Diane C. Creel v. Ecolab, Inc. ( 2018 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
TAMIKA R. MONTGOMERY-REEVES Leonard Williams Justice Center
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734
Date Submitted: July 12, 2018
Date Decided: October 31, 2018
M. Duncan Grant, Esquire Eric Lopez Schnabel, Esquire
Christopher B. Chuff, Esquire Robert W. Mallard, Esquire
Pepper Hamilton LLP Alessandra Glorioso, Esquire
1313 N. Market Street, Suite 5100 Dorsey & Whitney LLP
Wilmington, DE 19801 300 Delaware Avenue, Suite 1010
Wilmington, Delaware 19801
RE: Diane C. Creel v. Ecolab, Inc.
Civil Action No. 12917-VCMR
Dear Counsel:
This letter opinion addresses both Defendant’s Motion to Dismiss Count I of
Plaintiff’s Complaint and Plaintiff’s Motion for Summary Judgment. For the
reasons stated below, I deny the Motion to Dismiss, and I grant in part and deny in
part the Motion for Summary Judgment.
I. BACKGROUND
For purposes of the Motion to Dismiss, the facts are drawn from Plaintiff’s
Verified Amended and Supplemental Complaint for Indemnification (the
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“Complaint”) and the documents incorporated by reference therein.1 For purposes
of the Motion for Summary Judgment, the facts are drawn from the pleadings and
the evidence submitted by the parties.2
A. Ecovation Before the Merger
This action arises from Plaintiff’s request for indemnification from Ecolab,
Inc. (“Ecolab”), a Delaware corporation in the business of providing water, hygiene,
and energy technologies.3 The corporation at the center of this dispute is Ecovation,
Inc. (“Ecovation” or the “Company”), a Delaware corporation that was in the
business of providing sustainable wastewater treatment and renewable energy
solutions.4 In 2008, Ecolab acquired Ecovation through a merger.5 Diane C. Creel
1
On a motion to dismiss under Rule 12(b)(6), the Court may consider a document
outside the pleadings if “the document is integral to a plaintiff’s claim and
incorporated into the complaint” or “the document is not being relied upon to prove
the truth of its contents.” Vanderbilt Income & Growth Assocs., L.L.C. v.
Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del. 1996) (citing In re Santa Fe
Pac. Corp. S’holder Litig., 669 A.2d 59, 69-70 (Del. 1995)); see Allen v. Encore
Energy P’rs, L.P., 72 A.3d 93, 96 n.2 (Del. 2013).
2
See Ct. Ch. R. 56(c).
3
Compl. ¶ 7.
4
Id. Ex. B ¶ 19.
5
See id. Ex. C.
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was the President, Chief Executive Officer, and Chair of the Board of Directors of
Ecovation from May 2003 until the 2008 merger.6
When Creel joined Ecovation, it was struggling financially.7 In June 2004,
W. Jerome Frautschi, as trustee of the W. Jerome Frautschi Living Trusts and agent
of the Pleasant T. Rowland Revocable Trusts (together, the “Trusts”),8 caused the
Trusts to extend a $30 million line of credit to the Company; this agreement was
memorialized in the Line of Credit Agreement (the “LOC”). 9 After Ecovation’s
Board of Directors unanimously approved the LOC, Frautschi joined the Board in
May 2004.10 He served in that capacity until he resigned in November 2005.11
6
Compl. ¶ 10. After Ecolab acquired Ecovation, Creel no longer served as a director
or officer of Ecovation; she became an employee of Ecolab. Id.7
Id. Ex. A ¶ 25.
8
Compl. Ex. G, at 4 (listing Frautschi as Trustee of the W. Jerome Frautschi Living
Trust). The parties never explicitly define Frautschi’s relationship to the Pleasant
T. Rowland Revocable Trust. See, e.g., Def.’s Opening Br. 8 (describing the Trusts
as “owned and controlled by Mr. Frautschi and his wife”). I presume an agency
relationship for purposes of this opinion. This presumption has no bearing on my
analysis or decision.
9
Compl. Ex. A ¶¶ 24-25.
10
Id. ¶ 21.
11
Id. ¶ 37.
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The $30 million LOC proved insufficient to resolve the Company’s financial
problems.12 Therefore, Creel negotiated with the Trusts over the next three years to
amend the LOC multiple times and increase the Company’s financing to over $60
million.
B. The Underlying Proceedings
Creel’s request for indemnification in this action stems from proceedings in
the New York Supreme Court (the “Ahlers Action”) and in the United States District
Court for the Western District of New York (the “ITV Action”).13 Both underlying
actions involved allegations that Creel provided material nonpublic inside
information to Frautschi and the Trusts regarding Ecolab’s desire to acquire
Ecovation.14
1. The Ahlers Action
In the Ahlers Action, the plaintiffs asserted claims for breach of fiduciary duty,
interested director transactions, breach of the Charter, and unjust enrichment against
Creel, Frautschi, and the Trusts.15 The defendants prevailed on summary
12
Id. ¶ 45.
