Homestore, Inc. v. Tafeen

• Decision Date: 17 November 2005
• Docket Number: No. 223, 2005.,223, 2005.
• Citation: 888 A.2d 204
• Parties: HOMESTORE, INC., Defendant Below, Appellant, v. Peter TAFEEN, Plaintiff Below, Appellee.
• Court: United States State Supreme Court of Delaware

Page 204

888 A.2d 204

HOMESTORE, INC., Defendant Below, Appellant, v. Peter TAFEEN, Plaintiff Below, Appellee.

No. 223, 2005.

Supreme Court of Delaware.

Submitted: October 12, 2005.

Decided: November 17, 2005.

Court Below — Court of Chancery of the State of Delaware, in and for New Castle County, C.A. No. 023-N.

Upon appeal from the Court of Chancery. AFFIRMED.

William D. Johnston (argued) and Dawn M. Jones, Young, Conaway, Stargatt & Taylor, Wilmington, DE, for appellant.

William M. Lafferty, Jerry C. Harris, Jr. and Samuel T. Hirzel, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, and Marc A. Fenster (argued), Russ, August & Kabat, Los Angeles, CA, for appellee.

Before STEELE, Chief Justice, HOLLAND and RIDGELY, Justices.

HOLLAND, Justice:

This is an appeal from a final judgment entered by the Court of Chancery in an advancement proceeding brought by the plaintiff-appellee, Peter Tafeen, against his former employer, the defendant-appellant, Homestore, Inc. The Court of Chancery issued three significant opinions in this proceeding: a decision deciding cross-motions for summary judgment; a post-trial decision holding that Tafeen was entitled to advancement; and a decision affirming, with one exception, a Special Master's Final Report regarding the reasonableness of Tafeen's advancement request for attorney's fees. Homestore challenges certain aspects of each decision in this appeal.

Homestore has raised several issues on appeal. First, it asserts that the Court of Chancery committed legal error by rejecting Homestore's laches defense as a matter of law. Second, Homestore contends that the Court of Chancery committed legal error in rejecting its official capacity ("by reason of the fact") defense as a matter of law because it alleges Tafeen's actions were motivated by personal gain. Third, Homestore submits that the Court of Chancery abused its discretion by arbitrarily restricting the scope of Homestore's unclean hands defense. Fourth, Homestore alleges that the Court of Chancery's finding that Homestore failed to meet its burden of proof with respect to two affirmative defenses was clearly erroneous. Those defenses are unclean hands and a breach of the implied covenant of good faith and fair dealing. Fifth, Homestore argues that the Court of Chancery erred in approving the Special Master's Final Report on the reasonableness of Tafeen's request for the advancement of attorney's fees.

We have carefully considered each of Homestore's contentions. We have concluded that the record supports each of the Court of Chancery's discretionary rulings, that none of its factual findings were clearly erroneous, and that all of its legal rulings were correct. Therefore, the judgment of the Court of Chancery must be affirmed.

Facts

Homestore is a Delaware corporation that has a mandatory advancement provision in its bylaws. A few years ago, Homestore discovered some accounting irregularities that resulted in an overstatement of the company's revenues. In March 2002, it announced those findings and restated its financial statements for several periods. Thereafter, Homestore and its officers and directors were named as defendants in numerous civil actions. They also became the subjects of an administrative investigation by the Securities and Exchange Commission ("SEC") and a criminal investigation by the Department of Justice ("DOJ").

Tafeen is a former officer of Homestore. He was employed by Homestore from September 1997 through November 30, 2001, first as Vice President of Business Development and later as Executive Vice President of Business Development, Ads and Sales. Since Homestore's announcement and reinstatement of its financial statements, Tafeen has incurred and continues to incur substantial legal fees related to several investigations, civil actions, and a criminal indictment.

Section 6.1 of Homestore's bylaws provides for, among other things, indemnification of present or former officers and directors "to the fullest extent permitted by the" Delaware General Corporation Law. In addition, Section 6.2 of Homestore's bylaws contains a mandatory advancement provision: "[t]he Corporation shall pay all expenses (including attorney's fees) incurred by such a director or officer in defending any such Proceeding as they are incurred in advance of its final disposition."

Tafeen sought advancement for expenses in connection with investigations by Homestore's Audit Committee, the SEC, and the DOJ, and numerous civil actions that named Tafeen as a defendant (collectively, the "Proceedings"). Tafeen also sought advancement in connection with another action filed after this litigation was commenced — captioned Myers v. Homestore, Inc. There is no dispute that all of the Proceedings are a covered "Proceeding" under Homestore's bylaws.

