Fred L. Pasternack v. Northeastern Aviation Corp. ( 2018 )

THE COURT OF CHANCERY OF THE STATE OF DELAWARE
FRED L. PASTERNACK, )
)
Plaintiff, )
)
v. ) C.A. No. 12082-VCMR
)
NORTHEASTERN AVIATION )
CORP., )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: August 17, 2018
Date Decided: November 9, 2018
Paul D. Brown, Joseph B. Cicero, and Stephanie H. Dallaire, CHIPMAN BROWN
CICERO & COLE, LLP, Wilmington, Delaware; Cynthia S. Arato and Daniel J.
O’Neill, SHAPIRO ARATO LLP, New York, New York; Attorneys for Plaintiff.
Francis G.X. Pileggi and Alexandra D. Rogin, ECKERT SEAMANS CHERIN &
MELLOTT, LLC, Wilmington, Delaware; Edward J. Longosz, II, ECKERT
SEAMANS CHERIN & MELLOTT, LLC, Washington, D.C.; Attorneys for
Defendant.
MONTGOMERY-REEVES, Vice Chancellor.
In this case, Plaintiff, a pilot, seeks indemnification from Defendant, the
aircraft charter and management company for which he flew planes. The underlying
dispute for which Plaintiff seeks indemnification of legal fees and expenses arose in
connection with the pilot’s participation in random drug testing. The regulations
governing the operations of the company require that the company submit a random
selection of its pilots for drug testing. The company informed the pilot that he had
been randomly selected. The pilot reported, as instructed, to the testing site and
provided a sample, but the volume was insufficient to complete testing. Rather than
waiting at the testing site until he could provide an adequate sample for testing, the
pilot informed the drug test collector that he needed to attend an appointment but
would return to complete the testing. The pilot left, and he returned a few hours later
to complete the test. With the permission of the aircraft company, the collector
resumed the test. The pilot’s test results were negative for drugs, but the medical
review officer determined that the pilot refused to take the test by leaving before the
test was complete, resulting in an automatic failure of the drug test. As a result, the
Federal Aviation Administration issued an emergency order and revoked the pilot’s
certificate to fly. The pilot challenged this finding through two levels of appeal. In
the final resolution of the case, the Court of Appeals for the D.C. Circuit held that
there was insufficient evidence to determine whether the collector gave the pilot
2
permission to leave and reversed the revocation. Thus, the pilot prevailed in his
challenge.
Thereafter, the pilot sought indemnification for the legal expenses associated
with those proceedings under the company’s bylaws. The bylaws provide for
mandatory indemnification for directors, officers, employees, and agents to the
extent permitted by the Delaware General Corporation Law. Plaintiff argues that he
is entitled to indemnification because he is an employee or agent of the company;
his status as an employee or agent stems from his actions on behalf of the company
and the company’s control of those actions; he took the drug test by reason of his
role as a pilot at the company; and he acted at all times in the best interest of or not
opposed to the interests of the company. The aircraft company responds that it need
not provide indemnification because Plaintiff (1) was neither an employee nor an
agent because he was not acting in his pilot role during the drug test, (2) was not
subjected to the drug test by reason of his affiliation with the company, and (3) did
not act in good faith or in the best interests of the company when he prematurely left
the drug test. Additionally, the company argues that the doctrine of laches bars
Plaintiff’s claims.
In this opinion, I hold that Plaintiff is an agent of the company, that he took
the drug test by reason of his affiliation with the company, and that he acted in good
faith and in a manner, at the very least, not opposed to the best interests of the
3
company. Thus, the company must indemnify the pilot and pay fees-on-fees, and
laches does not bar Plaintiff’s claims.
I. BACKGROUND
The facts in this opinion reflect my findings based on admitted allegations in
the pleadings, stipulated facts, trial testimony of five witnesses, and thirty-nine
documentary exhibits. 1
A. The History of Northeastern and Its Evolution
Michael J. Russo and two other individuals started Northeastern Aviation
Corp. (“Northeastern” or the “Company”) in December 1978.2 Northeastern
operated as a Delaware corporation with its principal place of business at Republic
Airport in Farmingdale, New York. 3 Initially, the Company leased aircraft to a
single small commuter airline. 4 Northeastern employed no pilots at that time. 5 Fred
1
Citations to the trial transcript are in the form “Tr. # (X)” with “X” representing the
surname of the speaker. Joint Trial Exhibits are cited as “JX #.” Facts drawn from
the Joint Pretrial Stipulation and Order are cited as “PTO ¶ #.” Unless otherwise
indicated, citations to the parties’ briefs are to post-trial briefs. After initially
identifying individuals, I reference surnames without honorifics or regard to formal
titles such as “Doctor.” I intend no disrespect.
2
JX 1; PTO ¶¶ II.4-.5; see JX 30, at NEA00035, -37, -39.
3
PTO ¶ II.3.
4
Tr. 11:22-12:2 (Pasternack).
5
Tr. 12:23-13:7 (Pasternack).
4
L. Pasternack joined Northeastern in November 1980.6 He became a stockholder, a
director, and an officer of Northeastern, but Pasternack worked primarily as a
medical doctor.7
In 1983, Northeastern’s single customer went bankrupt; in response,
Northeastern changed its business model and started operating as an aircraft charter
and management company. 8 As a charter flight operator, Northeastern was and is
regulated under Part 135 of the Federal Aviation Administration (“FAA”)
regulations (“Part 135”).9
Russo and Pasternack initially served as Northeastern’s only pilots. 10 But
Northeastern grew during the 1980s, hired more pilots, and established a hierarchy
for its staff.11 In 1984, Pasternack became Northeastern’s Chief Pilot, a position
required by FAA regulations. 12 The Chief Pilot oversees the conduct of other pilots
6
JX 30, at NEA00044.
