James River Management Co., Inc. v. Kehoe, Civil Action No. 3:09cv387.

• Decision Date: 08 December 2009
• Docket Number: Civil Action No. 3:09cv387.
• Citation: 674 F.Supp.2d 745
• Parties: JAMES RIVER MANAGEMENT COMPANY, INC., et al., Plaintiffs, v. Michael P. KEHOE, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

674 F.Supp.2d 745

JAMES RIVER MANAGEMENT COMPANY, INC., et al., Plaintiffs, v. Michael P. KEHOE, et al., Defendants.

Civil Action No. 3:09cv387.

United States District Court, E.D. Virginia, Richmond Virginia.

December 8, 2009.

COPYRIGHT MATERIAL OMITTED

Steven K. Davidson, Emily Brooke Nestler, Jared Butcher, John F. O'Connor, Michael J. Baratz, Steptoe & Johnson LLP, Washington, DC, John David Lovi, Lara Romansic, Steptoe & Johnson LLP, New York, NY, for Plaintiffs.

Brian Emory Pumphrey, Erin Michelle Sine, Jonathan Chiu, McGuirewoods LLP, Christopher C. Spencer, Elizabeth Kinland Shoenfeld, O'Hagan Spencer LLP, Richmond, VA, William McCardell Furr, David Aaron Kushner, Willcox & Savage PC, Norfolk, VA, Charles B. Wayne, DLA Piper LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION

ROBERT E. PAYNE, Senior District Judge.

This matter is before the court on the Defendants' MOTION FOR ADVANCEMENT OF ALL FEES AND EXPENSES (Docket No. 94). For the reasons set forth below, the motion is granted in part and denied in part.

BACKGROUND

On June 19, 2009, James River Management Company Inc., James River Group Inc. ("JRG"), and James River Insurance Company ("JRIC") filed suit against Kinsale Management, Inc., Kinsale Capital Group, Inc., Kinsale Capital Group, Inc. (collectively "Kinsale"), William Kenney, Brian Haney, Ann Marie Marson,¹ Edward Desch (collectively "James River Individual Defendants"), Michael Kehoe, and Greg Share.

The facts are recited fully in the Court's memorandum opinion of November 18, 2009, 2009 WL 3874167 (Docket No. 130), and will not be repeated here. The First Amended Complaint ("FAC") alleges misappropriation of trade secrets and other misconduct, both tortious and in breach of contract, by Defendants who left the Plaintiffs' employment to start their own company. The Plaintiff's claims devolve from statute, as well as from the common law of tort (including breach of fiduciary duty) and contract. Although several claims in the original complaint have been dismissed, most are pending decision on motion for summary judgment.

On October 29, 2009, Defendants Kehoe, Desch, and Kenney moved "for an Order requiring JRG and JRIC to advance all fees and expenses (including attorneys' fees) incurred by or on behalf of the above named defendants in connection with this litigation." Def. Mot. at 1. The Defendants note that rights of advancement from JRG and JRIC must be analyzed separately. JRG, of which Kehoe only was a director, and thus from which only Kehoe seeks advancement, is a Delaware corporation. Def. Mem. at 1. JRIC, of which all three Defendants were officers, and thus from which all three Defendants seek advancement, was incorporated in Ohio. Id. Thus, the controlling law differs with respect to the relief sought against JRG and JRIC.

Citing Article VI of JRG's corporate bylaws, and 8 Del. Code § 145(a), Kehoe asserts that he is entitled to advancement, from JRG, of all fees and expenses incurred to date in this litigation, and all future fees and expenses as they are incurred. Def. Mot. at 1. Next, citing Ohio Code § 1701.13(E), Kehoe, Desch, and Kenney assert that Ohio law similarly mandates advancement of their fees and expenses. Id.

The Plaintiffs concede that Delaware law requires JRG to advance Kehoe's fees and expenses relating to the breach of fiduciary duty claim against him. PI. Oppo. Mem. at 2. However, they contend that JRG is not required to advance fees for the remainder of the claims against Kehoe, which the Plaintiffs contend implicate Kehoe in his personal capacity, not his capacity as director. As to the claims against JRIC by Kehoe, Desch, and Kenney, JRIC asserts several arguments: (1) "JRiC's bylaws create no right of advancement," and thus do not trigger Ohio Rev. Code § 1701.13(E); (2) Ohio Rev.Code § 1701.13(E) does not apply "to suits . . . brought by current corporate management against officers or directors;" and (3) Ohio law "does not mandate advancement to former directors, only current ones." Id. at 2-5 (emphasis added).²

The motion is fully briefed, and the matter is ripe for resolution. The moving Defendants have requested oral argument. However, the Court does not consider that to be necessary because the issues are adequately briefed and argument would not materially aid the decisional process.

