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Jackson Walker L.L.P. v. Spira Footwear, Inc., C.A No. 3150-VCP, (Del. Ch. June 23, 2008) (V.C. Parsons)

June 22, 2008

In this advancement action, the Chancery Court granted Jackson Walker’s motion for summary judgment and denied the summary judgment motion of Spira Footwear (“Spira”). The central issue on these motions was whether, based upon its status as former outside litigation counsel for Spira in the separate El Paso Action and the nature of the claims now asserted against it by Spira, Jackson Walker qualified as an “agent” eligible for advancement of its fees under Section 145 of the Delaware General Corporate Law. The Court concluded that Jackson Walker constituted an agent under both Spira’s bylaws and DGCL Section 145 and was therefore entitled to the advancement of its reasonable fees and expenses incurred in the separate El Paso action.

The case arose from a dispute between Andrew Krafsur (“Andrew”), then CEO of Spira and owner of 22% of Spira’s outstanding shares, and his brother David, who along with Francis LeVert (“LeVert”) collectively held 58% of the outstanding shares. Andrew, David and LeVert entered into a shareholders agreement in February 2005 to equalize the shares held between the three of them as well as contribute shares back to Spira for further capitalization. After relations soured, however, between Andrew and David, Spira initiated litigation against David and LeVert for breaches of fiduciary duty. David and LeVert responded in kind by terminating Andrew from his position as CEO of Spira and causing Spira to dismiss the action against them. David and LeVert also filed a separate action in Texas state court (the “El Paso Action”) in December 2005 seeking to have the shareholders agreement declared invalid. Spira, now under the control of David and LeVert, retained Jackson Walker as its counsel for the El Paso action. On June 23, 2006, Jackson Walker filed a Plea of Intervention on Spira’s behalf in the El Paso Action, seeking a declaratory judgment that the shareholders agreement was unenforceable and that various actions subsequently taken by David and LeVert were proper. A tentative settlement was reached in the El Paso Action in August 2006 under which Andrew would purchase David and LeVert’s controlling interest in Spira. Upon re-assuming control of Spira, Andrew ordered Jackson Walker to cease all work for Spira and then amended Spira’s plea in the El Paso action, adding Jackson Walker as a defendant. The amended plea claimed Jackson Walker had breached its fiduciary duty by wrongfully filing the Plea in Intervention on behalf of Spira which allegedly was “blatantly designed to further the interests of . . . David Krafsur and Francis LeVert to the detriment of Spira.” Jackson Walker responded by filing this advancement action in Delaware Chancery Court in August 2007.

The Court began its analysis by noting that a company’s bylaws are contractual in nature and advancement rights are thereby conferred by contract with Section 145 providing the statutory framework for when and how a corporation may provide such rights to its officers, directors, employees or agents. Spira’s mandatory advancement provision read, “[E]xpenses . . . incurred in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition . . . on behalf of the Director, officer, employee or agent.” Thus, to qualify for advancement, Jackson Walker was required to prove to the Court that it was a party to the El Paso Action by reason of the fact that it was an agent of Spira. With there being no dispute that Jackson Walker was a party to the El Paso Action through its role as outside counsel for Spira, the sole question remaining became whether serving in that capacity qualified Jackson Walker as an “agent” under Spira’s bylaws. Framing its analysis around the decision in Fasciana v. Electronic Data Systems Corp., 829 A.2d 160 (Del. Ch. 2003), the Court here chose to utilize the more restrictive common law definition of agent as applying only to persons who act on behalf of another in relations with third parties. The Fasciana Court had concluded that “agent” under Section 145 does not include a lawyer who acts as legal advisor to a corporate client but does not take any actions on the corporate client’s behalf with third parties. The Fasciana Court did, however, carve out an exception in that an attorney or law firm acts as an agent when having communications on the corporation’s behalf with two of the corporation’s customers during negotiations on how to characterize a transaction. The Court here seized on this exception, finding that the alleged wrongs for which Spira had brought suit against Jackson Walker were all instances in which Jackson Walker acted on Spira’s behalf in relations with third parties. Noting that attorneys have the ability to bind their parties in dealings with the court and opposing parties, the Court concluded that Jackson Walker was “act[ing] as an arm of the corporation vis-a-vis the outside world.” Fasciana, 829 A.2d at 163. Furthermore, because Spira admitted that its claims against Jackson Walker stem from Jackson Walker’s actions as litigation counsel, it made no difference to the Court that Jackson Walker had also provided legal work to Spira which did not involve any relations with third parties.

Finally, the Court dismissed Spira’s contention that they have not asserted any claims against Jackson Walker based upon representations made by Jackson Walker to a third party but instead have based their claims solely on Jackson Walker’s alleged breaches of its fiduciary duties to exercise professional care and judgment in its representation of Spira. The Court concluded that the appropriate inquiry must be broader and should center on “whether the claim asserted by the former corporate client emanates from actions taken by the attorney on behalf of the company and in relation to a third party.” Here, Jackson Walker was an agent of Spira when it made representations to the court and otherwise acted on Spira’s behalf in dealings with the court and other parties in the El Paso Action.

The full opinion is available here