7
Id. at NEA00044, -94, -95; PTO ¶ II.1.
8
Tr. 12:3-16 (Pasternack).
9
14 C.F.R. Pt. 135 (entitled “Operating Requirements: Commuter and On Demand
Operations and Rules Governing Persons on Board Such Aircraft”); Tr. 12:14-22
(Pasternack).
10
Tr. 15:20-16:1 (Pasternack).
11
Tr. 13:7-9, 16:2-7 (Pasternack).
12
JX 32, at FLP001463; Tr. 85:8-12 (Jordan); Tr. 150:18-22 (Montemurro); Tr. 227:1-
6 (Russo).
5
within the company. 13 The Chief Pilot reports directly to Russo, the Director of
Operations, investigates any accident or incident, and acts as a liaison for
Northeastern to the FAA. 14 Pasternack remained the Chief Pilot until approximately
1987. 15 After 1987, he continued to pilot flights for Northeastern, but not in the
supervisory role of Chief Pilot.16 Despite Pasternack’s recent service to
Northeastern as a pilot and previously as Chief Pilot, no written employment
agreement or agency agreement exists between him and Northeastern.17
Russo has been the President and Director of Operations of Northeastern since
1978. 18 Although Russo no longer pilots flights for Northeastern,19 he actively
13
Tr. 21:19-20 (Pasternack).
14
JX 16, at NA000560; Tr. 84:17-85:1 (Jordan). See generally JX 16, at NA000560.
15
Tr. 14:1-3 (Pasternack).
16
Tr. 15:2-9 (Pasternack).
17
Tr. 61:13-23 (Pasternack); Tr. 183:9-20, 184:14-18 (Montemurro); see also Tr.
187:16-188:3 (Montemurro) (testifying that he was unaware of any agreement
disclaiming Pasternack’s employee or agency status). Similarly, in 2007, Russo did
not have an employment agreement with Northeastern, despite his service to
Northeastern as a pilot and as Director of Operations. Tr. 188:18-23 (Montemurro).
Today, the Chief Pilot must be an employee of the company. JX 16, at NA000711
(“Tier I personnel are direct employees” of Northeastern.); Tr. 227:15-16 (Russo).
The record does not show whether that was true in 1984, but because the Chief Pilot
has responsibility for the conduct of other employed pilots, it seems likely that the
Chief Pilot would be an employee.
18
JX 16, at NA000707; JX 30, at NEA00095.
19
Tr. 228:16-19 (Russo).
6
manages the Company, making a majority of the business decisions for the
Company. 20
B. Northeastern Now
Since 1986, the ownership of Northeastern and its Board of Directors have
remained unchanged.21 Four stockholders, including Russo and Pasternack, each
own twenty-five percent of Northeastern. 22 Both Russo and Pasternack serve on the
Board of Directors; Russo serves as President, and Pasternack serves as a Vice
President. 23
Northeastern provides two types of pilots for its charter flights.24 Its pilots are
either full-time pilots or “on-demand” pilots. 25 Northeastern assigns full-time pilots
a tour of duty, which means that for a specified time (for example, twenty days 26)
20
Tr. 233:6-9 (Russo); see, e.g., Tr. 245:24-246:14 (Russo).
21
PTO ¶ II.7.
22
Id.
23
Id. ¶ II.6.
24
Tr. 80:17-81:2 (Jordan); see Tr. 85:19-86:3 (Jordan) (testifying that part of the Chief
Pilot’s role is to “provid[e] a set of qualified pilots to management or charter sales
in order to staff aircraft”).
25
Tr. 80:17-81:2 (Jordan).
26
Tr. 153:10-14 (Montemurro).
7
the pilot must remain fit to pilot a flight.27 During that time, Northeastern requires
that the full-time pilot be available for any flight Northeastern assigns to him or her.28
Pilots may not drink alcoholic beverages during a tour of duty. 29 If a pilot becomes
ill during the tour of duty, the pilot must inform Northeastern that he or she is not
medically fit to fly. 30 Northeastern classifies its full-time pilots as employees and
issues them W-2 forms. 31 Full-time pilots receive a salary, are not paid per flight,
and are not paid beyond their usual salary for compliance activities like training and
drug testing.32 Northeastern provides full-time pilots benefits such as health
insurance, life insurance, vacation and sick time, and paid personal days. 33
27
Tr. 89:16-24 (Jordan).
28
Tr. 160:24-161:6 (Montemurro). Pilot qualifications are for specific types of
aircraft, and a pilot must be qualified to fly the specific aircraft used for a flight. See
Tr. 52:22-53:3, 55:12-20, 57:8-16 (Pasternack); Tr. 234:4-8, 262:4-5 (Russo).
29
JX 16, at NA000569 (“The use of intoxicants, including beer and wine, by . . . flight
crewmembers, while scheduled as available for duty, is prohibited.”); see 14 C.F.R.
§ 91.17 (prohibiting pilots from consuming any alcoholic beverage within eight
hours of flying).
30
JX 16, at NA000568 (“Crewmembers have an individual responsibility for personal
disqualification from flight status under conditions of medical deficiency . . . . All
pilots are required to notify the Director of Operations of any change in their flying
status.”).
31
Tr. 84:11-13 (Jordan).
32
Tr. 113:19-22 (Jordan); Tr. 179:2-9 (Montemurro).
33
Tr. 94:1-15 (Jordan).
