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O'Brien v. IAC/Interactive Corp. f/k/a USA Networks, Inc., C.A. No. 3892-VCP (Del. Ch. Aug. 27, 2010) (Parsons, V.C.)

August 27, 2010

In this memorandum opinion by Vice Chancellor Parsons, the Court of Chancery  addressed issues relating to a former corporate officer’s demand for indemnification of legal fees and expenses, including (1) whether the amount of indemnification for attorneys’ success premiums is reasonable; (2) whether the corporate officer is entitled to indemnification for the corporate officer’s affirmative wrongful termination claim and related declaratory relief claims; (3) what time prejudgment interest  began to accrue; and (4) a parent corporation guarantor’s entitlement to a set-off for any recovery made by the corporate officer from the wholly owned subsidiary indemnitor. A notable procedural aspect is that the case was decided on a so-called “trial on the papers,” in which the parties submit a stipulated record to the Court and the Court makes factual determinations and legal conclusions as it would at an actual trial. 

The plaintiff, Wesley T. O’Brien, was the president, COO, and CEO of Precision Response Corporation (“PRC”) during 1998 through 2002. The defendant, IAC/Interactive Corp. (“IAC”), acquired PRC, as a wholly owned subsidiary in 2000. In 2005, PRC merged into PRC, LLC, which remained IAC’s subsidiary until IAC sold PRC, LLC to an unrelated entity in 2006. In 1998, the plaintiff entered into an indemnification agreement with PRC, governed by Florida law, that provided for mandatory advancement and indemnification, if he prevailed on the merits in defense of any claim against him as an officer of PRC. When IAC acquired PRC in 2000, IAC assumed this obligation in the merger agreement, which was governed by Delaware law and which contained a Delaware forum selection clause. The merger agreement also provided that IAC “shall, and shall cause [PRC] to, expressly assume and honor [the indemnification agreement].”

In 2001, PRC acquired Avaltus, Inc. (“Avaltus”). The merger agreement with Avaltus required arbitration through the American Arbitration Association. In 2002, Avaltus shareholders commenced arbitration against PRC (the “PRC Arbitration”) to recover certain escrow funds in connection with the Avaltus acquisition. Later that year, PRC terminated the plaintiff for cause and asserted counterclaims against the plaintiff in the PRC Arbitration, including claims for breach of his fiduciary duties to PRC and for fraudulently inducing PRC to acquire Avaltus, which failed shortly after the merger. The plaintiff sought a declaratory judgment in the PRC Arbitration that his actions were not wrongful. 

On January 9, 2003, the plaintiff demanded advancement of his attorneys’ fees and expenses incurred in the PRC Arbitration. PRC refused.  On January 19, 2005, the arbitration panel found that neither side was entitled to relief; declared neither side was a prevailing party; and ordered both parties to bear their own attorneys’ fees and expenses. The plaintiff sued PRC in Florida state court to enforce the indemnification agreement, ultimately succeeding on the issue of entitlement to indemnification in 2007 on remand from the intermediate Florida appellate court. 

Proceedings to determine the amount of indemnification were stayed because PRC filed for Chapter 11 bankruptcy in 2008 (the “PRC Bankruptcy”). The bankruptcy court ultimately approved PRC’s reorganization plan, and the plaintiff was permanently enjoined from proceeding in the Florida courts for indemnification. The plaintiff submitted a proof of claim against PRC in the PRC Bankruptcy that included his indemnification claims and a claim for wrongful termination. 

The plaintiff filed suit against IAC in Delaware on July 15, 2008, seeking (1) indemnification of his attorneys’ fees and expenses from the PRC Arbitration, the proceedings in the Florida state courts, and the PRC Bankruptcy, and (2) advancement of his attorneys’ fees and expenses in the Delaware action.

The plaintiff retained three law firms for whose fees and expenses he sought indemnification: Kelley Drye & Warren LLP (“Kelley Drye”), Hunt & Gross, P.A. (“Hunt & Gross”), and Martin Chioffi LLP (“Martin Chioffi”). The plaintiff entered into different contingency agreements with those law firms that each called for the payment of a success premium in addition to billed fees. Martin Chioffi and Hunt & Gross charged a success premium of 20% over their normal hourly rates. Kelley Drye, however, charged a “double or nothing” contingency fee.  Under this agreement, the plaintiff paid Kelley Drye an initial fee of $20,000 for a summary judgment motion in the Florida trial court and then would pay nothing for the remainder of Kelley Drye’s services if the plaintiff were ultimately unsuccessful. If the plaintiff succeeded, however, Kelley Drye would be entitled to twice its billed fees, or a 100% success premium.

On earlier summary judgment motions, the Court of Chancery granted the plaintiff’s advancement claim in part, and rejected the defendant’s statute of limitation defense, holding that the doctrine of laches applied and that the plaintiff’s claims were timely under that doctrine. The defendant filed a request for certification of an interlocutory appeal, which the Court and the Delaware Supreme Court denied. 

After the interlocutory appeal was denied, the parties stipulated to the remaining issues for the Court of Chancery to decide and submitted evidence and argument regarding those issues for a “trial on the papers.” 

In its opinion, the Court considered four main issues: 1) whether the defendant is required to indemnify the plaintiff for the success premiums payable to Kelley Drye, Hunt & Gross, and Martin Chioffi; 2) whether and to what extent the legal fees and expenses sought in the PRC Arbitration and PRC Bankruptcy should be reduced by the legal fees and expenses attributable to the plaintiff’s affirmative claim for wrongful termination and related declaratory relief claim asserted against PRC; 3) whether and to what extent the plaintiff is entitled to prejudgment interest on any indemnification award; and 4) whether the defendant is entitled to a set-off of any amounts the plaintiff may recover for his indemnification claim in the PRC Bankruptcy. 

