Title: Kaung v. Cole National Corporation
Citation: N/A
Docket Number: 480, 2004
State: Delaware
Issuer: Delaware Supreme Court
Date: July 5, 2005

IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
THOMAS T. S. KAUNG, 
 
§ 
§ 
No. 480, 2004   
Plaintiff-Below, 
 
 
§ 
Appellant,  
 
 
§ 
Court Below:   Court of Chancery of 
§ 
the State of Delaware, in and for New 
v. 
 
 
 
 
 
§ 
Castle County 
§ 
 
COLE NATIONAL 
 
  
§ 
No. 163-N  
CORPORATION,   
 
 
§ 
A Delaware Corporation  
 
§ 
§ 
Defendant-Below,  
 
§ 
Appellee. 
 
 
 
§ 
 
 
Submitted:  March 30, 2005 
 
Decided:  July 5, 2005 
 
Before STEELE, Chief Justice, HOLLAND and RIDGELY, Justices. 
 
Upon appeal from the Court of Chancery.  AFFIRMED IN PART; 
REVERSED IN PART. 
 
 
John L. Reed, Esq. (argued), Thomas P. McGonigle, Esq., Matt Neiderman, 
Esq., of Duane Morris, LLP, New Castle Delaware, for appellant. 
 
 
Donald J. Wolf, Jr., Esq., Arthur L. Dent, Esq., Joseph B. Cicero, Esq., of 
Potter, Anderson & Carroon, LLP. & Robert P. Duvin, Esq., Robert M. Wolff, Esq. 
(argued), Barry Y. Freeman, Esq. of Duvin, Cahn & Hutton, Cleveland, Ohio, for 
appellee. 
 
 
 
 
 
 
RIDGELY, Justice: 
 
 
2
This appeal challenges rulings of the Court of Chancery made in the context of 
an advancement proceeding for litigation expenses.  The case was brought by the 
plaintiff-appellant, Thomas T. S. Kaung (“Kaung”), as a corporate officer under 8 Del. 
C. § 145 (“Section 145”), against the defendant-appellee, Cole National Corporation 
(“Cole”). The Court of Chancery ruled that Kaung was not entitled to receive 
advancement of any part of his attorneys’ fees and expenses related to time spent with 
a non-lawyer consultant.  The Court of Chancery next ruled that Cole was entitled to 
recoup sums previously advanced with respect to the non-lawyer consultant’s fees and 
attorneys’ fees related to time spent with the non-lawyer consultant.  The Court of 
Chancery finally awarded Cole its attorneys’ fees and expenses, together with court 
costs, incurred in connection with this case.  Kaung appeals the latter two rulings.     
We find no abuse of discretion by the Court of Chancery in its award to Cole of 
fees and other legal expenses related to this action.  We reverse, however, the 
recoupment award because it is beyond the scope of a summary proceeding for interim 
advancement of litigation expenses under Section 145.     
I. FACTUAL BACKGROUND 
 
Kaung was employed by Cole on two separate occasions.1  Kaung began his 
                                                 
1 Cole is a publicly traded company incorporated in Delaware with its principal place of business in 
Ohio.  Cole is primarily engaged in the optical industry.  Its business includes retail stores operating 
 
 
3
career with Cole in 1979 as a Corporate Controller and he ultimately rose to the 
positions of Executive Vice President and Chief Administrative Officer.  In 1990, 
Kaung and Cole parted ways.  In the interim, Kaung pursued other opportunities, 
including starting his own financial consulting firm called River International, Inc. 
(“River”), which provided consulting services in the area of financial controls.  In fact, 
Cole was one of River’s clients.   
 
During this relationship, River assisted Cole in restoring its financial viability 
and searching for high level management to fill the positions of Chief Operating 
Officer (“COO”) and Chief Financial Officer (“CFO”).  While Cole was successful in 
filling the COO position, it struggled to find a new CFO.  Cole’s Chief Executive 
Officer (“CEO”), Jeffrey Cole, then approached Kaung about taking the CFO position. 
Kaung was reluctant at first, because he was preparing to retire, but Jeffrey Cole 
ultimately persuaded Kaung to sign a three-year contract with Cole as its CFO.  The 
parties had an understanding that during that period, Jeffrey Cole and Kaung would 
work towards turning around the company financially, while at the same time actively 
recruiting Kaung’s replacement.  
 