8
Northeastern utilizes its on-demand pilots differently. Northeastern contacts
one of its on-demand pilots if it is unable to staff a flight with full-time pilots. 34 The
on-demand pilot then may, at his or her discretion and without justification, accept
or decline the assignment. 35 To accept the assignment, the pilot must be fit to pilot
the flight. 36 After accepting the assignment, the on-demand pilot, just like a full-
time pilot, must “comply with the regulatory requirements for that [flight]” and with
Northeastern’s applicable policies. 37 In other words, after an on-demand pilot
accepts the assignment, there is no functional difference between the full-time pilot
and the on-demand pilot.38 There remain, however, administrative differences;
Northeastern issues each on-demand pilot an IRS Form 1099, and the pilots do not
receive any employment benefits.39 Northeastern pays its on-demand pilots per
flight,40 but like full-time pilots, Northeastern does not pay its on-demand pilots for
34
Tr. 96:22-97:3 (Jordan).
35
Tr. 97:4-6, 98:6-9 (Jordan).
36
Tr. 98:13-16 (Jordan).
37
Tr. 98:13-23 (Jordan); Tr. 163:7-11 (Montemurro).
38
Tr. 99:19-100:1 (Jordan); Tr. 163:7-11, 182:20-24 (Montemurro).
39
See PTO ¶¶ II.28-.37; Tr. 162:9-122 (Montemurro).
40
Tr. 154:1-8 (Montemurro).
9
compliance activities like training or drug testing.41 Northeastern classifies these
on-demand pilots as independent contractors. 42
All pilots, whether full-time or on demand, must comply with applicable
regulations to maintain their status as Part 135 pilots for Northeastern. 43 This
compliance includes completion of regular training and an evaluation of flying
skills. 44 It also includes compliance with Northeastern’s drug testing program. 45 If
pilots fail to comply with any applicable FAA or DOT regulations, they may not
pilot any Northeastern flights.46 In addition to these regulations, certain
Northeastern policies apply to both full-time and on-demand pilots.47 For example,
all pilots must complete Northeastern’s flight and ground training program annually;
if a pilot fails to complete this training, he or she may not pilot any flights for
Northeastern.48 Additionally, all pilots must wear Northeastern uniforms during
41
See Tr. 156:16-22 (Montemurro).
42
Tr. 153:17-20 (Montemurro).
43
Tr. 94:16-22, 95:8-10 (Jordan).
44
Tr. 94:23-95:7 (Jordan).
45
Tr. 182:12-15, 218:11-20 (Montemurro).
46
See, e.g., Tr. 218:11-20 (Montemurro).
47
Tr. 201:3-15 (Montemurro).
48
JX 16, at NA000580; Tr. 157:9-18 (Montemurro).
10
flights, and it therefore is not apparent to passengers whether an individual pilot is
full-time or on demand. 49
Pasternack flew for Northeastern as an on-demand pilot. He did not receive
the benefits enjoyed by full-time pilots, such as vacation or sick benefits, paid
personal days, paid holidays, health insurance benefits, life insurance benefits,
workers’ compensation benefits, unemployment compensation benefits, or
participation in any type of retirement plan through Northeastern. 50 He received an
IRS Form 1099, not a W-2. 51
C. Northeastern’s Regulatory Environment
“In 1983, Northeastern began operating its own charter flight service . . .
under Part 135 . . . .” 52 This operation falls under Department of Transportation
(“DOT”) and FAA regulations.53 Part 135 regulates charter flight service operators
like Northeastern.54
49
JX 16, at NA000567; Tr. 22:10-11 (Pasternack); Tr. 183:1-8 (Montemurro).
50
PTO ¶¶ II.28-.35; Tr. 162:9-22 (Montemurro).
51
PTO ¶¶ II.36-.37.
52
Id.¶ II.9.
53
Id. ¶¶ II.9, II.14.
54
14 C.F.R. Pt. 135.
11
Under Part 135, Northeastern must assume responsibility for operational
control over the flights it conducts.55 “Operational control” means exercising
“authority over initiating, conducting or terminating a flight.”56
Under DOT regulations, to maintain its Part 135 certificate, Northeastern must
conduct random alcohol and drug testing of its pilots. 57 DOT regulations—
specifically, 49 C.F.R. Pt. 40 (“Part 40”)—prescribe the procedures that
Northeastern must follow in administering drug and alcohol testing.58 Part 40 allows
Part 135 operators to use “service agents” for drug and alcohol testing.59 A “service
agent,” in this context, provides services to the operator (Northeastern) and its pilots
in connection with DOT drug and alcohol testing requirements. 60
55
“Each certificate holder is responsible for operational control and shall list, in the
manual required by § 135.21, the name and title of each person authorized by it to
exercise operational control.” 14 C.F.R. § 135.77.
56
14 C.F.R. § 1.1.
57
See 14 C.F.R. § 135.251 (2009) (recodified at 14 C.F.R. § 120.35). Part 135
requires random drug testing of all individuals who perform safety-sensitive
functions for the charter flight operator (in this case, Northeastern). 49 C.F.R.
§ 40.3. Under the statutory framework, both pilots and maintenance workers
perform safety-sensitive functions, and therefore, Northeastern includes both in its
pool for random drug testing. Tr. 129:3-10 (Schmitt); Tr. 163:2-6 (Montemurro).
Because Pasternack’s only safety-sensitive role was as a pilot, I focus solely on
pilots.
58
See 14 C.F.R. § 120.103; 49 C.F.R. Pt. 40.
59
See 49 C.F.R. § 40.3.
60
Id.
12
Service agents include, among other things, laboratories and medical review
officers. 61 LabCorp, the laboratory where Pasternack reported for his drug and
alcohol test, was a service agent of Northeastern.62 ChoicePoint was another service
agent and provided services to Northeastern as a medical review officer.63
Part 40 also limits what service agents may do. 64 Barring specific
exceptions,65 none of which apply here, service agents may “not make a
determination that [a pilot] has refused a drug or alcohol test. This is a non-delegable
duty” of Northeastern. 66
61
Id.
62
PTO ¶ II.18.