The Proceedings allege a scheme involving a series of transactions by Homestore that supposedly allowed Homestore's Finance Department to overstate Homestore's revenues. Tafeen was the head of the business development department and the challenged transactions were implemented by Tafeen's department. According to Tafeen, any role he had in implementing or overseeing the challenged transactions was in his official capacity as an officer of the corporation. Therefore, Tafeen asserts that he is a party to the Proceedings "by reason of the fact" that he was a former officer of Homestore. This assertion was challenged by Homestore. According to Homestore, Tafeen cannot satisfy the "by reason of the fact" requirements because his actions were motivated by personal greed that resulted in his receipt of $15 million.

The DOJ investigation led to an indictment of Tafeen and Homestore's former CEO in April 2005, with trial scheduled for January 2006. The securities class action and the SEC civil action have been stayed pending the outcome of the criminal trial. Three of the civil actions have been dismissed with prejudice as to Tafeen and no money was paid by Tafeen in connection with the resolution of those law suits.

In early 2002, Tafeen requested advancement of legal fees and costs incurred in defending all of the Proceedings. Homestore notified Tafeen that it would reimburse him for expenses accrued through February 2002 related to Homestore's internal investigation. Homestore initially refused to advance any expenses related to the other aspects of the Proceedings.

On April 30, 2002, Homestore sent a letter to Tafeen's counsel advising him that Homestore would advance expenses in connection with the SEC investigation and the then-pending civil litigation in which Tafeen had been named as a defendant. That advancement agreement by Homestore was contingent, however, upon Tafeen's agreement with an April 30 memorandum containing a bullet point list of conditions. None of the requirements in the April 30 memorandum were set forth in Homestore's bylaws. On the advice of his counsel, Tafeen did not return Homestore's proffered advancement documents.

On July 11, 2003, Tafeen's counsel wrote to Homestore's attorney demanding advancement once again. Enclosed with this letter was an undertaking signed by Tafeen, even though Homestore's mandatory advancement bylaw does not require an undertaking from a former officer. Homestore denied Tafeen's request for advancement.

Summary Judgment Decisions

After Homestore refused Tafeen's request for advancement, Tafeen filed a complaint in the Court of Chancery on October 28, 2003. It contained one count for advancement of expenses (including attorneys' fees) incurred or to be incurred by Tafeen in connection with the various matters, and one count for an award of expenses (including attorneys' fees) incurred by Tafeen in this advancement action. On November 18, 2003, Homestore filed its Answer and eleven affirmative defenses.

The parties filed cross motions for summary judgment based on the pleadings, without seeking discovery. Tafeen moved for summary judgment on the issue of liability. Homestore moved for summary judgment on its nine substantive affirmative defenses. The Court of Chancery denied both parties' motions and rejected, as a matter of law, all but one of Homestore's affirmative defenses.

With respect to the eight affirmative defenses rejected by the Court of Chancery on summary judgment, Homestore has not appealed six of them, e.g., fraudulent inducement; estoppel; Homestore's assertion that advancement should be denied because, due to his alleged actions at issue in the Proceedings, Tafeen could not establish his entitlement to an advancement because it is prohibited under the Sarbanes-Oxley Act of 2002; and Homestore's "undue financial hardship" defense. The other two defenses rejected on summary judgment — which have been raised by Homestore as issues on appeal — are: Homestore's laches defense; and Homestore's "official capacity defense" — i.e., that the proceedings at issue did not arise "by reason of the fact" that Tafeen is a former officer of Homestore, but arose due to Tafeen's personal greed.

The Court of Chancery's summary judgment decision also addressed what it characterized as Homestore's "novel" unclean hands defense. This defense was premised solely "on the allegation that `Tafeen purchased an expensive home in Florida, a state that has extremely protective `homestead' provisions against creditor claims,' in order to shelter assets, thus avoiding repayment should Tafeen's claims ultimately be found to be nonindemnifiable." In support of that defense, Homestore submitted the information and belief affidavit of Homestore's general counsel, Michael Douglas. Based on this affidavit, the Court of Chancery concluded that "there [were] sufficient factual disputes surrounding [Homestore's] unclean hands defense ... to warrant development of a more complete record."

On March 23, 2004, Tafeen filed a motion for reargument of the Court of Chancery's determination that a triable issue of fact existed regarding Homestore's...