Meyers v. Quiz-Dia LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PATRICK E. MEYERS et al., )
)
Plaintiffs, )
)
v. ) C.A. No. 9878-VCL
)
QUIZ-DIA LLC et al., )
)
Defendants. )
)
)
QUIZ-DIA LLC et al., )
)
Third-Party Plaintiffs, )
)
v. )
)
ROCKFORD MANAGER LLC et al., )
)
Third-Party Defendants. )
MEMORANDUM OPINION
Date Submitted: April 7, 2017
Date Decided: June 6, 2017
John T. Dorsey, Richard J. Thomas, Emily V. Burton, YOUNG CONAWAY STARGATT
& TAYLOR, LLP, Wilmington, Delaware; Bruce S. Bennett, Christopher Lovrien,
Nathaniel P. Garrett, Sarah G. Conway, JONES DAY, Los Angeles, California; Counsel
for Plaintiffs.
Brock E. Czeschin, Blake Rohrbacher, Susan M. Hannigan, Elizabeth A. DeFelice, Brian
F. Morris, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for
Defendants and Third-Party Plaintiffs.
LASTER, V.C.
In their operating agreements, defendants Quiz-DIA LLC, Quizmark LLC, and QCE
Gift Card LLC (collectively, the “Subs”) granted their officers a right to mandatory
indemnification. Plaintiffs Greg MacDonald and Dennis Smythe claim that they are
entitled to indemnification from each of the Subs for losses they incurred in connection
with a lawsuit filed in Colorado (the “Colorado Action”). At this point, the Colorado Action
has been dismissed, and the order dismissing the case has become final.
MacDonald and Smythe successfully defended the Colorado Action. They are
therefore entitled to indemnification from Quizmark and QCE Gift Card for losses they
incurred in connection with the Colorado Action, which they suffered by reason of their
status of former officers of the Subs. The covered losses encompass the expenses that
MacDonald and Smythe incurred first investigating and later defending against the claims
that were asserted against them in the Colorado Action. Summary judgment on these issues
is entered in favor of MacDonald and Smythe and against Quizmark and QCE Gift Card.
MacDonald and Smythe are not entitled to indemnification from Quiz-DIA. The
right to mandatory indemnification in Quiz-DIA’s operating agreement only extended to
members and officers of that entity. MacDonald and Smythe were neither. Summary
judgment on this issue is entered in favor of Quiz-DIA and against MacDonald and Smythe.
I. FACTUAL BACKGROUND
The issues addressed in this decision were presented on cross motions for summary
judgment. The parties have not identified any material disputes of fact, so the cross motions
1
are deemed “the equivalent of a stipulation for decision on the merits based on the record
submitted with the motions.”1
A. The Parties
At the time of the events giving rise to this decision, QCE LLC (“OpCo”) was the
primary operating entity for the Quiznos sandwich shop empire. The Subs were direct and
indirect subsidiaries of OpCo. Quiz-DIA and Quizmark were Delaware limited liability
companies. QCE Gift Card was an Arizona limited liability company.
MacDonald was the Chief Executive Officer of OpCo. Smythe was the Chief
Financial Officer of OpCo. MacDonald and Smythe claim that they were also officers of
all of the other entities in the Quiznos enterprise, including the Subs.
Each of the Subs had an operating agreement that granted its officers a right to
mandatory indemnification. Framed in identical terms, the provisions stated as follows:
To the full extent permitted by applicable law, a Member or Officer shall be
entitled to indemnification from the Company for any loss, damage or claim
incurred by such Member or Officer by reason of any act or omission
performed or omitted by such Member or Officer in good faith on behalf of
the Company and in a manner reasonably believed to be within the scope of
the authority conferred on such Member or Officer by this Agreement, except
that no Member or Officer shall be entitled to be indemnified in respect of
any loss, damage or claim incurred by such Member or Officer by reason of
willful misconduct with respect to such acts or omissions; provided,
however, that any indemnity under this Section . . . shall be provided out of
and to the extent of Company assets only, and the Member shall not have
personal liability on account thereof.2
1
Ct. Ch. R. 56(h).