Before analyzing these issues, the Court considered the defendant’s request that the Court determine the accrual date of the plaintiff’s claim for use in the  defendant’s anticipated appeal. The Court declined to rule on that issue. The Court reasoned that such a determination would require it to assume that the plaintiff’s claim was governed by the statute of limitations, instead of the doctrine of laches; would be highly factual; and should occur only on remand if the Delaware Supreme Court were to rule that the statute of limitations applied.

In considering the plaintiff’s entitlement to indemnification for the success premiums payable to his three law firms, the Court applied the three-part test announced in Delphi Easter Partners Limited Partnership v. Spectacular Partners, Inc., 1993 WL 328079 (Del. Ch.): A fee is reasonable if (1) the expenses were “actually paid or incurred”; (2) the services rendered were “thought prudent and appropriate in the good faith professional judgment of competent counsel”; and (3) the charges for the services were “made at rates, or on a basis, charged to others for the same or comparable services under comparable circumstances.” The party seeking  indemnification bears the burden of satisfying this test.

The Court held that the plaintiff was entitled to indemnification for the amount of the three success premiums, except that indemnification for the Kelley Drye premium would be reduced to 50% instead of 100%. The Court first concluded that the three success premiums were “actually paid or incurred” because if the plaintiff succeeded in the Delaware action, the terms of the legal services contracts would obligate him to pay those fees, even if the amount of indemnification awarded were less than the obligations. The Court then determined that the second factor was satisfied because the plaintiff was embroiled in an “eight-year saga involving arbitration, a trial,  appeal, remand proceedings, bankruptcy, advancement, and now disputes about the amount of indemnification.” As a result, having multiple law firms, especially where responsibility for work was shared among the law firms, was not inappropriate here, nor did the Court find any specific services to have resulted in duplicative or excessive fees.

On the third factor, the Court concluded that the 20% success premiums for Hunt & Gross and Martin Chioffi, though generous, were charged on a basis that they charged to other clients, especially because of the risk of nonpayment that law firms accept in agreeing to a contingency fee. The Court concluded, however, that Kelley Drye’s 100% success premium was unreasonable, not only because it was five times greater than the other two firms’ premiums – noting Hunt & Gross participated in most of the same matters and accepted substantially the same risk of nonpayment as Kelley Drye – but also because there was no evidence Kelley Drye had ever charged any other client on this basis.  Accordingly, the Court reduced the plaintiff’s indemnification for the Kelley Drye success premium to 50%. 

In considering the second issue, the Court applied the following rule of law:  consistent with Section 145(a) of the Delaware General Corporation Law, Delaware corporations have the power to indemnify persons who were or are parties to an action “by reason of the fact” that they were directors, officers, employees, or agents of Delaware corporations. The Court explained that a person pursuing a claim for breach of an employment contract, such as a wrongful termination claim, generally does not satisfy this “by-reason-of-the-fact” requirement.  The Court concluded that the plaintiff’s wrongful termination claim and related declaratory relief claims brought in the PRC Arbitration and the PRC Bankruptcy were not “by reason of the fact” of the plaintiff’s status as a corporate officer. 

Noting that the plaintiff bears the burden of persuasion on the issue of what legal fees and expenses are appropriate for indemnification, the Court concluded the plaintiff had failed to satisfy his burden because of billing practices that limited the Court’s ability to segregate clearly what legal fees and expenses were attributable to the indemnifiable claims, even though much of that work may nevertheless have been incurred absent the non-indemnifiable claims. The Court thus reduced the legal fees and expenses in the PRC Arbitration by 10% and those in the PRC Bankruptcy by 20%. 

The Court next considered plaintiff’s entitlement to prejudgment interest upon the amount of indemnification awarded. Recognizing settled Delaware law, the parties agreed the plaintiff was entitled to prejudgment interest as a matter of right, but disagreed as to when the interest began to accrue. The plaintiff argued that for expenses incurred before January 23, 2003, interest should begin on January 23, 2003 (ten business days after his formal demand of advancement from PRC) and that for expenses incurred after January 23, 2003 interest should accrue from the date the plaintiff paid each expense. 

The defendant contended that interest should not accrue until March 6, 2008 (the date the plaintiff made a demand on IAC and not PRC), because interest does not run until the plaintiff demanded indemnification and the defendant refused to indemnify without justification.  Since the PRC-IAC merger agreement provided that the defendant was required to cause PRC to abide by the indemnification agreement, the plaintiff responded that the defendant cannot shield itself by its status as a corporation because it was aware of the 2003 indemnification demand and controlled PRC’s attempts to avoid the indemnification obligations it was required to cause PRC to uphold.
The Court held prejudgment interest would begin to accrue on January 23, 2003 for fees and expenses incurred before then, and would begin to accrue on the date the plaintiff paid them for fees and expenses incurred thereafter. The Court concluded that PRC’s separate corporate existence should be disregarded because of IAC’s contractual obligation to cause PRC to indemnify the plaintiff, its control over PRC, and not only its failure to cause PRC to indemnify the plaintiff, but also its numerous attempts to defeat the plaintiff’s indemnification claims through its control of PRC.

Finally, applying settled Delaware law that plaintiff should not be permitted to recover twice on the same claim, the Court concluded the defendant was entitled to a set-off of any amount the plaintiff might receive on his indemnification claim against PRC in the PRC Bankruptcy.

The full opinion is available here