63
Id. ¶ II.27; Tr. 35:1-9 (Pasternack); Tr. 179:17-180:13 (Montemurro). A medical
review officer acts as “an independent and impartial ‘gatekeeper’” in the drug-
testing process, provides feedback to the flight operators, and confirms the
laboratory’s drug test results. 49 C.F.R. § 40.123(a), (b) (entitled “What are the
MRO’s responsibilities in the DOT drug testing program?”).
64
49 C.F.R. § 40.355; PTO ¶ II.19.
65
49 C.F.R. § 40.355(j) (“As an exception to paragraph (i) of this section, [a service
agent] may make a determination that [the pilot] has refused a drug or alcohol test,
if: (1) [The service agent] schedule[d] a required test for an owner-operator or other
self-employed individual, and the individual fails to appear for the test without a
legitimate reason; or (2) [An MRO service agent] determine[d] that an individual
has refused to test on the basis of adulteration or substitution.” (emphasis added)).
66
49 C.F.R. § 40.355(i).
13
D. Pasternack’s Drug Test
In June 2007, Northeastern had a random drug testing program in place as
required by the applicable FAA and DOT regulations.67 Northeastern submitted a
list of its pilots, including Pasternack, 68 to Choice Point, and Choice Point used that
list to randomly select individuals for drug testing. 69 Choice Point contacted Donna
Schmitt, Northeastern’s Flight Department Administrator and Designated Employer
Representative, and informed her that Pasternack had been selected for random drug
testing. 70
On June 1, 2007, Schmitt instructed Pasternack to report to LabCorp for his
drug test (the “Drug Test”).71 Pasternack realized that he did not have a custody and
control form (“CCF Form”) embossed with Northeastern’s information.72 LabCorp
requires the CCF Form to complete the Drug Test.73 Pasternack informed Schmitt,
and Schmitt mailed a new CCF Form to him and instructed him to report for the
67
PTO ¶ II.26.
68
Id. ¶ II.27; Tr. 164:1-3 (Montemurro).
69
PTO ¶ II.27.
70
Tr. 127:17-19, 128:15-129:10, 134:20-135:1 (Schmitt).
71
PTO ¶ II.38.
72
Tr. 27:12-24 (Pasternack).
73
See id.
14
Drug Test after he received the CCF Form. 74 Pasternack received the CCF Form,
and on June 5, 2007, shortly after 1:00 p.m., Pasternack reported to LabCorp to
provide a urine sample for the Drug Test.75
At LabCorp, Pasternack followed the instructions of the LabCorp collector,
Theresa Montalvo. 76 After Pasternack provided a sample, Montalvo informed him
that the amount of urine he had provided was insufficient.77 She instructed him to
wait at the LabCorp facility until he was able to produce another sample.78
Pasternack waited for approximately ten or fifteen minutes and then recalled that he
had a 2:00 or 2:30 p.m. appointment with one of his medical patients. 79 He informed
Montalvo that he needed to leave but that he would return the next day to complete
the Drug Test. 80 Montalvo explained that she would need to call Northeastern, but
74
Tr. 27:24-28:3 (Pasternack); Tr. 145:17-20 (Schmitt).
75
PTO ¶ II.39.
76
Id. ¶ II.41.
77
Id. ¶ II.42; Tr. 30:12-15 (Pasternack).
78
PTO ¶ II.42.
79
Id. ¶ II.43; Tr. 30:19-31:2 (Pasternack).
80
PTO ¶ II.43.
15
she did not explain that Pasternack’s departure would result in his Drug Test being
deemed a “refusal to test.”81
Pasternack’s appointment was approximately eight blocks away. 82 After the
appointment, he decided to return to LabCorp to complete the Drug Test that same
afternoon.83 LabCorp required that Northeastern first give its authorization to
resume the Drug Test. 84 Although Schmitt, Northeastern’s Designated Employer
Representative, would have been the appropriate Northeastern representative to
contact, Schmitt was not at work that day, 85 and Montalvo spoke with Peter
Montemurro, Northeastern’s General Manager. 86 She asked Montemurro to give
permission, on behalf of Northeastern, to resume Pasternack’s Drug Test after he
returned.87 Unfamiliar with drug testing requirements, Montemurro instructed
81
See Tr. 31:13-14 (Pasternack).
82
Tr. 32:1-2 (Pasternack).
83
Tr. 31:22-32:3 (Pasternack).
84
Tr. 32:9-12 (Pasternack).
85
Tr. 146:3-9 (Schmitt).
86
JX 16, at NA000707; Tr. 165:15-20 (Montemurro).
87
Tr. 165:21-166:2 (Montemurro).
16
Montalvo to “do whatever [she] think[s] is appropriate.” 88 Montalvo continued the
Drug Test, and Pasternack provided a sufficient sample at that time. 89
A few days later, ChoicePoint, in its role as medical review officer, deemed
Pasternack’s Drug Test a “refusal to test” because Pasternack left LabCorp before
he completed the Drug Test.90 On June 10, 2007, Schmitt informed Pasternack of
this result.91 ChoicePoint determined that Pasternack failed the Drug Test solely due
to the refusal to test;92 Pasternack’s sample tested negative for drugs.93
After the Drug Test, Pasternack did not pilot any flights for Northeastern. 94
E. The Underlying FAA Proceeding
On November 20, 2007, the FAA revoked Pasternack’s pilot’s certificates on
the ground that he refused to test.95 Pasternack retained counsel to represent him in
88
Tr. 166:6-11 (Montemurro).
89
PTO ¶ II.45.
90
Id. ¶ II.46; see Tr. 35:1-9 (Pasternack).
91
Tr. 33:19-34:1 (Pasternack).
92
Tr. 35:10-13 (Pasternack); Tr. 181:24-182:6 (Montemurro).
93
Tr. 181:17-23 (Montemurro).
94
Tr. 169:5-8 (Montemurro); see also Tr. 213:4-23 (Montemurro).
95
Compl. ¶ 13.
