Court Dismisses Contractual Claims for Advancement and Indemnification

By: Scott E. Waxman and Marissa Leon

In Nathan Brick v. The Retrofit Source, LLC, et al. (C.A. No. 2020-0254-KSJM), the Court of Chancery in the State of Delaware (the “Court”) dismissed claims for advancement and indemnification by a former officer of an automobile lighting products supplier.

Nathan Brick (the “Plaintiff”) served as Chief Operating Officer (the “COO”) of The Retrofit Source, LLC (the “Opco”).  The Plaintiff also served as a member of the Board of Managers (the “Holdco Board”) of the sole owner and manager of Opco, TRS Holdco, LLC (“Holdco” and, together with Opco, the “Companies”).  As COO of Opco, the Plaintiff was responsible for the supply chain management and order fulfillment of Opco, as well as U.S. Customs and Border Protection (“Customs”) matters, including paying Opco’s duties.  

The issue before the Court arose from the discovery by Opco’s officers that the company was running a “double-invoicing scheme” causing it to underpay its duties to Customs.  The officers subsequently reported the underpayment of duties to Customs and initiated an internal investigation at Opco.  The Plaintiff was suspected of engaging in the “double-invoicing scheme” and as a result the Holdco Board terminated Plaintiff’s employment with Opco and the Plaintiff resigned as a member of the Holdco Board.  In response, the Plaintiff submitted a letter to the Companies demanding advancement for his legal fees and expenses.  The Companies argued that the Plaintiff was not entitled to advancement or indemnification and that they reserved all rights and defenses with respect to any such claims.  

Plaintiff filed an action for advancement under Holdco’s LLC Agreement (the “Holdco LLC Agreement”) in the Court.  In response, the Holdco Board passed a resolution after Plaintiff filed his claim denying any advancement and indemnification to the Plaintiff (the “Board Resolution”).  Plaintiff then filed two additional demands for advancement claiming that he had incurred $129,925.30 in legal fees and expenses over the course of approximately four months.  The Company maintained the position that the Plaintiff was not entitled to any advancement or indemnification.  

The Companies filed a motion for summary judgment to dismiss the advancement claims and the Plaintiff filed a cross-motion for summary judgment.  The Court analyzed the Holdco LLC Agreement using ordinary contract interpretation principles.  According to the Court, the Holdco LLC Agreement clearly provided for a grant of indemnification and advancement to certain covered persons.  The Court found that the indemnification for officers was discretionary and indemnification for members of the Holdco Board was mandatory under the Holdco LLC Agreement.  As an officer of Holdco, the Plaintiff was not entitled to indemnification because the Holdco Board had successfully exercised its power to deny the Plaintiff any advancement in his capacity as COO of Opco through the Board Resolution.  The Court also concluded that the Plaintiff was not entitled to indemnification as a member of the Holdco Board because the proceedings for which the Plaintiff claimed advancement were solely by reason of the fact that he was the COO of Opco.  Therefore, the Court granted the Defendant’s motion for summary judgment and denied the Plaintiff’s cross-motion for summary judgment.

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