2
Ex. 7, § 17 (Quiz-DIA); Ex. 8, § 17 (Quizmark); Ex. 9, § 16 (QCE Gift Card).
Both sides submitted numerous exhibits in support of their cross motions. Exhibits
2
Because the three agreements are identical, this decision refers to the provisions singularly
as the “Indemnification Provision.”3
B. The Threatened Claims
In 2006, Quiznos engaged in a leveraged recapitalization. To fund the transaction,
OpCo borrowed a total of $875 million. OpCo subsequently suffered financial reversals.
By 2012, various funds affiliated with Avenue Capital Management II, L.P. and
Fortress Investment Group LLC (the “Funds”) had accumulated a substantial position in
OpCo’s debt. Their holdings gave them the power to declare a default under OpCo’s loan
agreements and pursue remedies as creditors. To neutralize that threat, Quiznos entered
into a complex out-of-court restructuring with its creditors (the “Restructuring”). In
practical terms, the Restructuring transferred ultimate ownership of Quiznos and its
subsidiaries, including the Subs, to the Funds.
MacDonald and Smythe left Quiznos in July 2012. In summer 2013, the Funds
asked MacDonald and Smythe to attend meetings with Fund representatives in New York
City and Denver. Suspecting that the Funds were contemplating litigation, MacDonald and
Smythe retained Jones Day to investigate potential claims that the Funds might pursue. At
designated by letter (e.g., Ex. Q) are attached to the Transmittal Affidavit of Richard J.
Thomas. Exhibits designated by number (e.g., Ex. 9) are attached the Transmittal Affidavit
of Blake Rohrbacher.
3
After disputes arose between the parties, the defendants amended the Subs’
operating agreements. The defendants no longer argue that the new provisions govern
MacDonald and Smythe’s rights to indemnification.
3
the meetings, the Funds interrogated MacDonald and Smythe about the Restructuring, and
they expressed frustration with the Restructuring and Quiznos’ post-transaction
performance.
On March 14, 2014, OpCo and many of its affiliates—but not the Subs—filed for
bankruptcy. Their filings disclosed that “[t]he Reorganized Debtors [and the Funds]
w[ould] enter into [a] Specified Litigation Agreement” to pursue “Specified Litigation
Claims” against various individuals, including MacDonald and Smythe.4 The plan of
reorganization defined the term “Specified Litigation Claims” as encompassing “all claims
and causes of action made, or which could be made, on behalf of the Debtors [or the Funds]
against” the named individuals. An exhibit to the plan stated that the Funds intended to
pursue “any claims and rights they or their affiliates may have against former management
and former owners of the Company relating to the [Restructuring] and any forecasts,
projections, models, representations, or warranties made or provided in connection
therewith . . . .”5
On July 1, 2014, Jones Day demanded indemnification and advancement on behalf
of MacDonald and Smythe for “all expenses incurred in connection with the threatened
claims.”6 The letter asked the Subs to “respond within 10 days of th[e] letter indicating
4
Ex. O, at 8 of 265.
5
Id. at 91, 207.
6
Ex. 22.
4
whether [they] agree[d] to indemnify [MacDonald and Smythe] and advance costs.” 7 On
July 10, just before the ten-day period expired, the plaintiffs filed this lawsuit. In their
original complaint, MacDonald and Smythe sought indemnification and advancement
under a range of agreements, but not the Subs’ operating agreements.
C. The Colorado Action
Less than two weeks later, on July 22, 2014, the Funds filed the Colorado Action.
The complaint alleged that MacDonald and Smythe induced the Funds to participate in the
Restructuring by creating financial projections that “made it appear that the debt burden
and capital structure that would remain in place post-[Restructuring] would be sustainable
and appropriate.”8 It also alleged that the projections that MacDonald and Smythe provided
were false or misleading. The Funds asserted claims for violations of the federal securities
laws and common law fraud.