At the time Kaung became CFO, Cole insured Kaung and others with a 
Directors and Officers (“D&O”) insurance policy.  Kaung also entered into an 
                                                                                                                                                             
under the names “Things Remembered,” Sears Optical, Target Optical, Pearle Vision and BJ’s 
 
 
4
indemnification agreement with Cole.  This agreement provided that if Kaung was the 
subject of litigation related to his employment, Cole would advance Kaung reasonable 
litigation costs to the extent that the D&O policy was insufficient.  Section 2(a) of the 
agreement provides that the company shall indemnify the Indemnitee “against any and 
all costs, charges and expenses (including, without limitation, attorneys’ and others’ 
fees and expenses), judgments, fines and amounts paid in settlement actually or 
reasonably incurred ... .”2  Pursuant to Section 2(e) of the agreement, attorneys’ and 
others’ fees and expenses “shall be paid by the Company in advance of the final 
disposition of such action, suit or proceeding as authorized in accordance with Section 
4(b) hereof.”3  Section 4(b), in relevant part, states: 
For purposes of determining whether to authorize advancement of 
expenses pursuant to Section 2(e) hereof, the Indemnitee shall submit to 
the Board a sworn statement of request for advancement of expenses . . . 
averring that (i) the Indemnitee has reasonably incurred or will 
reasonably incur actual expenses in defending an actual, civil, criminal, 
administrative or investigative action, suit, proceeding or claim and (ii) 
the Indemnitee undertakes to repay such amount if it shall ultimately be 
determined that the Indemnitee is not entitled to be indemnified by the 
Company, under this Agreement or otherwise.4 
     
Kaung returned to Cole as CFO in March 2000, and as agreed, Jeffrey Cole 
hired Kaung’s replacement, Larry Hyatt, in 2002.  Following a short transition period, 
                                                                                                                                                             
Optical.  Cole also operates a managed vision care provider called Cole Managed Vision.   
2  Kaung v. Cole Nat’l. Corp., 2004 Del. Ch. LEXIS 126, at *17-*18.  
3  Id. at *18. 
 
 
5
Kaung retired in July 2002.  In the fall of 2002, however, questions arose regarding 
Cole’s accounting practices.  Those questions specifically addressed the revenues Cole 
recorded in its financials received from warranties sold on its optical products.  Cole’s 
former auditor, Arthur Andersen LLP, had maintained that recognizing warranty 
revenues at the time of sale was appropriate.  Following the Enron and WorldCom 
scandals that implicated Arthur Anderson, Cole hired Deloitte & Touche LLP, which 
advised that the warranty revenue methodology that Arthur Anderson advocated was 
inappropriate.  As a result, Cole publicly announced that it would restate its financials 
for fiscal years 1998 through 2001 as well as the first two quarters of 2002.   
In response to Cole’s announcement, certain shareholders of Cole filed a class 
action suit on December 6, 2002.  That suit, which contained allegations of securities 
fraud against Cole and its various corporate officers, included Kaung as a defendant.  
In addition, on December 24, 2002, the Securities and Exchange Commission (the 
“SEC”) launched an investigation into Cole’s accounting and financial reporting for 
the period during which Kaung was the CFO.     
Cole then retained the Jones Day law firm to represent the corporate and 
individual defendants.  Cole also hired the law firm of Venable LLP to perform an 
internal investigation.  A determination was later made, however, that certain 
                                                                                                                                                             
4  Id. 
 
 
6
indemnitees, including Kaung, should seek separate representation.  The Cole board of 
directors passed a resolution approving the separate representation.   
Kaung hired Malcolm Kelso (“Kelso”), the sole member of the Irontree Group, 
Inc., as a non-lawyer consultant.5  Kelso then introduced Kaung to Steven D. Cundra, 
Esquire (“Cundra”), of the O’Rourke & Cundra law firm, with whom Kelso had a 
prior relationship.6  Kaung later retained the O’Rourke & Cundra law firm as his 
separate counsel in connection with the SEC investigation and the class action suit.  
The Court of Chancery inferred that Kelso recommended these lawyers and urged 
Kaung to hire them, as evidenced by the fact that Kelso engaged in profitable joint 
representation with this firm in the past.7  This inference is supported by the record. 
Initially, Cole advanced all of Kelso’s and Cundra’s bills.8  However, Cole then 
began to question the advancement of Kaung’s legal expenses, specifically inquiring 
into Kelso’s qualifications and his role in the litigation.  On May 2, 2003, counsel for 
                                                 