13
Id. ¶ 1.
14
Id. Ex. A ¶¶ 96-102; id. Ex. B ¶ 328.
15
Id. Ex. B ¶¶ 391-442.
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judgment.16 The New York Appellate Division, Fourth Department, affirmed the
trial court’s order on June 30, 2017.17 The parties filed no further appeals.18
2. The ITV Action
In 2008, a stockholder of Ecovation, Industrial Technology Ventures, L.P.
(“ITV”), filed an action against Creel, Frautschi, and the Trusts.19 In that action, the
plaintiff asserted claims against Creel for breach of fiduciary duty, tortious
interference with business relationships, securities fraud, common law fraud, and
civil conspiracy.20
The plaintiff alleged that while Creel and Frautschi were directors of
Ecovation, they, together with the Trusts, schemed to “take advantage of the
Company’s precarious financial positon and looming default” under a provision of
the LOC.21 The plaintiff further alleged that because Creel, in her capacity as
Ecovation’s CEO and President, ignored other sources of investment and because
16
Id. ¶ 92.
17
Id.
18
Id.
19
Compl. ¶ 22; Def.’s Opp’n Br. 1.
20
Id. ¶ 24.
21
Id. Ex. A ¶ 35.
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the Trusts increased the LOC, the Trusts were in a position of significant power to
threaten foreclosure on the LOC.22 The Trusts also owned a substantial amount of
stock and stock warrants in the Company.23 Under the terms of the LOC, the
Company issued warrants to the Trusts to purchase shares of Company stock for
$0.01 per share.24 Through the LOC and the terms of the Trusts’ loans to the
Company, the Trusts increased their ownership of Series A Preferred Stock to over
fifty percent, also increasing their already substantial influence.25 In 2007, allegedly
after receiving material nonpublic information from Creel regarding Ecolab’s
interest in acquiring Ecovation, the Trusts purchased additional Series A Preferred
stock from other investors, including the plaintiff.26 As a consequence of Ecolab’s
acquisition of Ecovation, the Trusts made a substantial profit on the shares they
purchased from the plaintiff.27 The ITV complaint followed.
22
Id. ¶¶ 59, 61, 70.
23
Id. ¶¶ 26, 29.
24
Id. ¶ 64.
25
Id. ¶ 71.
26
Id. ¶¶ 102, 106.
27
Id. ¶ 128.
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Throughout the ITV Action, Ecolab advanced defense fees and expenses to
Creel, first through its directors’ and officers’ liability policy and later, when that
policy was exhausted, from its own funds.28
3. Settlement of the ITV Action
The parties in the ITV Action began considering settlement in 2015.29 They
attempted mediation but were unsuccessful.30 Nonetheless, they continued
settlement negotiations.31 Counsel for Creel and counsel for Frautschi and the Trusts
estimated that a reasonable settlement of the claims would fall in the range of $3
million to $5 million.32 They communicated this estimate in a memorandum to
Ecolab’s counsel in September 2015.33
In April 2016, the parties reached a settlement agreement in principle.34 The
total settlement amount was $4.9 million; the parties to the ITV Action apportioned
28
Compl. ¶ 38; see id. ¶¶ 42-43.
29
See id. ¶¶ 37, 41.
30
Id. ¶¶ 41, 45.
31
Id. ¶ 46.
32
Id. ¶¶ 39, 48; Glorioso Aff. Ex. 11.
33
Compl. ¶ 39; Glorioso Aff. Ex. 11.
34
Compl. ¶ 51.
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$2.94 million to Creel and $1.96 million to the Frautschi and the Trusts (together,
the “Frautschi Parties”).35 As a condition to settlement, the agreement required
Ecolab to fully indemnify Creel for her portion of the settlement.36
Counsel for Creel and counsel for the Frautschi Parties communicated the
terms of this agreement to Ecolab’s counsel on April 28, 2016.37 Nearly three
months later, on July 19, 2016, Ecolab’s counsel informed Creel and the Frautschi
Parties, through their counsel, that Ecolab would contribute $3 million to the
settlement.38 This contribution would be contingent on releases from Creel and the
Frautschi Parties as to claims for indemnification, an unacceptable result for the
Frautschi Parties.39 As such, the parties did not effectuate the agreement in principle,
and Ecolab did not contribute any money toward settlement.40
The parties continued settlement discussions. In August 2016, the parties
executed a Settlement Term Sheet that largely reflected their agreement in principle
35
Id.
