Pontone v. Milso, C.A. No. 8842-VCP (August 22, 2014) (Parsons, V.C.)

By Jamie Bruce and Mark Hammes

This case involves a claim for advancement of legal fees by plaintiff Scott Pontone (“Pontone”), a director and officer of two Delaware corporations, based on indemnification and expense advancement provisions of the corporations’ bylaws. Faced with both a motion to dismiss for lack of standing and Pontone’s motion for summary judgment, the Court granted in part and denied in part the  motion to dismiss, and granted partial summary judgment in Pontone’s favor with respect to advancement of certain legal fees and expenses.  The Court also found that Pontone was entitled to advancement as to 75% of his “fees on fees” in prosecuting this action.

Pontone was the Vice President of Old Milso, a New York regional casket manufacturer, when it was acquired by The York Group, Inc. (“York”) in 2005.  After the acquisition, Pontone served as a director and Executive Vice President of Both York and the successor entity Milso Industries Corporation (“New Milso”) until 2007.  In May 2010, Pontone entered into a consulting arrangement with a competitor, Batesville Casket Company (“Batesville”).  In August 2010, York and New Milso instituted an action in a federal court in Pennsylvania (the “Underlying Action”) against Pontone and Batesville alleging that they engaged in a wrongful scheme to induce several employees and many of their most lucrative customers to switch to Batesville.  The Underlying Action is still ongoing.

Pontone made multiple requests to York and New Milso for advancement of his legal fees and expenses in the Underlying Action pursuant to their bylaws, which included indemnification and fee advancement provisions for directors and officers.  When these requests were denied, Pontone instituted this action in the Delaware Court of Chancery against York and New Milso (the “Defendants”), each of which is a Delaware corporation.  The Defendants moved to dismiss the complaint under Court of Chancery Rule 12(b)(6) on the grounds that Pontone lacks standing to pursue his advancement claims because he has a right to mandatory advancement from Batesville, and Pontone moved for partial summary judgment on the issue of his entitlement to advancement from the Defendants.

The Court granted in part and denied in part Defendants’ motion to dismiss.  Defendants’ argument was that Pontone had no injury-in-fact, and thus lacked standing, because he could not show that he had or would suffer any out of pocket expenses due to the fact that he had mandatory indemnification and advancement rights from his new employer, Batesville.  Although Pontone and Batesville had entered into a transaction which was, on its face, a loan for Pontone’s legal expenses, because the loan would be forgiven upon final disposition of the case, regardless of its outcome, the court found that Pontone had the “functional equivalent” of mandatory advancement and indemnification rights from Batesville.  Thus, he did not have any out of pocket expenses for the amounts previously paid to him by Batesville. Therefore, as to these amounts, the Court granted Defendants’ motion to dismiss for lack of standing.  However, as to those legal fees and expenses Pontone might incur in the future or those which had been previously incurred but not yet been paid by Batesville, the Court denied Defendants’ motion to dismiss.  The Court reasoned that the mere fact that Pontone had the right to have Batesville advance those amounts to him and had exercised it in the past did not undermine his independent contractual rights to advancement under the Defendants’ bylaws.  Furthermore, allowing the Defendants to escape liability simply because Batesville had honored its contractual obligation would cause a “perverse incentive” for companies to delay paying advancements in the hopes that they will be let off the hook.  Thus the Court denied the Defendants’ motion to dismiss as to those expenses which Pontone had not yet been advanced by Batesville.

The Court then turned to Pontone’s motion for summary judgment.  First, in reviewing the Defendants’ bylaws in detail, the Court determined that York’s bylaws were ambiguous with respect to whether advancement of expenses was mandatory or permissive, so summary judgment could not be granted as to advancement from York.  Next, the Court found that the Underlying Action was indeed brought “by reason of” Pontone’s former role as an officer and director (as required by New Milso’s bylaws) because the Defendants’ allegations were based on the misuse of confidential information learned in Pontone’s official corporate capacity.  Thus, Pontone was entitled to summary judgment as to advancement from New Milso.  For similar reasons as in its disposition of the Defendants’ motion to dismiss, the Court held that Pontone was not entitled to summary judgment as to expenses which had been previously advanced by Batesville, but was entitled to partial summary judgment as to expenses which Batesville had not yet paid.

Finally, the Court considered whether Pontone was entitled to advancement for expenses connected with his counterclaims and “fees on fees” for bringing this action for advancement.  The Court held that Pontone was entitled to advancement of fees relating to his defamation counterclaim because it was a compulsory counterclaim, but was not entitled to advancement of fees relating to his false advertising counterclaim, as it was a permissive counterclaim.  The Court further held that, under New Milso’s bylaws, Pantone was entitled to advancement of “fees on fees.”  As Pontone succeeded in establishing that he was entitled to advancement of some fees but not others, the Court judged, in “a nonscientific inquiry,” that he was entitled to 75% of the reasonable “fees on fees” incurred in connection with this advancement proceeding.

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