On September 17, 2015, the United States District Court for the District of Colorado
(the “District Court”) dismissed the Colorado Action, holding that federal jurisdiction did
not exist because the claims did not fall within the scope of the Securities Exchange Act of
1934. The Funds appealed the ruling to the United States Court of Appeals for the Tenth
Circuit (the “Court of Appeals”).
7
Id.
8
Ex. 45, ¶ 65.
5
D. The Cross Motions
On September 9, 2015, the plaintiffs amended their complaint to include claims for
indemnification and advancement under the Subs’ operating agreements. On June 22,
2016, the Subs moved for summary judgment. MacDonald and Smythe cross-moved for
summary judgment.
On November 30, 2016, this court dismissed the claims for indemnification as
premature (the “Delaware Dismissal Order”).9 The order explained that because the Court
of Appeals had not yet ruled, the disposition of the claims in the Colorado Action was not
yet final for purposes of indemnification under Delaware law.
Less than two weeks later, on December 13, 2016, the Court of Appeals affirmed
the District Court’s dismissal of the Colorado Action. On December 14, MacDonald and
Smythe moved to vacate the Delaware Dismissal Order. By order dated January 10, 2017,
the court denied their motion as premature because the Funds could still petition the United
States Supreme Court for a writ of certiorari.10 The order also described a path forward for
the litigation:
If the Funds petition for certiorari and the United States Supreme Court
grants it, then this court will rule on [MacDonald and Smythe’s] entitlement
to advancement. If the writ is not sought or if the petition is denied, then this
court could rule on [MacDonald and Smythe’s] entitlement to
9
Dkt. 200.
10
See Dkt. 209.
6
indemnification, assuming [MacDonald and Smythe] still want the court to
do so in the context of this action and on the current record.11
On March 13, 2017, the deadline to petition for a writ of certiorari passed. The Funds
did not file a petition. Instead, they filed a new lawsuit in Colorado state court that advanced
substantially similar allegations against MacDonald and Smythe.12 With the passing of the
deadline, the dismissal of the Colorado Action became final for purposes of
indemnification under Delaware law, and MacDonald and Smythe’s claims for
indemnification became ripe.
II. LEGAL ANALYSIS
Summary judgment may be granted when the record shows that “there is no genuine
issue as to any material fact and that the moving party is entitled to a judgment as a matter
of law.”13
A. The Need For A New Action
As a threshold procedural objection, the Subs argue that MacDonald and Smythe
can no longer seek indemnification in this action because this court dismissed their claims
without prejudice. They assert that MacDonald and Smythe must file a separate action
asserting a claim for indemnification and that the parties must brief the matter anew. That
11
Id. at 5.
12
See Avenue Capital Mgmt. II, L.P. v. Schaden, No. 2017-CV-30165 (Colo. Dist.
Ct.).
13
Ct. Ch. R. 56(c).
7
would be a waste of judicial and litigant resources. To dispose of this issue, this decision
grants relief from the Delaware Dismissal Order.
“On motion and upon such terms as are just, the Court may relieve a party or a
party’s legal representative from a final judgment, order, or proceeding” for any “reason
justifying relief from the operation of the judgment.”14 “The decision to vacate a dismissal
and reopen a judgment is left to the discretion of the trial court.” 15 In exercising its
discretion, the court “construe[s] and administer[s] [the Rules] to secure the just, speedy
and inexpensive determination of every proceeding.”16
Vacating the Delaware Dismissal Order is just under the circumstances. The parties
have fully briefed the scope of the Subs’ indemnification obligation. The Subs have not
identified any prejudice that would ensue if the court ruled on the issues now. When the
court issued the Delaware Dismissal Order, the court recognized the possibility of issuing
a future ruling on MacDonald and Smythe’s rights to indemnification in this action, once
the issue became ripe.17 In a letter to the court dated March 15, 2017, MacDonald and
Smythe asked to proceed on the existing record.18 The Subs did not object. Nor did they
object after the court requested supplemental briefing to bring the matter current.
