Stay current on changes and developments in corporate law with a wide variety of resources and tools.
May 29 — Echo Therapeutics Inc. must advance fees and expenses its former CEO and Chairman incurred while defending a counterclaim and two affirmative defenses filed by the company in a lawsuit arising out of the former executive's termination, the Delaware Chancery Court ruled May 28.
Vice Chancellor Donald F. Parsons Jr. held that both defenses were asserted by reason of fact that the former CEO was a officer and director of Echo, triggering advancement rights.
However, the court declined to rule in favor of plaintiff Dr. Patrick Mooney with respect to all six categories of attorneys' fees for which he requested.
Instead, Parsons concluded that the ex-CEO failed to show that the company improperly withheld an advancement of fees and expenses related to a Financial Industry Regulatory Authority investigation, a separate investigation commenced by the company or a second lawsuit filed by the former officer to “vindicate his reputation.”
After determining that fees related to both the FINRA and internal investigations were not advanceable, the court addressed whether the former CEO was entitled to certain fees he incurred while litigating the first of two lawsuits he filed in the Philadelphia Court of Common Pleas.
Because Echo had already paid most of the former CEO's fees related to an original counterclaim filed by company, the more substantial issue related to whether an amended counterclaim and affirmative defenses arose out of Dr. Mooney's role as a corporate officer, triggering advancement rights.
Despite Echo's conscious effort to amend its counterclaim and affirmative defenses to allege only “person capacity” claims, Parsons still held that both satisfied the “by reason of the fact” element of the advancement burden of proof, requiring that claims be asserted because of the petitioner's official capacity.
Noting that the summary nature of advancement proceedings generally favor a ruling in favor of advancement on less than clear-cut disputes, Parsons found the counterclaim likely implicated official capacity issues. He additionally opined that Echo could not circumvent its advancement obligation by a counterclaim that appeared to bring non-advanceable claims for improper reimbursements because it was “unlikely that such extensive, and expensive, reimbursements could have been obtained other than by reason of the fact that Dr. Mooney was CEO.”
The court additionally ruled that Dr. Mooney was entitled to advancement for fees incurred in defending against two affirmative defenses despite a lack of precedent on this issue.
“I am convinced, however, that the policies underlying advancement justify the payment of fees when an officer defends against affirmative defenses that implicate his performance as a corporate official, much in the same way the assertion of counterclaims by a corporation can require advancement,” he wrote.
Finding that the two affirmative defenses were tantamount to declaratory judgments of breach of fiduciary duties, Parson concluded that litigating them required the former CEO to defend his conduct as an officer and director of the company.
However, the court found that Mooney was not entitled to advancement for the claims asserted in the second lawsuit he filed against the company.
In doing so, the court rejected a contention that “defending” includes filing action to vindicate one's honest and integrity.
Noting the general rule that offensive litigation is not advanceable, Parson held that he could not stretch Delaware's advancement law to consider litigation “defensive” if it was neither compulsory nor asserted to defeat or offset affirmative claims by the corporation.
“If the term defending were construed more broadly, advancement would have the potential to become an unfettered license enabling disgruntled former officers and directors to litigate at the Company's expense,” he wrote. “Vindicating ones reputation may serve important personal objectives, but that does not mean that filing an offensive lawsuit qualifies as ‘defending,' within the meaning of 8 Del. C. § 145, against claims asserted by reason of the fact that one was an officer or director.”
Even though the plaintiff only prevailed in one category of his advancement claims, the court still awarded him 40 percent of his fees on fees reasonably incurred in the prosecution of this case.
“I arrived at this amount through a comparison of the invoices in the record and their respective amounts, as well as by considering the likely future importance of [the two lawsuits he filed in the Philadelphia Court of Common Pleas],” Parson wrote.
To contact the reporter on this story: Michael Greene in Washington at email@example.com
To contact the editor responsible for this story: Ryan Tuck at firstname.lastname@example.org
The opinion is available at http://www.bloomberglaw.com/public/document/PATRICK_MOONEY_MD__Plaintiff_v_ECHO_THERAPEUTICS_INC_Defendant_No.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)