Scott Pontone v. Milso Industries Corporation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
SCOTT PONTONE, )
)
Plaintiff, )
)
v. ) C.A. No. 8842-VCP
)
MILSO INDUSTRIES CORPORATION )
and THE YORK GROUP, INC., )
)
Defendants. )
)
OPINION
Submitted: April 2, 2014
Decided: August 22, 2014
Philip A. Rovner, Esq., Jonathan A. Choa, Esq., POTTER ANDERSON & CORROON
LLP, Wilmington, Delaware; Valeria Calafiore Healy, Esq., HEALY LLC, New York,
New York; Attorneys for Plaintiff.
Brian M. Rostocki, Esq., John C. Cordrey, Esq., REED SMITH LLP, Wilmington,
Delaware; Steven Cooper, Esq., Danielle J. Marlow, Esq., REED SMITH LLP, New
York, New York; Attorneys for Defendants.
PARSONS, Vice Chancellor.
This is an action by a former officer and director of two Delaware companies for
advancement from those companies of the legal fees and expenses he has incurred in
underlying litigation between the parties in a federal court in Pennsylvania. Although the
Pennsylvania action has been pending since 2010, the complaint only seeks
indemnification from January 2013. The Pennsylvania litigation at issue in this case is
the same underlying litigation at issue in a related case pending before this Court, Harry
Pontone v. Milso Industries, et al., Civil Action No. 7615-VCP. The plaintiff in this case,
Harry Pontone‘s son, claims he is entitled to mandatory advancement from both
defendants. The defendants have moved to dismiss the plaintiff‘s claims, however, for
lack of standing. The defendants contend the plaintiff has no standing because he has a
right to mandatory advancement and indemnification from his new employer or client,
which company has paid the plaintiff‘s legal fees and expenses through at least the end
of 2012 and allegedly has continued to pay them to this day. According to the
defendants, because the plaintiff has incurred no out-of-pocket expenses, he has no
standing to seek advancement from them. Instead, the defendants contend, his new
employer and co-indemnitor‘s only remedy would be to seek contribution from the
defendants at the indemnification stage of these proceedings. The plaintiff opposes the
motion to dismiss and insists that he does have standing to pursue his claims for
advancement of the fees and expenses he has incurred since January 2013.
For the reasons stated in this Opinion, I grant in part, and deny in part, the
defendants‘ motion to dismiss. Specifically, I grant the motion as to any legal fees and
expenses incurred since January 1, 2013 that have been paid by the plaintiff‘s current
1
employer or client, on the ground that the plaintiff lacks standing to pursue those claims.
I deny the motion to dismiss with respect to any fees and expenses incurred since January
1, 2013 that have not been paid by the co-indemnitor. As to those fees and expenses, the
plaintiff is entitled to advancement from at least the one defendant that clearly owes a
mandatory advancement and indemnification obligation to the plaintiff.
This matter is also before the Court on the plaintiff‘s co-pending motion for partial
summary judgment. That motion requests an order that the plaintiff is entitled to
advancement from the defendants under their bylaws. The defendants oppose this motion
on several grounds. For the reasons stated herein and consistent with my ruling on the
defendants‘ motion to dismiss, I grant partial summary judgment of advancement against
one of the two defendants as to the unpaid legal fees and expenses, and deny it as to the
other, because there are disputed issues of fact as to whether the other defendant‘s
advancement obligation is permissive or mandatory. I also deny summary judgment of
advancement as to certain of the numerous counterclaims the plaintiff in this action has
asserted in the underlying action. For all but one of the affected counterclaims, I rely on
the same rulings and reasoning I articulated in the related action before me involving
Harry Pontone. The one additional counterclaim for which I denied advancement is for
false and misleading advertising.
Lastly, based on my rulings on the two pending motions, I grant the plaintiff
advancement as to 75% of his ―fees on fees‖ in prosecuting this action.
2
I. BACKGROUND1
A. The Parties
Plaintiff, Scott Pontone, is an individual residing in New York. Defendants are
The York Group Inc. (―York‖), a Delaware corporation wholly owned by Matthews
International Corporation (―Matthews‖), and Milso Industries Corporation (―New
Milso‖), a Delaware corporation wholly owned by York. York and New Milso are active
in the death care industry and, in particular, casket manufacturing. From July 2005
through May 2007, Scott Pontone served as a director and Executive Vice President for
York and New Milso.
B. Facts
1. Old Milso is Acquired by Matthews
Until mid-2005, Scott Pontone was the Vice President of Old Milso, a New York
regional casket company founded by Scott Pontone‘s grandparents in the 1930s. Old
Milso was run by Scott Pontone and his father, Harry Pontone.2 In early 2005, Matthews,
a newcomer to the casket industry, expressed interest in purchasing Old Milso. Among
other things, Matthews sought to take advantage of Old Milso‘s established business
presence in New York, where Matthews previously had not been active. The parties
1
Unless otherwise noted, the facts recited herein are drawn from the well-pled
allegations of the Verified Complaint, together with its attached exhibits, and are
presumed true for the purposes of Defendants‘ motion to dismiss.
2
Harry Pontone is the plaintiff in a related advancement action before this Court.
Pontone v. Milso Indus. Corp., C.A. No. 7615-VCP (Del. Ch.).
3
reached a deal after Matthews promised that, following the acquisition, Scott and Harry
Pontone would remain in leadership positions similar to those they had held at Old Milso.
To implement the transaction, Old Milso entered into an Asset Purchase
Agreement (―APA‖) with York and New Milso, a newly formed acquisition subsidiary.
The APA reflected, among other things, that Harry and Scott Pontone would become
officers and directors of Matthews‘ new casket business, which was to be run through
York and New Milso. Accordingly, Scott and Harry Pontone executed employment
agreements with York and New Milso. On July 11, 2005, Scott Pontone became the
Executive Vice President of York and New Milso and a director of both companies.
Harry Pontone became the President and a director of both companies.
In 2007, Scott and Harry Pontone brought suit to enforce certain of their rights
under the employment agreements they entered into with York. The suit resulted in a
settlement reached in May 2007. As part of the settlement agreement, Scott Pontone
resigned from his positions with York and New Milso. Scott3 also agreed not to compete
with or to solicit the customers of York and New Milso for a period of three years, during
which they continued to pay him a salary.
After the expiration of that three-year period, on May 30, 2010, Scott entered into
a consulting arrangement with Batesville Casket Company (―Batesville‖). Batesville is a
3
For simplicity and to avoid confusion, this Opinion sometimes uses only the given
name of either Scott Pontone or Harry Pontone, as the parties do in their papers.
The use of first names does not imply familiarity and intends no disrespect.
4
leading manufacturer and distributor of caskets in the United States and competes with
York and New Milso in the New York region where Old Milso previously conducted
business. Pursuant to the consulting arrangement, Scott was to assist Batesville in
marketing its products in the New York metropolitan market and in parts of Texas. Scott
formalized his relationship with Batesville through a consulting agreement between
Batesville and an entity created by Scott, the Pontone Casket Company (―PCC‖), of
which Scott is the sole owner (the ―Consulting Agreement‖).4
2. The Pennsylvania Action
On August 16, 2010, York and New Milso, along with their corporate parent
Matthews, instituted an action against Scott Pontone and Batesville in the United States
District Court for the Western District of Pennsylvania (the ―Pennsylvania Action‖),5
challenging the propriety of their consulting arrangement. On February 28, 2011, the
plaintiffs in the Pennsylvania Action (the ―Pennsylvania Plaintiffs‖) filed an amended
complaint, joining Harry Pontone and PCC as defendants.
The central allegation of the Pennsylvania Plaintiffs is that Scott and the other
defendants in the Pennsylvania Action engaged in a wrongful scheme to induce several of
4
Opening Br. in Supp. of Defs.‘ Mot. to Dismiss (―Defs.‘ Opening Br.‖) Ex. 2. The
Consulting Agreement was expressly referenced in the Complaint. Moreover,
Plaintiffs have waived any objection to the Court‘s consideration of the exhibits
attached to Defendants‘ Opening Brief in ruling on this motion to dismiss. See
Pl.‘s Answering Br. in Opp‘n to Defs.‘ Mot. to Dismiss (―Pl.‘s Answering Br.‖)
26-27. I therefore consider the Consulting Agreement to be properly before me on
Defendants‘ motion to dismiss.
5
See York Gp., Inc. v. Pontone, 2014 WL 896632 (W.D. Pa. Mar. 6, 2014); York
Gp., Inc. v. Pontone, 2012 WL 3127141 (W.D. Pa. July 31, 2012).
5
the Pennsylvania Plaintiffs‘ employees and many of their most lucrative customers to
move to Batesville. As to Scott, the amended complaint in the Pennsylvania Action
alleges that he, in his capacity as Executive Vice President, played a central role in the
operations of York and New Milso and had ―continuous and unrestricted access to highly
proprietary confidential information and trade secrets‖ concerning their business and
customers.6 The Pennsylvania Plaintiffs allege that Scott misappropriated their
confidential information and trade secrets by using them to help Batesville solicit the
Pennsylvania Plaintiffs‘ employees and customers in his role as Batesville‘s consultant.
The Pennsylvania Plaintiffs claim that these actions violated Scott‘s employment
contracts with York and New Milso, which included confidentiality, non-compete, and
non-solicitation provisions, as well as the common law.
The Pennsylvania Plaintiffs asserted numerous claims against Scott, including for
breach of contract, tortious interference with contract, unfair competition, unjust
enrichment, and trademark infringement. In response, Scott asserted a number of
counterclaims in the Pennsylvania Action. That action is still pending.
3. York and New Milso’s Indemnification and Advancement Bylaws
York and New Milso each have bylaws addressing indemnification and
advancement. New Milso‘s indemnification and advancement obligations are covered in
6
Compl. Ex. 1 ¶ 40.
6
Section 2.15 of its bylaws.7 Section 2.15(a) of the New Milso bylaws, entitled ―Right to
Indemnification,‖ states in relevant part:
Except as prohibited by law, every director and officer of
[New Milso] shall be entitled as of right to be indemnified by
[New Milso] against all expenses and liability . . . incurred by
such person in connection with any actual or threatened
claim, action, suit or proceeding . . . whether brought by or
against such person or by or in the right of the Corporation or
otherwise, in which such person may be involved, as a party
or otherwise, by reason of such person being or having been a
director or officer of [New Milso] . . . (such claim, action,
suit, or proceeding hereinafter being referred to as an
―Action‖); provided, however, that no such right to
indemnification shall exist with respect to an action brought
by an indemnitee . . . against [New Milso] (an ―Indemnitee
Action‖) except . . . . [if] the Indemnitee Action is instituted
under Paragraph (c) of this Section and the indemnitee is
successful in whole or in part . . . .8
Section 2.15(a) defines ―expenses‖ and ―liability‖ as follows: ―‗expenses‘ means all
expenses actually and reasonably incurred, including fees and expenses of counsel
selected by an indemnitee; and ‗liability‘ means all liability incurred, including the
amounts of any judgments, excise taxes, fines or penalties and any amounts paid in
settlement.‖9
7
Choa Aff. in Supp. of Pls.‘ Opp‘n to Defs.‘ Mot. to Dismiss (―Choa Aff. I‖) Ex. 1
§ 2.15. The bylaws of York and New Milso are ―expressly referred to and relied
upon in the complaint‖; therefore, they are properly subject to the Court‘s
consideration on Defendants‘ motion to dismiss. In re Tyson Foods, Inc., 919
A.2d 563, 585 (Del. Ch. 2007).
8
Choa Aff. I Ex. 1 § 2.15(a).
9
Id.