14
Ct. Ch. R. 60(b).
15
Neal v. Neal, 2005 WL 3986089, at *1 (Del. Dec. 19, 2005) (TABLE).
16
Ct. Ch. R. 1.
17
Dkt. 209, at 5.
18
See Dkt. 212.
8
“Given these realities, it is not clear what substantive purpose is served by [the
Subs’] argument, other than to proliferate complaints and increase court costs. . . . In this
particular case, it would disserve judicial and litigative efficiency to require separate
complaints.”19 The Delaware Dismissal Order is therefore vacated so that the court can rule
on the cross motions for summary judgment that the parties have briefed and presented.
B. Governing Principles Of Contract Interpretation
Quiz-DIA and Quizmark are Delaware limited liability companies, and their
operating agreements are governed by Delaware law. The Delaware Limited Liability
Company Act authorizes limited liability companies to provide indemnification subject
only to the “standards and restrictions” imposed by the company’s operating agreement.20
The scope of a party’s right to indemnification under an operating agreement is therefore
governed by contractual principles.21
When interpreting a contract governed by Delaware law, “the role of a court is to
effectuate the parties’ intent.”22 “Unless there is ambiguity, Delaware courts interpret
contract terms according to their plain, ordinary meaning.”23 “If a writing is plain and clear
19
Nagy v. Bistricer, 770 A.2d 43, 57-58 (Del. Ch. 2000) (Strine, V.C.).
20
6 Del. C. § 18-108.
21
Bernstein v. TractManager, Inc., 953 A.2d 1003, 1010 (Del. Ch. 2007); Senior
Tour Players 207 Mgmt. Co. LLC v. Golftown 207 Hldg. Co., LLC, 853 A.2d 124, 127
(Del. Ch. 2004).
22
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).
23
Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012).
9
on its face, i.e., its language conveys an unmistakable meaning, the writing itself is the sole
source for gaining an understanding of intent.”24
QCE Gift Card is an Arizona limited liability company, and its operating agreement
is governed by Arizona law. Like the Delaware act, the Arizona Limited Liability Company
Act authorizes limited liability companies to “[m]ake contracts, including contracts of
guaranty, suretyship and indemnification . . . [and] [i]ndemnify a member, manager,
employee, officer or agent or any other person.”25 An Arizona limited liability company’s
indemnification scheme may include “any provision that is not contrary to
law[.]26”Arizona’s principles of contract interpretation parallel Delaware’s.27
24
City Investing Co. Liquidating Tr. v. Cont’l Cas. Co., 624 A.2d 1191, 1198 (Del.
1993).
25
Ariz. Rev. Stat. Ann. § 29-610 (2016) (West).
26
Id. § 29-682.
See Hadley v. Sw. Prop., Inc., 570 P.2d 190, 193 (Ariz. 1977) (“The interpretation
27
of a contract is [a] question of law for the court.”); Goodman v. Newzona Inv. Co., 421
P.2d 318, 320 (Ariz. 1966) (“The intent of the parties, as ascertained by the language used,
must control the interpretation of a contract.”); Jokake Const. Co. v. Elward Const. Co.,
2010 WL 334992, at *3 (Ariz. Ct. App. Jan. 28, 2010) (“The parties’ intent is best
ascertained by the language in the contract itself.”); Isaak v. Mass. Indem. Life Ins. Co.,
623 P.2d 11, 14 (Ariz. 1981) (“A clear and unambiguous contract must be interpreted
according to its terms.”); In re Estate of Lamparella, 109 P.3d 959, 963 (Ariz. Ct. App.
2005) (“A contract is not ambiguous just because the parties to it . . . disagree about its
meaning. . . . Language in a contract is ambiguous only when it can reasonably be
construed to have more than one meaning.” (citations omitted)); Broadband Dynamics,
L.L.C. v. Global Credit Network, L.L.C., 2012 WL 6602392, at *2 (Ariz. Ct. App. Dec. 18,
2012) (holding that courts must “construe contracts as a whole and look to the entire
instrument for the intention of the parties in order to give effect to every word in the
agreement.” (citations omitted)).