5 Kaung testified that he and Kelso have known each other for over twenty years, and that they have 
worked on unrelated matters involving Cole in the past.  In fact, Kelso is the ex-brother-in-law of 
Jeffrey Cole, the company’s former CEO.  Kelso has a very colorful background, including being 
serially sanctioned, found liable for civil theft in securities fraud and incarcerated for contempt of 
court.  One judge has described Kelso as using “litigation to harass opponents and disrupt the 
judicial process.”  Legal Econometrics, Inc. v. Abramson, 1997 U.S. Dist. LEXIS 20354, at *5 (N.D. 
Tex.) (citation omitted).     
6 The parties disputed the extent of Kelso’s prior relationship with the O’Rourke & Cundra law firm, 
but the record is clear that the two have worked together on prior occasions.  Kaung, 2004 Del. Ch. 
LEXIS 126, at *6 n.5.   
7 Id. at *5.   
8 The Cole board of directors authorized advancement of Kaung’s legal expenses on January 23 and 
24, 2003, and again, on March 27, 2003.   
 
 
7
Cole sent a letter to O’Rourke & Cundra concerning the advancement of their bills 
and inquiring about Kelso’s qualifications.  In addition, on May 9, 2003, Cole’s 
general counsel, Leslie D. Dunn, Esquire (“Dunn”), wrote to Kaung directly, 
expressing concern about the reasonableness of Kelso’s fees.   
Dunn testified that despite these repeated requests she never received 
information regarding Kelso’s education or professional background, the scope of his 
work at Cole, the number of hours he worked on this matter or even his billing rate.  
Kaung claimed that he responded to Dunn’s reservations about Kelso by pointing out 
that Kelso provided litigation consulting services to both Cole and Jones Day in the 
past.  Kaung also emphasized that AIG, the D&O insurance carrier, had reviewed and 
approved payment for Kelso’s work.    
Cole advanced approximately $150,000 with respect to Kelso’s bills for time 
spent through May 15, 2003.  Cole also advanced all of O’Rourke & Cundra’s fees 
through January 2004.  In December 2003, out of the concern that the fees requested 
by Kaung were becoming excessive, Cole hired the law firm of Duvin, Cahn & Hutton 
to evaluate all advancement requests from Kaung related to the SEC investigation.   
On January 7, 2004, Kaung sent Cole a notice of default for its failure to pay the 
balance of Kelso’s bills for the period of mid-May until August 2003 and the 
November and December 2003 bills of O’Rourke & Cundra.  Cole responded to 
 
 
8
Kaung on January 12, 2004, advising him that it was investigating the reasonableness 
of his litigation expenses, emphasizing that the shareholders’ class action suit had 
concluded.9  The same day, Kaung filed suit in the Court of Chancery to compel Cole 
to advance Kelso’s and Cundra’s fees for the SEC investigation and related class 
action litigation.  The next day Cole authorized full payment of O’Rourke & Cundra’s 
outstanding bills, but again notified Kaung that it had retained special outside counsel 
to review the reasonableness of all the bills.  Despite the fact that Cole paid O’Rourke 
& Cundra’s outstanding bills and continued to advance its fees, Kaung persisted in 
prosecuting this case in the Court of Chancery.  
The course of discovery in this case was marked by conflict.  The most 
egregious conduct came from Kelso.  The Court of Chancery found that there were 
“emails from Kelso to Dunn and outside counsel to Cole that are at best bizarre and at 
worst threatening ... [and] Kelso’s behavior in connection with his own deposition  
was highly inappropriate in that he repeatedly postponed his appearance and then 
refused to answer questions when he finally appeared.”10  In addition, Cundra’s 
conduct during discovery was suspicious in that he did not respond to any of Cole’s 
                                                 
9 The shareholders class action suit was settled in May 2003.  However, the SEC investigation was 
ongoing.  
10 Id. at *8 n.10.   
 
