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Trascent Management Consulting, LLC v. George Bouri, C.A. No. 10915 (Del. Nov. 28, 2016) (Strine, C.J.)

November 28, 2016

In this opinion, the Delaware Supreme Court affirmed the Court of Chancery’s ruling that a company cannot avoid its advancement obligations by claiming in a summary proceeding that the advancement agreement was fraudulently induced.  Specifically, the Supreme Court affirmed that, where an agreement’s language clearly provides for advancement rights, any defense of fraudulent inducement must await a final indemnification proceeding.

The underlying claim involved Trascent LLC terminating and suing former executive George Bouri.  Bouri sought advancement for his defense costs under both his employment agreement and the company’s LLC agreement.  On motion for summary judgment, Trascent asserted that the employment contract was fraudulently induced, and therefore the advancement provision was invalid.  Trascent further argued that the LLC agreement provisions were invalid as to Bouri because Bouri’s advancement rights as an executive were solely the result of his fraudulently induced employment.

In rejecting this defense, the Court of Chancery held that Trascent’s argument was contrary to the plain language of both agreements.  The Court of Chancery reasoned that allowing Trascent to assert this defense, “identical to what is properly a plenary claim on which Trascent has the burden of persuasion,” would allow the company to escape a “clear promise” to advance Bouri’s defense costs until a final decision regarding indemnification.  Thus, the Court of Chancery held that advancement rights should be enforced according to the plain terms of the contracts. 

The Supreme Court affirmed.  First, the Supreme Court held that the trial court had correctly applied the plain language interpretation standard applicable in advancement proceedings.  Second, the Supreme Court held that the Court of Chancery correctly determined that a company may not inject the defense of fraudulent inducement into a summary proceeding for advancement when the agreement at issue, on its face, clearly provides for advancement rights until a final ruling on indemnification. 

The Supreme Court reasoned that allowing a company to assert this defense would be contrary to public policy regarding both advancement rights and summary proceedings.  The Court explained that allowing a company to assert a fraudulent inducement defense in a summary advancement proceeding would undermine the clear statutory purpose of such proceedings.  The Supreme Court found that allowing the defense could undermine reliance on advancement provisions, as found in both the Delaware General Corporation Law and the state’s Limited Liability Company Act, and could allow companies to escape their clear contractual promise of advancement.  Finally, the Supreme Court noted that allowing a complicated defense like fraudulent inducement in a summary advancement proceeding would allow companies to promise executives advancement rights but then effectively deny those rights by prolonging their enforcement.

The full opinion is available here