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"Advancement and Indemnification Litigation in Delaware," by David S. Eagle, October 2007

10.18.07

Advancement and Indemnification
Litigation in Delaware

By David S. Eagle

The Wilmington office of Klehr Harrison has developed particular expertise and has had notable success in cases involving the advancement and indemnification of litigation expenses to officers and directors of Delaware corporations (under section 145 of the General Corporation Law).  The firm has represented both plaintiffs and defendants.  Recently, in Reddy v. Electronic Data System Corporation, Del. Ch., C.A. No. 19467, 2002 WL 1358761, Strine, V.C. (June 18, 2002), the firm served as co-counsel to plaintiff Michael Reddy in his advancement case against Fortune 100 information technology giant EDS.

Mr. Reddy, a former senior executive of EDS, had been indicted by the U.S. Attorney’s Office in the Southern District of New York for alleged accounting improprieties, as well as being sued by EDS in federal court in Texas.  He sought Klehr Harrison’s assistance in recovering his litigation expenses pursuant to the company’s bylaws and Delaware’s corporation statute.  Barely three months after Klehr Harrison filed the complaint, the Court of Chancery awarded Reddy summary judgment as to both underlying lawsuits, and denied EDS’ motion to transfer the case to Texas.  According to the Court’s opinion, “[b]ecause both suits seek to hold Reddy liable for wrongdoing that he [allegedly] committed in his official capacity as an EDS executive, they are within the scope of coverage of the advancement provision of EDS’s bylaws.”  Moreover, the Court awarded Mr. Reddy “fees for fees” (i.e., his attorneys’ fees and expenses in bringing the advancement case itself) under a decision of the Delaware Supreme Court which predated the opinion by five days. On April 9, 2003, the Delaware Supreme Court affirmed the Chancery Court's decision in Reddy.

The Chancery Court in Reddy relied in part upon a slightly earlier Klehr Harrison victory in Perconti v. Thornton Oil Corporation, Del. Ch., 2002 WL 982419, Noble, V.C. (May 3, 2002).  In that case, the firm was co-counsel to the former president of Thornton Oil, a Delaware corporation and owner and operator of gas stations and convenience stores throughout the Midwest, who had been indicted for fraud and tried by the U.S. Attorney’s Office in the Western District of Kentucky.  The criminal trial resulted in a dismissal of the charges against Mr. Perconti, who then sought payment of his legal expenses under Delaware’s mandatory indemnification statute and the company’s bylaws.  After denying the defendant’s motion to dismiss or stay on grounds of forum non conveniens, the Chancery Court awarded Mr. Perconti summary judgment on his claim for indemnification.  In the words of the Court in Reddy, “Perconti is not an isolated decision, but instead reflects a consistent line of authority upholding the contractual and statutory advancement and indemnification rights of corporate officials charged with serious misconduct allegedly inspired by personal greed.”  Months after the Court’s decision, the parties are still embroiled in a dispute as to whether Mr. Perconti is also entitled to his “fees for fees” under Thornton Oil’s bylaws.             

The firm’s recent successes in representing plaintiffs in this area of corporate litigation follow its landmark victory on behalf of the defendant-intervenor in Nakahara v. The NS 1991 American Trust, Del. Ch., 739 A.2d 770 (1998) (Chandler, C.).  In Nakahara, Klehr Harrison was called upon to represent Japanese conglomerate Nihon Sangyo Kabushiki Kaisha (NSKK) and its chairman Yokoi to oppose the advancement of litigation expenses to the trustees of a Delaware Business Trust (one of whom was Yokoi’s daughter), which held title to the Empire State Building.  The circumstances under which ownership of the Empire State Building was transferred from NSKK to a complex offshore trust system were the subject of enormous publicity and litigation throughout the world, including in the Isle of Man. See Pacelle, Mitchell, Empire:  A Tale of Obsession, Betrayal, and the Battle for an American Icon (John Wiley & Sons. 2001). 

After an intensive period of expedited discovery and trial, NSKK prevailed in defeating the claim of advancement in its entirety.  The Court of Chancery based its decision (embodied in an 81-page opinion) upon the equitable defense of “unclean hands” raised by Klehr Harrison’s attorneys, concluding that the trustees were barred from advancement because they had surreptitiously withdrawn $900,000 from the trust prior to commencing the Delaware litigation.  Following the entry of judgment against them, the trustees restored the funds to the trust and filed an unprecedented motion to open the judgment on the ground that they had “purged” their “unclean hands.”  Klehr Harrison argued against the motion and the Court denied it.  A leading treatise has described the 1998 Nakahara case as “one of the Court of Chancery’s strongest pronouncements on the compelling principles of equity underlying the unclean hands doctrine.”  D. Wolfe and M. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery

More recently, Klehr Harrison successfully negotiated a pre-litigation settlement on behalf of a former employee of a major U.S. corporation, including a binding arbitration feature in which the firm prevailed. Our client received advancement of virtually all of his attorneys' fees and expenses in defending against a criminal indictment in the United States District Court for the Southern District of New York, as well as his "fees on fees." Klehr Harrison represented attorney John Fasciana in the frequently cited decision, Fasciana v. Electronic Data Systems Corporation, 829 A.2d 160 (Del. Ch. Feb. 27, 2003). And most recently, Klehr Harrison represented former financial officer John A. Boultbee in advancement litigation against Hollinger International, Inc. arising out of several highly publicized criminal and civil actions pending in Chicago and Canada against Lord Conrad Black, Mr. Boultbee and others. After a one-day trial in Chancery Court in November 2005, the parties entered into a global settlement covering past and future advancement of fees and expenses. According to papers filed in court, Mr. Boultbee received 100% advancement for prior legal services incurred on his behalf; advancement in whole or in part for each underlying proceeding going forward, based upon an agreed percentage; and an agreed-upon payment of "fees on fees."

Klehr Harrison’s Wilmington office  remains actively engaged in representing clients in this and other areas of corporate law.