7
Section 2.15(b) of the bylaws of New Milso, entitled ―Right to Advancement of
Expenses,‖ provides:
Every indemnitee shall be entitled as of right to have the
expenses of the indemnitee in defending any Action or in
bringing and pursuing any Indemnitee Action under
Paragraph (c) of this Section paid in advance by [New Milso]
prior to final disposition of the Action or Indemnitee Action,
provided that the Corporation receives a written undertaking
by or on behalf of the indemnitee to repay the amount
advanced if it should ultimately be determined that the
indemnitee is not entitled to be indemnified for the
expenses.10
Bylaw Section 2.15(c), entitled ―Right of Indemnitee to Bring Action,‖ states:
If a written claim for indemnification under Paragraph (a) of
this Section or for advancement of expenses under Paragraph
(b) of this Section is not paid in full by [New Milso] within
30 days after the claim has been received by [New Milso], the
indemnitee may at any time thereafter bring an Indemnitee
Action to recover the unpaid amount of the claim and, if
successful in whole or in part, the indemnitee shall also be
entitled to be paid the expense of bringing and pursuing such
Indemnitee Action.11
York‘s indemnification and advancement obligations are addressed in Article VII
of its bylaws.12 The preamble to Article VII states that ―[York] shall indemnify and
advance expenses under this Article VII to the fullest extent permitted by applicable law
10
Id. § 2.15(b).
11
Id. § 2.15(c).
12
Choa Aff. I Ex. 2 art. VII.
8
in effect on the date of adoption of these Bylaws and to such greater extent as applicable
law may thereafter permit.‖13
Section 2 of Article VII of York‘s bylaws, entitled ―Obligation to Indemnify in
Actions, Suits or Proceedings by or in the Right of the Corporation‖ provides in relevant
part:
[York] shall indemnify any person who was or is a party to
any threatened, pending, or completed action or suit by or in
the right of [York] to procure a judgment in its favor by
reason of the fact that he is or was a director, officer,
employee or agent of [York] . . . except that no
indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to
be liable to [York.]14
Section 7 of Article VII, entitled ―Expenses Payable in Advance,‖ states:
Expenses incurred in defending or investigating a threatened
or pending action, suit or proceeding may be paid by [York]
in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount
if it shall ultimately be determined that he is not entitled to be
indemnified by [York] as authorized in this Article VII.15
4. Scott Pontone Requests Advancement from York and New Milso
On January 17, 2013, in the related advancement proceeding brought by Harry
Pontone against York and New Milso, this Court granted partial summary judgment in
favor of Harry, upholding his right to receive advancement from New Milso for expenses
13
Id.
14
Id. § 2.
15
Id. § 7.
9
incurred in defending the Pennsylvania Action.16 Subsequently, Scott Pontone elected to
seek advancement from New Milso and York for the legal fees and expenses he had
incurred in the Pennsylvania Action since January 2013. Before Scott submitted a
request for advancement to New Milso and York, however, he executed a loan agreement
with Batesville on April 7, 2013 (the ―Loan Agreement‖).17 Pursuant to that agreement,
Batesville agreed to provide Scott with funds to pay his legal fees and expenses in the
Pennsylvania Action and in an advancement proceeding against York or New Milso
before this Court, subject to various terms discussed in greater detail infra.
On July 24, 2013, Scott, by counsel, wrote to Defendants York and New Milso to
demand advancement for the attorneys‘ fees and expenses he had incurred in connection
with the Pennsylvania Action from January 2013 through June 2013. Scott‘s counsel‘s
letter also provided an undertaking guaranteeing his repayment of funds advanced should
he ultimately be deemed ineligible for indemnification. On August 23, 2012, Defendants,
by counsel, responded that they regarded the facts relevant to Scott‘s claim for
advancement as ―fundamentally different‖ from those relevant to his father‘s claim.18
Nonetheless, for the stated purpose of avoiding further litigation costs, New Milso
expressed its intent to grant Scott‘s advancement request to the extent it determined that
16
Pontone v. Milso Indus. Corp., C.A. No. 7615-VCP, at 52-79 (Del. Ch. Jan. 17,
2013) (TRANSCRIPT). The Court found York‘s bylaws ambiguous as to whether
they provided for mandatory or permissive advancement. Id. at 61-63. The Court
denied, therefore, summary judgment as to Harry Pontone‘s entitlement to
advancement from York. Id.
17
Compl. Ex. 2.
18
Defs.‘ Opening Br. Ex. G.
10
the requested ―categories of fees and expenses are permissible under Delaware law, are
reasonable, and are reasonably necessary in defense of the claims asserted against
Scott.‖19 York declined to pay any advancement.
Dissatisfied with the responses of New Milso and York to his advancement
requests, Scott commenced this advancement proceeding against New Milso and York on
August 26, 2013. Since then, Defendants have moved to dismiss, arguing primarily that
Scott lacks standing to pursue advancement from them because he is entitled to and has
been receiving mandatory advancement from Batesville, and ultimately will be entitled to
indemnification by Batesville, under the terms of the Consulting Agreement and the Loan
Agreement. I therefore consider it helpful to review the relevant terms of those
agreements.
5. The Consulting and Loan Agreements
Both the Consulting Agreement and the Loan Agreement include terms that are
relevant to Scott‘s ability to obtain funding from Batesville to pay for his litigation
expenses. Paragraph 17 of the Consulting Agreement, entitled ―Indemnification,‖
provides in relevant part:
[Batesville] agrees to indemnify, defend and hold harmless
[PCC], its owners, agents, employees (including [Scott]
Pontone and Wynn) and assigns, against any and all third
party claims, damages, losses, liability, expenses and costs
(including reasonable attorneys‘ fees) that may be incurred by
or asserted against [PCC] or any such owner, agent, employee
or assign on account of or arising out of this Agreement,
including the provision of Services hereunder, except only to
19
Id.
11
the extent any such claim, damages, losses, liability,
expenses, or costs are found by a court in a final, non
appealable order to have resulted from unauthorized
representations or contractual commitments made by [PCC]
to third parties or from [PCC]‘s negligence or willful
misconduct.20
The relevant obligations of Scott and Batesville under the Loan Agreement are
governed by a number of provisions in that agreement. The stated purpose of the Loan
Agreement, as expressed in its recitals, is to provide for a loan from Batesville to Scott
(the ―Loan‖) of all funds necessary for Scott ―to pay all fees, expenses, and costs
previously incurred and to be incurred‖ by him and PCC in the Pennsylvania Action and
by him in this advancement proceeding (―Qualifying Expenses‖).21 The Loan consists of
an initial loan advance and subsequent loan advances that Scott may request from
Batesville. Section 2(a) of the Loan Agreement provides in relevant part:
On the date hereof [April 7, 2013] . . . [Batesville] shall make
a Loan Advance to [Scott Pontone] in the amount of
$388,535.81 (the ‗Initial Loan Advance‘). The Initial Loan
Advance represents the unpaid balance of fees and expenses
incurred through January 31, 2013 by [Scott Pontone], plus a
$15,000 retainer payable to Delaware counsel retained by
[Scott Pontone] to act as local counsel in connection with the
Advancement Proceeding.22
20
Defs.‘ Opening Br. Ex. B ¶ 17.
21
Compl. Ex. 2.
22
Id. § 2(a).
12
And Section 2(b) provides: ―From time to time hereafter, within 30 days after each
written request therefor by [Scott], [Batesville] shall make additional Loan Advances to
Borrower, to fund Qualifying Expenses invoiced after the date hereof.‖23
Section 3 of the Loan Agreement requires Scott to use any surplus advancement
obtained from York or New Milso to repay the Loan. That section provides:
If and to the extent any of the [Pennsylvania Plaintiffs]
actually pay any monies to [Scott] that are claimed by [him]
in the Advancement Proceeding (each an ―Advancement
Payment‖), [Scott] shall make a repayment of a portion of the
unpaid balance of the Loan equal to the amount (if any) of the
Advancement Payment that remains after [Scott] has paid all
outstanding invoices in respect of Qualifying Expenses.24
On the other hand, if Scott is ultimately required to repay any Advancement Payment (or
portion thereof) to any of the Pennsylvania Plaintiffs, Section 4 of the Loan Agreement
requires Batesville to make an additional loan advance to Scott Pontone to cover the
amount of that advancement repayment.25
Section 5 addresses forgiveness of the Loan by Batesville. That section provides:
Except as provided in Section 6, the entire unpaid balance of
the Loan shall be deemed forgiven by [Batesville], and
automatically shall be extinguished and cease to be an
obligation of [Scott Pontone], upon the occurrence of either
of the following contingencies: (a) a dismissal with prejudice
of the claims against [Scott] and [PCC] in the [Pennsylvania]
Litigation; or (b) entry of final judgment in the
23
Id. § 2(b).
24
Id. § 3.
25
Id. § 4.
13
[Pennsylvania] Litigation that has become subject to no
further appeal.26
Section 6, entitled ―Repayment Obligation Contingent Upon Counterclaim,‖
provides in relevant part:
[I]n the event that [Scott Pontone] and/or PCC prevail on any
counterclaim, after final judgment and expiration of any
appeals . . . , [Scott] and/or PCC shall repay to [Batesville]
any prior defense fees paid by [Batesville] up to the amount
of any remaining counterclaim recovery minus any costs
incurred by [Scott] or PCC to the extent not previously paid
by [Batesville].
It is the intent of the parties that the aggregate amount of all
repayments required of [Scott] under this Section 6 will not
cause [him] to incur any net financial cost in respect of the
[Pennsylvania] Litigation and the Advancement Proceeding
(taking into account (i) all payments required to be made to
any Plaintiffs in the [Pennsylvania] Litigation by [Scott] on
account of fees, costs, damages or otherwise, and (ii) all
amounts actually received by [Scott] as damages or
indemnification awards).27
Section 12 of the Loan Agreement specifies that, ―[e]xcept as effected herein, this
Agreement does not otherwise modify the Consulting Agreement or any other
agreements between [Scott Pontone], [Batesville] and [PCC], which remain in effect,
including terms therein addressing indemnity.‖28
26
Id. § 5.
27
Id. § 6.
28
Id. § 12.
14
C. Procedural History
On August 23, 2013, Scott Pontone filed his Verified Complaint (the
―Complaint‖) against Defendants, York and New Milso. In his Complaint, Scott seeks
advancement of the legal fees and expenses that he has incurred in connection with the
Pennsylvania Action since January 2013 and that he continues to incur. On September
24, 2013, Defendants moved to dismiss the Complaint under Court of Chancery Rule
12(b)(6) on the grounds that Scott lacks standing to pursue his advancement claims.
After filing his opposition to Defendants‘ motion to dismiss on December 6, 2013, Scott
Pontone moved for partial summary judgment on December 16 on the issue of his
entitlement to advancement from Defendants. After full briefing on Defendants‘ motion
to dismiss and Scott‘s motion for partial summary judgment, I heard argument on both
motions on April 2, 2014. This Opinion constitutes my rulings on Defendants‘ motion to
dismiss and Plaintiff‘s motion for partial summary judgment. I address the motions in
that order.
II. Defendants’ Motion to Dismiss
A. Parties’ Contentions
Defendants contend that Scott Pontone lacks standing to assert his advancement
claims because Batesville is obligated to and has been advancing Scott‘s fees and
expenses in connection with the Pennsylvania Action, pursuant to the terms of the
Consulting Agreement and the Loan Agreement. In that regard, Defendants assert that
the Loan Agreement is not a bona fide loan agreement and is, instead, a disguised
mandatory advancement and indemnification agreement. Because, according to
15
Defendants, Scott has been and will continue receiving mandatory advancement from
Batesville, and ultimately will be indemnified by Batesville, Defendants argue that Scott
cannot demonstrate that he has suffered or stands to suffer any out-of-pocket expenses.
Defendants further aver that the existence of such out-of-pocket expenses is a prerequisite
under Delaware law for him to have standing to assert his advancement claims.
Moreover, in light of Scott‘s receipt of advancement from Batesville, Defendants claim
that any payment of advancement from them would result in an improper double payment
to Scott for the same set of fees and expenses.
Scott does not concede that all of his litigation costs and expenses have been paid
by Batesville and maintains that any amounts he has received from Batesville under the
Loan Agreement are, in fact, in the nature of a loan. Nonetheless, Scott argues that, even
if Defendants were correct that he is entitled to and has been receiving mandatory
advancement of his litigation costs and expenses from Batesville, and ultimately will be
entitled to be indemnified by Batesville for those costs and expenses, that fact would not
deprive him of standing to seek advancement from the Defendants. In that regard, Scott
notes that Defendants‘ bylaws do not condition advancement on ―out-of-pocket‖
payments and are expressly non-exclusive of his other advancement and indemnification
rights. He also claims that, under Delaware law, he has standing to seek advancement for
any legal expenses for which he is or will be liable, regardless of whether he has paid
those expenses himself or previously collected advancement from another source.
