Pasternack v. Northeastern Aviation Corp., C.A. No. 12082-VCMR (Del. Ch. Nov. 9, 2018) (Montgomery-Reeves, V.C.)

In this memorandum opinion, the Delaware Court of Chancery held that a pilot was entitled to indemnification under his company’s bylaws, which provide mandatory indemnification for directors, officers, employees, and agents in accordance with Section 145(a).

The underlying dispute for which the pilot sought indemnification of legal fees and expenses arose in connection with the pilot’s participation in the company’s random drug testing program. The medical review officer determined that the pilot refused to take the test by leaving before it was complete, resulting in an automatic failure of the drug test and revocation of the pilot’s license to fly.  Following a successful challenge of the medical review officer’s determination in federal court, the pilot sought indemnification under the company’s bylaws for the legal expenses associated with those proceedings.

The company disputed that the pilot met certain requirements set forth in Section 145(a) and the bylaws regarding: (i) whether he was an agent or employee of the company, (ii) whether his participation in the underlying proceedings was “by reason of the fact” of his affiliation with the company, and (iii) whether he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the company.

First, the Court held that the pilot acted as the company’s agent during the drug test. The Court explained that agency in the indemnification context is limited to “only those situations when an outside contractor . . . can be said to be acting as an arm of the corporation vis-à-vis the outside world.” Further, the underlying proceeding must result from the purported agent’s “conduct on behalf of the corporation.”  The Court thus determined that the pilot, a part-time employee of the company, acted as an arm of the company by reporting for the drug test and complying with the company’s instructions.

Next, the Court ruled that the pilot appeared for the drug test by reason of his agency status with the company. For the party seeking indemnification to be a party to the proceeding by reason of the fact of his corporate function, the Court reasoned that there must be a causal connection, or nexus, between the underlying proceeding and the party’s corporate function. The Court emphasized that the pilot had no independent individual requirement to complete the drug test and his sole reason for attending the test was his affiliation with the company.

The Court then determined that the pilot acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the company. The Court explained that, because the pilot was not aware that his departure from the test would be deemed a refusal to test, he was acting not opposed to the best interests of the company at a minimum.

Having found that the pilot met the requirements of Section 145(a), the Court held that he was entitled to mandatory indemnification as provided in the company’s bylaws.

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