MANDATORY INDEMNIFICATION PROVIDED UNDER BYLAWS TO AGENT DUE TO ACTIONS TAKEN ON COMPANY’S BEHALF

By: Annette BeckerRich Minice

In Fred L. Pasternack v. Northeastern Aviation Corp., C.A. No. 12082-VCMR (Del. Ch. Nov. 9, 2018), the Delaware Court of Chancery awarded mandatory indemnification for legal expenses and fees-on-fees to Fred Pasternack (“Pasternack”), a former pilot for Northeastern Aviation Corp. (“Northeastern”) under Northeastern’s Bylaws (the “Bylaws”) because he was determined to be an agent of Northeastern when attending a random drug test to maintain his pilot certification.

Pasternack served as a longtime on-demand pilot for Northeastern, a position classified as an independent contractor. All pilots (including on-demand pilots) were required to comply with Northeastern’s drug testing program. Northeastern ordered Pasternack to appear for a mandatory random drug test (the “Test”). After providing a urine sample of insufficient volume, Pasternack told the facilitator of the Test (the “Facilitator”) he had an appointment with a patient for his medical practice and would return later to complete the test. The Facilitator did not object, and Pasternack left the Test prematurely before returning to complete it later that day. Before resuming the Test, the Facilitator phoned Northeastern and asked for permission to proceed, which it received. Despite returning and passing the drug test, the Facilitator determined that Pasternack refused to take the Test by leaving before it was completed, resulting in an automatic failure.

As a result the Federal Aviation Association (“FAA”) revoked Pasternack’s pilot license. Pasternack challenged the revocation. Ultimately the Court of Appeals for the D.C. Circuit, ruled in favor of Pasternack finding that there was insufficient evidence to determine whether the Facilitator provided permission to leave the Test.

Pasternack brought this suit seeking indemnification in accordance with the Bylaws for the legal expenses he incurred from Northeastern following the appellate decision. Northeastern denied the request claiming that Pasternack was not an employee or an agent of Northeastern, was not subjected to the drug test due to his affiliation with Northeastern, and did not act in good faith or in the best interests of Northeastern by prematurely leaving the drug test. Pasternack sought indemnification under the Bylaws for legal fees and expenses he incurred in defending himself in the underlying FAA proceedings. The Bylaws provide for mandatory indemnification of its officers, directors, employees and agents to the extent permitted by the General Corporation Law of Delaware. Section 145(a) of the DGCL sets out the relevant requirements for indemnification by a corporation:

“A corporation shall have the power to indemnify any person, who was or is a party… to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative… by reason of the fact that the person is or was a director, officer, employee or agent of the corporation… against expenses (including attorneys’ fees)… actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation.”

8 Del. C. § 145(a) (emphasis added). Delaware limits agency in the indemnification context to “only those situations when an outside contractor… can be said to be acting as an arm of the corporation vis-à-vis the outside world” and the underlying proceeding must result from the purported agent’s “conduct on behalf of the corporation.” Fasciana v. Electronic Data Systems Corp., 829 A.2d 160, 163 (Del. Ch. 2003). Northeastern conceded Pasternack was an agent when serving as a pilot, but argued that Pasternack was not acting on its behalf when appearing for the Test.

The Chancery Court disagreed and held in favor of Pasternack, citing that Northeastern (i) provided a list of pilots to be chosen at random and tested to the Facilitator, (ii) instructed Pasternack attend the Test as part of his work duties, and (iii) provided the required Custody and Control Form to Pasternack for the Test. By reporting for the Test and complying with Northeastern and the Facilitator’s instructions, Pasternack acted on behalf of Northeastern, to ensure Northeastern’s compliance with the FAA and Department of Transportation regulations. Pasternack was also awarded fees-on-fees under Delaware law.

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