Moreover, Scott contends that there is no risk of him receiving double payment for the
same set of expenses, because if any funds advanced to him by Defendants exceed the
16
amount of his outstanding unpaid expenses, he is required, under the Loan Agreement, to
use the excess amount to repay the Loan from Batesville.
B. Legal Standard
Defendants‘ motion to dismiss is governed by Court of Chancery Rule 12(b)(6).29
For purposes of a motion to dismiss under Rule 12(b)(6), the Court will ―assume the
truthfulness of the well-pled allegations of the complaint‖30 and afford the plaintiff ―the
benefit of all reasonable inferences.‖31 If the well-pled allegations in the complaint
would entitle the plaintiff to relief under any ―reasonably conceivable‖ set of
circumstances, the Court must deny the motion to dismiss.32 The Court, however, need
not ―accept conclusory allegations unsupported by specific facts.‖33 Moreover, failure to
plead an element of a claim precludes entitlement to relief and, therefore, is grounds to
29
See Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1285 (Del.
2007) (―[W]here a party is not arguing that the court lacks the authority to grant
the relief requested to any plaintiff (i.e., lacks subject matter jurisdiction), but
rather is arguing that the court cannot grant relief to these particular plaintiffs, the
motion is more properly decided under Rule 12(b)(6) because the plaintiff has
failed to plead a necessary element of a cognizable claim, not because the court
does not have jurisdiction.‖)
30
Superwire.com, Inc. v. Hampton, 805 A.2d 904, 908 (Del. Ch. 2002) (citing
Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 38 (Del. 1996)).
31
Id. (quoting In re USACafes, L.P. Litig., 600 A.2d 43, 47 (Del. Ch. 1991))
(internal quotation marks omitted).
32
Central Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531,
536 (Del. 2011); see also Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 813 n.12
(Del. 2013).
33
Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing
Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
17
dismiss that claim.34 Nonetheless, the Court must ―accept even vague allegations as ‗well
pleaded‘ if they give the opposing party notice of the claim.‖35 Generally, on a motion to
dismiss under Rule 12(b)(6), the Court will consider only the complaint and the
documents integral to or incorporated by reference into it.36
Defendants‘ motion to dismiss turns on the question of standing. ―The term
‗standing‘ refers to the right of a party to invoke the jurisdiction of a court to enforce a
claim or to redress a grievance. Standing is a threshold question that must be answered by
a court affirmatively to ensure that the litigation before the tribunal is a ‗case or
controversy‘ that is appropriate for the exercise of the court‘s judicial powers.‖ 37 ―Unlike
the federal courts, where standing may be subject to stated constitutional limits, state
courts apply the concept of standing as a matter of self-restraint to avoid the rendering of
advisory opinions at the behest of parties who are ‗mere intermeddlers.‘‖ 38 To establish
standing, a plaintiff or petitioner generally must demonstrate: (1) that he or she suffered
an injury-in-fact (i.e., an invasion of a legally protected interest), (2) caused by the
34
See Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 972 (Del. Ch. 2000)
(Steele, V.C., by designation).
35
Central Mortg., 27 A.3d at 535.
36
See Allen v. Encore Energy P’rs, 72 A.3d 93, 96 n.2 (Del. 2013).
37
Dover Historical Soc’y v. City of Dover Planning Comm’n, 838 A.2d 1103, 1110
(Del. 2003) (citing Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1382 (Del.
1991)).
38
Stuart Kingston, Inc., 596 A.2d at 1382 (citing Crescent Park Tenants Assoc. v.
Realty Equities Corp. of New York, 275 A.2d 433, 437-38 (N.J. 1971)).
18
complained of conduct of the defendant, and (3) that could be redressed by a favorable
decision by the Court.39
Defendants appear to challenge Scott Pontone‘s standing on the ground that he
cannot demonstrate an injury-in-fact, because he cannot show that he has or will suffer
any out-of-pocket expenses due to his mandatory advancement and indemnification rights
from Batesville. To determine whether Scott has standing, I first consider a factual
premise of Defendants‘ argument, namely, that Scott is entitled to mandatory
advancement and indemnification from Batesville under the Consulting Agreement and
the Loan Agreement. Based on the record before me, even if it were limited to the
allegations in the Complaint and the terms of the Consulting Agreement, there does not
appear to be any dispute that the indemnification provisions in the Consulting Agreement
are mandatory. I therefore find that to be true. The Loan Agreement applies to the time
period in and after January 2013. Based on my review of the Loan Agreement and the
arguments presented on the motion to dismiss, I conclude that the Loan Agreement
effectively provides Scott with mandatory rights to advancement.
I must then consider whether it is reasonably conceivable that Defendants‘ bylaws
provide Scott with a right to advancement of his costs and expenses in the Pennsylvania
Action, notwithstanding his mandatory advancement and indemnification rights from
Batesville. I find that such an interpretation is reasonably conceivable. Finally, I address
39
See Dover Historical Soc’y, 838 A.2d at 1110-11 (citing Soc’y Hill Towers
Owners’ Ass’n v. Rendell, 210 F.3d 168, 175-76 (3d Cir. 2000)).
19
whether, under Delaware law, Scott is the proper party-in-interest with standing to assert
his advancement claims against Defendants. I conclude that he is.
1. Scott Pontone’s advancement and indemnification rights from Batesville
I agree with Defendants that Scott Pontone‘s rights under the Loan Agreement and
the Consulting Agreement approximate rights of mandatory advancement and
indemnification for his litigation expenses incurred in connection with the Pennsylvania
Action. As for Scott‘s advancement rights from Batesville, the Loan Agreement provides
that ―within 30 days after each written request therefor by [Scott], [Batesville] shall make
additional Loan Advances to Borrower, to fund Qualifying Expenses invoiced after the
date hereof.‖40 ―Qualifying expenses‖ include ―all fees, expenses, and costs previously
incurred and to be incurred‖ in the Pennsylvania Action and in this action. 41 The
implication of these provisions is that Scott is contractually entitled to request and receive
funding from Batesville for his litigation costs incurred in connection with the
Pennsylvania Action, which amounts to a mandatory advancement right.
Scott also appears to have indemnification rights from Batesville under the terms
of the Loan Agreement and the Consulting Agreement. Under the Loan Agreement, all
amounts lent to Pontone for his Qualifying Expenses are forgiven upon either: ―(a) a
dismissal with prejudice of the claims against [Scott] and [PCC] in the [Pennsylvania]
Litigation; or (b) entry of final judgment in the [Pennsylvania] Litigation that has become
40
Compl. Ex. 2 § 2(b) (emphasis added).
41
Compl. Ex. 2.
20
subject to no further appeal.‖42 As dismissal or a final judgment in the Pennsylvania
Action is likely inevitable, and there is no requirement that the final judgment in the
Pennsylvania Action be favorable to Pontone for the Loan to be forgiven, forgiveness of
the Loan would appear to be guaranteed. In light of the inevitable Loan forgiveness,
there seem to be only two circumstances under which Scott might be required to repay
any portion of the Loan, each of which is specifically provided for under the Loan
Agreement. Before the Loan is forgiven, Scott is required to repay the Loan to the extent
that he obtains advancement from Defendants, in excess of his outstanding Qualifying
Expenses.43 After the Loan is forgiven, Scott is still liable to repay Batesville to the
extent that he succeeds on his counterclaims in the Pennsylvania Action and has money
left over after paying all of his remaining litigation costs and expenses.44 Apart from
these two exceptions, Scott appears to be effectively indemnified for any Qualifying
Expenses for which he receives funding under the Loan Agreement.
Moreover, Scott‘s rights under the Loan Agreement are without prejudice to his
rights under the Consulting Agreement, which also provides him with indemnification.
Specifically, under that agreement, Batesville ―agrees to indemnify, defend and hold
harmless‖ Scott ―against any and all third party claims, damages, losses, liability,
expenses and costs (including reasonable attorneys‘ fees) that may be incurred by or
42
Id. § 5.
43
Id. § 3.
44
Id. § 6.
21
asserted against [him] . . . on account of or arising out of this Agreement.‖ 45 As Scott is
being sued in the Pennsylvania Action principally due to the actions he took working as a
consultant for Batesville, his litigation expenses in that action would appear to fall within
the scope of the indemnified expenses under the Consulting Agreement.
The Loan Agreement and the Consulting Agreement, therefore, appear to provide
Scott with the functional equivalent of mandatory advancement and indemnification
rights from Batesville as to his litigation costs and expenses in the Pennsylvania Action.
Thus, in analyzing Defendants‘ motion to dismiss, I proceed on the premise that Scott has
mandatory advancement and indemnification rights from Batesville under the terms of
the Loan Agreement and the Consulting Agreement.
Based on the allegations in the Complaint and the documentary evidence referred
to by the parties without objection, I also find that the only reasonable inference
supported by the record on the Motion to Dismiss is that Scott has not paid any out-of-
pocket expenses in connection with the Pennsylvania Action since January 2013. Scott is
liable for out-of-pocket expenses, however, for any unpaid invoices from his legal
counsel in the past few months and for any unbilled time and expenses. In this regard, I
also note that the Complaint alleges that Batesville has agreed to provide Scott Pontone
with funds under the Loan Agreement ―to cover his legal fees and expenses that are the
subject of Scott Pontone‘s request for advancement and indemnification with the
45
Def.‘s Opening Br. Ex. B ¶ 17.
22
understanding that Scott Pontone would seek advancement and eventually
indemnification from Defendants and repay any resulting amounts to Batesville.‖ 46
2. Notwithstanding his rights from Batesville, Pontone has a contractual right to
mandatory advancement from Defendants
For purposes of their motion to dismiss, Defendants do not dispute that New
Milso‘s bylaws provide for mandatory advancement or that Scott would be entitled to
receive advancement from them for at least some of his litigation costs in the
Pennsylvania Action, if he were not already collecting advancement from another source.
Defendants argue, however, that because Scott currently is receiving and is entitled to
continue receiving advancement from another source, namely, Batesville, he cannot
demonstrate that he has or will suffer any out-of-pocket expenses and has no right to
collect advancement from Defendants under their bylaws. Scott disputes Defendants‘
contention and asserts that their bylaws do not impose an ―out-of-pocket‖ expense
requirement and are expressly non-exclusive. Despite Batesville‘s payment of his past
litigation expenses under the Loan Agreement, therefore, Scott asserts that he has a right
under Defendants‘ bylaws to collect advancement from them for the litigation expenses
in the Pennsylvania Action since January 2013 that he seeks to recoup.
I have reviewed Defendants‘ bylaws and considered the arguments of both sides.
Based on that review, I conclude that at least the bylaws of Defendant New Milso47
46
Compl. ¶ 46.
47
As discussed infra with respect to Plaintiff‘s Motion for Partial Summary
Judgment, Defendants do not concede, and the record at this point is not
sufficiently clear, that the advancement rights contained in York‘s bylaws are
23
entitle Scott Pontone to advancement for, at a minimum, any of his outstanding legal
expenses incurred in the Pennsylvania Action since January 2013 for which he has not
yet requested or received funding from Batesville under the Loan Agreement, and for the
future costs and expenses that he presumably will incur in that action.
At the outset, I note that bylaws entitling the directors of a Delaware corporation
to advancement are adopted under the auspices of Section 145(e) of the Delaware
General Corporation Law (the ―DGCL‖).48 That section authorizes advancement of the
expenses a director incurs in defending an action so long as the director undertakes ―to
repay such amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the corporation.‖49 It further provides that ―such expenses . . . may be
so paid upon such terms and conditions . . . as the corporation deems appropriate.‖50
As this Court has held, ―[w]hen a corporation agrees to make mandatory the
permissive authority to provide advancement and indemnification conferred by Sections
145(a), (b), and (e) of the General Corporation Law, the corporation confers a contractual
mandatory, rather than permissive. For purposes of this section concerning
Defendants‘ Motion to Dismiss, I need not decide whether the York advancement
right is mandatory, because it is sufficient to find, as I do, that the New Milso
bylaw provides a mandatory right of advancement. Moreover, I am convinced that
it is at least reasonably conceivable that the York bylaws also provide for
mandatory advancement.
