Huff v. Longview Energy Co., C.A. No. 8453-CS (Del. Ch. Aug. 12, 2013) (Strine, C.)
In this letter opinion, the Court of Chancery granted the defendant corporation’s (“Longview”) motion to dismiss the complaint of two of its directors (the “Directors”), who sought indemnification from Longview, because the underlying action for which the Directors sought indemnification was on appeal and, therefore, not final.
The Directors’ claim for indemnification from Longview stemmed from an action in which a Texas court entered a judgment against the Directors for breach of the fiduciary duty of loyalty (the “Texas Action”). In the Texas Action, Longview originally asserted eight counts against the Directors in connection with the Directors’ usurpation of a corporate opportunity. However, at trial in the Texas Action, Longview presented only its claim for breach of fiduciary duty. To remedy the Directors’ breach, the jury in the Texas Action imposed, among other things, a constructive trust in Longview’s favor and a damage award of $95 million against the Directors. The Directors appealed the judgment in the Texas Action.
Despite their pending appeal in the Texas Action, the Directors filed a complaint in the Court of Chancery seeking indemnification from Longview for litigation-related expenses arising from the seven claims Longview decided not to submit to the jury. Analogizing precedent relating to indemnification under 8 Del. C. § 145(c) in the context of a criminal action where specific criminal counts were dismissed, the Directors contended that they were “successful” within the meaning of 8 Del. C. § 145(c) because, at trial in the Texas Action, Longview asserted only one of its original eight counts against the Directors. Further, the Directors argued that, even if the Texas Action was remanded for a new trial, Texas law would preclude Longview from pursuing against the Directors all of its theories except for its breach of fiduciary duty theory. Longview moved to dismiss or stay the Directors’ complaint in the Court of Chancery.
Noting that, under Delaware law, a claim for indemnification typically does not ripen until the underlying claim is finally determined and is no longer subject to appeal, the Court of Chancery found that it was not possible to determine the extent of the Directors’ success in the Texas Action because the Texas Action was still subject to appeal. The Court of Chancery did not find it facially obvious that Texas courts would limit Longview’s ability to present all of its theories against the Directors if the Texas Action was remanded for a new trial. In addition, the Court of Chancery noted that attempting to determine the Directors’ success in the Texas Action at this stage would risk the need to reopen the Court of Chancery action if the Court of Chancery’s guess as to how the Texas Action would come out was incorrect. Further, the Court of Chancery reasoned that, because the Directors, pending the outcome of their appeal in the Texas Action, owed Longview millions of dollars and had been adjudicated to have breached their fiduciary duties to Longview, they were not in an equitable position to prematurely obtain money damages from Longview. Thus, the Court of Chancery dismissed the Directors’ complaint, without prejudice, because the Directors’ claim for indemnification from Longview was not ripe.