Donohue v. Corning, et al., C.A. No. 3733-VCS (Del. Ch. June 20, 2008)

The Court of Chancery denied plaintiff’s motion for partial summary judgment on the issue of whether plaintiff was entitled to advancement of expenses in connection with an action that plaintiff brought to determine who is in control of defendant Expansion Capital Partners, LLC (“Expansion”).

The plaintiff, Mark Donohue (“Donohue”), was the managing member of Expansion until he was
purportedly removed from his position for “Cause” by a “Special Board Approval” under the terms of Expansion’s limited liability company agreement (the “Agreement”). Prior to taking action to remove Donohue, the defendants offered Donohue a reduced role at Expansion but never threatened to bring any type of action, claim, suit or proceeding against him. When Donohue refused the offer of a reduced role, the defendants took action to remove him. Following Donohue’s purported removal, Donohue filed an action to dispute that he was validly removed as the managing member under the terms of the Agreement and sought to have his litigation costs for that action advanced by Expansion.

The Agreement contains a provision providing that Expansion will indemnify and hold harmless a
“Covered Person,” which includes a managing member, “from and against all liabilities and expenses . . . incurred in connection with the defense or disposition of any claim, action, suit or proceeding . . . in which the Covered Person is involved as party or otherwise, or with which the Covered Person may be threatened, either during the Covered Person’s incumbency or thereafter . . .” In addition, the Agreement indicates that Expansion “shall advance such expenses to the Covered Person upon receipt of an undertaking from such Covered Person to repay the advanced amount if it is ultimately determined that such Covered Person was not entitled to indemnification.”

Donohue argued that he was entitled to advancement of expenses under the terms of the Agreement because the defendants threatened to remove him for cause, and accused him of breaching his duties to Expansion and engaging in malfeasance; and that he was disposing of that threatened action by brining his claim. The defendants contended that Donohue was not entitled to advancement of expenses because Donohue had not been threatened with any “claim, action, suit or proceeding.”

The Court found that the language in the indemnification provision limiting a Covered Person’s
indemnification to liabilities and expenses related to the “defense or disposition of” a claim should be interpreted as requiring the Covered Person’s actions be defensive or responsive in nature, although not necessarily limited to defending a suit. The Court reasoned that any other interpretation would render the “defense or disposition of” language mere surplusage, which could be removed without altering the meaning of the provision. The Court indicated that Donohue had implicitly acknowledged this interpretation by arguing that he was responding to a threatened action.

The Court noted, however, that the problem with Donohue’s argument was that he could not identify the threatened action that he was supposedly defending or disposing of by brining his action since the only explicit threat made by the defendants was that they would remove him for cause, which the defendants did subsequently in fact do. The Count further noted that Donohue wished to dispute his removal for cause but, since advancement of expenses for such an action is not granted under the terms of the Agreement, he was trying to recast his action as responsive to a threatened action for breach of fiduciary duty, which the defendants had expressly disclaimed. Since the defendants had not initiated or threatened Donohue with any action, claim, suit or proceeding, the Court found that Donohue was not entitled to the advancement of expenses under the Agreement and, therefore, denied Donohue’s motion for partial summary judgment on that issue.

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