10
C. Officer Status
The Indemnification Provision grants indemnification to “Members and Officers.”
MacDonald and Smythe were not members of any of the Subs, so they only can obtain
indemnification if they were officers. Quizmark and QCE Gift Card concede the point.
Quiz-DIA does not. The undisputed evidence establishes as a matter of law that
MacDonald and Smythe were not officers of Quiz-DIA.
Quiz-DIA’s operating agreement provides as follows:
[T]he Officers of the Company shall be designated by the Member. Officers
of the Company may consist of at least a President, a Secretary and a Chief
Financial Officer. . . . The Member may appoint such other Officers and
agents as it shall deem necessary or advisable who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall
be determined from time to time by the Member.28
Quiz-DIA’s sole member was its direct parent, The Quizno’s Master LLC (“MasterCo”).29
The record demonstrates that MasterCo never designated MacDonald or Smythe as
officers of Quiz-DIA. The record contains written consents appointing MacDonald as
President and CEO and Smythe as CFO of thirteen different limited liability companies in
the Quiznos enterprise. Those thirteen companies included QCE Gift Card and Quizmark.
They did not include Quiz-DIA. The record also contains five additional consents in which
MasterCo appointed officers of Quiz-DIA. None of them appointed MacDonald or Smythe.
28
Ex. 7 § 15(a).
29
See Ex. 1; Ex. 7.
11
MacDonald and Smythe contend that they nevertheless served as de facto officers
of Quiz-DIA because they performed “the same functions [for that company] as [they] did
for every other entity.”30 That does not follow. To the contrary, serving as an officer of
Quiz-DIA entailed meeting additional requirements that MacDonald and Smythe never
satisfied. Unlike QCE Gift Card or Quizmark, Quiz-DIA held a Colorado liquor license so
that it could sell alcoholic beverages at its locations in the Denver International Airport.
Quiz-DIA could not obtain the liquor license unless its officers underwent background
checks. MacDonald and Smythe never underwent background checks.
MacDonald and Smythe were not officers of Quiz-DIA. They consequently have no
right to indemnification from that entity. Summary judgment is entered in favor of Quiz-
DIA on MacDonald and Smythe’s claim for indemnification. The remainder of this
decision focuses only on Quizmark and QCE Gift Card.
D. Coverage For The Colorado Action
MacDonald and Smythe only can obtain indemnification for the Colorado Action if
it fell within the scope of the Indemnification Provision. It clearly did.
The Indemnification Provision granted indemnification for “any loss, damage or
claim incurred . . . by reason of any act or omission performed or omitted by such Member
or Officer in good faith on behalf of the Company.” In the corporate context, an action
meets the “by reason of” standard “if there is a nexus or causal connection between any of
30
Smythe Dep. 90-91; accord MacDonald Dep. 58.
12
the underlying proceedings . . . and one’s official corporate capacity, . . . regard[less] [of]
one’s motivation for engaging in that conduct.”31
The Colorado Action attacked MacDonald and Smythe’s involvement in
negotiating the Restructuring and preparing the financial statements and projections that
provided the basis for the Restructuring. The Restructuring was intended to save the entire
Quiznos family of companies from financial failure. The actions that MacDonald and
Smythe took when negotiating the Restructuring and preparing the financial statements and
projections for it were therefore taken on behalf of the entire Quiznos family of companies,
including Quizmark and QCE Gift Card.
Given this fact, MacDonald and Smythe acted “by reason of” their status as CEO
and CFO of Quizmark and QCE Gift Card. Any losses that they suffered in the Colorado
Action were incurred by reason of acts they performed on behalf of the Quiznos family of
companies, including Quizmark and QCE Gift Card. The Indemnification Provision
therefore covers expenses that MacDonald and Smythe incurred in the Colorado Action.