 
9
interrogatories or requests for production of documents regarding Kelso.11        
The Court of Chancery held a one day trial on June 18, 2004.  At a pretrial 
conference, Kaung’s new Delaware counsel withdrew Kaung’s request for payment of 
Kelso’s fees.  The Court of Chancery, therefore, only considered Kelso’s role as a 
litigation advisor for the purpose of evaluating O’Rourke & Cundra’s fees related to 
consultations with Kelso.  It determined that the time billed by O’Rourke & Cundra 
relating to its dealing with Kelso was not reasonably incurred in connection with its 
representation of Kaung pursuant to the indemnification agreement.12  As a result, the 
Court of Chancery concluded that O’Rourke & Cundra was not entitled to 
advancement of its unpaid legal fees.13  The Court of Chancery also held that Cole 
would be entitled to offset any additional amount of those disallowed time charges 
against any future request by Kaung for advancement, and that at the conclusion of the 
SEC matter Cole would be entitled to sue Kaung for recovery of amounts it has 
already advanced that it believes were not properly subject to a claim for 
indemnification.14   
In its final order and judgment following its written opinion, the Court of 
Chancery ordered Kaung to pay Cole $150,606.85 for the amount already advanced 
                                                 
11 Id.     
12 Kaung, 2004 Del. Ch. LEXIS 126, at *26-*27.   
13 Id. at *27.   
 
 
10
for Kelso’s fees.  It also determined that $81,760 of O’Rourke & Cundra’s bill related 
to its interactions with Kelso and that Cole had no obligation to pay Kaung the 
$65,226.86 billed for the time that O’Rourke & Cundra spent consulting with Kelso.  
Kaung was ordered to pay Cole $16,533.14 as the portion of O’Rourke & Cundra’s 
fees that had already been advanced pertaining to its dealings with Kelso.  Kaung was 
also ordered to pay Cole $300,000 for attorneys’ fees and expenses due to the bad 
faith conduct of his representatives in this action.   
II. THE COURT OF CHANCERY’S FEE SHIFTING AWARD 
We first address whether the Court of Chancery improperly shifted the costs of 
this advancement action to Kaung by awarding Cole its attorneys’ fees and expenses, 
together with court costs, incurred in connection with this advancement action.  At 
issue is whether the misconduct in this case satisfies the bad faith standard required 
for fee shifting.  The Court of Chancery’s discretion is broad in fixing the amount of 
attorneys’ fees to be awarded.15  Absent a clear abuse of discretion, we will not reverse 
the Court of Chancery’s award.16  After carefully reviewing the record, we find no 
abuse of discretion with respect to the Court of Chancery’s fee shifting award.   
It is a general rule that courts in the United States do not award attorney’s fees 
                                                                                                                                                             
14 Id.    
15  Johnston v. Arbitrium (Cayman Islands) Handels AG, 720 A.2d 542, 547 (Del. 1998).   
16  Id. (citing Chavin v. Cope, 243 A.2d 694 (Del. 1968)).   
 
 
11
to prevailing parties in litigation.17  This practice, commonly referred to as the 
“American Rule,”18 is followed by the Delaware courts.19  However, there are 
recognized exceptions to the American Rule, which invoke equitable principles that 
have been recognized as a matter of common law.20  One well-recognized exception to 
the American Rule is where the “losing party has ‘acted in bad faith, vexatiously, 
wantonly, or for oppressive reasons.’”21  The purpose of this so-called “bad faith” 
exception is to “‘deter abusive litigation in the future, thereby avoiding harassment 
and protecting the integrity of the judicial process.’”22  Delaware courts have awarded 
attorney’s fees for bad faith when “parties have unnecessarily prolonged or delayed 
litigation, falsified records or knowingly asserted frivolous claims.”23  In the present 
case, the record fully supports the Court of Chancery’s conclusion that Kaung’s 
“actions in the course of this litigation constitute bad faith conduct sufficient to justify 
an award of attorneys’ fees.”24   
At the time the suit was filed, Cole had already advanced more than $150,000 
with respect to Kelso’s fees and was withholding further payment after Kaung failed 
                                                 
17 Id. at 545. 
18 Id. 
19 Brice v. State, 704 A.2d 1176, 1178 (Del. 1998).  
20 Id. (citing Goodrich v. E.F. Hutton Group, Inc., 681 A.2d 1039, 1043-44 (Del. 1996)). 
21 Id. at 1179 (quoting Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 258-59 (1975)). 
22 Id. (quoting Schlank v. Williams, 572 A.2d 101, 108 (D.C. 1990)).  
23 Johnston, 720 A.2d at 546 (footnotes and citations omitted).  
24 Kaung, 2004 Del. Ch. LEXIS 126, at *28.   
 
