Court Opinion

ID: 3180969
Source: CourtListenerOpinion
Date Created: 2016-02-29 08:15:05.93714+00
Date Added: 2024-06-11T14:46:49.037114
License: Public Domain

COURT OF CHANCERY
                                  OF THE
                            STATE OF DELAWARE

 JOHN W. NOBLE                                            417 SOUTH STATE STREET
VICE CHANCELLOR                                           DOVER, DELAWARE 19901
                                                         TELEPHONE: (302) 739-4397
                                                         FACSIMILE: (302) 739-6179

                                February 26, 2016

Kevin M. Coen, Esquire                      Richard P. Rollo, Esquire
Morris, Nichols, Arsht & Tunnell LLP        Richards, Layton & Finger, P.A.
1201 North Market Street                    920 North King Street
Wilmington, DE 19801                        Wilmington, DE 19801

      Re:   Wong v. USES Holding Corp.
            C.A. No. 11475-VCN
            Date Submitted: December 18, 2015

Dear Counsel:

      This is an advancement case. Plaintiffs, a former director and a former

officer of Defendant USES Holding Corp. (“USES”), seek advancement of legal

fees and expenses incurred in defending an action in New York that challenges

their conduct in the sale of USES to its current owner. Counsel have worked

responsibly to narrow the debate to two discrete issues. The first issue involves

“fees on fees”; the second issue involves allocation of the Special Master’s costs.

Counsel have submitted a stipulated form of order that resolves most of the
Wong v. USES Holding Corp.
C.A. No. 11475-VCN
February 26, 2016
Page 2

otherwise open issues, including entitlement to advancement and the process for

determining and paying the appropriate amount to be advanced.1

      1.    Fees on Fees

      As a general matter, a party entitled to advancement is entitled to recover the

fees expended in contesting a wrongful rejection of a demand for advancement.

USES had no obligation to advance litigation expenses to Plaintiffs until they had

properly demonstrated a right to advancement. USES conditioned advancement

upon an officer or director’s2 undertaking to repay sums advanced if it later turned

out that they were obligated to repay them. By Section 9.1(b) of USES’s Bylaws:

      [I]f the Delaware Statute requires, an advancement of expenses
      incurred by an indemnitee in his or her capacity as a director or
      officer . . . shall be made only upon delivery to the Corporation of an
      undertaking . . . by or on behalf of such indemnitee, to repay all
      amounts so advanced if it shall ultimately be determined by final
      judicial decision . . . that such indemnitee is not entitled to be
      indemnified . . . .3

1
  Letter of Richard P. Rollo, Esq., dated Dec. 15, 2015 (“Rollo Letter”) Ex. A
(Stipulated Order).
2
  Plaintiff Felix Wong was a director of USES; Plaintiff Gregory Johnson was an
officer of USES. Compl. ¶¶ 2–3.
3
  Rollo Letter Ex. C (USES Bylaws) § 9.1(b). By 8 Del. C. § 145(e), an officer or
director of a Delaware corporation is required to submit an undertaking to repay
Wong v. USES Holding Corp.
C.A. No. 11475-VCN
February 26, 2016
Page 3

         Plaintiffs did not submit the required undertakings until November 25,

2015.4 Until Plaintiffs perfected their requests for advancement by providing the

undertakings, they had no right to advancement or to fees on fees because USES

had no obligation to advance any amount to Plaintiffs.5

         Once the undertakings were delivered, the Plaintiffs’ rights to advancement

were established, and, from that point on, they are entitled to recover their “fees on

fees.”

         2.    Special Master’s Costs

         The Bylaws require USES to pay the Special Master’s costs incurred

because of challenges to the reasonableness or allocation of Plaintiffs’ fees and

expenses if the Plaintiffs are successful in whole or in part. Plaintiffs rely upon

Section 9.1(c) of the Bylaws which provides in part:

advanced amounts if later it is determined that the officer or director had no right
to indemnification.
4
  See Pls.’ Reply Br. in Supp. of Their Mot. for Partial Summ. J. Ex. 11.
5
  See Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316, at *13 (Del.
Ch. May 30, 2008).
Wong v. USES Holding Corp.
C.A. No. 11475-VCN
February 26, 2016
Page 4

        If a claim under Section 9.1(b) [(i.e., the indemnification and
        advancement provision)] . . . is not paid in full by the Corporation
        within 60 days after a written claim has been received by the
        Corporation (including, without limitation, in the case of a claim for
        an advancement of expenses), the indemnitee may at any time
        thereafter bring suit against the Corporation to recover the unpaid
        amount of the claim. If successful in whole or in part in any such suit,
        or in a suit brought by the Corporation to recover an advancement of
        expenses pursuant to the terms of any undertaking, the indemnitee
        shall be entitled to be paid also the expense of prosecuting or
        defending such suit.6

A Special Master is appointed to facilitate resolution of this suit filed by Plaintiffs

to recover advancement. Thus, if successful, in whole or in part, they are “entitled

to be paid also the expense of prosecuting . . . such suit” which would include

Special Master costs.