48
8 Del. C. § 145(e).
49
Id.
50
Id.
24
fee-shifting right on the covered person.‖51 The scope of Scott Pontone‘s contractual
right to advancement from Defendants is properly determined, in the first instance, by
reference to the language of the relevant bylaws.52
York and New Milso‘s bylaws provide, respectively, that covered individuals are
entitled to obtain advancement for ―[e]xpenses incurred‖ and for ―expenses actually and
reasonable incurred‖ in a qualifying action.53 Although neither set of bylaws defines the
term ―incur,‖ accepted meanings of that term include ―to become liable and subject to‖54
and ―[t]o suffer or bring on oneself (a liability or expense).‖ 55 Thus, a party incurs an
expense once he becomes liable for that expense.
Scott Pontone is, at a minimum, liable for any outstanding legal expenses incurred
in the Pennsylvania Action since January 2013 for which he has not yet requested or
51
Danenberg v. Fitracks, Inc., 58 A.3d 991, 996 (Del. Ch. 2012).
52
See Schoon v. Troy Corp., 948 A.2d 1157, 1165 (Del. Ch. 2008).
53
Choa Aff. I Ex. 1 (New Milso‘s bylaws) § 2.15(b) (―Every indemnitee shall be
entitled as of right to have the expenses of the indemnitee . . . paid in advance
. . . .‖), § 2.15(a) (―[E]xpenses means all expenses actually and reasonably
incurred‖); id. Ex. 2 (York‘s bylaws) art. VII preamble (―The Corporation shall
indemnify and advance expenses‖), art. VII § 7 (―Expenses incurred . . . may be
paid by the Corporation in advance‖).
54
Agere Sys., Inc. v. Worthington Steel Co., 2013 WL 4958220 (Del. Super. Sept.
12, 2013), aff’d, 89 A.3d 478 (Del. 2014) (quoting Webster’s New Collegiate
Dictionary (9th ed. 1983)).
55
Ameristar Casinos, Inc. v. Resorts Int’l Hldgs., LLC, 2010 WL 1875631, at *9
(Del. Ch. May 11, 2010) (quoting Black’s Law Dictionary 341 (2d Pocket ed.
2001)).
25
received funding from Batesville under the Loan Agreement.56 If, for example, at the
time of this ruling, Scott‘s counsel in the Pennsylvania Action had performed 100 hours
of work for which they had not yet been paid, Scott would be liable for paying for those
legal services. The fact that Scott had not yet paid for those services out-of-pocket, and
potentially could request funding for those expenses under the Loan Agreement, would
not change the fact of his present liability.57 He therefore properly could be said to have
incurred those expenses and to have a right to advancement for those expenses from (at
least) New Milso under the terms of its bylaws. Scott similarly would have a right to
advancement from New Milso, under its bylaws, for his future legal expenses in
connection with the Pennsylvania Action as they were incurred, assuming that he does
not first obtain advancement for those expenses from Batesville.
The mere fact that Scott has a contractual right to request and receive
advancement from Batesville, and has received advancement from Batesville in the past,
does not undermine his independent contractual rights to advancement under the bylaws
of York and New Milso. Had Defendants so desired, their bylaws could have stated that
York and New Milso will provide advancement only to the extent that covered
56
For purposes of Defendants‘ Motion to Dismiss, I need not reach the issue of
whether Scott Pontone can be said to have ―incurred‖ expenses as to attorneys‘
fees, for example, for which he already has obtained advancement from Batesville.
57
Agere Sys., Inc., 2013 WL 4958220, at *9 (holding that the defendant‘s argument
that ―costs are ‗incurred‘ only when a party pays costs out-of-pocket is incorrect
and erroneous‖).
26
individuals are unable to obtain advancement from other sources.58 The bylaws do not
contain such a provision, however. Rather, York and New Milso‘s bylaws provide
indemnification and advancement rights that are expressly non-exclusive of any other
rights to advancement and indemnification a covered individual may have.
In that regard, Section 2.15(e) of New Milso‘s bylaws, entitled ―Non-Exclusivity;
Nature and Extent of Rights,‖ provides: ―[t]he rights to indemnification and advancement
of expenses provided for in this Section shall (i) not be deemed exclusive of any other
rights, whether now existing or hereafter created, to which any indemnitee may be
entitled under any agreement . . . or otherwise.‖59 And, Section 8 of Article VII of
York‘s bylaws provides: ―[t]he indemnification and advancement of expenses provided
by, or granted pursuant to, the other sections of this Article VII shall not be deemed
exclusive of any other rights to which those seeking indemnification and advancement of
expenses may be entitled under any Bylaw, agreement, contract . . . or otherwise.‖60
These provisions indicate that Defendants intended the advancement rights conferred by
their bylaws to be broadly available to covered individuals, notwithstanding any similar
rights a covered individual might have from other sources.
58
See, e.g., DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058, at *7, *15 (Del. Ch.
Jan. 23, 2006) (applying contract provision providing ―to the extent that any
Indemnified Person may be entitled to indemnification with respect to any Loss,
such Indemnified Person first shall be required to seek indemnification and/or
insurance benefits from the Target Company before seeking indemnification from
the Company pursuant to this Section 4.4.‖)
59
Choa Aff. I Ex. 1 § 2.15(e).
60
Choa Aff. I Ex. 2 art. VII § 8.
27
For the foregoing reasons, I conclude that, based on the terms of New Milso‘s
bylaws, Scott Pontone has a contractual right to advancement for, at a minimum, any of
his outstanding legal expenses incurred in the Pennsylvania Action since January 2013
for which he has not yet requested or received funding from Batesville under the Loan
Agreement, and for the future costs and expenses that he will incur in that action. I also
conclude that Scott had a contractual right to advancement from New Milso for his
outstanding legal expenses incurred in the Pennsylvania Action from January 1, 2013 and
even earlier. To the extent those legal expenses have been paid by Batesville, however,
Defendants assert that Scott has not suffered any out-of-pocket loss and, therefore, has no
standing to maintain an advancement claim against either York or New Milso for such
expenses. Because the arguments as to expenses that admittedly have been paid by
Batesville and those that have not been paid or requested yet are different, I analyze those
two time periods separately in this Opinion.
In this vein, I pause briefly to address a concern Defendants repeatedly expressed
in the briefing on their Motion to Dismiss and reiterated at oral argument61 that if the
Court were to award advancement to Scott, he would be receiving a double payment.
Defendants asserted at argument, for example, that: ―if we are ordered to now pay [Scott]
Pontone, he will recover twice. What he will do with the money I do not know, but this
61
Defs.‘ Opening Br. 2 (―Put simply, a plaintiff cannot seek to be paid twice for the
same fees and expenses.‖); Defs.‘ Reply Br. 1 (―Delaware law therefore precludes
the double recovery Scott Pontone seeks.‖); Id. at 9 n. 6 (In the context of
subrogated claims brought by insurers, ―there is no double recovery.‖); Id. at 15 n.
10 (―Similarly here, Scott Pontone has shown no such intent on the part of
Defendants . . . to allow multiple recoveries by him.‖).
28
will be a second payment.‖62 This argument is a red herring. If Scott has received an
invoice from his counsel that he either has not submitted to Batesville or which Batesville
has not paid, there would be no double payment. As to the legal fees and expenses Scott
incurred before January 1, 2013, he is not seeking advancement from York or New
Milso. Once again, therefore, there is no risk of a double payment or recovery. Finally,
for fees and expenses Scott incurred after January 1, 2013 that have been paid by
Batesville, and conceivably might give rise to a double payment or recovery, I have
determined for the reasons discussed in Section II.B.3.b infra that Scott has failed to
allege sufficient facts to support a reasonable inference that he has standing to enable him
to pursue those claims in his own right. 63
3. Scott Pontone’s standing to seek advancement from Defendants
a. The relevant case law and the Parties’ contentions
Defendants argue that, whatever advancement rights Scott Pontone may have
under their bylaws, under Delaware law, he lacks standing to pursue the claims he has
asserted in this litigation and is not the proper party in interest to assert those rights.
Defendants argue that this is so because he is not at risk of suffering any loss if the
advancement he requests from them is denied, due to the mandatory advancement and
indemnification he will receive from Batesville. In support of their argument, Defendants
62
Tr. 57.
63
I note, however, that even in this third circumstance, it is unlikely that there would
be a double payment, because of the requirement in Section 3 of the Loan
Agreement that Scott must use any surplus advancement obtained from New
Milso or York to repay the Loan. See supra note 24 and related text.
29
principally rely upon this Court‘s decision in Levy v. HLI Operating Co.,64 in which 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. Scott asserts that this case is distinguishable from Levy on
numerous grounds, including that Levy addressed standing to bring indemnification, not
advancement, claims. In that regard, Scott contends that the facts present here are more
analogous to those in Schoon v. Troy Corp.,65 in which the court held that a party
receiving voluntary advancement from one source had standing to pursue mandatory
advancement from another. Because Levy and Schoon are the most pertinent cases to the
standing issue before this Court, those decisions merit more detailed exposition.
The plaintiffs in Levy were six former directors of HLI Operating Company, Inc.
(―Old Hayes‖) who had been named as defendants in multiple securities lawsuits relating
to restatements of Old Hayes‘s financial results. The plaintiffs had agreed to pay $1.2
million each to settle certain of those lawsuits, and they subsequently requested
indemnification from Old Hayes for those payments pursuant to their indemnification
rights under Old Hayes‘ bylaws and various indemnification agreements. Old Hayes
rejected the directors‘ request, and, in response, they filed suit.
In the course of the litigation, discovery revealed that JLL Fund, a major
shareholder of Old Hayes that had appointed four of the plaintiff directors (the ―JLL
64
924 A.2d 210, 214 (Del. Ch. 2007).
65
948 A.2d 1157, 1159 (Del. Ch. 2008).
30
Representatives‖), had made the settlement payments for each of the JLL Representatives
pursuant to contractual indemnification obligations it owed to them. Based on that
information, Old Hayes moved for summary judgment against the JLL Representatives,
arguing that they had suffered no injury and therefore lacked standing to bring an
indemnification claim. The Court agreed and granted summary judgment in favor of Old
Hayes, holding 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 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.66
The Court further held that, as the real party-in-interest, the indemnitor who fully
satisfied its obligation to its indemnitee could sue the co-indemnitor in its own name on a
theory of contribution.
Schoon was decided shortly after Levy by the same Vice Chancellor. In Schoon,
this Court considered the standing of a party presently receiving advancement from one
source to pursue advancement from another. The plaintiffs in Schoon were Richard
66
Levy, 924 A.2d at 222.
31
Schoon and William Bohnen, a current and former director of the defendant, Troy
Corporation (―Troy‖). The plaintiffs had been appointed to Troy‘s board of directors by
Steel Investment Company (―Steel‖), a major Troy stockholder. In two previously-filed
actions, Troy had asserted or attempted to assert breach of fiduciary duty claims against
the plaintiffs. In response, the plaintiffs requested advancement from Troy under the
terms of its bylaws, which provided for mandatory advancement for directors of all fees
and expenses incurred in defending threatened or pending claims. After Troy refused to
advance funds to cover all of the claimed fees and expenses, the plaintiffs filed suit
against Troy for advancement.
The Court resolved the advancement claims on cross-motions for summary
judgment. In its decision, the Court determined that Bohnen, as a former director of
Troy, no longer was entitled to advancement under its bylaws due to a bylaw amendment
that Troy had adopted. The Court then turned to Schoon‘s right to advancement. Earlier
in the proceedings, the plaintiffs disclosed that Steel had been advancing their expenses
in the previously-filed actions and in the instant advancement action. Steel was under no
legal obligation to provide advancement to the plaintiffs and was doing so voluntarily,
subject to a commitment by them to repay any amounts they received as advancement or
indemnification from Troy.