36
Id. ¶ 52.
37
Id. ¶ 57.
38
Id. ¶ 58.
39
Id.
40
Id.
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from April 2016.41 The Settlement Term Sheet contained the same apportionment:
$2.94 million to be “paid on behalf of Defendant Diane C. Creel,” and $1.96 million
to “be paid by” the Frautschi Defendants.42
Although Creel, Frautschi, and the Trusts were aware of Ecolab’s position
regarding its contribution, the Settlement Term Sheet contained a condition that
Ecolab agree to pay or be ordered by a court to pay Ms. Creel’s portion of the
settlement.43 This contingency reduced the certainty of settlement, and the district
court placed the proceeding on its trial calendar for January 2018.44
In October 2016, Ecolab denied Creel’s demand for indemnification.45 The
parties in the ITV Action therefore could not move forward with the Settlement Term
Sheet.46 The parties agreed to modify the terms of the settlement to eliminate the
indemnification contingency.47 To move forward with settlement of the ITV Action,
41
Id. ¶ 60; id. Ex. G.
42
Id. Ex G, at 1.
43
Id. at 1-2; Compl. ¶ 77; see id. ¶ 58.
44
Id. ¶ 78.
45
Id. ¶¶ 79-80.
46
Id. ¶ 81.
47
Id. ¶ 82.
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the Trusts agreed to advance to Creel her portion of the settlement proceeds. 48 The
Trusts and Creel memorialized this advancement in the written Agreement to
Effectuate Settlement Agreement dated April 24, 2017 (“Effectuation
Agreement”).49 Under the terms of the Effectuation Agreement, the Trusts advanced
Creel’s portion of the settlement, and Creel agreed to pursue indemnification from
Ecolab.50 If Creel is successful in obtaining indemnification, she must reimburse the
Trusts for any amount she receives in indemnification, up to the amount the Trusts
advanced.51
To remove the contingency of indemnification from settlement in the ITV
Action, the plaintiff agreed to reduce the settlement amount to $4.65 million, a
difference of $250,000.52 The parties reduced the Trusts’ portions of the settlement
because the Trusts were assuming the risk that Creel may not be successful in her
indemnification claim.53
48
Id. ¶ 83; id. Ex. H, at 1.
49
Id. Ex. H.
50
Id. §§ 1-2.
51
Id. § 1.
52
Compl. ¶ 84.
53
Id. ¶ 85.
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On April 25, 2017, the parties signed a formal Settlement and Release
Agreement (the “Settlement”).54 Ecolab did not explicitly approve the Settlement.55
Under the terms of the Settlement and the Effectuation Agreement, the Trusts
provided $2.94 million to Creel’s counsel, who in turn transferred that amount to
plaintiff’s counsel.56 The Frautschi Parties also paid their portions of the Settlement
to the plaintiff.57 The district court dismissed the ITV Action on May 1, 2017.58
II. ANALYSIS OF ECOLAB’S MOTION TO DISMISS
In this action, Creel seeks indemnification for her portion of the Settlement in
the ITV Action (Count I), the difference between Creel’s defense counsel’s standard
hourly rates and the discounted rate Ecolab actually paid in the ITV and Ahlers
Actions (Count II), and the fees Creel incurred to enforce her indemnification rights
in this action (Count III).59
54
Id. ¶ 86; id. Ex. I.
55
See Compl. ¶ 80.
56
Id. ¶ 87; id. Ex. H § 1; id. Ex. I § 3(d).
57
Compl. ¶ 87; id. Ex. I § 3(a)-(c).
58
Compl. ¶ 88; id. Ex. N.
59
See generally Compl. ¶¶ 101-27.
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Ecolab filed its Motion to Dismiss Count I of the Complaint on October 13,
2017,60 and an amended motion on November 13, 2017 (the “Motion to Dismiss”).61
Ecolab argues that Creel fails to state a claim under Court of Chancery Rule 12(b)(6)
because Creel did not actually incur her portion of the Settlement when the Trusts
advanced that amount to her.62
When considering a motion to dismiss for failure to state a claim under Court
of Chancery Rule 12(b)(6), a court must accept all well-pled factual allegations in
the complaint as true, accept even vague allegations in the complaint as well-pled if
they provide the defendant notice of the claim, “draw all reasonable inferences in
favor of the non-moving party,” and deny the motion unless the plaintiff could not
recover “under any reasonably conceivable set of circumstances susceptible of
proof.”63
A. Section 145 of the General Corporate Law of Delaware
This Court has long recognized the dual policies of Section 145:
(a) [to allow] corporate officials to resist unjustified
lawsuits, secure in the knowledge that, if vindicated, the
60
D.I. 58.
61
D.I. 67.
