NOT FOR PUBLICATION

UNITED STATES DISTRICT COURT

DISTRICT OF NEW JERSEY

CIRCUPORT, INC.,

Plaintiff, 

v.

DAVID C. DLESK and PHASE-N

CORPORATION,

Defendants.

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Civil Action No. 11-00369 (SRC)

OPINION & ORDER

CHESLER, District Judge

This matter comes before the Court on the motion by Defendant, Counterclaimant and

Third-Party Plaintiff David C. Dlesk (“Dlesk”) for the entry of an Order granting Dlesk’s

application for advancement of expenses and other relief. The Court heard oral argument on

March 28, 2012. For the reasons stated below, the motion will be granted.

In brief, Dlesk seeks advancement of legal expenses he has incurred in connection with

his defense in this litigation. Dlesk argues that Plaintiff Circuport, Inc. (“Circuport”) is obligated

both to indemnify him and to advance his litigation expenses pursuant to the terms of the

Amended and Restated Certificate of Incorporation (the “Certificate”) which states, in pertinent

part:

TENTH: The following indemnification provisions shall apply to the persons

enumerated below:

l. Right to Indemnification of Directors and Officers. The Corporation shall

indemnify and hold harmless, to the fullest extent permitted by applicable

law as it presently exists or may hereafter be amended, any person (an

“Indemnified Person”) who was or is made or is threatened to be made a

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party or is otherwise involved in any action, suit or proceeding, Whether

civil, criminal, administrative or investigative (a “Proceeding”), by reason

of the fact that such person, or a person for whom such person is the legal

representative, is or was a director or officer of the Corporation or, while a

director or officer of the Corporation, is or was serving at the request of

the Corporation as a director, officer, employee or agent of another

Corporation or of a partnership, joint venture, limited liability company,

trust, enterprise or nonprofit entity, including service with respect to

employee benefit plans, against all liability and loss suffered and expenses

(including attorneys’ fees) reasonably incurred by such Indemnified Person

in connection such Proceeding. Notwithstanding the preceding sentence,

except as otherwise provided in Section 3 of the Article Tenth, the

Corporation shall be required to indemnify an Indemnified Person in

connection with a Proceeding (or part thereof) commenced by such

Indemnified Person only if the commencement of such Proceeding (or part

thereof) by the Indemnified Person was authorized in advance by the

Board of Directors.

2. Prepayment of Expenses of Directors and Officers. The Corporation shall

pay the expenses (including attorneys’ fees) incurred by an Indemnified

Person who is or was a director of the Corporation in defending any

Proceeding in advance of its final disposition; provided however, that, to

the extent required by law, such payment of expenses in advance of the

final disposition of the Proceeding shall be made only upon receipt of an

undertaking by such Indemnified Person to repay all amounts advanced if

it should be ultimately determined that such Indemnified Person is not

entitled to be indemnified under this Article Tenth or otherwise. The

Corporation may, if authorized by the Board of Directors at its sole

discretion, pay the expenses (including attorneys’ fees) incurred by an

Indemnified Person who is or was an officer of the Corporation in

defending any Proceeding in advance of its final disposition; provided

however, that, to the extent required by law, such payment of expenses in

advance of the final disposition of the Proceeding shall be made only upon

receipt of an undertaking by such Indemnified Person to repay all amounts

advanced if it should be ultimately determined that such Indemnified

Person is not entitled to be indemnified under this Article Tenth or

otherwise.

(Pls.’ Opp. Br. 6-7.) Dlesk contends that he is both an officer and director, and that he is a party

to this litigation by the reason of the fact that he was a director or officer of the corporation. 

Dlesk contends that Circuport is therefore obligated both to indemnify him and to pay his

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expenses in this litigation in advance of its final disposition. 

Circuport disputes its obligation to advance expenses to Dlesk pursuant to the Certificate,

arguing that the second paragraph makes advancement of expenses of only directors mandatory,

and makes advancement of expenses of officers a matter entrusted to the discretion of the Board

of Directors. “A certificate of incorporation is viewed as a contract among shareholders, and

general rules of contract interpretation apply to its terms.” Waggoner v. Laster, 581 A.2d 1127,

1134 (Del. 1990). 

There is no dispute that Dlesk has been both an officer and a director of the corporation. 

Circuport argues, however, that it has not alleged in this litigation that Dlesk breached his duties

as a director, but only as an officer. Circuport thus takes the position that Dlesk did not become a

party to this litigation by reason of the fact that he was a director, but only by reason of the fact

that he was an officer. This argument fails, as it misreads the plain language of the Certificate.

The Certificate obligates the corporation to indemnify:

any person (an “Indemnified Person”) who was or is made or is threatened to be

made a party or is otherwise involved in any action, suit or proceeding, Whether

civil, criminal, administrative or investigative (a “Proceeding”), by reason of the

fact that such person, or a person for whom such person is the legal representative,

is or was a director or officer of the Corporation . . . 

The language in the first paragraph at issue creates an obligation to indemnify any person who is

made a party by reason of the fact that such person “is or was a director or officer of the

Corporation.” Because there is no dispute that Dlesk is or was a director or officer of the

corporation, the corporation is obligated to indemnify him.

Next, in the second paragraph at issue, the Certificate states that the “Corporation shall

pay the expenses (including attorneys’ fees) incurred by an Indemnified Person who is or was a

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director of the Corporation in defending any Proceeding in advance of its final disposition . . .” 

