Evans v. Avande, Inc., C.A. No. 2018-0454-LWW (Sept. 23, 2021) (Will, V.C.)
In this memorandum opinion, the Court of Chancery granted in part and denied in part plaintiff’s motion for summary judgment on indemnification claims brought in connection with his partial success in prior litigation the defendant corporation (“Avande”) brought against him. In doing so, the Court of Chancery rejected plaintiff’s “novel theory of proportional indemnification” that he was entitled to indemnification for a breach of fiduciary duty claim on which the Court found him liable but awarded Avande only a small portion of the damages it sought.
Plaintiff sought indemnification for expenses incurred in a prior Court of Chancery action in which Avande alleged, among other things, that plaintiff, who was the former chief executive officer and a former director of Avande, breached his fiduciary duty of loyalty “by engaging in self-interested transactions, authorizing improper expenditures, and failing to maintain proper documentation.” After trial, the Court of Chancery found that plaintiff breached his fiduciary duties but that Avande had waived its claims for declaratory judgment, tortious interference, defamation, and conversion by failing to brief those arguments. Plaintiff had filed a complaint seeking advancement of expenses in connection with the prior action, but the parties agreed to stay the advancement action until the conclusion of the prior litigation. Following the conclusion of the fiduciary duty litigation and lifting of the stay in the advancement action, plaintiff filed an amended complaint, seeking indemnification for fees and expenses in the fiduciary duty litigation and “fees on fees” for the current indemnification action.
The Court first addressed plaintiff’s entitlement to mandatory indemnification. The Court determined that plaintiff was successful “otherwise” as a result of the failure of Avande to brief the declaratory judgment, conversion, tortious interference, and defamation claims in its post-trial briefing. Plaintiff also argued for proportional indemnification on the breach of fiduciary duty claim, on which he was found liable, as the Court only awarded 1.2% of Avande’s request for damages on that claim. The Court rejected awarding proportional indemnification in this context because, while a party may seek indemnification in cases of partial success, the Court evaluates partial success on a claim by claim basis. Because plaintiff was liable on the fiduciary duty claim, he was not successful on that claim and was not entitled to indemnification for it.
Having found that plaintiff was entitled to indemnification on the claims for declaratory judgment, conversion, tortious interference, and defamation, the Court then evaluated whether those claims were brought against plaintiff “by reason of the fact” that plaintiff was a director or officer of Avande. The Court determined that, because the conversion and declaratory judgment claims arose from, among other things, allegations that plaintiff had misused Avande’s information post-termination that he received while serving as chief executive officer, the claims were “by reason of the fact” that plaintiff was an officer of the corporation. The Court thus awarded indemnification, as a matter of law, on those claims. On the other hand, the Court explained that it could not determine, as a matter of law, that the defamation and tortious interference claims were “by reason of the fact” that plaintiff was an officer or director of Avande. These claims were not based on the use of confidential information but instead arose from plaintiff’s alleged communications with Avande’s vendors and creditors stating that the corporation could not pay its debts and encouraging them to take legal action against the corporation. Therefore, it was not “apparent” to the Court that plaintiff’s “former status was necessary for the challenged misconduct.”
Finally, the Court found that plaintiff was entitled to “fees on fees” in proportion to his success in seeking indemnification on the conversion and declaratory judgment claims. The Court noted that plaintiff would also be entitled to a proportionate share of his expenses and fees to the extent he prevailed on the other claims and that the amount of fees and expenses would be determined in a later proceeding.