17
the administrative proceeding and to challenge the FAA revocation.96 During the
administrative proceedings, the FAA called ten witnesses, including employees of
Northeastern.97 Administrative Law Judge Fowler affirmed the FAA’s revocation.98
Pasternack appealed the decision, initially to the National Transportation Safety
Board (“NTSB”) and then to the United States Court of Appeals for the D.C.
Circuit.99 The D.C. Circuit remanded to the NTSB, which in turn remanded the
matter to Judge Fowler for credibility determinations.100
After Judge Fowler upheld and the NTSB affirmed Judge Fowler’s original
decision, Pasternack filed a second appeal with the D.C. Circuit.101 The D.C. Circuit
held that because there was insufficient evidence to show whether the collector
(Montalvo at LabCorp) impliedly gave Pasternack permission to leave, Pasternack’s
departure was not a “refusal to test” and the NTSB’s decision was arbitrary and
96
PTO ¶ II.47.
97
Id. ¶ II.48; Tr. 91:10-19 (Jordan); Tr. 164:9-18 (Montemurro).
98
PTO ¶ II.48.
99
Tr. 38:21-39:5 (Pasternack).
100
Tr. 39:5-13 (Pasternack).
101
Tr. 39:15-16; 39:22-40:2 (Pasternack).
18
capricious. 102 On March 22, 2013, the D.C. Circuit reversed the decision of the
NTSB, also reversing the revocation of Pasternack’s pilot’s certificates. 103
F. Pasternack’s Demand for Indemnification and This Litigation
At no point during the underlying FAA proceedings did Pasternack make any
demands for indemnification from Northeastern for attorneys’ fees.104 Over two
years after the conclusion of the FAA proceeding, on October 20, 2015, Pasternack
sent a letter to Northeastern requesting indemnification for approximately $140,000
in legal fees and expenses he incurred in defending himself during the FAA
proceedings.105 His letter requests indemnification under Northeastern’s bylaws,
which, according to Pasternack’s letter, “provide that employees shall be
indemnified to the full extent allowed under Delaware law.” 106
Northeastern’s corporate governance documents, including its bylaws (the
“Bylaws”), have been in effect since 1980 or earlier107 and remain unchanged since
102
Pasternack v. Huerta, 513 F. App’x 1 (D.C. Cir. 2013); Tr. 40:10-14 (Pasternack).
103
Pasternack, 513 F. App’x 1; Tr. 40:3-7 (Pasternack).
104
PTO ¶ II.50; Tr. 48:18-23, 65:10-16 (Pasternack); Tr. 168:7-18 (Montemurro); Tr.
245:13-17 (Russo); see Tr. 44:7-14 (Pasternack); Tr. 244:2-21, 288:17-289:10
(Russo).
105
JX 21, at NEA00135.
106
Id.
107
PTO ¶ II.8.
19
incorporation.108 The Bylaws contain an indemnification provision: “The
corporation shall indemnify its officers, directors, employees and agents to the extent
permitted by the General Corporation Law of Delaware.” 109
Northeastern responded to Pasternack’s request via letter on November 3,
2015. 110 In that letter, Northeastern stated that it will “check[] into this matter
and . . . get back to [Pasternack] in the near future.” 111 Northeastern never
substantively responded to Pasternack’s letter.112
On March 7, 2016, Pasternack filed his Verified Complaint for
Indemnification against Northeastern.113 This Court held a two-day trial in this
matter on March 15 and 16, 2018.
II. ANALYSIS
“To succeed at trial, ‘Plaintiff[] . . . ha[s] the burden of proving each
element . . . of each of his causes of action against [the] Defendant . . . by a
108
Id.; see Tr. 11:7-15 (Pasternack).
109
JX 29, at NEA00030.
110
JX 21; PTO ¶ II.52.
111
JX 21.
112
PTO ¶ II.53; Tr. 45:1-5 (Pasternack); Tr. 288:1-6 (Russo).
113
JX 22.
20
preponderance of the evidence.’” 114 “Proof by a preponderance of the evidence
means proof that something is more likely than not. It means that certain evidence,
when compared to the evidence opposed to it, has the more convincing force and
makes you believe that something is more likely true than not.”115
A. Northeastern Aviation Must Indemnify Pasternack Under Its
Mandatory Indemnification Bylaw
Pasternack seeks indemnification under Northeastern’s Bylaws for legal fees
and expenses he incurred in defending himself in the underlying FAA
proceedings.116 The Bylaws’ indemnification provision states, “The corporation
shall indemnify its officers, directors, employees and agents to the extent permitted
by the General Corporation Law of Delaware.” 117 Section 145(a) of the Delaware
General Corporation Law sets out the relevant requirements for indemnification by
a corporation:
A corporation shall have power to indemnify any person
who was or is a party . . . to any threatened, pending or
114
S’holder Representative Servs. LLC v. Gilead Scis., Inc., 2017 WL 1015621, at *15
(Del. Ch. Mar. 15, 2017) (quoting inTEAM Assocs., LLC v. Heartland Payment Sys.,
Inc., 2016 WL 5660282, at *13 (Del. Ch. Sept. 30, 2016)), aff’d, 177 A.3d 610 (Del.
2017).
115
Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18, 2010)
(quoting Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *17 (Del. Ch.
Oct. 23, 2002)).
116
Compl. ¶¶ 27-33.
117
JX 29, at NEA00030.
21
completed action, suit or proceeding, whether civil,
criminal, administrative or investigative . . . 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) . . . 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 . . . . 118
Thus, the evidence must show that (1) Pasternack was a party to a threatened,
pending, or completed action, suit, or proceeding by reason of the fact that he was a
director, officer, employee, or agent of Northeastern; (2) the action, suit, or
proceeding was brought neither by nor in the right of the corporation; (3) he actually
and reasonably incurred legal expenses in connection with the action, suit, or
proceeding; and (4) he “acted in good faith and in a manner [he] reasonably believed
to be in or not opposed to the best interests of the corporation.”119
The parties dispute (1) whether Pasternack was an agent or employee of
Northeastern,120 (2) whether Pasternack’s participation in the underlying FAA
proceedings was “by reason of the fact” of his affiliation with Northeastern, and
118
8 Del. C. § 145(a).
119
Id.