62
See generally Def.’s Opening Br. Mot. to Dismiss 17-30.
63
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002).
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corporation will bear the expense of litigation; and (b) [to
encourage] capable women and men to serve as corporate
directors and officers, secure in the knowledge that the
corporation will absorb the costs of defending their
honesty and integrity.64
Additionally, “[Section 145] should be broadly interpreted to further the goals it was
enacted to achieve.”65
Section 145(a) authorizes Delaware corporations to indemnify directors,
officers, employees, and agents in connection with actions brought against them by
third parties:
A corporation shall have power to indemnify any person
who was or is a party . . . to any . . . action, suit or
proceeding . . . (other than an action by or in the right of
the corporation) by reason of the fact that the person is or
was a director, officer, employee or agent of the
corporation . . . against expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best
interests of the corporation . . . .66
64
VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 84 (Del. 1998).
65
Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002).
66
8 Del. C. § 145(a).
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Stated differently, to obtain indemnification under Section 145(a), the
director, officer, employee, or agent must show that (1) she was a party to a
threatened, pending, or completed action, suit, or proceeding by reason of the fact
that she was a director, officer, employee, or agent of the corporation; (2) the action,
suit, or proceeding was brought neither by nor in the right of the corporation; (3) she
actually and reasonably incurred attorneys’ fees, expenses, judgments, fines, or
amounts paid in settlement in connection with the action, suit, or proceeding; and
(4) she “acted in good faith and in a manner [she] reasonably believed to be in or not
opposed to the best interests of the corporation.”67
Ecovation’s Amended and Restated Certificate of Incorporation (the
“Charter”) provides Creel with indemnification against “all expense, liability and
loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by the
indemnitee.”68 Ecovation’s Bylaws (the “Bylaws”) provide Creel with
indemnification to the “fullest extent authorized or permitted by the Delaware
67
Id.
68
Compl. Ex D, at 16. Ecovation was formerly known as AnAerobics, Inc.; the
Charter reflects the former name.
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General Corporation Law.”69 In its Motion to Dismiss, Ecolab challenges only that
Creel did not actually “incur” a loss or expense in the Settlement of the ITV Action
because the Trust paid Creel’s portion of the Settlement and because she will never
pay her portion of the Settlement.70
B. Creel Has Stated a Reasonably Conceivable Claim That She
Incurred the Settlement Amount
This Court has defined “incur” in the advancement context as “to become
liable and subject to” and “[t]o suffer or bring on oneself (a liability or expense).”71
The parties here do not dispute the definition of incur; rather, they dispute whether,
under the facts and circumstances surrounding the Settlement, Creel’s portion of the
Settlement falls within this definition.
69
Id. Ex. E art. V, § 1, at 9. The Bylaws reflect Ecovation’s former name, AnAerobics,
Inc.
70
See generally Def.’s Opening Br. Mot. to Dismiss 17-30.
71
Pontone v. Milso Indus. Corp., 100 A.3d 1023, 1039-40 (Del. Ch. 2014) (alteration
in original) (quoting Agere Sys., Inc. v. Worthington Steel Co., 2013 WL 4958220,
at *9 (Del. Super. Sept. 12, 2013), aff’d, 89 A.3d 478 (Del. 2014); Ameristar
Casinos, Inc. v. Resorts Int’l Hldgs., LLC, 2010 WL 1875631, at *9 (Del. Ch. May
11, 2010)).
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The Company points to Levy v. HLI Operating Co.72 and Pontone v. Milso
Industries Corp.73 to argue that Creel did not incur any expense because the Trusts
paid the expense as the Effectuation Agreement legally required the Trusts to do.
In Levy, the Court held that parties who had been fully reimbursed for certain
expenses by one indemnitor lacked standing to pursue indemnification for the same
expenses from a different indemnitor.74 HLI Operating Company, Inc. (“Old
Hayes”) issued restatements of its financial results.75 Thereafter, stockholders sued
six former directors of Old Hayes in multiple securities lawsuits.76 To settle certain
of those lawsuits, the former directors agreed to pay $1.2 million each.77 They then
requested indemnification from Old Hayes for those payments under the
indemnification provision of Old Hayes’s bylaws and various indemnification
72
924 A.2d 210 (Del. Ch. 2007).
73
100 A.3d 1023 (Del. Ch. 2014).
74
924 A.2d at 224.
75
Id. at 214.
76
Id.77
See id.Creel v. Ecolab, Inc.
