In a short letter-to-counsel opinion, Vice Chancellor John Noble of the Delaware Chancery Court held that a prior order granting advancement to two officers and directors can be modified based on changes in factual circumstances. Duthie v. CorSolutions Medical, Inc., et al., No. 3048-VCN (Del. Ch., June 16, 2009).
The parties were involved in a contract dispute since 2005 when defendant Corsolutions, Medical, Inc. (“CorSolutions”) was acquired by defendant Matria Healthcare, Inc. (“Matria”). As a result, the parties engaged in an arbitration proceeding and subsequent litigation. In the arbitration proceeding, the plaintiffs, directors and officers of CorSolutions, were accused of fraud and breach of contract based on misrepresentations and omissions allegedly made in anticipation of the acquisition. During the arbitration proceeding, plaintiffs sought and received an order providing for advancement of fees and expenses incurred thus far. The plaintiffs then filed suit to enjoin the arbitration proceeding. The complaint was later amended to include claims against Matria for defamation, tortious interference with prospective economic advantage and violations of ERISA, following Matria’s alleged public announcement of the fraud allegations against the plaintiffs. The plaintiffs then returned to Court, seeking an advancement of the costs incurred pursuing the affirmative claims.
In a September 10, 2008 order, the court granted advancement of fees and expenses for certain affirmative claims. The court, in that order, held that the right to advancement includes the right to have legal fees advanced for purposes of pursuing affirmative defenses, mandatory counterclaims, and other “good offense” aspects of an effective defense to claims made against director or officer to whom advancement rights must be provided. The court relied on CorSolution’s Certificate of Incorporation which “broadly allows for the advancement of defensive fees and expenses incurred by its officers and directors and cannot be read to preclude advancement of affirmative claims which are defensive in nature.”
In the case at bar, defendants argued that the advancement award was no longer appropriate because there was an intervening change in circumstances -- the change being that the charges asserted against the directors and officers had been terminated eliminating the threat of further litigation. The court, relying on the representation that the defendants did not intend to bring any other actions against the plaintiffs, held that the defamation claims pursued as a defense were no longer a direct response to any claims against plaintiffs. According to the court, the important factor in determining whether plaintiffs had a right to advancement of fees and expenses for affirmative claims was whether the claims were defensive, in other words, the “affirmative claims must be responsive to some actual threat.” The court reasoned that no such threat existed and as a result, the September 10, 2008 advancement award must be modified.