Troy argued that, under Levy, Schoon lacked standing to bring his advancement
claim because he had not suffered an actual loss. The Court in Schoon rejected this
argument, noting that the facts before it were distinguishable from those in Levy because
unlike the JLL Fund in Levy, which had a mandatory indemnification obligation to the
32
JLL Representatives in that case, Steel was not obligated to advance Schoon his costs and
was doing so voluntarily. The Court found this to be significant for two primary reasons.
First, the Court noted that, in contrast to the JLL Representatives, it was not
certain that Schoon ―has not and will not sustain any actual out-of-pocket loss,‖ because
he ―has no assurance that Steel will continue advancing his costs and is obliged to repay
those amounts to the extent he recovers them from Troy.‖67 The Court thus held that
―Schoon has articulated sufficient injury to establish his standing.‖68
Second, the Court found that accepting Troy‘s arguments would inequitably
reward it. In that regard, the Court noted that because Steel voluntarily undertook to pay
Schoon‘s fees and expenses without obligation, it would have no claim for contribution
against Troy, because a contribution claim requires a party to ―show concurrent
obligations existed to the same entities.‖69 Thus, the Court observed that ―were the court
to accept Troy‘s argument that Schoon also lacks standing, no party could sue Troy. This
result would inequitably reward Troy for failing to discharge its advancement obligations.
The better approach is to allow Schoon to press his claim.‖70
The Schoon Court also cited DeLucca v. KKAT Management, L.L.C.71 in support
of its decision that Schoon had standing. The plaintiff in DeLucca sought to enforce
67
Schoon, 948 A.2d at 1175.
68
Id.69
Id. (quoting Levy, 924 A.2d at 220).
70
Schoon, 948 A.2d at 1175.
71
2006 WL 224058 (Del. Ch. Jan. 23, 2006).
33
mandatory advancement rights against the defendant companies in that action but was
receiving advancement from a separate company in the meantime. The defendants
argued that, because the plaintiff had not been making any payments directly, she could
not demonstrate a loss and, therefore, could not pursue advancement from them. The
Court in DeLucca disagreed and found that the plaintiff could demonstrate an economic
loss because she owned the company that was advancing her costs. The DeLucca Court
also emphasized, however, that embracing the defendants‘ argument would provide a
―perverse incentive‖ that would encourage companies to refuse to provide advancement
in the hopes that the person owed advancement would ―find an affluent aunt, best friend,
or other third party to front her defense costs,‖ thereby forfeiting her advancement
rights.72 The Court in DeLucca noted that ―[t]he incentives for such refusal are already
abundant . . . and there is no legal or equitable justification for adding to them . . . .‖73
Thus, the Schoon Court found that the policy considerations underlying the Court‘s
decision in DeLucca also supported its decision that Schoon had standing to pursue his
advancement claims.
Defendants argue that, under Levy, Scott Pontone lacks standing to assert an
advancement claim against them because he is entitled to mandatory advancement and
indemnification from Batesville and, therefore, he ―has not and will not sustain any actual
72
Id. at *9.
73
Id.
34
out-of-pocket loss.‖74 They assert that this case does not fit within Schoon because the
advancement the plaintiff was receiving from a third party there was voluntary, not
mandatory. Defendants contend this was ―critical‖ to the Court‘s determination that the
plaintiff had standing. For his part, Scott argues that Levy is inapposite because it was an
action for indemnification—not advancement—involving claims made after the
underlying action had terminated and after all of the former directors‘ litigation costs had
been paid by a third party indemnitor. Rather, Scott maintains that advancement cases
such as Schoon and DeLucca are more analogous to the instant case and support the
proposition that a corporate defendant cannot escape its advancement obligations merely
because a plaintiff has been receiving advancement from another source, whether on a
mandatory or a voluntary basis.
b. Plaintiff’s claims for advancement for expenses incurred from January 2013
to the present that already have been paid
As stated supra, there is neither an allegation in the Complaint nor an indication in
the documentary evidence referred to by the parties to support a reasonable inference that
Scott Pontone has paid or is liable for any out-of-pocket expenses in connection with the
Pennsylvania Action, with the exception of only the most recent invoices for legal fees
and expenses that remain unpaid and any completed work that has not yet been billed.
Such liability for out-of-pocket expenses presumably relates to a fairly recent period,
after June 30, 2014, for example. As to the claims for advancement of expenses up to
that point, I infer that they have been paid by Batesville already, and I conclude,
74
Defs.‘ Opening Br. 20.
35
therefore, that Scott has no standing to assert a claim for indemnification under Levy.
Extending the reasoning of Schoon, I conclude that Scott does not have standing to
pursue a claim for advancement of those expenses, either. Because I find that Scott does
not have standing with respect to claims for advancement of the expenses that already
have been paid, I grant Defendants‘ motion to dismiss that aspect of Scott‘s advancement
claim, without prejudice to his right to seek leave of Court to amend his Complaint if, in
fact, he has suffered out-of-pocket expenses during the time period in question (from
January 1, 2013 through June of this year).75 This dismissal is also without prejudice to
any claim that Batesville may have for contribution against New Milso in the
indemnification stage of this matter.
c. Plaintiff’s claims for advancement from January 2013 to the present that
have not been paid
Having reviewed the relevant case law, I conclude that, under Delaware law, Scott
Pontone has standing to pursue, at a minimum, advancement from Defendants for the
litigation expenses he has incurred and will incur in the Pennsylvania Action and for
which he has not already received advancement from Batesville under the Loan
Agreement. In my view, Scott has a contractual right to receive advancement from at
least Defendant New Milso for at least those litigation expenses, and Defendants‘ refusal
to honor their obligations in that regard presents an injury-in-fact that gives Scott Pontone
75
If the last period for which Batesville paid Scott Pontone‘s legal fees and expenses
is some other recent date in 2014, I would expect the parties to incorporate that
corrected date in an order implementing the rulings in this Opinion.
36
standing, regardless of his presumed ability to request and receive mandatory
advancement and indemnification from another source.
Notwithstanding Defendants‘ protestations to the contrary, this decision does not
conflict with this Court‘s decision in Levy. The Court in Levy was determining the
plaintiff‘s standing to pursue an indemnification claim, not an advancement claim. In its
analysis, the Court looked to the language of the subsections of 8 Del. C. § 145 that
address indemnification, which authorize a corporation to provide indemnification only
of amounts ―actually . . . incurred by the person.‖76 The Court held that this language
should be read as incorporating the restriction from the common law of indemnification
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.‖77 The indemnitee‘s losses had
been paid at the time of the Court‘s decision in Levy.
As an initial matter, it is not apparent to me that the reasoning of Levy should be
mechanically extended to advancement. A corporation‘s authority to provide
advancement is addressed in its own subsection of Section 145, namely, Section 145(e),
that uses distinct language from the subsections addressing indemnification and permits
advancement of ―expenses incurred.‖78 Moreover, as this Court consistently has held,
―advancement and indemnification, although obviously related, are ‗distinct types of
76
Levy, 924 A.2d at 222 (quoting 8 Del. C. § 145(a)-(c)).
77
Id. (quoting Perno v. For–Med Med. Gp., P.C., 176 Misc.2d 655, 673 N.Y.S.2d
849, 851 (N.Y. Sup. Ct. 1998)).
78
8 Del. C. § 145(e).
37
legal rights‘ and . . . the right to advancement is not ordinarily dependent upon a
determination that the party in question will ultimately be entitled to be indemnified.‖79
To the contrary, ―Section 145(e) . . . expressly contemplates that corporations may confer
a right to advancement that is greater than the right to indemnification and recognizes that
advances must be repaid if it is ultimately determined that the corporate official is not
entitled to be indemnified.‖80
Nonetheless, even if the restriction articulated in Levy were extended to
advancement, it would not bar Scott‘s standing in this case. The Levy Court‘s
determination that plaintiffs had not and would not incur any out-of-pocket expense was
driven by the fact that they already had been fully reimbursed by a third party for the
settlement payment for which they sought to be indemnified by the defendant. Here,
Scott seeks advancement for the expenses he has incurred and will continue to incur in
the ongoing Pennsylvania Litigation, at least some portion of which has not yet been paid
for by Batesville. Defendants‘ argument as to why Scott nonetheless will not incur any
out-of-pocket expenses going forward is that he will be able to request and obtain
advancement, and ultimately indemnification, from Batesville for any unpaid present and
future expenses.
This argument is unpersuasive. Were the Court to accept Defendants‘ argument, it
would mean that any time a plaintiff held and pursued advancement and indemnification
79
Senior Tour Players 207 Mgmt. Co. v. Golftown 207 Hldg. Co., 2004 WL 550743,
at *2 (Del. Ch. Mar. 10, 2004)
80
Homestore, Inc. v. Tafeen, 888 A.2d 204, 212-13 (Del. 2005).
38
rights from a party that was willing to honor its obligations, it would lose the ability to
enforce any other advancement rights it might have as to other parties, and have to wait
until the conclusion of the relevant proceedings for the co-indemnitors to sort out their
respective rights. This cannot be the law. The fact that a third party is willing to honor
its contractual commitments to the plaintiff if called upon to do so should not serve as a
basis for a defendant to escape its own, independent and commensurate, contractual
obligations. In other words, an indemnitee having two essentially co-equal sources of
advancement and indemnification should have the right to switch from one to the other in
the middle of litigation, if he decides to do so. The indemnitee could not recover twice
and presumably would have to stop accepting advancement in the first instance from the
first indemnitor. Thus, unlike the situation in Levy, it would not be a foregone conclusion
that he would not have any out-of-pocket expenses. For similar reasons, I also find that
this Court‘s decisions in Schoon and DeLucca support the conclusion that Scott Pontone
has standing to pursue advancement.
This result avoids the ―perverse incentive‖ cautioned against in Schoon and
DeLucca. According to Defendants, once a plaintiff begins to collect advancement from
a source that owes him mandatory advancement and indemnification rights, the plaintiff
loses standing to pursue advancement from any other source. This creates a perverse
incentive for companies to delay paying advancement in the hopes that they will be let
off the hook.
Indeed, this case illustrates that possibility to some extent. Because Defendants
here vigorously contested Harry Pontone‘s advancement claims in related litigation in
39
this Court, it is not surprising that Scott initially chose to seek and obtain advancement
from Batesville. In January 2013, this Court entered an Opinion that largely granted
Harry Pontone‘s claims for advancement. Promptly thereafter, Scott Pontone attempted
to obtain advancement from Defendants rather than his client, Batesville. I see nothing
nefarious or suspicious about Scott‘s conduct. In that regard, I note, for example, that
Scott alleges in his Complaint that Batesville‘s commitment to paying his litigation
expenses is negatively impacting his employment relationship. Rather, Scott‘s decision
reflects the economic advantage he enjoys by having at least two separate, mandatory
sources of advancement.81
In conclusion, in light of the foregoing analysis, Scott Pontone at least has
standing to pursue advancement for the qualified expenses for which he has not yet
received advancement from Batesville. As to those expenses, dismissal for lack of
standing therefore would be inappropriate.
Having concluded that Scott has standing to pursue advancement from Defendants
as to the expenses he has and will incur in the Pennsylvania Action for which Batesville
81
For these reasons, I also conclude that Defendants‘ argument that the doctrine of
unclean hands bars Scott Pontone from recovering on his advancement claim is
without merit. Apart from their baseless criticism of Scott‘s decision to seek
advancement from Defendants in the middle of their underlying litigation, the only
other basis for Defendants‘ unclean hands argument is that the Loan Agreement is
a sham transaction. The Loan Agreement may have been drafted with cases like
Levy and Schoon in mind, but that is understandable because this is a complicated
area of the law. The likelihood that the parties to that agreement attempted to
remain within the confines of the relevant case law, while also giving effect to
Scott‘s and Batesville‘s goal of providing Scott with full advancement and
indemnification, is simply not the type of behavior that the doctrine of unclean
hands seeks to deter.
40
has not yet provided him advancement, I now consider Scott‘s motion for partial
summary judgment as to his entitlement to advancement for those expenses.