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agreements.78 When Old Hayes rejected the directors’ request, the former directors
filed suit.79
During the indemnification litigation, discovery documents revealed that JLL
Fund, a major stockholder of Old Hayes that had appointed four of the plaintiff
directors (the “JLL Representatives”), paid the $1.2 million settlement for each of
the JLL Representatives.80 JLL Fund made these payments pursuant to contractual
indemnification obligations it owed the JLL Representatives.81 Using this
information, Old Hayes argued that the JLL Representatives suffered no injury and
lacked standing to bring their indemnification claim.82 On that argument, Old Hayes
moved for summary judgment.83 The Court granted summary judgment and
explained its reasoning as follows:
When a purported indemnitee has all of his indemnifiable
expenses paid in full and cannot show an out-of-pocket
loss, he has no claim for indemnification under section
145. The relevant provisions of that statute empower a
78
Id. at 214-15.
79
Id. at 216.
80
Id. at 216-17.
81
Id. at 217.
82
Id. at 217-18.
83
Id. at 217.
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corporation to provide indemnification of only those
amounts “actually . . . incurred by the person . . . .” This
language is best understood as a statutory embodiment of
the common law of indemnification, which generally
recognizes that a party who “‘has not and will not sustain
any actual out-of-pocket loss’ as the result of a claim
raised against it has no indemnification claim . . . .”
Therefore, under this reading of section 145, once a co-
indemnitor fully reimburses its indemnitee for
indemnifiable liabilities, the indemnitee lacks standing to
assert an indemnification claim against the other
indemnitor in the indemnitee’s own right.84
The Court further held that JLL Fund was the real party-in-interest because it
fully satisfied its obligations to its indemnitees.85 As such, JLL Fund could sue the
co-indemnitor on a theory of contribution.86
In Pontone, the Court held that because the plaintiff, a former officer and
director, received advancement from a competitor under a separate indemnification
agreement, he lacked standing to pursue advancement for expenses already paid by
the competitor.87 The plaintiff in Pontone had resigned from his position as
84
Id. at 222-23 (omissions in original) (quoting 8 Del. C. §§ 145(a)-(c); Perno v. For-
Med Med. Gp., P.C., 673 N.Y.S.2d 849, 851 (Sup. Ct. 1998)).
85
Id. at 224.
86
Id.
87
100 A.3d 1023 at 1045.
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executive vice president and director of two corporations.88 As part of his
resignation, he agreed not to compete with or solicit customers from the corporations
for three years.89 At the end of the three-year period, the plaintiff became a
consultant for a competitor corporation.90 The corporations brought litigation
against the plaintiff challenging the propriety of the plaintiff’s consulting agreement
with the competitor.91
The plaintiff executed a loan agreement with the competitor.92 Under that
agreement, the competitor agreed to advance the plaintiff’s legal fees and expenses
in the underlying proceeding and in the advancement proceeding against the
corporations.93 The terms of the loan agreement required the plaintiff to repay the
advanced expenses if he recovered them from the corporations.94 The terms also
88
Id. at 1029.
89
Id.90
Id.91
Id. at 1030.
92
Id. at 1032.
93
Id.94
Id. at 1033-34.
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forgave all advanced expenses if the plaintiff was unsuccessful in his advancement
proceeding against the corporations.95
The loan agreement, which the plaintiff and competitor entered into after the
commencement of litigation, also referenced the indemnification terms of the
consulting agreement, which they entered into before any litigation.96 The
consulting agreement explicitly indemnified the plaintiff against third-party claims,
expenses, and costs arising out of the consulting agreement.97
The Court agreed with the corporations that the loan and consulting
agreements provided rights of mandatory advancement and indemnification from
the competitor for expenses incurred in the underlying proceeding.98 Thus, the
plaintiff lacked standing to pursue advancement from the corporation for expenses
already paid.99
Ecolab argues that the Effectuation Agreement between Creel and the Trusts
is similar to the indemnification agreements in Levy and Pontone and that the
95
Id. at 1034.
96
Id. at 1029, 1032-34.
97
Id. at 1033.
98
Id. at 1037-38.
99
Id. at 1059.
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payment by the Trusts on behalf of Creel under the terms of the Effectuation
Agreement is similar to the indemnification and advancement payments made on
behalf of the plaintiffs in Levy and Pontone because (1) the Effectuation
Agreement’s provisions regarding reimbursement are similar to those of common
indemnification agreement and (2) Creel is not actually responsible for her portion
of the Settlement.100
Creel asserts that the Effectuation Agreement is not an indemnification
agreement. First, the indemnification agreements in Levy and Pontone explicitly and
unambiguously provided indemnification rights.101 By comparison, a cursory review
of the language of the Effectuation Agreement reveals no explicit or unambiguous
language regarding indemnification.102 To the contrary, the Effectuation Agreement
states the purpose of the agreement is to “complete settlement of the ITV Action,”
100
Def.’s Opening Br. Mot. to Dismiss 19-26.