120
Pasternack does not argue that he was acting as an officer or director at the time of
the Drug Test. See generally Pl.’s Opening Br. 30-43 (arguing only that Pasternack
was an employee or an agent–independent contractor).
22
(3) whether Pasternack acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation.121
1. Pasternack was an agent of Northeastern
The party seeking indemnification under Section 145(a) must be a director,
officer, employee, or agent. Pasternack asserts that he is an employee or agent.122
“An agency relationship is created when one party consents to have another act on
its behalf, with the principal controlling and directing the acts of the agent.” 123 “It is
well settled that questions of agency are not subject to absolute rules but, rather, turn
on the facts of the individual case.”124
Then-Vice Chancellor, now-Chief Justice, Strine discussed agency as it
relates to Section 145 in Fasciana v. Electronic Data Systems Corp.125 As he
explained, to serve the policy rationale of Section 145, this Court limits agency in
121
Def.’s Answering Br. 9. Defendant also argues that Pasternack failed to mitigate
his legal expenses. Id. The parties stipulated that the reasonableness of Pasternack’s
legal expenses will be addressed, if necessary, separately from the determination of
indemnification. PTO 18 n.3; Post-Trial Hr’g Tr. 32:20-22. Any dispute regarding
mitigation of legal expenses will be addressed in that process.
122
Pl.’s Opening Br. 30-43.
123
Cochran v. Stifel Fin. Corp., 2000 WL 286722, at *17 (Del. Ch. Mar. 8, 2000)
(quoting Fisher v. Townsends, Inc., 695 A.2d 53, 57 (Del. 1997)), aff’d in pertinent
part, 809 A.2d 555 (Del. 2002).
124
Fisher, 695 A.2d at 61 (quoting Sussex Cty. v. Morris, 610 A.2d 1354, 1360 (Del.
1992)).
125
829 A.2d 160, 163 (Del. Ch. 2003).
23
the indemnification context to “only those situations when an outside contractor . . .
can be said to be acting as an arm of the corporation vis-à-vis the outside world.”126
Further, the underlying proceeding must result from the purported agent’s “conduct
on behalf of the corporation.” 127
When applying this definition of agency in the context of a Part 135 charter
flight operator, all pilots, whether full-time or on demand, are agents for the operator
when piloting a flight. Northeastern, as the Part 135 carrier, “authorizes” the pilot
to “exercise operational control” of a flight. 128 The pilot is “acting as an arm of the
corporation vis-à-vis” Northeastern’s passengers, air traffic controllers, and ground
crew.
Northeastern’s General Operations Manual (the “Manual”) supports this
conclusion. It states explicitly that “[Northeastern] retains responsibility for the
operational control of aircraft operations, and thus the safety of each flight conducted
under its Certificate and Operations Specifications, including the actions of all direct
employees and agents.”129 “All flight crewmembers will be either a Direct
126
Id.
127
Id.
128
14 C.F.R. § 135.77.
129
JX 16, at NA000708.
24
Employee or an Agent for [Northeastern].” 130 The Manual repeats this explicit
statement: “[All crewmembers] are either employees or agents of [Northeastern].”131
Defendant concedes this point but tries to distinguish the conduct of a pilot
during a flight from the conduct of a pilot during a drug test. Defendant argues that
Pasternack acted as an agent only when he was piloting a flight and not during other
tasks such as taking the Drug Test. Defendant posits that Pasternack was not acting
on behalf of Northeastern when Pasternack appeared for the Drug Test. 132
The record shows otherwise. Northeastern provided the names of all its pilots
to its service agent ChoicePoint.133 Northeastern designated Pasternack as one of its
pilots. 134 ChoicePoint randomly selected, from all of Northeastern’s pilots, which
pilots must be tested to satisfy Northeastern’s regulatory obligations for the calendar
quarter. 135 In June 2007, ChoicePoint informed Northeastern that Pasternack had
130
Id.
131
Id. at NA000712.
132
Def.’s Answering Br. 24.
133
Tr. 132:7-133:12 (Schmitt).
134
Tr. 87:22-88:5 (Jordan); Tr. 164:1-3 (Montemurro). Defendant argues that
Pasternack was not subject to random drug testing because he was not current with
regard to training requirements. This argument does not explain why Northeastern
kept Pasternack in the pool of pilots, thus making him subject to random drug
testing. See Tr. 86:4-17 (Jordan) (testifying that Northeastern uses its list of pilots
as a compliance tracking tool).
135
Tr. 133:6-15 (Schmitt).
25
been randomly selected. 136 Schmitt, Northeastern’s Designated Employer
Representative, instructed Pasternack to report for the drug test at LabCorp.137 When
Pasternack informed Schmitt that he did not have the requisite CCF Form, Schmitt
sent him a new form and instructed him to report to LabCorp as soon as he received
it.138 Northeastern and ChoicePoint took these actions to ensure Northeastern’s
compliance with FAA and DOT regulations.139
Pasternack complied with the instructions he received from Northeastern and
ChoicePoint. When Pasternack left the facility, he believed he did so with the
implied permission of the collector at the facility, Theresa Montalvo. 140 Montalvo
then contacted Northeastern. 141 When Pasternack returned to resume the drug test,
Montalvo refused to resume testing until she received authorization from
Northeastern to do so 142 because it was Northeastern’s nondelegable duty to
136
Tr. 134:20-135:1 (Schmitt).