There is no dispute that Dlesk is or was a director of the corporation. Under the second

paragraph, the corporation must advance his expenses. 

Circuport nevertheless argues: “In the critical words of both the Delaware statute and the

Company’s Certificate of Incorporation, Dlesk is not incurring expenses in defending this matter

‘by reason of the fact’ that he is or was a director of Circuport.” (Pl.’s Opp. Br. 11.) The first

paragraph quoted above obligates Circuport to indemnify one who is made a party by reason of

the fact that he was a “director or officer.” The objection that Dlesk was not made a party by

reason of the fact that he was a director cannot suffice to remove him from the category of

persons who were made a party by reason of having been officers or directors. 

Circuport’s argument conflates the language of the two provisions, making it appear as if

the second paragraph requires the corporation to advance expenses only for suits arising out of

the fact that a person is or was a director, and giving it discretion to refuse to advance expenses

in suits arising out of the fact that a person is or was an officer. That is not what the Certificate

says, that discretion only exists where a defendant is only an officer and does not have the dual

role that Dlesk had.

Even if the Certificate had been drafted so that the second paragraph provisions

incorporated the “by reason of the fact” phrasing of the first paragraph, Circuport still would not

prevail. Circuport’s argument that the suit targets Dlesk as an officer, rather than as a director,

would be rejected by the Delaware Supreme Court, which has firmly rejected a similar argument:

We are aware that the pleadings in the MAH action named VonFeldt as a

defendant in his capacity as an officer and employee of SNC, rather than as an

SNC director. This distinction is immaterial. In keeping with the aversion to

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undue formalism, we decline to engage in the hyper-technical exercise of trying to

measure the “scope” of Stifel Financial’s request against the various roles

VonFeldt filled at SNC. Stifel Financial was surely aware that, in today’s

corporate world, directors will commonly extend their official activities beyond

the four walls of the boardroom. Sometimes directors will involve themselves in

the day-to-day management of the firm’s operations, thereby assuming multiple

roles in the corporation. Where such is the case, the director seeking

indemnification is not required to prove the existence of a request relating

specifically to his work as an officer and employee of the subsidiary. We hold

that, as a matter of law, the request to serve as an officer and employee of a

wholly-owned subsidiary is inferred from the director’s election to the subsidiary's

board. Therefore, VonFeldt may pursue indemnification for costs incurred in the

MAH action, although the action implicated his conduct only as an officer and

employee of SNC.

VonFeldt v. Stifel Fin. Corp., 714 A.2d 79, 85 (Del. 1998). The analogy is so clear that elaborate

discussion of this quote is not needed: the Delaware Supreme Court would surely find

Circuport’s argument similarly hyper-technical.

Lastly, Circuport argues that its claims against Dlesk are in the nature of employment

contract claims, which are personal in nature and do not arise by reason of Dlesk’s position as

director or officer. The case which Circuport cites in support, Weaver v. ZeniMax Media, Inc.,

2004 WL 243163 (Del.Ch. 2004), however, works against it. In Weaver, the Chancery Court

held: “Taking too much vacation time and submitting fraudulent travel expenses are examples of

personal conduct by employees; they did not give rise to claims ‘by reason of the fact’ that

Weaver was an officer and director.” Id. at *5. Broadly speaking, the Second Amended

Complaint alleges a conflict of interest in Dlesk’s conduct of the primary business of the

corporation as its CEO; this is not a suit about personal conduct like taking too much vacation

time or submitting fraudulent travel expenses. It is very difficult to read the Complaint’s

allegations, which center on Dlesk’s alleged self-dealing in giving corporate business to vendor

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Phase(n), and see them as concerning personal conduct rather than official conduct. Circuport

argues that its claims “do not implicate his use or abuse of his position of corporate authority as a

director of the Company.” (Pl.’s Opp. Br. 15.) Perhaps, but Circuport’s claims certainly

implicate Dlesk’s alleged abuse of his position of corporate authority as an officer – thus

triggering the corporation’s obligation to indemnify him.

Moreover, it is worth noting that, in Weaver, the Chancery Court stated: “When this

Court has construed the “by reason of the fact” requirement of 8 Del. C. § 145 in the

indemnification context, it has done so broadly and in favor of indemnification.” Id. at *3. 

At oral argument, Circuport argued that it was unfair to ask a corporation to advance the

litigation expenses of an officer that it is suing for malfeasance. The Court is not unsympathetic

to this position, but perhaps that should have been considered by the management of the

corporation when it drafted its certificate of incorporation. Presumably, the Certificate was

drafted with the assistance of counsel. Had the management of Circuport wished to include the

distinctions it now asserts when the Certificate was drafted, it could have done so, but it did not. 

It is understandable if Circuport management is unhappy now with the consequences of the

Certificate’s express terms, but the corporation has shown no reason why it should be allowed to

escape them.

For these reasons,

IT IS THEREFORE on this 9th day of April, 2012,

ORDERED that Dlesk’s motion for advancement of expenses (Docket Entry No. 69) is

GRANTED; and it is further

ORDERED that Circuport shall advance to Dlesk the expenses of this litigation, subject

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to his providing the required undertaking.

 s/ Stanley R. Chesler 

Stanley R. Chesler, U.S.D.J.

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