Patriot Rail Must Pay Some of Ex-CEO's Fees in Debtor Case

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By Michael Greene

March 1 — Patriot Rail Co. must advance some of the legal fees and expenses its former chief executive officer incurs in opposing a bid to add him as a debtor in a California case, the Delaware Chancery Court ruled Feb. 29.

Vice Chancellor J. Travis Laster rejected an argument that Patriot Rail shouldn't have to advance former chairman and CEO Gary Marino's legal expenses because he no longer is a director or officer of the company.

Instead, Laster found that Patriot Rail's charter—which mandates an advancement “to the fullest extent permitted by law”—provides coverage that applies back to actions Marino took while serving as a director or officer of the company.

Delaware's indemnification and advancement statute's “continuation” and “no termination” clauses allow companies to implement mandatory advancement rights that provide coverage to individuals for actions taken during their periods of service. Such rights continue after the individuals cease to serve, and can't be altered or eliminated after the individuals are exposed to litigation, Laster said.

The judge added that this approach was supported by state public policy in favor of encouraging capable men and women to serve as corporate directors.

“By establishing a statutory presumption of continuing coverage for actions taken during the period of service, the Continuation Clause and the No Termination Clause ensure that the public policy interest prevails, unless the individuals know when they choose to serve that their rights will terminate or can be cut off later,” he wrote.

In detailed instructions, the court specified several actions each party must take to implement its ruling, including that Marino's counsel submit monthly advancement demands for fees and expenses incurred in the California litigation.

Covered Conduct

The advancement claims stemmed from a lawsuit filed in the U.S. District Court for the Eastern District of California in which Sierra Railroad Co. alleged that Patriot Rail had misused confidential information obtained during failed merger negotiations and that it breached a letter of intent for an asset purchase. While the underlying litigation was ongoing, Patriot Rail was sold and Marino resigned from his positions with the company.

After being awarded more than $50 million in damages from the litigation, Sierra filed a motion asking the California court to add Marino as a debtor to the judgment. Marino subsequently sought advancement from Patriot Rail for defending against the motion.

Laster found Marino was entitled to advancement for defending against claims that he personally caused Patriot Rail to misuse Sierra's confidential information because the alleged conduct occurred while he served as a director and officer of the company.

However, the court declined to award advancement for Marino's defense against an assertion that he transferred funds from the company to avoid judgment because that conduct occurred after he left Patriot Rail.

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

For More Information

The opinion is available at http://src.bna.com/cYf.