 
12
to provide further information regarding the reasonableness of Kelso’s bills.  Cole was 
not delinquent in paying O’Rourke & Cundra’s bills and actually authorized the 
payment of them the day after Kaung filed suit.  The record suggests that the decision 
to file suit was made in the hope of Cole advancing sums that were not reasonably 
incurred in connection with the representation of Kaung.25   
In addition, the record shows that throughout the litigation Kaung’s 
representatives made excessive and duplicative deposition requests while ignoring 
their own discovery obligations.  They refused to facilitate the schedule of Kelso’s 
deposition, and when he finally appeared for deposition, he refused to answer 
questions and instead peppered Cole’s attorneys with questions and accusations.  
Cundra, who accompanied Kelso to the deposition, aggravated the situation by 
supporting Kelso’s behavior and failing to provide any substantive answers to Cole’s 
discovery requests regarding Kelso.  
We therefore have no difficulty in upholding the Court of Chancery’s 
conclusion that the conduct of Kaung’s representatives in this case rose to the level of 
bad faith.  Thus, the Court of Chancery did not abuse its discretion in awarding Cole 
its attorneys’ fees and expenses incurred in connection with this advancement action. 
                                                 
25 An email from Kelso to Cundra strongly suggests an improper motive.  The email reads as 
follows:  “This looks good to me – file suit as soon as possible – they will pay – DUNN is a fool.”  
See Transcript of Trial Proceeding on June 18, 2004 at Defense Exhibit 77.   
 
 
13
We take this opportunity to comment further on the unseemly conduct of Kelso 
and Cundra.  We do so under our “exclusive supervisory responsibility to regulate and 
enforce appropriate conduct of ... all lawyers, litigants, witnesses, and others” 
participating in a Delaware proceeding.26 
For the past several years, professionalism and legal ethics has been the subject 
of much discussion among judges, practitioners, scholars and the general public.27  
One component of this dialogue concerns professional responsibility in the discovery 
practice, which implicates the “basic and fundamental” concept of civility,28 the flip 
side of the coin being incivility.29  Civility plays an important role in the 
administration of civil and criminal justice.  Without it, litigation becomes even more 
expensive and public trust and confidence in the administration of justice is 
undermined.  Alexander Hamilton put it best that “the ordinary administration of 
criminal and civil justice ... contributes ... more than any other circumstance, to 
impressing upon the minds of the people affection, esteem, and reverence toward the 
                                                 
26 Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 52 n.23 (Del. 1994) 
(citations omitted).           
27 See generally Paula L. Hannaford, The National Action Plan on Lawyer Conduct: A Role for the 
Judge in Improving Professionalism in the Legal System, 36 CT. REV. 36 (1999) (addressing he 
increasing role of the judicial system in improving attorney professionalism).  
28 Kohlmayer v. Nat’l R.R. Passenger Corp., 124 F.Supp.2d 877, 879 (D.N.J. 2000).    
29 See Douglas R. Richmond, The Ethics of Zealous Advocacy: Civility Candor and Parlor Tricks, 
34 TEX. TECH. L. REV. 3, 7 (2002).    
 
 
14
government.”30  Litigation tainted with incivility and its resulting expense has the 
opposite effect.  Justice Sandra Day O’Connor has commented: 
I believe that the justice system cannot function effectively when the 
professionals charged with administering it cannot even be polite to one 
another. Stress and frustration drive down productivity and make the 
process more time-consuming and expensive. Many of the best people 
get driven away from the field. The profession and the system itself lose 
esteem in the public’s eyes. 
 
**********************************************************
* 
 
In my view, incivility disserves the client because it wastes time and 
energy--time that is billed to the client at hundreds of dollars an hour, 
and energy that is better spent working on the case than working over the 
opponent.31 
 
We could not agree more with Justice O’Connor’s insightful comments.   
 
