Meyers v. Quiz-DIA, C.A. No. 9878 (Del. Ch. June 6, 2017) (Laster, V.C.)
In this memorandum opinion, the Court granted summary judgment in favor of plaintiffs who were seeking indemnification from Quizmark LLC and QCE Gift Card LLC for expenses incurred in defending against claims related to decisions they made while officers of those entities. The operating agreements of these two companies, which were identical, granted officers and members a right to mandatory indemnification. However, the Court granted summary judgment in favor of defendant Quiz DIA LLC, which also had an identical operating agreement, because plaintiffs were not officers or members of that entity.
Quizmark LLC (“Quizmark”), QCE Gift Card LLC (“QCE Gift Card”), and Quiz-DIA LLC (“Quiz-DIA”) (collectively, the “Subs”) were all subsidiaries of QCE LLC (“OpCo”), the primary operating entity for the Quiznos enterprise. Plaintiffs Greg MacDonald and Dennis Smythe (“Plaintiffs”) were officers of OpCo, and claimed to be officers of all the subsidiaries of the company. During their employment at OpCo, Plaintiffs had negotiated an out-of-court restructuring with various creditors. These creditors brought claims against the Plaintiffs in Colorado District Court (the “Colorado Action”), alleging that the projections they presented were false or misleading. The Colorado District Court dismissed the creditors’ claims on jurisdictional grounds. Prior to all appeal rights expiring, the Plaintiffs filed a complaint in the Court of Chancery seeking indemnification. The Court dismissed this claim without prejudice since the claims were not yet ripe while the appeals process was ongoing. After the creditors had exhausted all appeals, the Plaintiffs again sought indemnification for the expenses incurred defending against the Colorado Action.
As a procedural matter, the Court rejected the Subs’ argument that the Plaintiffs were required to file a separate action since their indemnification claim was dismissed without prejudice. The Court found that requiring Plaintiffs to file a new complaint would be a waste of judicial and litigant resources. Accordingly, the Court vacated the prior order of dismissal and allowed Plaintiffs to continue to pursue their claim.
On the merits of the indemnification claim, the Court held that Delaware law applied to all three of the operating agreements, even though one of the subsidiaries was an Arizona limited liability company, because neither party had argued that the application of a different law would change the result. The Court noted that, under Delaware law, companies may provide indemnification subject only to the limitations of the operating agreement.
Regarding the issue of whether Plaintiffs qualified for indemnification based on their role in the Subs, the Court held that, while neither were members of any of the Subs, both were officers of QCE Gift Card and Quizmark. However, the Court held that neither of the Plaintiffs were explicitly designated as officers of Quiz-DIA, and it also rejected Plaintiffs’ argument that they served as de facto officers. Officer status in that entity entailed certain requirements, such as background checks, that Plaintiffs had not completed. Since the operating agreements only indemnified officers and members, the Court granted Quiz-DIA’s motion for summary judgment.
Next, the Court found that the Colorado Action was covered by the indemnification provisions. First, the Court noted that the operating agreements provided indemnification for “any loss, damage, or claim incurred . . . by reason of any act or omission performed or omitted by such Member or Officer in good faith on behalf of the Company. . . .” The Court found that the “by reason of” standard was met since the Colorado Action arose from Plaintiffs’ negotiations undertaken as corporate officials while working on behalf of the entire Quiznos enterprise, including Quizmark and QCE Gift Card.
Furthermore, the Court found that the language of the indemnification provisions covered pre-litigation expenses. It noted that losses in the indemnification context generally include investigative costs and defense. The Court rejected the argument that expenses incurred prior to the filing of the Colorado Action should not be covered because they were not a part of the Plaintiffs’ legal defense. The indemnification provisions were not limited to the costs of defense and, in any case, the Court reasoned that defense in a litigation context has a broad meaning.
Finally, the Court rejected the argument that the Plaintiffs’ costs should not be indemnified because they had not acted in good faith. The Court noted that the indemnification provisions of the operating agreements granted indemnification “[t]o the full extent permitted by applicable law.” Accordingly, this language included a right to indemnification without having to show good faith since Plaintiffs had been successful in defending the Colorado Action.