101
Levy, 924 A.2d at 216 (“[U]nder the relevant provision of JLL Fund's limited
partnership agreement, each of the JLL Representatives enjoyed broad
indemnification rights for actions taken on behalf of the partnership.”); Pontone,
100 A.3d 1023, at 1033.
102
See Compl. Ex. H.
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and the agreement requires that Creel “reimburse the Trusts” upon the successful
conclusion of Creel’s indemnification claim against Ecolab.103
Second, the context in which Creel’s counsel and the Trusts’ counsel drafted
the Effectuation Agreement is very different from the contexts of Levy and Pontone.
For example, in Pontone, the indemnification agreement was part of a larger
agreement, the consulting agreement.104 Also, in both Levy and Pontone, the co-
indemnitors entered into the indemnification agreements before the litigation
commenced, and the co-indemnitors, thus, had pre-existing obligations to their
indemnitees.105 Here, the Effectuation Agreement is limited in scope to the payment
and potential reimbursement of the Settlement, and Creel and the Trusts entered into
the agreement to settle the then-extant litigation.106 The Trusts had no pre-existing
obligation to Creel to advance her portion of the Settlement.
103
Id. at 1.
104
Pontone, 100 A.3d at 1033.
105
Compare id. at 1029 (consulting agreement dated May 30, 2010), with id. at 1032
(advancement proceeding commenced August 26, 2013); compare Levy, 924 A.2d
at 216-17 (indemnification rights established under limited partnership agreement
of JLL Fund), with id. at 217 (payment of already-existing indemnification
obligations).
106
See Compl. Ex. H, at 1.
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Third and finally, counsel for Creel submitted to the Court that they drafted
the agreement to ensure that the agreement did not adversely affect Creel’s
indemnification rights and that the agreement only facilitated settlement of the ITV
Action when Ecolab shirked its advancement obligation by refusing to advance
payment of Creel’s portion of the Settlement.107
Creel points to DeLucca v. KKAT Management, L.L.C.108 and Schoon v. Troy
Corp.109 to respond that she did incur the Settlement expense because the Trusts
acted as volunteers and because she is obligated to repay them in the event she is
successful in this indemnification action. This line of Delaware cases suggests that
this Court will not allow the purported indemnitor to shirk its obligations because of
the efforts of a volunteer. In DeLucca, the Court refused to allow the company to
stall payment when the person owed advancement rights “find[s] an affluent aunt,
best friend, or other third party to front her defense costs” because this creates a
“perverse incentive” for companies to refuse to provide advancement.110 Similarly
107
Oral Arg. Tr. 50:1-11.
108
2006 WL 224058 (Del. Ch. Jan. 23, 2006).
109
948 A.2d 1157 (Del. Ch. 2008), superseded on other grounds by statute, 77 Del.
Laws ch. 14, § 3 (2009).
110
DeLucca, 2006 WL 224058, at *9.
Creel v. Ecolab, Inc.
C.A. No. 12917-VCMR
October 31, 2018
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in Schoon, which then-Vice Chancellor Lamb decided only ten months after issuing
his ruling in Levy, the Court echoed the holding of DeLucca and refused to provide
a “perverse incentive” to companies when a third party “voluntarily under[takes] to
[advance] fees and expenses without obligation.”111
Defendant argues, and I acknowledge, that DeLucca and Schoon arose in the
advancement context.112 Defendant, however, does not provide any justification
why Delaware policy should not prevent a corporation from shirking its
indemnification obligation when a third party advances payment without a pre-
existing obligation, when that same policy prevents corporations from shirking their
advancement obligations.
Thus, while I do not resolve for purposes of this motion whether the
Effectuation Agreement is, or is not, an indemnification agreement, I rule that Creel
has stated a reasonably conceivable claim that the Effectuation Agreement is not an
indemnification agreement, which would make the teachings of Levy and Pontone
inapplicable here. I also do not decide whether the holdings of DeLucca and Schoon
111
Schoon, 948 A.2d at 1175.
112
Def.’s Reply Br. Mot. to Dismiss 16.
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October 31, 2018
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apply at this point. I only point out the alternative role the Trusts may have acted in,
if they were not co-indemnitors.
III. ANALYSIS OF CREEL’S MOTION FOR SUMMARY JUDGMENT
Creel seeks summary judgment on all counts of her Complaint. She seeks
indemnification for her portion of the Settlement, indemnification for her attorneys’
fees at her counsel’s standard hourly rates, and fees-on-fees for this action to enforce
her indemnification rights.113 Additionally, Creel seeks pre-judgment interest on
these amounts.114
In its opposition to Creel’s motion, Ecolab argues that Creel is not entitled to
indemnification because (1) Creel did not incur her portion of the Settlement, as
argued in the Motion to Dismiss, (2) Creel did not obtain the required approval of
the Settlement from Ecolab, and (3) the Settlement allocation was not reasonable.115
A. Standard of Review
Summary judgment will be “granted if the pleadings, depositions, answers to
interrogatories and admissions on file, together with the affidavits, show that there
is no genuine issue as to any material fact and that the moving party is entitled to a
113
See generally Compl. ¶¶ 101-27.