In Paramount, this Court addressed in an addendum to its opinion the “issue of 
professionalism involving deposition practice in proceedings in Delaware trial 
courts.”32  The focus of the addendum in Paramount was a lawyer, who represented a 
Paramount director in his deposition in an unprofessional way.33  The lawyer did not 
otherwise appear for a party in this case and was not admitted pro hac vice.34  During 
the deposition, he instructed the Paramount director not to answer questions, “was 
                                                 
30 The Federalist No. 78, at 103 (Alexander Hamilton) (1st Modern Library ed., 1941). 
31 Paramount, 637 A.2d at 52 n.24 (quoting Justice Sandra Day O’Connor, Remarks to an American 
Bar Association Group on “Civil Justice Improvements” (Dec. 14, 1993)). 
32 Id. at 52.    
 
 
15
extraordinarily rude, uncivil and vulgar,” obstructed the deposing lawyer from 
eliciting testimony from the Paramount director, and disparaged the deposing lawyer 
with personal insults. 
This Court found that lawyer’s “unprofessional behavior to be outrageous and 
unacceptable.”35  It is just as outrageous and unacceptable when accomplished by a 
non-lawyer consultant or a witness at a deposition.  We join the Court of Chancery in 
its strong disapproval of it.  For future guidance and deterrence, we emphasize that 
sanctions may be imposed upon anyone participating in a Delaware proceeding who 
engages in abusive litigation tactics.36  
III. THE COURT OF CHANCERY’S RECOUPMENT AWARD 
We now turn to whether the Court of Chancery erred, as a matter of law, by 
determining Kaung’s liability to Cole for fees previously advanced in this summary 
proceeding.  We review the Court of Chancery’s factual findings for clear error.37  
Once the Court of Chancery’s factual findings are established, we will review the 
                                                                                                                                                             
33 Id.  
34 Id.  
35 Paramount, 637 A.2d at 54-55.   
36  See Link v. Wabash R.R., 370 U.S. 626, 631-32 (1962) (providing that courts have inherent 
power to levy sanctions in response to abusive litigation tactics); Roadway Express v. Piper, 447 
U.S. 752, 764-67 (1980) (recognizing that courts have inherent power to assess attorney’s fees 
against counsel for abusive litigation practices); In re Miller, 81 B.R. 669, 676 (Bankr. M.D. Fla. 
1988) (noting that all courts have inherent civil contempt power). 
37 Scharf v. Edgcomb Corp., 864 A.2d 909, 916 (Del. 2004) (citing Anderson v. Bessemer City, 470 
U.S. 564, 574 (1985)).   
 
 
16
ultimate determination of the legal issue presented under a de novo standard of 
review.38        
Section 145 of the DGCL vests Delaware corporations with the capacity to 
protect their present and former corporate officials from expenses incurred in 
connection with litigation and other legal proceedings.39  Rights to indemnification 
and advancement are deeply rooted in the public policy of Delaware corporate law in 
that they are viewed less as an individual benefit arising from a person’s employment 
and more as a desirable mechanism to manage risk in return for greater corporate 
benefits.40  Section 145 of the DGCL expressly contemplates protection for corporate 
officials from the risks of legal proceedings not only by way of reimbursement (i.e., 
indemnification) but also by the pre-indemnification advancement of certain litigation-
related expenses.41   
An advancement action is a summary proceeding.42  The statutory authorization 
for interim advancement of litigation expenses is distinct from the right to receive 
                                                 
38 Id. (citing Pullman-Standard, Div. of Pullman, Inc. v. Swint, 456 U.S. 273, 289 n.19 (1982); 
Ornelas v. United States, 517 U.S. 690 (1996); Lopez v. State, 861 A.2d 1245 (Del. 2004)).  
39 See Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the 
Delaware Court of Chancery, § 8-2.     
40 Id.   
41 Id.  
42 Homestore, Inc. v. Tafeen, 2005 Del. LEXIS 217, at *2; Fasciana v. Elec. Data Sys. Corp., 829 
A.2d 160, 167 (Del. Ch. 2003). 
 