III. MOTION FOR SUMMARY JUDGMENT
A. Legal Standard
Under Delaware law, ―[s]ummary judgment is 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 judgment as a matter of law.‖82 When considering a motion for
summary judgment, the evidence and the inferences drawn from the evidence are to be
viewed in the light most favorable to the nonmoving party. 83 Summary judgment will be
denied when the legal question presented needs to be assessed in the ―more highly
textured factual setting of a trial.‖84 The Court also ―maintains the discretion to deny
summary judgment if it decides that a more thorough development of the record would
clarify the law or its application.‖85
82
Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14,
2007) (citing Ct. Ch. R. 56(c)).
83
GMC Capital Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del.
2012) (quoting State Farm Mut. Auto. Ins. Co. v. Patterson, 7 A.3d 454, 456 (Del.
2010)); Judah v. Del. Trust Co., 378 A.2d 624, 632 (Del. 1977).
84
Schick, Inc. v. Amalgamated Clothing & Textile Workers Union, 533 A.2d 1235,
1239 n.3 (Del. Ch. 1987) (citing Kennedy v. Silas Mason Co., 334 U.S. 249, 256–
57 (1948)).
85
Tunnell v. Stokley, 2006 WL 452780, at *2 (Del. Ch. Feb. 15, 2006) (quoting
Cooke v. Oolie, 2000 WL 710199, at *11 (Del. Ch. May 24, 2000)).
41
Under Section 145(k) of the DGCL, ―[t]he Court of Chancery may summarily
determine a corporation‘s obligation to advance expenses (including attorneys‘ fees).‖ 86
Indeed, ―summary judgment practice is an efficient and appropriate method to decide‖ an
advancement dispute, ―as the relevant question turns on the application of the terms of
the corporate instruments setting forth the purported right to advancement and the
pleadings in the proceedings for which advancement is sought.‖87
I consider, in turn, Scott Pontone‘s entitlement to advancement from York and
New Milso.
B. Scott’s Entitlement to Advancement From York
Scott asserts that he is entitled to mandatory advancement from York of his fees
and expenses in the Pennsylvania Action. York‘s bylaws authorize advancement, but it is
unclear whether they provide for advancement that is mandatory or permissive in nature.
The preamble to Article VII of York‘s bylaws suggests mandatory advancement, stating
that ―[York] shall indemnify and advance expenses under this Article VII to the fullest
extent permitted by applicable law in effect on the date of adoption of these Bylaws and
to such greater extent as applicable law may thereafter permit.‖88 On the other hand,
Section 7 of Article VII of York‘s bylaws, entitled ―Expenses Payable in Advance,‖
suggests that advancement is only permissive, stating that:
86
8 Del. C. § 145(k).
87
Weinstock v. Lazard Debt Recovery GP, LLC, 2003 WL 21843254, at *2 (Del. Ch.
Aug. 8, 2003) (citing Reddy v. Elec. Data Sys. Corp, 2002 WL 1358761, at *3
(Del. Ch. June 18, 2002), aff’d, 820 A.2d 371 (Del. 2003)).
88
Choa Aff. I Ex. 2 art. VII.
42
Expenses incurred in defending or investigating a threatened
or pending action, suit or proceeding may be paid by [York]
in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount
if it shall ultimately be determined that he is not entitled to be
indemnified by [York] as authorized in this Article VII.89
Scott Pontone asserts that the language in the preamble of Article VII, by its plain
terms, establishes conclusively that he has a mandatory advancement right against York,
to the fullest extent of the law. Scott also argues that the two relevant bylaw provisions
can be read in harmony if the second provision is interpreted as providing for permissive
advancement in circumstances beyond those provided for by Delaware law—for
example, in instances where a York employee is sued not by reason of his or her official
capacity. Furthermore, Scott argues that any perceived ambiguity should be resolved
against the drafter, Defendant York, under the doctrine of contra proferentem.
York contends that Article VII‘s preamble cannot be the ―final word‖ on
advancement and indemnification, or it would render the remaining sections of that
article superfluous. York also notes that Article VII‘s preamble is a general provision
and the twelve sections that follow are more specific. Therefore, under the rule of
contract interpretation that specific provisions should prevail over general provisions,
York argues that the language in Section 7 is controlling and that its bylaws should be
interpreted as providing only for permissive advancement. York further argues that, at a
89
Id. § 7.
43
minimum, its bylaws are ambiguous and their meaning, therefore, cannot be resolved on
Scott‘s motion for summary judgment.
In the related advancement proceeding brought before this Court by Scott‘s father,
Harry Pontone, I considered the interpretation of York‘s bylaws on a motion for partial
summary judgment by Harry. Counsel for the parties raised substantially the same
arguments on that motion as they do here as to the proper interpretation of York‘s
bylaws. In an oral ruling on that motion, I found York‘s bylaws to be ambiguous and
declined to grant summary judgment on the issue of Harry‘s entitlement to advancement
from York.90 In that regard, I stated as follows:
In this instance I believe that both [parties‘] interpretations
are reasonable, given the apparent inconsistency in the
drafting between the preamble or the lead-in sentence that
clearly refers to mandatory advancement, and, then, Section
7, which is written in permissive terms. As I‘ve indicated,
it‘s my preliminary view that Pontone is correct and that this
should be a case of mandatory advancement. . . . But I
recognize the . . . principle that‘s been referred to by the
defendants, that the more specific provisions generally are to
be given preference over the general. There‘s at least a
colorable argument in that regard here. So for purposes of
summary judgment, it strikes me that this is not a situation
that I should jump to the contra proferentem conclusion or
application of that principle, but rather it would be one where,
if the parties considered it necessary, we could go on to
further proceedings. There might be discovery related to this
issue.91
90
Pontone v. Milso Indus. Corp., C.A. No. 7615-VCP, at 52-79 (Del. Ch. Jan. 17,
2013) (TRANSCRIPT).
91
Id. at 62-63.
44
Notwithstanding my prior ruling, Scott Pontone argues that I should reconsider my
interpretation of York‘s bylaws and hold that they provide for mandatory advancement
because York has not come forward with any additional evidence to support its proposed
interpretation. I reject this argument for two reasons. First, on a motion for partial
summary judgment, it is the moving party’s burden to prove the absence of a genuine
issue of material fact, and the court will resolve doubts in the non-movant‘s favor.92
Second, Scott has not identified any evidence developed in discovery that would enable
the Court to conclude, as a matter of law, that York‘s bylaws mean what Scott contends
they do.
No new evidence or arguments have been presented that cause me to question my
previous ruling that York‘s bylaws are ambiguous as to whether they provide for
mandatory or permissive advancement. I therefore reach the same conclusion here.
Thus, I hold that there is a genuine issue of material fact that precludes summary
judgment as to Scott‘s entitlement to advancement from York.
C. Scott’s Advancement Claim Against New Milso
By contrast to Scott Pontone‘s advancement rights under York‘s bylaws, it is
undisputed that Scott, as a former officer and director of New Milso, has mandatory
advancement rights under New Milso‘s bylaws. In that regard, Section 2.15(b) of New
Milso‘s bylaws provides that ―[e]very indemnitee shall be entitled as of right to have the
92
Citizens Coal., Inc. v. Cty. Council of Sussex Cty., 773 A.2d 1018, 1022-23 (Del.
Ch. 2000) (citing Brown v. Ocean Drilling & Exploration Co., 403 A.2d 1114,
1115 (Del. 1979)).
45
expenses of the indemnitee in defending any Action . . . paid in advance by [New Milso]
prior to final disposition of the Action,‖ subject to the requirement that ―[New Milso]
receiv[e] a written undertaking by or on behalf of the indemnitee to repay the amount
advanced if it should ultimately be determined that the indemnitee is not entitled to be
indemnified for the expenses.‖93 In Section 2.15(a), ―indemnitee‖ is defined, in relevant
part, as ―each director and officer of New Milso‖; ―expenses‖ are defined as ―all
expenses actually and reasonably incurred‖; and ―Action‖ is defined as ―any actual or
threatened claim, action, suit or proceeding . . . in which [the indemnitee] may be
involved, as a party or otherwise, by reason of such person being or having been a
director or officer of [New Milso].‖94
Scott Pontone asserts that, under Section 2.15(b) of New Milso‘s bylaws, he is
entitled to advancement from New Milso for the fees and expenses he has incurred and
will continue to incur in the Pennsylvania Action. New Milso raises two principal
arguments as to why the advancement Scott requests is outside the scope of New Milso‘s
obligations. First, New Milso argues that the Pennsylvania Action was not brought
against Scott ―by reason of‖ his having been a director or officer of New Milso and, thus,
is not a qualifying action for purposes of advancement. Second, New Milso contends
that, even if the Pennsylvania Action was brought ―by reason of‖ Scott‘s former role as
an officer and director of New Milso, Scott‘s counterclaims in that action were not
93
Choa Aff. I Ex. 1 § 2.15(b).
94
Id. § 2.15(a).
46
asserted ―in defending‖ the action and, therefore, at a minimum, the fees and expenses
associated with his counterclaims are not eligible for advancement. I address these issues
in turn.
1. Was the Pennsylvania Action brought “by reason of” Scott Pontone’s former
role as an officer and director of New Milso?
The ―by reason of‖ limitation in New Milso‘s advancement bylaws is consistent
with the statutory language contained in Section 145(a) of the DGCL, which authorizes
indemnification when a person is made or threatened to be made a party to an action or
proceeding ―by reason of the fact‖ that the person is or was a director or officer.95 Under
Delaware law, ―[t]he ‗by reason of the fact‘ standard, or the ‗official capacity‘ standard,
is interpreted broadly and in favor of indemnification and advancement.‖96 As the
Delaware Supreme Court held in Homestore, Inc. v. Tafeen, ―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.‖97 The requisite
connection is established ―if the corporate powers were used or necessary for the
commission of the alleged misconduct.‖98
95
8 Del. C. §145(a).
96
Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316, at *7 (Del. Ch.
May 30, 2008) (citing Weaver v. ZeniMax Media, Inc., 2004 WL 243163 (Del. Ch.
Jan. 30, 2004)).
97
888 A.2d 204, 214 (2005).
98
Bernstein v. TractManager, Inc., 953 A.2d 1003, 1011 (Del. Ch. 2007).
47
In the Harry Pontone advancement proceeding, I concluded that Harry was made a
party to the Pennsylvania Action by reason of his former role as an officer and director of
Defendants and, therefore, was entitled to advancement from New Milso of his costs and
expenses in that action.99 One factor I relied upon in reaching that conclusion was that
the Pennsylvania Plaintiffs asserted a breach of fiduciary duty claim against Harry as well
as numerous other claims that were based on his misuse of information obtained in his
capacity as an officer and director.
Although both Scott and Harry Pontone served as officers and directors of New
Milso and the allegations asserted against Scott by the Pennsylvania Plaintiffs are
substantially similar to those asserted against his father, Defendants argue that two key
distinctions compel the conclusion that Scott is not a defendant in the Pennsylvania
Action ―by reason of‖ his role as a former New Milso officer and director. Those two
distinctions are that, unlike Harry Pontone: (1) Scott has not been expressly accused of a
breach of fiduciary duty in the Pennsylvania Action; and (2) Scott was not serving as an
officer or director at the time of the alleged misconduct. Having re-examined the
amended complaint in the Pennsylvania Action, I find that, notwithstanding these
distinctions raised by New Milso, Scott was made a party to the Pennsylvania Action ―by
reason of‖ his former corporate office.
As to the first distinction, although it is true that the Pennsylvania Plaintiffs have
not brought an express count for breach of fiduciary duty against Scott Pontone, the
99
Pontone v. Milso Indus. Corp., C.A. No. 7615-VCP, at 64-72 (Del. Ch. Jan. 17,
2013) (TRANSCRIPT).
48
claims they have asserted against him—including for breach of contract, tortious
interference with contract, unfair competition, unjust enrichment, and trademark
infringement—are nonetheless inextricably intertwined with and based on his former role
as an officer of New Milso. In that regard, the gravamen of the allegations in the
Pennsylvania Complaint is that Scott and Harry Pontone engaged in a wrongful scheme
to divert employees and customers away from New Milso and toward Batesville, and that
this scheme was facilitated by the confidential proprietary and trade secret information
they acquired from serving as directors and officers of New Milso.
