Marino v. Patriot Rail Company, C.A. No. 11605-VCL (Del. Ch. Feb. 29, 2016) (Laster, V.C.)
In this opinion on cross-motions for summary judgment, the Court of Chancery addressed whether the advancement provision of a certificate of incorporation covered an individual who had ceased to be a director and officer of the company. In holding that the former director and officer was entitled to advancement of some expenses, the Court traced the legislative history of three provisions of Section 145 of the DGCL - Sections 145(e), 145(j), and 145(f) – and analyzed how those sections interact with each other.
Gary Marino (“Marino”) had been the Chairman, President, and CEO of Patriot Rail Company LLC (the “Company”), which had converted from a corporation to an LLC in 2013. In 2008, the Company entered into a letter of intent to acquire Sierra Railroad Company (“Sierra”). Later that same year, the Company and Sierra sued each other for breach of the letter of intent (the “Underlying Action”). Sierra’s suit also included claims against a Marino-affiliated entity that was a Company stockholder. In 2014, Sierra prevailed against the Company and the Marino affiliate at trial. In 2015, Sierra moved in the Underlying Action to add Marino as a judgment debtor under California law (the “Post-Judgment Motion”).
Marino sought advancement from the Company to oppose the Post-Judgment Motion. In 2012, however, while the Underlying Action was pending, Patriot Funding LLC had acquired the Company and Marino resigned from all his positions with the Company. Marino argued that he was entitled to advancement because the Post-Judgment Motion was a continuation of the Underlying Action, a covered event that pre-dated his resignations from the Company. The Company countered that Marino was not entitled to advancement because the Post-Judgment Motion focused primarily on Marino’s conduct after he had resigned from the Company.
The Court first considered Section 145(e). Vice Chancellor Laster explained that although Section 145(e) distinguishes between a corporation’s authority to advance fees and costs to current and former officers and directors, that distinction serves a narrow purpose. The legislative history of Section 145(e) reveals that the provision’s drafters made the distinction to address concerns about the propriety of directors granting themselves advancement rights. The Court observed that Section 145(e)’s different treatment of current directors and officers from former directors and officers “represented a legislative determination that advancing litigation expenses to current officers or directors [on condition of an unsecured undertaking] was entirely fair,” even though it is an interested transaction. Accordingly, the Court concluded that Section 145(e) did not address the question of under what circumstances advancement rights continued after a director or officer resigned.
Instead, the Court turned to Section 145(j), which “addresses what happens when an individual who is protected by indemnification or advancement rights while serving in a covered capacity ceases to serve in that capacity.” The Court explained that the mandatory language of Section 145(j) “means that if a person serves as a director and makes a decision, and if that person would be entitled to receive advancements in litigation over that decision while serving as a director, then that person’s rights to advancements ‘shall…continue’ after that person has ‘ceased to be a director.’”
The Court also reviewed Section 145(f), which addresses under what circumstances a corporation can eliminate or impair an indemnification or advancement right. Vice Chancellor Laster noted that Section 145(f) “recognizes that a covered person serves in a covered capacity in reliance on the indemnification and advancement rights that the corporation has provided, establishing a contractual relationship.” Because a covered person’s indemnification and advancement rights vest at the time of service, those rights “cannot be amended retroactively unless the original grant of protection specifically contemplated the possibility of after-the-fact amendment.”
Applying the Section 145 provisions to the relevant portion of the Company’s certificate of incorporation, the Court held that when “Marino agreed to serve in a covered capacity he became entitled to receive mandatory indemnification and advancements to the fullest extent of Delaware law” and that the certificate of incorporation “did not state up front that it could be amended retroactively or that Marino could lose coverage when he ceased to serve.” The Court then examined the assertions of the Post-Judgement Motion, and concluded that some portions pursued Marino by reason of his service in a covered capacity, while other portions pursued Marino for conduct after he had resigned from all of his Company positions. Accordingly, Vice Chancellor Laster held that Marino was entitled to some, but not all, of his fees and expenses in opposing the Post-Judgment Motion.