114
Id. at 35-36.
115
Def.’s Opp’n Br. Mot. Summ. J. 30-52.
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October 31, 2018
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judgment as a matter of law.”116 The movant bears the initial burden of
demonstrating that there is no question of material fact.117 When the movant carries
that burden, the burden shifts to the nonmoving party “to present some specific,
admissible evidence that there is a genuine issue of fact for a trial.”118 When
considering a motion for summary judgment, this Court must view the evidence and
the inferences drawn from the evidence in the light most favorable to the nonmoving
party.119 Even so, the nonmoving party may not rely on allegations or denials in the
pleadings to create a material factual dispute.120
B. Indemnification for Creel’s Portion of the Settlement
As I explained above,121 Ecolab’s argument that Creel did not incur any loss
or expense associated with the Settlement requires this Court to interpret the
116
Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14,
2007) (citing Ct. Ch. R. 56(c)).
117
Deloitte LLP v. Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009).
118
Id. (citing Watson v. Taylor, 829 A.2d 936 (TABLE), 2003 WL 21810822, at *2
(Del. Aug. 4, 2003)).
119
Judah v. Del. Tr. Co., 378 A.2d 624, 632 (Del. 1977); Fike v. Ruger, 754 A.2d 254,
260 (Del. Ch. 1999), aff’d, 752 A.2d 112 (Del. 2000).
120
Ct. Ch. R. 56(e).
121
See Section II.B above.
Creel v. Ecolab, Inc.
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October 31, 2018
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Effectuation Agreement and determine whether it is, or is not, an indemnification
agreement. Both parties provide objectively reasonable interpretations of the
Effectuation Agreement. Ecolab argues that the Effectuation Agreement is an
indemnification agreement because it obligated the Trusts to pay Creel’s portion of
the Settlement and does not obligate Creel to repay the Trusts if she is unsuccessful
in her indemnification claim.122 This interpretation stresses characteristics that are
present in traditional indemnification agreements. Creel, on the other hand, asserts
that the Effectuation Agreement is not an indemnification agreement because the
Trusts had no pre-existing obligation to indemnify Creel and because Creel is
required to repay the Trusts if she is successful in this indemnification action; the
agreement simply allowed the parties to complete settlement of the ITV Action.
Creel’s interpretation highlights the Trusts’ voluntary role.
Faced with two reasonable interpretations, I must examine the intent of the
parties when they entered into the agreement. Creel and Ecolab have submitted
exhibits to support, or oppose, this motion for summary judgment. None of these
exhibits, however, allow me to deduce the intent of Creel and the Trusts when
creating the Effectuation Agreement. Without more factual information regarding
122
Def.’s Opening Br. Mot. to Dismiss 27-28.
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October 31, 2018
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the intent of Creel and the Trusts, I cannot appropriately interpret the Effectuation
Agreement.123 I, therefore, deny summary judgment as to indemnification for
Creel’s portion of the Settlement.
C. Indemnification for Creel’s Attorneys’ Fees at Standard Hourly
Rates
Ecolab provided Creel with advancement during the ITV and Ahlers Actions;
however, Ecolab demanded a discount on the attorneys’ fees of approximately nine
percent off the standard 2015 rate, and Ecolab refused to permit any annual rate
increases.124 Ecolab rejected annual rate increases based on its policy with its own
outside counsel to hold hourly billing rates level during the pendency of a matter.125
Ecolab based the discount on Creel’s counsel’s decision to offer a discount to the
directors’ and officers’ liability insurer that originally paid the fees. Creel’s counsel
agreed to submit invoices at the discounted rate without annual rate increases but
123
This factual information will illuminate the legal issue surrounding the Effectuation
Agreement. In re Dairy Mart Convenience Stores, Inc. Deriv. Litig., 1999 WL
350473, at *11 (Del. Ch. May 24, 1999) (“[T]his Court has the discretion to deny
summary judgment if it decides that a more thorough development of the record
would clarify the law or its application.” (citing Alexander Indus., Inc. v. Hill, 211
A.2d 917, 918-19 (Del. 1965); Ebersole v. Lownegrub, 180 A.2d 467, 468-69 (Del.
1962))).
124
Grant Aff. Ex. 26, at DC0000916.
125
Id. at DC0000914.
Creel v. Ecolab, Inc.
