Delaware Court Orders Indemnification And Legal Fee Award

The Delaware Court of Chancery has held that a former corporate officer is entitled to indemnification and legal fees in litigation involving his company

The Company opposes Horne’s demand for indemnification. Specifically, the Company contends that certain of the claims in the underlying litigation did not arise by reason of Horne’s service as an officer of the Company and also that certain of the fees charged by Horne’s counsel are unreasonable. Horne disagrees and seeks summary judgment on his claims for: (i) fees and expenses incurred in successfully defending the underlying litigation, (ii) fees and expenses incurred prosecuting this action, and (iii) pre- and post-judgment interest on all amounts. For the reasons that follow, the motion is GRANTED.

The background

The sordid factual background that gave rise to the underlying litigation was described in considerable detail in the Trial Opinion. My focus here is on the facts necessary to inform the indemnification analysis. In September 2012, a Company employee [Geller] reported to Waite that she and Morelli had engaged in a sexual relationship over a period of time and that she believed Morelli had sexually harassed her. This report prompted a series of responses from Horne and the Director Defendants that ultimately led to Morelli’s removal as CEO. In the underlying litigation, Morelli contended that the defendants had been looking to remove him for years and that the reported sexual misconduct with an employee was merely a pretext to allow the defendants to seize to control of the Company.  He alleged that the defendants bribed and coaxed the female employee to make a false claim of sexual harassment as the first step of their plan and then initiated a bogus investigation of the report to provide cover for the challenge they knew would follow his removal as CEO.

In the Trial Opinion, the Court summarized Horne’s very limited involvement in the sexual harassment investigation and subsequent attempt to remove Morelli as CEO. In essence, Horne gave statements to lawyers charged with leading the investigation and pointed out to the lawyers that a stockholders agreement would have to be amended if the Board decided to remove Morelli in order to prevent Morelli from simply replacing the majority of directors as controlling stockholder and then reinstating himself as CEO. When the Board met to consider Morelli’s removal, Horne was not present and did not otherwise participate.

Morelli sued Horne and others

While the Morelli Complaint named Horne in several counts, the claims actually presented against Horne during the six-day trial were much more limited. Indeed, the trial court recounted how the Plaintiffs had either abandoned or waived nine of the claims they alleged in the Morelli Complaint.  As to Horne, the court noted that the primary claim prosecuted against him at trial was that he aided and abetted the Director Defendants in their alleged breaches of fiduciary duty.  The Trial Opinion characterized the Plaintiffs’ claims as “a shifting target and impossible to defend against without enormous expense” and rejected each claim against against Horne out of hand.

Horne then sued for indemnification and his legal expenses

When determining whether fees are reasonable under Section 145(c), the court considers whether: (1) the expenses were actually paid or incurred, (2) the services were in good faith thought prudent and appropriate by competent counsel, and (3) the rates or charges were comparable to those charged in similar circumstances.  The Company does not dispute that Horne incurred fees. Nor does the Company challenge the rates charged by Horne’s counsel. Instead, the Company challenges certain strategic decisions made by Horne’s counsel during the underlying litigation, including the decision to rely upon a witness declaration that was later deemed to be unreliable and the decision to depose a witness who Defendant alleges did not provide relevant testimony, both of which Defendant alleges “were the product of meritless litigation strategies that Horne abandoned prior to trial, but not before racking up considerable expense.”  The Company’s invitation to nitpick counsel’s strategic decisions in this hotly litigated case where Horne ultimately prevailed on every claim is offered with little grace.

This court will review litigation strategy decisions only if they are “unmistakably unreasonable” and constitute “clear abuse.”  The Company has fallen well short of making this showing. Nor has the Company justified its requests for discovery into the fees or that the Court engage in a line-by-line review of counsel’s bill.  Given the complexity of the issues, the duration and scope of discovery, the extensive pre-trial motion practice and the lengths to which Horne was forced to go to defend himself—at trial and post-trial appeal—it is clear that the requested fees are reasonable on their face.

The earlier opinion is linked here. 

In this action, the CEO and the company return to this Court alleging that the four defendants engaged in a long-running and wide-ranging conspiracy that involved, essentially, everyone who disagreed with the CEO‘s management of the company. The plaintiffs seek approximately $50 million in damages, as well as equitable relief in the form of an extension of the stockholders agreement in order to cement the CEO‘s control for another two years. The alleged wrongs range from nebulous breaches of fiduciary duty based on undermining the company‘s strategic vision to breach of contract claims. After extensive pre-trial proceedings, I tried this matter for six days in February 2015. This Memorandum Opinion (“Opinion”) reflects my post-trial findings of fact and conclusions of law, as well as my rulings on certain ancillary motions. Because of the far-ranging claims advanced by the plaintiffs and the number of non-party actors who figure in their narrative, the recitation of the facts is unusually lengthy.

Overall, the plaintiffs seek damages and equitable relief for breach of the duty of loyalty, breach of contract, and tortious interference, and they advance secondary liability theories of aiding and abetting and conspiracy. The defendants deny liability on all counts, argue that there was and is no conspiracy, and contend that the CEO is a paranoid narcissist. The defendants also accuse the plaintiffs of having undermined the integrity of the litigation process by engaging in conduct akin to bribing and tampering with witnesses.

The court found that the plaintiffs engaged in serious litigation misconduct

I recognize that parties have a right to vigorously pursue their claims. I also assume that, misguided as I consider it to be, Morelli and his counsel believe their rhetoric regarding a vast conspiracy to take control of Optimis away from Morelli for the alleged insurgents‘ own self-serving motives. But, even so, the conduct I have described here is beyond the pale. Specifically, I find that Plaintiffs‘ conduct was  “prejudicial to the administration of justice” and has undermined the integrity of these proceedings by materially impacting the Court‘s ability reliably and accurately to find the facts. The crucial allegation underlying Plaintiffs‘ breach of loyalty claims is that Defendants used Geller as a pretext to take over the Company. When deposed, she demolished the reliability of the key statements in the Final Geller Declaration that might support a finding that Defendants engaged in a takeover conspiracy and used Geller‘s sexual harassment claims as a pretext. I, therefore, find it appropriate to disregard, in their entirety, all of the documents in the Geller Settlement and to reject any attempt by Plaintiffs to use those documents affirmatively to impeach Geller or any other witness. Relying on those documents is impossible based on the cynical context and manner in which they were created. As a result of Plaintiffs‘ improper conduct, I instead find credible and reliable what Geller said at her deposition and resolve any doubts about her credibility in favor of Defendants. 

Forward Forensics reported on issues of corporate governance at the company. (Mike Frisch)