 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:
73
See id. Ex. C.
74
See id. Exs. O-P.
32
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
the plaintiffs attesting that (i) he personally reviewed the invoice, (ii) each
time entry and expense falls within the scope of the plaintiffs’ 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, the Partnership’s counsel will respond
to the advancement demand in writing. The response shall identify each specific
time entry or expense to which the Partnership objects and explain the nature of the
objection. The senior member of the Delaware bar representing the Partnership 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 the Partnership relies. Any objection not included in
the response is deemed waived.
33
3. The Partnership shall pay the undisputed amount contemporaneously with the
response. If the Partnership disputes more than 50% of the amount sought in any
advancement demand, the Partnership shall pay 50% of the amount sought and the
plaintiffs’ 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, the plaintiffs’ 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 advancements that result from the meet-and-confer session
will be paid with the next month’s payment of undisputed amounts.
6. Not more frequently than quarterly, the plaintiffs 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. The plaintiffs and the Partnership
shall not raise any new arguments not previously raised with the other side in the
applicable demand, response, reply, or meet-and-confer. The plaintiffs and the
Partnership 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 in 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, the plaintiffs may
34
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, the plaintiffs shall not
seek or receive advancement or indemnification for time spent preparing invoices
and advancement demands, addressing responses, or conferring regarding
advancement requests.75
H. Fees on Fees
The plaintiffs are entitled to an award of fees on fees in light of their success to date
in pursuing this action for advancement.76 When a plaintiff seeks fees on fees in a
successful advancement action, he is “actually seeking indemnification and not an
advancement. He is partially entitled to that indemnification because he has already
partially succeeded in litigation in which he was a party.” 77 When an indemnitee achieves
only limited success, the award of fees will be reduced proportionately to its entitlement
and the reasonableness of its fees.78
75
See generally Fitracks II, 58 A.3d at 1002-04.
76
Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002); see also 1 David A.
Drexler et al., Delaware Corporation Law and Practice 16-10 (2016).
77
Fasciana v. Elec. Data Sys. Corp. (“Fasciana II”), 829 A.2d 178, 182 (Del. Ch.
2003) (Strine, V.C.) (quoting Cochran, 809 A.2d at 561).
78
Id. at 184-85.
35
It is highly likely that the plaintiffs will be entitled to some amount of fees on fees.
It is not yet possible to determine the amount. As part of the Fitracks Procedures, the
plaintiffs should include in their requests the fees incurred for enforcing their advancement
rights.
IV. CONCLUSION
Partial summary judgment is entered for the plaintiffs. Consistent with the analysis
in this decision, the parties will follow the Fitracks Procedures to determine the specific
advancements that are due.
36