In its factual background, the Pennsylvania Complaint emphasizes that Scott
played a central and important role in the management and operations of York and New
Milso during his time as an officer of those companies. It also states that:
In their capacities as, respectively, President and Executive
Vice-President, Harry and Scott had continuous and
unrestricted access to highly proprietary confidential
information and trade secrets of Plaintiffs, including, but not
limited to: information concerning their past, present and
prospective business contacts; past, present and prospective
customers; customer lists, including key customer contact
information; customer purchasing histories, trends and
requirements; sales information; distribution information;
information regarding Plaintiffs‘ marketing strategies and
other marketing information; information regarding
employees, including the terms of employment and
contractual covenants; and information regarding Plaintiffs‘
internal policies and practices.100
In describing the alleged wrongful scheme perpetrated by Scott and Harry
Pontone, the Pennsylvania Complaint alleges that ―[o]nce Scott . . . joined Batesville, [he]
100
Compl. Ex. 1 ¶ 40.
49
moved quickly—with Harry‘s acquiescence and assistance—to use the customer contacts
and relationships, and the confidential and proprietary information regarding customer
requirements, pricing and discounts that they gained access to while employed by
Plaintiffs, to target the largest accounts Harry handled . . . .‖101 The Pennsylvania
Plaintiffs‘ allegation that Scott misappropriated confidential and proprietary information
learned during his time as a director and officer underlie nearly all of the claims they
assert against him.
For example, in support of their breach of contract claim against Scott, the
Pennsylvania Plaintiffs allege that ―Scott Pontone breached the confidentiality provisions
of the APA (Section 12.1) and his Employment Agreement (Section 4.01) by, inter alia,
disclosing to Batesville Plaintiffs‘ customer lists and customer information, trade secrets
and other proprietary information.‖102 In support of their unfair competition claim
against all of the defendants in the Pennsylvania Action, the Pennsylvania Plaintiffs
allege that ―Defendants‘ misconduct described above—including, but not limited to,
Defendants‘ misappropriation of Plaintiffs‘ customer lists, requirements, and other
confidential information, [and] Defendants‘ use thereof to solicit Plaintiffs‘ customers
and employees . . . —constitutes unfair methods of competition.‖103 And, in support of
their unjust enrichment claim against all defendants, the Pennsylvania Plaintiffs allege
that ―[a]s a result of the actions of Defendants alleged above, including but not limited to
101
Id. ¶ 120.
102
Id. ¶ 128.
103
Id. ¶ 186.
50
their . . . improper misappropriation of Plaintiffs‘ business relationships, business
contacts, and proprietary information, Defendants have profited at the expense of
Plaintiffs.‖104
This Court has held previously that where the claims asserted against a defendant
in an action are based on the misuse of confidential information that the defendant
learned in his or her official corporate capacity, that action qualifies as being asserted ―by
reason of‖ that corporate capacity.105 Based on this analysis, I find that the claims
asserted against Scott in the Pennsylvania Action are based largely on his misuse and
misappropriation of confidential and proprietary information that he learned in his
capacity as an officer or director of New Milso. This is sufficient to support the
conclusion that Scott was made a party to the Pennsylvania Action ―by reason of‖ his
former role as a New Milso officer or director, even in the absence of a claim against him
for breach of fiduciary duty.
104
Id. ¶ 192.
105
Brown v. LiveOps, Inc., 903 A.2d 324, 330 (Del. Ch. 2006) (concluding that
underlying claims arose ―by reason of the fact‖ that plaintiff was a director or
officer of defendant because ―[t]he gravamen of the underlying complaint is that
[plaintiff] had access to proprietary information by reason of the fact that he was a
director and officer of [defendant] and that he wrongly used that information for
his personal benefit.‖); see also Perconti v. Thornton Oil Corp., 2002 WL 982419,
at *7 (Del. Ch. May 3, 2002) (holding that the relevant inquiry for purposes of the
―by reason of‖ standard ―is into whether the [wrongful] scheme is alleged to have
employed the corporate powers (or, for example, confidential inside information
acquired through the corporate status) conferred upon the officer by virtue of his
status‖).
51
In addition, I note that, although the Pennsylvania Plaintiffs have not asserted an
express claim for breach of fiduciary duty against Scott, the complaint contains
allegations suggesting that he, in fact, did owe such a duty to the Pennsylvania Plaintiffs
and arguably raising an inference that he breached that duty through the wrongful
conduct challenged in the complaint. In that regard, the Pennsylvania Complaint asserts
that ―as with Harry, the fiduciary duty and confidentiality provisions set forth in Section
12.1 of the APA and Sections 1.07 and 4.01 of Scott‘s Employment Agreement continue
indefinitely.‖106 The Pennsylvania Complaint further alleges that Section 1.07 of Scott‘s
Employment Agreement imposed on him ―a fiduciary duty of loyalty.‖107 The
Pennsylvania Complaint also asserts that ―in addition to his contractual obligations to
Plaintiffs, Scott was also subject to certain common law obligations to Plaintiffs,
including the duty of loyalty, a fiduciary duty as an officer, and the duty to maintain the
confidentiality of Plaintiffs‘ confidential and proprietary information.‖108 These
allegations, when coupled with the Pennsylvania Plaintiffs‘ claims that Scott misused the
confidential and proprietary information that he learned as an officer and director for his
own benefit and to his unjust enrichment, arguably raise an inference that he breached his
fiduciary duties. Particularly in light of these fiduciary allegations in the Pennsylvania
Complaint, I reject as hypertechnical and overly formalistic Defendants‘ argument that
106
Compl. Ex. 1 ¶ 35.
107
Id. ¶¶ 28, 34.
108
Id. ¶ 36.
52
Scott is not a party to the Pennsylvania Action ―by reason of‖ his former corporate office
because no express claim for breach of fiduciary duty has been raised against him.109
As to the second distinction identified by Defendants, although it is true that Scott
Pontone was no longer an officer or director of Defendants when the alleged wrongful
scheme to usurp their customers and employees for Batesville commenced, I find that the
claims challenging Scott‘s participation in that scheme nonetheless arise by virtue of his
former position as an officer and director of New Milso. This is so because the
confidential and proprietary information that allegedly enabled and facilitated the
wrongdoing was acquired by Scott during his tenure as an officer and director. Notably,
the Pennsylvania Complaint specifically avers that the confidential and proprietary
information acquired by Scott during his employment with Defendants and later allegedly
misused by him remained valuable despite the passage of time:
Consistent with the tightly-knit nature of the death care
industry, . . . the confidential nature of information regarding
[Plaintiffs‘] customers—particularly with respect to key
contact information and preferences—did not become stale
merely because of the passage of time. Likewise, given the
extensive continuity of the product mix in the casket industry,
the confidential nature of information regarding matters such
as product preferences and purchasing histories did not
quickly become stale. Thus, much of the confidential and
proprietary information to which Scott had access before his
separation from Plaintiffs has retained its confidential and
109
See Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761 (Del. Ch. June 18, 2002)
(rejecting defendant‘s argument that because it did not specifically allege that
plaintiff had committed a breach of fiduciary duty in the underlying action, that
action was not a proper subject of advancement).
53
proprietary status—and value to Plaintiffs—to the present
day.110
For the foregoing reasons, I conclude that Scott, like his father, was made a party
to the Pennsylvania Action ―by reason of‖ his former role as a director or officer of New
Milso. Therefore, under Section 2.15(b) of New Milso‘s bylaws, Scott is entitled to
advancement for the expenses he incurs ―in defending‖ that action.111
2. Is Scott entitled to advancement for his counterclaims in the Pennsylvania
Action?
Among other expenses, Scott seeks advancement for the litigation expenses he has
incurred in connection with the counterclaims he has asserted in the Pennsylvania Action.
Scott has asserted a number of counterclaims against the Pennsylvania Plaintiffs, all but
two of which mirror counterclaims that also were asserted by Harry Pontone. 112 In Harry
Pontone‘s advancement proceeding, I ruled on the issues pertaining to Harry‘s
entitlement to advancement for his counterclaims in a Memorandum Opinion that
addressed Defendants‘ exceptions to the Second Report of the Special Master appointed
in that proceeding.113 The parties agree that my ruling as to which of Harry‘s
counterclaims are subject to advancement is controlling as to any corresponding
counterclaims that have been asserted by Scott Pontone.114 Therefore, I adopt that ruling
for purposes of this case115 and need not address those counterclaims further. The two
counterclaims Scott has asserted that do not correspond to counterclaims asserted by
110
Compl. Ex. 1 ¶ 35.
111
Choa Aff. I Ex. 1 § 2.15(b).
54
Harry Pontone are Scott‘s counterclaims for defamation and for false and misleading
advertising.
In Citadel Holding Corp. v. Roven,116 the Delaware Supreme Court considered
whether the ―in defending‖ language in an advancement provision extended to the
assertion of various counterclaims. Adopting a broad reading of the phrase ―in defense‖
in the litigation context, the Court held that advancement was required for the
compulsory counterclaims at issue in that case, because they were ―necessarily part of the
same dispute and were advanced to defeat, or offset‖ the affirmative claim.117 Under the
test articulated in Roven, and refined by subsequent case law,118 a counterclaim will be
112
Specifically, both Scott and Harry Pontone asserted against the Pennsylvania
Plaintiffs counterclaims for breach of contract, breach of the implied covenant of
good faith and fair dealing, tortious interference with prospective business
advantage, unjust enrichment, unfair competition, abuse of process, and
declaratory judgment and injunctive relief on restrictive covenants. Choa Aff. in
Supp. of Pl.‘s Br. in Supp. of Mot. for Partial Summ. J. (―Choa Aff. II‖) Ex. 4.
113
Pontone v. Milso Indus. Corp., 2014 WL 2439973 (Del. Ch. May 29, 2014).
114
See Defs.‘ Answering Br. in Opp‘n to Pl.‘s Mot. for Partial Summ. J. 8-9; Pl.‘s
Reply Br. in Further Supp. of His Mot. for Partial Summ. J. 20.
115
Harry Pontone has moved for reargument on the Court‘s May 29, 2014 ruling, and
that motion remains pending. Nothing in this Opinion is intended to reflect the
Court‘s disposition as to the motion for reargument.
116
603 A.2d 818 (Del. 1992).
117
Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992).
118
See, e.g., Zaman v. Amedeo Hldgs., Inc., 2008 WL 2168397, at *35 (Del. Ch. May
23, 2008); Reinhard & Kreinberg v. Dow Chem. Co., 2008 WL 868108, at *3
(Del. Ch. Mar. 28, 2008); Gentile v. SinglePoint Fin., Inc., 787 A.2d 102, 109-10
(Del. Ch. 2001).
55
considered to be ―defending‖ and thus advanceable, if it is: (1) ―necessarily part of the
same dispute,‖ in the sense that it qualifies as a compulsory counterclaim under the
prevailing Delaware and federal procedural standard, and (2) ―advanced to defeat, or
offset‖ the affirmative claims.119 Under Federal Rule of Civil Procedure 13 and its
Delaware analog, a counterclaim is compulsory if it, among other requirements, ―arises
out of the transaction or occurrence that is the subject matter of the opposing party‘s
claim.‖120
In light of the foregoing standard, I next consider whether Scott is entitled to
receive advancement for his counterclaims for defamation and for false and misleading
advertising.
a. Defamation
Scott has asserted a counterclaim for defamation against the Pennsylvania
Plaintiffs, alleging that, on numerous occasions, they ―knowingly caused false,
misleading, and untrue statements to be made or published to customers and news outlets
or agencies with the intent of defaming Scott Pontone.‖121 Among the specific examples
provided in the counterclaim, Scott asserts that ―on or about September 21, 2010, the
Casket & Funeral Supply Association of America (―CFSA‖) published an email with a
119
See Pontone v. Milso Indus. Corp., 2014 WL 2439973, at *7 (Del. Ch. May 29,
2014); Paolino v. Mace Sec. Int’l, Inc., 985 A.2d 392, 399-400 (Del. Ch. 2009).