137
Tr. 145:14-16 (Schmitt).
138
Tr. 145:17-146:2 (Schmitt).
139
See 14 C.F.R. § 135.251 (2009) (recodified at 14 C.F.R. § 120.35).
140
See PTO ¶¶ II.43-.44.
141
Tr. 165:15-19 (Montemurro).
142
Tr. 32:9-12 (Pasternack).
26
determine whether Pasternack could continue the Drug Test.143 By reporting for the
Drug Test and by complying with Northeastern and ChoicePoint’s instructions,
Pasternack acted on behalf of Northeastern to ensure Northeastern’s compliance
with the FAA and DOT regulations. Pasternack acted as an arm of Northeastern vis-
à-vis the FAA and the DOT. Thus, Pasternack acted as Northeastern’s agent during
the Drug Test.
Because I conclude that Pasternack acted as Northeastern’s agent at the time
of Drug Test, I need not address whether Pasternack was an employee of
Northeastern at that time.
2. Pasternack appeared for the Drug Test by reason of the fact
of his agency status with Northeastern
The party seeking indemnification must be a party to a proceeding by reason
of the fact of his corporate function.144 There must be a “causal connection or nexus
between [the underlying proceeding] and [Pasternack’s] corporate function or
‘official [corporate] capacity.’” 145 “The phrase ‘by reason of’ can be equated to ‘by
virtue of,’ ‘by force of,’ or ‘by the authority of.’” 146
143
49 C.F.R. § 40.355(i).
144
Perconti v. Thornton Oil Corp., 2002 WL 982419, at *4 (Del. Ch. May 3, 2002).
145
Id. (third alteration in original) (quoting Cochran v. Stifel Fin. Corp., 2000 WL
1847676, at *6 (Del. Ch. Mar. 8, 2000)).
146
Id.
27
Northeastern determined, in compliance with FAA and DOT regulations, who
was in the pool of pilots subject to random drug testing. 147 Schmitt informed
Pasternack that he was selected to submit to a random drug test and instructed him
to report for the Drug Test.148 Pasternack reported to the Drug Test by reason of the
instructions he received from Schmitt. Although Pasternack, as an on-demand pilot,
could refuse a flight assignment, he could not refuse to take the Drug Test. The
consequence of such a refusal would be that Pasternack could no longer pilot flights
for Northeastern.149
Additionally, Pasternack had no independent individual requirement to
complete the Drug Test. His sole reason for attending the Drug Test was his
affiliation with Northeastern, a Part 135 charter flight operator. 150 But for
Pasternack’s affiliation with Northeastern, there would have been no reason for him
to initiate the Drug Test. In short, Northeastern instructed Pasternack to report for
the random drug test, and Pasternack did so by reason of that instruction.
147
Tr. 180:18-20 (Montemurro).
148
PTO ¶ II.38.
149
Tr. 217:6-11 (Montemurro).
150
Tr. 143:17-20 (Schmitt).
28
Defendant argues that Pasternack prematurely left the testing facility for his
own reasons, not on behalf of Northeastern. 151 Pasternack left the LabCorp facility
because he had an appointment in connection with his work as a medical doctor.152
This argument, however, ignores Pasternack’s reason for appearing for the Drug
Test, which is solely attributable to his affiliation with Northeastern. But for that
relationship, the “refusal to test” and underlying FAA proceeding would not have
occurred. Pasternack appeared for the Drug Test by reason of the fact of his agency
relationship with Northeastern.
3. Pasternack acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of Northeastern
Section 145(a) requires that the party seeking indemnification “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.”153 Northeastern argues that Pasternack acted in a
151
Def.’s Answering Br. 24-25.
152
PTO ¶ II.43; Tr. 30:19-31:2 (Pasternack).
153
8 Del. C. § 145(a). Although Section 145(c) mandates indemnification when the
party seeking indemnification was “successful on the merits or otherwise in defense
of any action, suit, or proceeding,” this mandate applies only to directors and
officers. See Cochran, 2000 WL 1847676, at *2 n.6 (noting the amendment of
Section 145(c) in 1994 to remove mandatory indemnification of agents). The parties
agree that Pasternack was not acting in his role as director or officer in connection
with the Drug Test or the subsequent proceedings. Def.’s Answering Br. 1-2; see
generally Pl.’s Opening Br. 3-14.
29
manner opposed to the best interests of Northeastern when he prematurely left the
Drug Test to attend an appointment related to his work as a medical doctor and
completely unrelated to his affiliation with Northeastern and also when he pursued
extensive administrative and legal proceedings to challenge the FAA’s revocation.154
According to Northeastern, Pasternack, as a medical doctor and as a former
medical review officer, should have known the consequences of his actions—
namely, that the Drug Test would be deemed a “refusal to test.”155 The D.C. Circuit,
however, held that there was insufficient evidence to show that Pasternack left the
Drug Test without the implied permission of the LabCorp collector.156 Further,
Pasternack credibly testified that he was unaware that ChoicePoint would deem his
departure a refusal to test.157 Northeastern points to no credible evidence to the
contrary. Pasternack, therefore, did not act in a manner opposed to Northeastern’s
best interests when he left the Drug Test.
Additionally, at trial, Russo testified that a pilot’s failed drug test negatively
impacts the carrier’s reputation.158 Pasternack’s challenge to the FAA’s revocation
154
Def.’s Answering Br. 35-38.
155
Id. at 37.
156
Pasternack v. Huerta, 513 F. App’x 1 (D.C. Cir. 2013).
157
Tr. 34:6-13 (Pasternack).
158
Tr. 274:21-275:3 (Russo).
30
and his ultimate exoneration served to protect Northeastern’s reputation. Further, if
Pasternack had not challenged the revocation, he would not be allowed to serve
Northeastern as a pilot. His protection of Northeastern’s reputation and his service
to Northeastern were in the best interests, or at a minimum, not opposed to the best
interests, of Northeastern.