I. The Applicable Legal Standard³

"[A] corporation can make the right to advancement of expenses mandatory, through a provision in its certificate of incorporation or bylaws." Gentile v. SinglePoint Financial, Inc., 787 A.2d 102, 106 (Del.Ch.2001). "Where such a mandatory provision exists, the rights of potential recipients of such advancements will be enforced as a contract." Id. Advancement proceedings must be summary in nature if they are to serve their intended purpose of covering the directors' legal expenses while the merits of the litigation are determined. Lipson v. Supercuts, Inc., 1996 WL 560191, at *2 (Del.Ch. Sept. 10, 1996); see also Reddy v. Electronic Data Systems Corp., 2002 Del. Ch. LEXIS 69, at *30, 2002 WL 1358761, at *9 (Del. Ch. June 18, 2002) (noting the Delaware General Assembly's determination "that persons claiming a right to the advancement of expenses (including attorneys' fees) under Delaware law should be entitled to have their claims adjudicated by this court in a summary fashion").

Advancement is a remedy distinct from indemnification, and, due to the necessity of promptly adjudicating issues of advancement, a director's right to advancement must be determined before his ultimate right to indemnification. Homestore, Inc. v. Tafeen, 888 A.2d 204, 212 (Del.2005). A director's right to advancement is in no way dependent upon a showing of any likelihood that he will be ultimately entitled to indemnification. Id. Nor does it depend, unless the agreement so provides, on a litigant's ability to ultimately repay the funds if the litigant loses. See Reddy, 2002 Del. Ch. LEXIS 69, at *13, 2002 WL 1358761, at *4 (noting that the corporation "could have conditioned former employees' advancement rights on an undertaking, proof of an ability to repay, or even the posting of a secured bond. But it did not do so."). Thus, in toto, this motion for advancement is a determination of whether the Defendants meet the basic contractual requirements for advancement of fees and expenses, and, if they do, which fees and expenses are covered.

II. JRG's Advancement Obligations Under Delaware Law.

The Delaware Code, providing for indemnification of officers by the corporations they serve, as follows:

A corporation shall have power to indemnify any person who was or is a party . . . to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative . . . by reason of the fact that the person is or was a director, officer, employee or agent of the corporation . . . against expenses (including attorneys' fees), actually and reasonably incurred by the person in connection with such action . . . if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation. . . .

8 Del.Code § 145(a). Indemnification is available for defending actions "by or in the right of the corporation to procure a judgment in its favor,"⁴ even if the Defendant does not ultimately prevail on the merits, if a chancery court decides that "in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity." Id. § 145(b).

The statute further provides that the corporation may agree to pay these fees and expenses in such proceedings "in advance of the final disposition of such action . . . upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation. . . ." Id. § 145(e). This right is commonly referred to as "advancement."

The Delaware indemnification and advancement statute demonstrates the state's "salutary public policy [of] attracting the most capable people into corporate service." Homestore, 888 A.2d at 218. "Indemnification encourages corporate service by capable individuals by protecting their personal financial resources from depletion by the expenses they incur during an investigation or litigation that results by reason of that service." Id. at 211. Rights of advancement enhance the benefits of indemnification. Although "[n]o Delaware corporation is required to provide for advancement of expenses," id., many do so in their quest to hire top-notch directors. Advancement serves as "an especially important corollary to indemnification," relieving directors and officers "from the personal out-of-pocket financial burden of paying the significant ongoing expenses inevitably involved with investigations and legal proceedings," id. at 211. The Defendants note, Def. Reply at 2, that the JRG bylaws include an expansive mandatory advancement and indemnification provision, which reads as follows:

Expenses (including attorneys' fees) incurred by a present or former director, officer, employee, or agent in defending any civil, criminal, administrative, or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this Article VI. . . . .

The Delaware advancement and indemnification statute "should be broadly interpreted to further the goals it was enacted to achieve." Stifel Financial Corp. v. Cochran, 809 A.2d 555, 561 (Del.2002). Conversely, the statute is not to be interpreted narrowly if such narrow interpretation disserves the Delaware policy of allowing...