E. Pre-Litigation Expenses
MacDonald and Smythe seek to recover not only expenses that they incurred
defending the Colorado Action, but also expenses they incurred preparing to defend the
claims that they feared the Funds would file. The pre-litigation expenses are covered.
31
Homestore, Inc. v. Tafeen, 888 A.2d 204, 214 (Del. 2005).
13
As noted, the Indemnification Provision granted indemnification for “any loss,
damage or claim incurred . . . by reason of any act or omission performed or omitted by
such Member or Officer in good faith on behalf of the Company.” In this case, MacDonald
and Smythe incurred the costs to hire Jones Day and investigate the claims that the Funds
might bring “by reason of” their actions on behalf of the Quiznos family of companies,
including Quizmark and QCE Gift Card. Those costs were losses within the plain language
of the Indemnification Provision.
In the indemnification context, the concept of losses generally includes not only
fines or judgments, but also the costs of investigation and defense. 32 Given this settled
understanding, it was incumbent upon Quiznos to limit the scope of the Indemnification
Provision if it sought to exclude losses resulting from the costs of investigating claims and
32
See Homestore, 888 A.2d at 211 (“Indemnification encourages corporate service
by capable individuals by protecting their personal financial resources from depletion by
the expenses they incur during an investigation or litigation that results by reason of that
service.”); White v. Curo Tex. Hldgs., LLC, 2016 WL 6091692, at *26 (Del. Ch. Sept. 9,
2016) (holding that covered expenses included costs of investigation); Scharf v. Edgcomb
Corp., 1997 WL 762656, at *1 (holding that indemnitee stated claim to recover expenses
incurred during investigation). Cf. 8 Del. C. § 145(a) (authorizing indemnification for an
“investigative” proceeding); id. § 145(b) (same); id. § 145(c) (providing for mandatory
indemnification when a covered person has been “successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections (a) and (b) of this
section”); Edward P. Welch et al., 1 Folk on the Delaware General Corporation Law §
145.02, at 4-394 (6th ed. 2017) (“[I]n the first edition of this treatise, Professor Folk stated
that even where a director neither was served with process nor voluntarily appeared in a
stockholder’s derivative action, the director’s concern for his ‘business reputation’ was
sufficient reason to incur expenses and obtain indemnity.” (citations omitted)).
14
preparing a defense. Nothing in the Indemnification Provision purports to prevent a party
from obtaining indemnification for the costs of conducting a pre-litigation investigation.
Quizmark and QCE Gift Card argue that MacDonald and Smythe should not be
entitled to recover the costs of investigating potential claims against them because they
“were not engaged in the ‘defense’ of the Colorado [Action] until it was actually filed.”33
For starters, the Indemnification Provision is not limited to costs of defense. But even if it
were, “[i]n a litigation context the term ‘defense’ has a broad meaning [unless the entities]
. . . show[] that the parties intended to accord it a restrictive definition in their
relationship.”34 MacDonald and Smythe learned about the Funds’ potential claims against
them in summer 2013, when the Funds summoned them to meetings and conveyed their
frustration about the Restructuring. In March 2014, the Funds stated in the Quiznos
bankruptcy filings that they intended to pursue claims against MacDonald and Smythe. It
was reasonable for MacDonald and Smythe to believe that the Funds were threatening a
lawsuit and that it was necessary to investigate the claims that the Funds might bring as
part of their defense.
Under the plain language of the Indemnification Provision, MacDonald and Smythe
are entitled to indemnification for the expenses they incurred investigating claims that the
Funds might bring against them. Those amounts were losses they suffered by reason of
33
Dkt. 182, at 46.
34
Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992).
15
actions taken on behalf of the Quiznos family of companies, including Quizmark and QCE
Gift Card.
F. Good Faith
Quizmark and QCE Gift Card point out that the Indemnification Provision only
applies if the officers act “in good faith on behalf of the Company.” They contend that to
obtain indemnification, MacDonald and Smythe must prove that they acted in good faith
in connection with the events underlying the Colorado Action, even though the Colorado
Action has been dismissed. That position is contrary to law.
