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Edward M. Weil, et al. v. VEREIT Operating Partnership, L.P., C.A. No. 2017-0613-JTL (Del. Ch. Feb. 13, 2018) (Laster, V.C.)

February 13, 2018

In this memorandum opinion, the Court of Chancery granted partial summary judgment in favor of former officers of a publicly traded real estate investment trust who were seeking advancement of their legal expenses in connection with an internal board investigation, multiple civil lawsuits filed by stockholders, and multiple United States federal government investigations. 

The Plaintiffs are four former officers and directors of VEREIT Inc. (“VEREIT” or the “Company”), which conducts its business through defendant VEREIT Operating Partnership, L.P. (“Partnership”).  In September 2014, the audit committee of VEREIT’s board of directors began an internal investigation concerning alleged irregularities in VEREIT’s financial reporting (the “Internal Investigation”).  As a result of the Internal Investigation, VEREIT restated its earnings for certain prior years and quarters.  Following the disclosure of the restatements, a number of lawsuits were commenced alleging that the Company’s CEO made intentionally false statements about VEREIT’s financial results, leading to the four Plaintiff-officers paying more than $900 million to entities that they controlled, including AR Capital (the “Civil Actions”).  In addition, the SEC, DOJ, and certain state regulators commenced investigations into VEREIT and AR Capital (the “Government Investigations” and together with the Internal Investigation and Civil Actions, the “Underlying Matters”).  At the time of the Court’s opinion, the Internal Investigation had concluded, but the Civil Actions and the Government Investigations remained pending.

Plaintiffs hired counsel to represent them in the Underlying Matters and sought advancement first from VEREIT and then eventually from the Partnership pursuant to their indemnification agreements with the Company and the Partnership agreement.  Afterward, Plaintiffs’ advancement requests were largely denied and the Plaintiffs filed suit against VEREIT and the Partnership for advancement.  Prior to the motion for summary judgment, VEREIT was dismissed from the litigation for lack of personal jurisdiction but the Partnership remained a defendant. 

In connection with Plaintiffs’ motion for summary judgment, the Partnership did not dispute that the Partnership agreement provided for mandatory advancement for the Plaintiffs.  Nevertheless, the Partnership argued that certain categories of fees and expenses in Plaintiffs’ advancement demand were not advanceable under the Partnership agreement.  First, the Partnership argued that the Civil Actions also involved claims against the Plaintiffs for actions taken on behalf of AR Capital, which is not a party to the Partnership agreement.  The Court determined that the operative test is whether “the disputed expenses [would] have been incurred in defense of a covered proceeding even if there was no non-covered proceeding.”  The Court found that at the current stage of the proceedings, it was impracticable to determine whether the Plaintiffs were acting on behalf of AR Capital or on behalf of VEREIT.  However, the Court determined that because Plaintiffs’ counsel was representing both Plaintiffs and AR Capital in the Civil Actions, counsel’s certification that “much of the work reflected in the invoices benefited one or more of the [Plaintiffs]” was not sufficient.  The Court required Plaintiffs’ counsel to make a good faith apportionment between work that benefitted Plaintiffs and work that only benefitted AR Capital, with an explanation for the basis of its allocation.

Second, the Partnership argued that work performed in defense of the Government Investigations was not advanceable because AR Capital was being investigated, not the Plaintiffs, and AR Capital is not entitled to advancement.  The Court noted that it was unclear whether the Plaintiffs were “parties” to the Government Investigations, as required by the Partnership agreement for entitlement to advancement.  In the Court’s view, the Plaintiffs’ mere belief that they could become a target of the Government Investigations was insufficient to entitle them to advancement.  However, the Court left open the opportunity for Plaintiffs to submit new evidence demonstrating that they are targets of the Government Investigations.

Third, the Partnership sought to impose a set of unilateral terms on Plaintiffs’ counsel’s billing practices, including an obligation to create and adhere to a litigation budget, a mandatory 10% discount from all Plaintiffs’ counsel’s firms, and a rate cap. The Court found that these conditions are not required by the advancement provisions of the Partnership agreement, and that the Partnership cannot unilaterally impose such conditions.

Fourth, the Partnership sought to retroactively apply a previously made payment to its advancement obligations for the Civil Actions, which constituted “nearly all” of the advancement demand for those actions.  The Court found that such retroactive reallocations were not permitted by the Partnership agreement, and that the Partnership must advance the full amount demanded for the Civil Actions within the guidelines of its earlier rulings.

Fifth, the Partnership withheld advancement to Plaintiffs on the grounds that they had received payment already via a settlement with AR Capital’s insurance carrier.  The Plaintiffs refused to provide any information to the Partnership about that insurance payout.  The Court determined there was an issue of material fact that cannot be determined on summary judgment and reserved its ruling for trial.

Sixth, the Partnership objected to the reasonableness of the Plaintiffs’ counsel’s fees and expenses.  The Court noted that this was a motion for payment under Court of Chancery Rule 88, which placed the burden on the Plaintiffs to prove the reasonableness of the requested fees and expenses.  Regarding rates charged for staff attorneys, the Court determined that the Plaintiffs must demonstrate that the rates are consistent with what other comparable firms would charge for staff attorneys.  Because this is a factual question that required development of a factual record, the Court reserved judgement until after trial.  Regarding the alleged over-staffing of the case, the Court determined that a “gross abuse” standard applied, and that there was insufficient evidence to question Plaintiffs’ counsel’s good-faith certification as to the staffing needs of the case.  Regarding allegedly vague work descriptions, the Court noted that it had reviewed the descriptions submitted and determined that they were customary and reasonable.

The Court awarded fees on fees because the Plaintiffs had been successful in their defense of their advancement rights and concluded by reiterating that the parties were to make and object to advancement demands in accordance with the procedures set forth in Danenberg v. Fitracks, Inc., 2012 WL 11220 (Del. Ch. Jan. 3, 2012).

The full opinion is available here