Fraud No Defense in Advancement Dispute, Del. High Court Says

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By Michael Greene

Nov. 29 — A limited liability company can’t avoid advancing a former executive’s litigation expenses by claiming it was fraudulently induced into entering an employment agreement, the Delaware Supreme Court ruled Nov. 28 ( Trascent Mgmt. Consulting LLC v. Bouri , 2016 BL 393911, Del., No. 2016, 11/28/16 ).

Trascent Management Consulting, under its LLC agreement with former managing principal George Bouri, must advance Bouri’s litigation expenses until a court determines indemnification isn’t required, Chief Justice Leo E. Strine Jr. said. The ruling affirms a January bench decision by the Delaware Chancery Court.

Under Delaware law, companies may provide indemnification rights in their bylaws or employment agreements that allow officers and directors to be reimbursed for employment-related losses, including legal expenses. However, such agreements generally require an employee to return any advanced funds if it’s ultimately determined that the employee isn’t eligible for an indemnification.

The state high court said Trascent may later show that Bouri isn’t entitled to indemnification, but can’t go back on its promise to provide an advancement by alleging the parties’ employment contract is invalid.

Advancement Required

Trascent sued Bouri in April 2015, saying the former executive violated an employment agreement by making false statements about the company and the reasons for his departure.

In response, Bouri claimed the company had to advance his expenses related to defense of the lawsuit under his employment agreement and Trascent’s operating agreement.

However, the company countered that Bouri wasn’t entitled to an advancement because he made misrepresentations during employment negotiations.

The high court found that advancement disputes are summary proceedings under Delaware law. Trascent can’t escape its advancement obligations “by injecting into a summary advancement proceeding a defense based on the argument that the underlying contract under which the parties are operating is invalid altogether, because of fraud in the inducement,” Strine said. “Sanctioning that defense would undermine the General Assembly’s purpose in making advancement proceedings summary in nature.”

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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