The Indemnification Provision granted mandatory indemnification “[t]o the full
extent permitted by applicable law.” In Delaware, “a promise to indemnify ‘to the fullest
extent permitted by law[]’ [is] an expression of the intent for the promise of indemnity to
reach as far as public policy will allow.”35 In the corporate context, such a promise includes
a commitment to provide mandatory indemnification of any “expenses . . . actually and
reasonably incurred by” any “present or former director or officer of a corporation [who]
has been successful on the merits or otherwise in defense of any action, suit or proceeding
. . . .”36 “The phrase found in Section 145(c)—‘on the merits or otherwise’—permits the
indemnitee to be indemnified as a matter of right . . . [even] if he or she successfully asserts
35
DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058, at *10 (Del. Ch. Jan.. 23,
2006) (Strine, V.C.).
36
8 Del. C. § 145(c).
16
a ‘technical’ defense, such as a defense based upon a statute of limitations.”37 “Success”
includes the dismissal without prejudice of a federal action, even if the same claims are re-
alleged in state court at a later date.38
“The good faith requirement does not apply to a director or officer who is
‘successful’ under Section 145(c).”39 When Chief Justice Strine was a member of this
court, he explained in the Stockman decision that when an alternative entity’s operating
agreement grants mandatory indemnification to “the fullest extent permitted by law,” the
grant includes a right to mandatory indemnification when an individual has been successful
“on the merits or otherwise,” without having to show good faith.40
37
1 R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corporations &
Business Organizations § 4.12[B], at 4-64 (2014) [hereinafter, Balotti & Finkelstein].
38
Zaman v. Amadeo Hldgs., Inc., 2008 WL 2168397, at *21-23 (Del. Ch. May 23,
2008) (Strine, V.C.).
39
Balotti & Finkelstein § 4.12[B], at 4-64 n.388; accord Perconti v. Thornton Oil
Corp., 2002 WL 982419, at *3 (Del. Ch. May 3, 2002) (“If the former officer is ‘successful
on the merits or otherwise’ in a proceeding described in Section 145(a), then he is entitled
to indemnification regardless of whether or not he acted in good faith or in what he
perceived to be the best interests of the corporation.”); Cochran v. Stifel Fin. Corp., 2000
WL 286722, at *18 (Del. Ch. Mar. 8, 2000) (Strine, V.C.) (“Delaware permits – nay,
mandates – indemnification of directors and officers who satisfy the success criteria in §
145(c) regardless of their good faith . . . .”), aff’d in part, rev’d in part on other grounds,
809 A.2d 555 (Del. 2002); Green v. Westcap Corp. of Del., 492 A.2d 260, 265 (Del. Super.
1985) (reviewing DGCL drafting history and concluding that “the only portion of
subsection (a) and (b) [of Section 145] which is incorporated by reference is the portion
which defines the type of action, suit or proceeding covered by each section and that that
reference does not incorporate the subsequent qualification required for indemnification.”).
40
Stockman v. Heartland Indus. P’rs, L.P., 2009 WL 2096213, at *13-18 (Del. Ch.
July 14, 2009) (Strine, V.C.).
17
Quizmark and QCE Gift Card argue that Chief Justice Strine’s analysis in Stockman
was dictum. Perhaps, but it is nonetheless persuasive.41 Quizmark and QCE Gift Card also
contend that Stockman does not state a governing rule of law, because “additional
discovery—in some instances mimicking the very litigation avoided by the [resolution of
the underlying proceeding]—may be required to permit a determination on whether the
indemnitee acted in good faith.”42 In the decision on which they rely, the party seeking
indemnification had not been successful on the merits or otherwise. The decision
recognized that if “the indemnitee has succeeded ‘on the merits or otherwise,’ . . . further
inquiry into the ‘how’ and ‘why’ of the result is unnecessary.”43
41
See Hoffman Plastic Compounds, Inc. v. N.L.R.B., 535 U.S. 137, 147 (2002); Bata
v. Bata, 163 A.2d 493, 510 (Del. 1960).