 
17
final indemnification under Section 145(a) and (b) of the DGCL.43  Whether a 
corporate officer has a right to indemnification is a decision that must necessarily 
await the outcome of the investigation or litigation.44  Section 145(e) of the DGCL fills 
the gap by permitting advancement, so the corporation may shoulder these interim 
costs.45  However, the scope of an advancement proceeding under Section 145(k) of 
the DGCL is limited to determining “the issue of entitlement according to the 
corporation’s advancement provisions and not to issues regarding the movant’s 
alleged conduct in the underlying litigation.”46    
We recognize, as the Court of Chancery has, that the right to advancement “is a 
subsidiary element of the right to ultimate indemnification”47 and these legally distinct 
rights “are commonly addressed in neighboring statutory provisions.”48 However, the 
narrow scope of an advancement proceeding prohibits an ultimate determination of 
indemnification and liability owed by a corporate official for sums already advanced.49 
                                                 
43 See Advanced Mining Sys., Inc. v. Fricke, 623 A.2d 82, 84 (Del. Ch. 1992) (finding that 
“indemnification rights and rights to advancement of possibly indemnifiable expenses ... [are] 
distinct types of legal rights.”); Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992) (holding 
that the right to advancement of expenses was not dependent on the right to indemnification).   
44 See Wolfe & Pittenger, supra note 39, at § 8-2.   
45 Id. 
46 Homestore, 2005 Del. LEXIS 217, at *2.     
47 Weinstock v. Lazard Debt Recovery GP, LLC, 2003 Del. Ch. LEXIS 83, at *12-*13.   
48 Nakahara v. NS 1991 Am. Trust, 739 A.2d 770, 779 n.52 (Del. Ch. 1998).   
49 See, e.g., Reddy v. Elec. Data Sys. Corp., 2002 Del. Ch. LEXIS 69, at *29 (“Section 145 of the 
DGCL is an explicit rejection of this approach, because the clear authorization of advancement 
rights presupposes that the corporation will front expenses before any determination is made of the 
 
 
18
 While the rights to indemnification and advancement are correlative, they are still 
discrete and independent rights, with the latter having a much narrower scope.50        
In the present case, it was appropriate for the Court of Chancery to determine 
that the time billed by O’Rourke & Cundra relating to its dealings with Kelso was not 
reasonably incurred in connection with its representation of Kaung pursuant to the 
indemnification agreement, and that O’Rourke & Cundra was not entitled to 
advancement of its unpaid legal fees.  However, we conclude that the Court of 
Chancery prematurely decided Kaung’s liability for sums previously advanced 
voluntarily by Cole.  The Court of Chancery’s determination was premature, just as a 
direct recoupment claim would have been by Cole for fees it advanced.  We hold that 
an advancement proceeding is summary in nature and not appropriate for litigating 
indemnification or recoupment.  The detailed analysis required of such claims is both 
premature and inconsistent with the purpose of a summary proceeding.51        
                                                                                                                                                             
corporate official’s ultimate right to indemnification,”) (citing Greco v. Columbia/HCA Healthcare 
Corp., 1999 Del. Ch. LEXIS 24, at *12; Ridder v. Cityfed Fin. Corp., 47 F.3d 85, 87 (3d Cir. 1995)).  
50 See Wolfe & Pittenger, supra note 39, at § 8-2.   
51 See Bergonzi v. Rite Aid Corp., 2003 Del. Ch. LEXIS 117, at *11-*12 (holding that the 
corporation could not assert as a defense to a claim for advancement or as a ground for recouping 
amounts previously advanced that the former CFO had not satisfied statutory standards of conduct 
for indemnification, notwithstanding a guilty plea by the former CFO in a criminal proceeding for 
which advances were sought, and that it would be premature to decide whether the former CFO was 
entitled to indemnification because he had not been sentenced and therefore the criminal proceeding 
had not reached final judgment).  Cf. Rales v. Blasband, 634 A.2d 927, 931 n.4 (Del. 1993) 
(indicating that a statutory books and records action is a summary proceeding); Khanna v. Covad 
Comm’n Group, Inc., 2004 Del. Ch. LEXIS 11, at *22 (providing that a statutory books and records 
action is not the proper forum for litigating a breach of fiduciary duty case because the detailed 
 
 
19
 
IV. CONCLUSION 
We affirm the Court of Chancery’s award of attorneys’ fees and expenses in 
favor of Cole.  We reverse as premature the judgment of the Court of Chancery to the 
extent it ordered Kaung to repay sums already advanced. 
 
                                                                                                                                                             
analysis required for a fiduciary duty action would defeat the purpose of that summary proceeding).