        USES focuses on the advancement that has been sought, not future amounts

that may be sought. It points to the introductory language of Section 9.1(c) of the

Bylaws which grants the Plaintiffs the right to file suit sixty days after claims for

advancement if the claims are not paid in full within those sixty days. In this

instance, the Plaintiffs filed the action some thirty-five days after their first

6
    USES Bylaws § 9.1(c).
Wong v. USES Holding Corp.
C.A. No. 11475-VCN
February 26, 2016
Page 5

submitted demand for advancement.7 USES argues that the early filing precludes

an allocation of the costs of the Special Master to it.

      A fair reading of the Bylaws is that USES has sixty days to review the

request for advancement and any invoices submitted for payment; that would

include the time necessary to assess the reasonableness of the amount sought.

USES did not need the sixty-day period for that purpose. Instead, it took the

position that Plaintiffs had no entitlement to advancement8 and, thus, the

reasonableness of the amount sought was not pertinent. The debate was not about

how much advancement to pay; it was about whether to pay any advancement at

all. Once USES advised Plaintiffs that it would pay nothing, there was no longer

any purpose to finishing the sixty-day period.

7
  Transmittal Decl. of Kevin M. Coen (“Coen Decl.”) Exs. 3 & 4. The first
demand was sent July 31, 2015; the second demand was sent August 21, 2015.
This action was filed on September 4, 2015.
8
  Coen Decl. Exs. 5 & 6 (Letters of Arthur Luk, Esq., dated August 28, 2015
(“[T]he Board [of USES] has concluded that [Plaintiffs are] not entitled to either
indemnification or advancement of legal fees and expenses under [the USES
Bylaws].”).
Wong v. USES Holding Corp.
C.A. No. 11475-VCN
February 26, 2016
Page 6

      As a matter of general contract law, “an unequivocal statement by a

promisor that he will not perform his promise gives ‘the injured party an

immediate claim to damages for total breach . . . .’”9         Yet, general contract

principles do not prevent the parties from reaching a different agreement. USES

has the argument that can, perhaps too simplistically, be reduced to “sixty days

means sixty days.” The purpose of the sixty days is obvious: to give USES the

time necessary to assess the advancement request.          Once it concluded that

Plaintiffs were not entitled to any advancement, no purpose for additional delay in

resolving the question can be identified, and the better reading of the Bylaws is that

a total and absolute refusal to pay would not be subject to the delay provision.

      Evaluating advancement requests—especially in this case where there may

be both reasonableness and allocation among various claims issues—can take time

and USES assured itself, in its Bylaws, a reasonable opportunity to assess the

application. This is not a situation where a partial payment was made within the

sixty-day period because, even when partial payment has been made, that does not

9
  Carteret Bancorp., Inc. v. Home Gp., Inc., 1988 WL 3010, at *5 (Del. Ch.
Jan. 13, 1988) (quoting Farnsworth on Contracts § 8.20 (1982)).
Wong v. USES Holding Corp.
C.A. No. 11475-VCN
February 26, 2016
Page 7

preclude either further negotiations or further review within the time that USES

allowed itself in its Bylaws.

      Thus, Plaintiffs are not required to absorb all or part of the Special Master’s

costs simply because they brought this action less than sixty days after they filed

their demand for advancement.

      In conclusion, Plaintiffs are entitled to “fees on fees,” incurred on or after

November 25, 2015, for pursuing this action and the sixty-day provision in

Section 9(c) of the Bylaws does not preclude Plaintiffs from shifting Special

Master expenses to USES.

      IT IS SO ORDERED.10

                                      Very truly yours,

                                      /s/ John W. Noble

JWN/cap
cc: Register in Chancery-K

10
   The question of the Special Master’s costs is addressed in paragraph 9 of the
Stipulated Order, which leaves that issue for the Court. USES proposed a good
cause standard, but the Bylaws allocate those costs based on whether the Plaintiffs
prevail in whole or in part. The version of the Stipulated Order proposed by
Plaintiffs’ counsel will be entered.