42
Hermelin v. K-V Pharm. Co., 54 A.3d 1093, 1113 (Del. Ch. 2012).
43
Id. at 1107 (citations omitted). There is one case that arguably runs counter to
Stockman, but neither side cited it. See Branin v. Stein Roe Inv. Counsel, LLC, 2014 WL
2961084 (Del. Ch. June 30, 2014). The covered person in Branin was originally protected
by a provision that closely resembled the Indemnification Provision. After litigation arose,
the entity amended the provision. The principal disputes were which indemnification
provision governed and whether the plaintiff had been sued in a covered capacity. The
court ruled in the plaintiff’s favor on both issues, but refused to hold as a matter of law that
the plaintiff was entitled to indemnification, stating that there was “a disputed issue of fact”
concerning whether the covered party “acted in good faith and in a manner he reasonably
believed to be within the scope of his authority.” Id. at *10. The continuing role of good
faith in the analysis after a party has been successful on the merits or otherwise does not
appear to have been a focal point of the opinion, and the parties do not appear to have
brought Stockman to the court’s attention. Because no one in this case cited Branin, and
because Branin did not consider the implications of Stockman, this opinion does not
consider Branin further.
18
The Indemnification Provision granted mandatory indemnification “[t]o the full
extent permitted by applicable law.”44 It drew on corporate concepts by covering losses
suffered “by reason of” a persona’s status as an officer.45 It therefore encompassed a
commitment to provide mandatory indemnification, without a requirement that the officer
first prove good faith, when the officer has been successful on the merits or otherwise.
The District Court dismissed the Colorado Action for lack of jurisdiction. The Court
of Appeals affirmed. The Funds did not pursue the matter further. Once the deadline for
filing a petition for certiorari passed, the dismissal of the Colorado Action became final.
At that point, MacDonald and Smythe were “successful on the merits or otherwise” and
entitled to mandatory indemnification without any need to prove good faith.
The foregoing analysis applies plainly to Quizmark, because it is a Delaware entity.
A wrinkle arises for QCE Gift Card, because it is an Arizona entity, and Arizona law
governs whether a grant of mandatory indemnification to the fullest extent of the law
encompasses a right to indemnification without a need to prove good faith following
success in the underlying litigation. The parties did not brief this issue. When neither party
argues for a different result under the law of a different state, this court is entitled to apply
Compare id. at *3 (“To the fullest extent permitted by law, the Partnership agrees
44
to indemnify . . .”).
45
Compare 8 Del. C. §§ 145(a) & (b); see Hyatt v. Al Jazeera Am. Hldgs. II, LLC,
2016 WL 1301743, at *7 (Del. Ch. Mar. 31, 2016) (noting that a “by reason of” standard
“tracks the language of Section 145 of the DGCL”).
19
Delaware law.46 MacDonald and Smythe are therefore entitled to indemnification from
both Quizmark and QCE Gift Card.
G. The Amount Of The Indemnification
This decision does not address the specific amount of indemnification to which
MacDonald and Smythe are entitled. If the parties cannot agree on an amount, then
MacDonald and Smythe shall make an application pursuant to Court of Chancery Rule 88.
III. CONCLUSION
Judgment is entered in favor of MacDonald and Smythe and against Quizmark and
QCE Gift Card on the question of whether MacDonald and Smythe are entitled to
mandatory indemnification from Quizmark and QCE Gift Card for the amounts they
incurred preparing for and defending the Colorado Action.
Judgment is entered in favor of Quiz-DIA and against MacDonald and Smythe on
the question of whether MacDonald and Smythe are entitled to mandatory indemnification
from Quiz-DIA.
46
See Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 765 (Del. Ch. 2014);
Republic of Panama v. Am. Tobacco Co., 2006 WL 1933740, at *5 (Del. Super. June 23,
2006).
20