120
Fed. R. Civ. P. 13(a)(1); accord Del. Ct. Ch. R. 13(a).
121
Choa Aff. II Ex. 4 ¶ 259.
56
statement that CFSA had confirmed information regarding the instant lawsuit.‖122 He
further alleges that:
The statement was made and confirmed, on information and
belief, by Plaintiffs‘ directors, officers, agents,
representatives, or employees. The statement that was
published in the CFSA email and newsletter was false, untrue,
misleading, and defamatory. Plaintiffs were aware that Scott
Pontone‘s non-compete expired May 30, 2010, yet they
nonetheless caused an untrue statement regarding the instant
lawsuit to be published with reckless disregard for the truth
and with the malicious intent of injuring, or otherwise causing
harm and loss to Scott Pontone‘s trade, business, or
profession.123
In Duthie v. CorSolutions Medical, Inc.,124 this Court addressed whether the
plaintiffs in that action, whom the Court had found to be entitled to advancement in
defending underlying litigation brought by the defendants, were ―entitled to advancement
of fees incurred in affirmatively asserting defamation claims against the Defendants
based on public statements which the Defendants have made about them regarding the
matters already in litigation.‖125 The Court held that:
Where a party holding a right to advancement is the target of
defamation by his adversary, the ability to ―defend oneself‖
includes the capacity to respond to such attacks by filing
defamation actions. Because the alleged defamatory attacks
reprise the same charges as advanced in the litigation and
because the adverse party has already brought litigation
involving the same allegations, it is neither practicable nor
122
Id. ¶ 262.
123
Id. ¶ 263.
124
2008 WL 4173850 (Del. Ch. Sept. 10, 2008).
125
Id. at *1.
57
reasonable to attempt to draw some line defining which
defensive strategy, even though it may involve an assertion of
affirmative claims, is appropriate.126
The Court concluded that the counterclaims for defamation in Duthie were a ―necessary
part of the same dispute‖ and awarded the plaintiffs advancement of their fees and
expenses incurred in asserting those claims.
I consider the facts relevant to Scott‘s defamation counterclaim to be analogous to
the facts surrounding the defamation counterclaims at issue in Duthie. As in Duthie,
Scott‘s counterclaim alleges that Defendants committed defamation by, inter alia,
spreading false statements echoing the very charges Defendants are advancing in the
underlying litigation, including that Scott has acted in violation of the contractual
obligations he owes to them. Consistent with the ruling in Duthie, therefore, I conclude
that Scott‘s defamation counterclaim is compulsory and a ―necessary part of the same
dispute.‖ Success on that counterclaim also would likely produce an offsetting damages
award and negate any of the Pennsylvania Plaintiffs‘ contractual claims premised on
Scott‘s non-competition obligations extending beyond May 30, 2010. Thus, I hold that
Scott‘s defamation counterclaim was asserted ―in defending‖ the underlying action, and
that he is entitled to advancement from New Milso for his fees and expenses incurred in
connection with that counterclaim.
126
Id.
58
b. False and misleading advertising
Scott also has asserted a counterclaim for false and misleading advertising against
the Pennsylvania Plaintiffs. In that counterclaim, Scott alleges that the Pennsylvania
Plaintiffs ―engaged in acts of false, deceptive, and misleading advertising,‖ by, among
other things: giving false information about their headquarters, implying that Harry
Pontone remained affiliated with the Company after he had resigned, implying that
members of the Pontone family had leadership roles in the Matthews casket division
when they did not, distributing caskets made by others as their own, and placing improper
designations of origin on their products.127 The counterclaim further alleges that
―[c]onsumers have been confused by Plaintiffs false and misleading advertising‖ and that
it has damaged Scott, PCC, and consumers.128
Having considered Scott‘s counterclaim for false and misleading advertising in
relation to the affirmative claims asserted against him in the Pennsylvania Action, I
conclude that his counterclaim is not sufficiently related to the affirmative claims to be
considered compulsory or a ―necessary part of the same dispute.‖
As previously noted, under Federal Rule of Civil Procedure 13(a) and its Delaware
analog, a counterclaim is compulsory if it, among other requirements, ―arises out of the
transaction or occurrence that is the subject matter of the opposing party‘s claim.‖ 129 The
test used to determine whether a claim and counterclaim arise out of the same
127
Choa Aff. II Ex. 4 ¶ 294.
128
Id. ¶¶ 296-97.
129
Fed. R. Civ. P. 13(a)(1); accord Del. Ct. Ch. R. 13(a).
59
―transaction or occurrence‖ is whether the two bear a ―logical relationship.‖130 Whether
two claims bear a logical relationship to one another may be informed by considerations
such as whether they share issues of fact and law in common or would involve
presentation of the same evidence.131
Scott argues that his counterclaim for false and misleading advertising is
necessarily part of the same dispute as the affirmative claims because, if he proves that
counterclaim, it will help to demonstrate that any reduction in New Milso‘s business is
the result of its own poor business practices—in deceiving and confusing customers—
rather than the result of any wrongful scheme by him. I find that argument insufficient to
demonstrate a ―logical relationship‖ for purposes of establishing that the counterclaim is
compulsory.
The legal and factual issues implicated by the affirmative claims—including
whether Scott breached his contractual duties to New Milso, tortiously interfered in New
Milso‘s contractual relations, infringed on its trademark, engaged in unfair competition,
or was unjustly enriched—are largely distinct from those implicated by a false and
misleading advertising claim against New Milso. In that regard, I note that, in order to
130
See Mott v. State, 49 A.3d 1186, 1188–89 & n.8 (Del. 2012); Pontone v. Milso
Indus. Corp., 2014 WL 2439973, at *9 (Del. Ch. May 29, 2014).
131
See Mott, 49 A.3d at 1188–89 & n.8; Pontone, 2014 WL 2439973, at *9;
Transamerica Occidental Life Ins. Co. v. Aviation Office of Am., Inc., 292 F.3d
384, 389–90 (3d Cir. 2002).
60
establish a false advertising claim under the Lanham Act,132 upon which Scott has based
his counterclaim,133 a plaintiff must prove:
1) that the defendant has made false or misleading statements
as to his own product [or another‘s]; 2) that there is actual
deception or at least a tendency to deceive a substantial
portion of the intended audience; 3) that the deception is
material in that it is likely to influence purchasing decisions;
4) that the advertised goods traveled in interstate commerce;
and 5) that there is a likelihood of injury to the plaintiff in
terms of declining sales, loss of good will, etc.134
At least the first four of those elements are wholly distinct from the elements at issue in
the Pennsylvania Plaintiffs‘ affirmative claims. This lack of overlap also suggests that
Scott‘s assertion of the false and misleading advertising claim in the Pennsylvania Action
does not substantially promote judicial economy, a policy underlying Rule 13(a).135
For the foregoing reasons, I conclude that Scott‘s counterclaim for false and
misleading advertising is not logically related to the affirmative claims in the
Pennsylvania Action and, therefore, is not compulsory or a ―necessary part of the same
dispute.‖ Assertion of that counterclaim, therefore, does not qualify as ―defending‖ for
purposes of New Milso‘s bylaws, and expenses incurred by Scott in connection with the
counterclaim are not subject to advancement.
132
15 U.S.C. § 1125.
133
Choa Aff. II Ex. 14 at 24-25.
134
Pernod Ricard USA, LLC v. Bacardi U.S.A., Inc., 653 F.3d 241, 248 (3d Cir.
2011).
135
Transamerica Occidental Life Ins. Co., 292 F.3d at 389.
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D. Fees on Fees
Section 2.15(c) of New Milso‘s bylaws provides that, if New Milso does not
timely pay a request for indemnification or advancement, the indemnitee may commence
an ―Indemnitee Action‖ to recover the unpaid amount and ―if successful in whole or in
part, the indemnitee shall also be entitled to be paid the expense of bringing and pursuing
such Indemnitee Action.‖136 Although a literal reading of New Milso‘s bylaw suggests
that Scott is entitled to indemnification for all ―fees on fees‖ related to this advancement
action if he is even partially successful, this Court, under Section 145 of the DGCL, will
―only award that amount of fees that is reasonable in relation to the results obtained.‖137
Determining an appropriate award of ―fees on fees‖ based on the results obtained
by a plaintiff in an advancement or indemnification action ―is a nonscientific inquiry that
simply involves a reasoned consideration of the issues at stake in the case and an
assessment of the plaintiffs‘ level of success.‖138 In this action, Scott has succeeded in
establishing his entitlement to advancement for the fees and expenses he has incurred and
will incur in the Pennsylvania Action that have not yet been paid by Batesville. The
record indicates that the amount of those fees over time is likely to be substantial. On the
other hand, Scott has failed to demonstrate that he is entitled to advancement for
136
Choa Aff. I Ex. 1 § 2.15(c)
137
Schoon v. Troy Corp., 948 A.2d 1157, 1176 (Del. Ch. 2008) (quoting Fasciana v.
Elec. Data Sys. Corp., 829 A.2d 178, 185 (Del. Ch. 2003)) (internal quotation
marks omitted).
138
Zaman v. Amedeo Hldgs., Inc., 2008 WL 2168397, at *39 (Del. Ch. May 23,
2008).
62
previously incurred fees and expenses that Batesville already has funded. Based on the
level of Scott‘s success in this action, including on Defendants‘ motion to dismiss and his
motion for partial summary judgment, I hold that he is entitled to 75% of the reasonable
―fees on fees‖ that he has incurred in connection with this advancement proceeding.
E. Prejudgment Interest
―In Delaware, prejudgment interest is awarded as a matter of right.‖139 A party
from whom advancement is improperly withheld ―is entitled to interest computed from
the date of demand,‖ defined as the date on which the party ―specified the amount of
reimbursement demanded and produced his written promise to pay.‖140 Scott made an
initial demand for advancement and provided an undertaking to New Milso on July 24,
2013 and has made additional monthly requests for advancement since that time, all of
which New Milso has rejected.141 Each of those requests specified the monetary amount
of advancement requested. Thus, I hold that, as to any legal expenses Scott has incurred
in the Pennsylvania Action since January 2013 that have not yet been paid by Batesville,
Scott is entitled to receive prejudgment interest from New Milso at the legal rate running
from July 24, 2013 or the date that advancement for such legal expenses was requested
from New Milso, whichever is later. For future advancement requests from Scott, New
139
Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 826 (Del. 1992) (citing Moskowitz v.
Mayor & Council of Wilm., 391 A.2d 209 (Del. 1978)).
140
Roven, 603 A.2d at 826 & n.10.
141
Choa Aff. II Ex. 5-9, 20-21.
63
Milso shall have a commercially reasonable period of ten days to provide the requested
advancement before prejudgment interest shall begin to accrue.
IV. CONCLUSION
For the reasons stated in this Opinion, I grant in part and deny in part Defendants‘
motion to dismiss for lack of standing. I grant that motion in that I hold Scott lacks
standing to pursue advancement for legal expenses he has incurred in the Pennsylvania
Action for which he already has received funding from Batesville. I deny the motion in
that I hold Scott has standing to pursue advancement for legal expenses he has incurred
and will incur in the Pennsylvania Action for which he has not received funding from
Batesville.
I grant in part and deny in part Scott‘s motion for partial summary judgment. I
grant that motion in that I hold Scott is entitled to receive advancement from New Milso
for his expenses incurred in the Pennsylvania Action, subject to the limitations specified
in this Opinion. I deny the motion in that there remains a genuine issue of material fact
as to whether Scott is entitled to receive mandatory advancement from Defendant York.
Finally, I award ―fees on fees‖ and prejudgment interest as specified herein.
Counsel for Plaintiff shall circulate a proposed form of order implementing these
rulings and file the proposed order within fifteen days of the date of this Opinion.142 If
the parties are unable to agree on the form of order, they shall file their respective
142
The Court will hold a telephone conference with counsel on August 27, 2014 at
11:00 a.m. to discuss certain preliminary matters regarding the form of order.
64
proposal with a supporting letter of not more than five pages in length within fifteen days
of this Opinion.
65