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reserved its right to seek recovery of the higher rates.126 Defendant does not dispute
these facts.127 Creel now seeks indemnification for her counsel’s standard hourly
rates, without any discount and with annual rate increases, and prejudgment interest
on those additional attorneys’ fees.
Section 145(a) requires that the indemnitee’s attorneys’ fees be reasonable.128
“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.’”129
Advancement is a contractual right governed by the terms
of the operative agreement. When a company has
provided a covered person with a mandatory advancement
right conditioned only on an undertaking to pay, the
company “does not have the right to impose any terms or
conditions on . . . advancement other than an undertaking
to repay.” . . . [The company] cannot now build in other
obligations. . . . [The company] could have built
126
Grant Aff. Ex. 3, at 35 (Ecolab’s response to RFA No. 51).
127
See Def.’s Opp’n Br. Mot. Summ. J. 53-56.
128
8 Del. C. § 145(a) (limiting indemnification to “expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred”).
129
White v. Curo Tex. Hldgs., LLC, 2017 WL 1369332, at *5 (Del. Ch. Feb. 21, 2017)
(alterations and omissions in original) (quoting Delphi Easter P’rs Ltd. P’ship v.
Spectacular P’rs, Inc., 1993 WL 328079, at *9 (Del Ch. Aug. 6, 1993)).
Creel v. Ecolab, Inc.
C.A. No. 12917-VCMR
October 31, 2018
Page 30 of 32
conditions and limitations into the advancement right . . . .
What [the company] cannot do now is retrospectively
revise the advancement right to insert conditions and
limitation that are not part of the contract.130
Ecolab does not assert that Creel’s counsel’s standard rates for attorneys’ fees
are unreasonable.131 Instead, it argues that when a third party is paying an
indemnitee’s attorneys’ fees, the third party must be allowed to determine the
appropriateness of the billing rate.132 While parties may agree to such a third-party
determination, Delaware law does not mandate it.
The advancement provisions of Ecolab’s Charter and Bylaws required Ecolab
to pay Creel’s attorneys’ fees.133 These provisions fail to state any conditions on
attorneys’ fees.134 If Ecolab desired to pay the same rates as the policy insurer
without any annual increases, then it should have included these conditions in its
130
White, 2017 WL 1369332, at *7-8 (first omission in original) (quoting Blankenship
v. Alpha Appalachia Hldgs., Inc., 2015 WL 3408255, at *26 (Del. Ch. May 20,
2015)).
131
See Def.’s Opp’n Br. Mot. Summ. J. 53-56.
132
Id. at 55.
133
Compl. Ex. D, at 17; id. Ex. E art. V, § 3.
134
See Compl. Ex. D, at 17; id. Ex. E art. V, § 3.
Creel v. Ecolab, Inc.
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Charter, Bylaws, and Indemnification Agreement. It did not, and therefore, it cannot
impose these conditions after the fact.135
For the foregoing reasons, I grant Creel’s Motion for Summary Judgment as
to additional attorneys’ fees at counsel’s standard hourly rates. I also award
prejudgment interest for the additional attorneys’ fees. Prejudgment interest accrues
at the legal rate set forth in 6 Del. C. § 2301(a) and is compounded quarterly.136
D. Fees-on-Fees
Indemnitees may recover expenses incurred in prosecuting an indemnification
suit, or fees-on-fees, when they are awarded indemnification.137 Because the largest
amount at issue, Creel’s portion of the Settlement, remains unresolved, I reserve
judgment at this time.
IV. CONCLUSION
For the foregoing reasons, I determine that Plaintiff has stated a reasonably
conceivable claim and, therefore, DENY Defendant’s Motion to Dismiss. I GRANT
135
White, 2017 WL 1369332, at *8 (“[The Company] also could have built conditions
and limitations into the advancement right . . . . What [it] cannot do now is
retrospectively revise the advancement right to insert conditions and limitations that
are not part of the contract.”).
136
Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316, at *19 (Del. Ch.
May 30, 2008).
137
See Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561 (Del. 2002).
Creel v. Ecolab, Inc.
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October 31, 2018
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in part and DENY in part Plaintiff’s Motion for Summary Judgment. The nature of
the Effectuation Agreement, whether it is, or is not, an indemnification agreement,
the question of whether Creel “actually incurred” her portion of the Settlement, and
a determination as to Creel’s claim for fees-on-fees remain open issues for trial.138
IT IS SO ORDERED.
Sincerely,
/s/Tamika Montgomery-Reeves
Vice Chancellor
TMR/jp
138
I address Ecolab’s argument that Creel did not obtain approval of the Settlement in
a separate letter opinion issued today. I do not address Ecolab’s reasonableness
argument as it is contingent on a showing that Creel did not incur her portion of the
Settlement.