Because Pasternack has shown that he acted as an agent of Northeastern when
appearing for the Drug Test, that he appeared for the Drug Test by reason of the fact
of his agency status, and that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of Northeastern, he is entitled
to mandatory indemnification as provided by Northeastern’s Bylaws.159
B. Pasternack Timely Requested Indemnification
Defendant argues that despite Pasternack’s commencement of this
indemnification action within the analogous three-year statute of limitations,
Pasternack’s claim must be denied on the basis of laches.
“[L]aches generally requires the establishment of three things: first,
knowledge by the claimant; second, unreasonable delay in bringing the claim, and
159
The parties have stipulated that the reasonableness of Pasternack’s legal expenses
will be addressed, if necessary, separately from the determination of
indemnification. PTO 18 n.3; Post-Trial Hr’g Tr. 32:20-22.
31
third, resulting prejudice to the defendant.”160 A plaintiff’s “action will be barred by
laches only if unusual conditions or extraordinary circumstances make it inequitable
to allow the prosecution of his claim within the time allowed by law.” 161
Defendant argues that Plaintiff’s unreasonable delay in filing this action
unfairly prejudiced the Company. 162 “[U]nreasonable delay involves consideration
of whether the plaintiff acted with the degree of diligence that fairness and justice
require.” 163 Northeastern claims that had Pasternack requested indemnification
before the conclusion of the underlying proceeding, Northeastern would have
participated in the proceeding to Pasternack’s benefit.164
First, Plaintiff’s indemnification claim was not ripe until the conclusion of the
underlying FAA proceeding in March 2013.165 Second, Northeastern cites no
authority supporting its purported right to participate in the underlying
160
Reid v. Spazio, 970 A.2d 176, 182-83 (Del. 2009) (quoting Homestore, Inc. v.
Tafeen, 888 A.2d 204, 210 (Del. 2005)).
161
Id. at 183.
162
Def.’s Answering Br. 46.
163
Houseman v. Sagerman, 2015 WL 7307323, at *8 (Del. Ch. Nov. 19, 2015).
164
Def.’s Answering Br. 46.
165
Kaung v. Cole Nat’l Corp., 884 A.2d 500, 509 (Del. 2005) (“Whether a corporate
officer has a right to indemnification is a decision that must necessarily await the
outcome of the investigation or litigation.”).
32
proceedings.166 I am aware of no such authority in Delaware, and Northeastern’s
Bylaws do not establish this right. Third, despite its claim that it was unable to
participate in the underlying FAA proceeding, Northeastern did, in fact, participate
in the underlying FAA proceeding. Northeastern representatives testified in the
underlying FAA proceeding.167
In support of its argument, Northeastern discusses Houseman v. Sagerman.168
In Houseman, this Court focused on prejudice suffered by the defendants in
determining that the plaintiffs’ delay was unreasonable. Mrs. Houseman’s
justifications for the delay in filing her claim (that she could not accurately calculate
the monetary amount at issue, that she wanted to avoid the expense of a second
litigation, and that this Court would likely stay the action pending resolution of a
related action in another jurisdiction) “ignore the concern that the Defendants may
suffer prejudice by the Plaintiffs’ delay.” 169 In this action, Defendant fails to show
that Pasternack’s delay in filing his claim offends fairness and justice or prejudices
Northeastern. Northeastern merely conjectures that Pasternack’s delay is
attributable to the integrity of his claim. Northeastern fails to point to any prejudice
166
See Def.’s Answering Br. 46.
167
Tr. 91:10-19 (Jordan); Tr. 164:9-18 (Montemurro).
168
2015 WL 7307323 (Del. Ch. Nov. 19, 2015).
169
Id. at *9.
33
it suffered after March 2013, when Pasternack’s indemnification claim became
ripe. 170
I do not find that “unusual conditions or extraordinary circumstances” are
present that “make it inequitable to allow the prosecution of [Pasternack’s] claim
within the time allowed by [the analogous statute of limitations].”171 I therefore hold
that Pasternack filed this action within a reasonable time after the underlying
proceeding concluded and that laches is inapplicable here.
C. Pasternack Is Entitled to Fees-on-fees
It is well settled in Delaware law that when a claimant prevails on an
indemnification claim, an award of fees-on-fees is permissible. 172 Northeastern
provides indemnification “to the extent permitted by the General Corporation Law
of Delaware.”173 To give full effect to Section 145, an award of fees-on-fees is not
only permissible, but appropriate in light of the language of Northeastern’s
indemnification provision and the policy of Section 145. This policy “eschew[s a]
narrow construction of the statute,” and “without an award of attorneys’ fees for the
170
See Def.’s Answering Br. 46-47.
171
Reid, 970 A.2d at 183.
172
Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 561-62 (Del. 2002); Levy v. HLI
Operating Co., 924 A.2d 210, 225 (Del. Ch. 2007).
173
JX 29, at NEA00030.
34
indemnification suit itself, indemnification [is] incomplete.”174 Had Northeastern
desired to avoid payment of fees-on-fees, it could have tailored its indemnification
provision to exclude such payments. 175 It did not. Thus, Pasternack’s request for an
award of fees-on-fees is granted.
III. CONCLUSION
For the foregoing reasons, I conclude that Pasternack has shown that he is
entitled to (1) indemnification under Northeastern’s bylaws and (2) fees-on-fees
under Delaware law. Additionally, Defendant has not shown that the doctrine of
laches applies.
The parties shall confer and advise the Court within thirty days of this opinion
whether any outstanding matters remain that require the Court’s attention. If not,
this opinion will serve as the final order of the Court.
IT IS SO ORDERED.
174
Stifel Fin. Corp., 809 A.2d at 561.
175
See id. at 561-62.
35