Court Opinion

ID: 6320816
Source: CourtListenerOpinion
Date Created: 2022-03-07 18:02:45.476139+00
Date Added: 2024-06-11T09:02:38.777168
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MARLENE KRAUSS, M.D.,                     )
                                          )
               Plaintiff,                 )
                                          )
         v.                               )    C.A. No. 2021-0714-LWW
                                          )
180 LIFE SCIENCES CORP.,                  )
                                          )
               Defendant.                 )

                            MEMORANDUM OPINION
                        Date Submitted: December 7, 2021
                          Date Decided: March 7, 2022
Kenneth J. Nachbar, S. Mark Hurd, and Sara Toscano, MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware; Aaron Miner, ARNOLD &
PORTER, New York, New York; Counsel for Plaintiff Marlene Krauss, M.D.

Matthew F. Davis, Aaron R. Sims, and Callan R. Jackson, POTTER ANDERSON
& CORROON LLP, Wilmington, Delaware; Jeffrey W. Shields, SHIELDS LAW
OFFICES, Irvine, California; Counsel for Defendant 180 Life Sciences Corp.

WILL, Vice Chancellor
       A former director and officer of a Delaware corporation seeks advancement

pursuant to provisions in the company’s charter and bylaws. She is pursuing

advancement of expenses incurred in responding to subpoenas from the Securities

and Exchange Commission, in defending herself against third-party claims in a New

York state action, and in connection with litigation in this court. The company

contests her entitlement to advancement, asserting that she was not made a party to

those proceedings by reason of the fact that she was a fiduciary.

       The plaintiff has moved for partial summary judgment on her entitlement to

advancement, including an award of fees-on-fees. This decision grants that motion

in part.

I.     FACTUAL BACKGROUND

       The following facts are drawn from the undisputed allegations of the Verified

Amended and Supplemental Complaint for Advancement (the “Complaint”) and

from certain documentary exhibits.1

1
  Dkt. 7. Citations to “Pl.’s Opening Br. Ex. __” refer to exhibits to the Transmittal
Declaration of Sara Toscano in Support of the Opening Brief in Support of Plaintiff’s
Motion for Partial Summary Judgment (Dkt. 37). Citations in the form of “Def.’s
Answering Br. Ex. __” refer to exhibits to the Transmittal Declaration of Callan R. Jackson
in Support of Defendant’s Answering Brief in Opposition to Plaintiff’s Motion for Partial
Summary Judgment (Dkt. 39). Page numbers to exhibits are designated by the last three
digits of a Bates number, where appropriate.

                                            1
          A.    Krauss, KBL, and KBL’s Governing Documents

          Plaintiff Marlene Krauss is the former Chief Executive Officer and director of

defendant KBL Merger Corp. IV (“KBL”), a special purpose acquisition company.

She served in those roles until her resignation on November 6, 2020—when KBL

entered into a business combination with 180 Life Sciences Corp., Katexco

Pharmaceuticals Corp., and CannBioRx. After the transaction closed, KBL was

renamed 180 Life Sciences Corp. (the “Company”).2

          KBL’s original certificate of incorporation provided for advancement of legal

fees incurred by officers and directors in connection with their duties.3 Its July 2017

Amended and Restated Certificate of Incorporation detailed KBL’s advancement

policy in Section 8.2(a):

                To the fullest extent permitted by applicable law . . . the
                Corporation shall indemnify and hold harmless each
                person who is or was made a party or is threatened to be
                made a party to or is otherwise involved in any threatened,
                pending or completed action, suit or proceeding . . . by
                reason of the fact that he or she is or was a director or
                officer of the Corporation . . . whether the basis of such
                proceeding is alleged action in an official capacity as a
                director, officer, employee or agent, or in any other
                capacity while serving as a director, officer, employee or
                agent, against all liability and loss suffered and
                expenses (including, without limitation, attorneys’
                fees . . . ) reasonably incurred by such indemnitee in
                connection with such proceeding. The Corporation shall

2
    Verified Am. & Suppl. Compl. for Advancement (“Compl.”) ¶¶ 2-3 (Dkt. 7).
3
    Id. ¶ 6.

                                             2
                    to the fullest extent not prohibited by applicable law pay
                    the expenses (including attorneys’ fees) incurred by an
                    indemnitee in defending or otherwise participating in any
                    proceeding in advance of its final disposition . . . .4

Section 8.2(a) also provided that approval by KBL’s board of directors (the “Board”)

was required for advancement of proceedings “initiated” by officers and directors:

                    Notwithstanding the foregoing provisions of this Section
                    8.2(a), except for proceedings to enforce rights to
                    indemnification and advancement of expenses, the
                    Corporation shall indemnify and advance expenses to an
                    indemnitee in connection with a proceeding (or part
                    thereof) initiated by such indemnitee only if such
                    proceeding (or part thereof) was authorized by the Board.5
And Section 8.2(b) contained a non-exclusivity provision:

                    The rights to indemnification and advancement of
                    expenses conferred on any indemnitee . . . shall not be
                    exclusive of any other rights that any indemnitee may have
                    or hereafter acquire under law, this Amended and Restated
                    Certificate, the Bylaws, an agreement, vote of
                    stockholders or disinterred directors, or otherwise.6
Section 8.2 remains unchanged in KBL’s Second Amended and Restated Certificate

of Incorporation (the “Charter”), which it adopted in connection with the business

combination.7

4
    Pl.’s Opening Br. Ex. B § 8.2(a).
5
    Id.
6
    Id. § 8.2(b).
7
    Pl.’s Opening Br. Ex. C (“Charter”) § 8.2; Compl. ¶ 7.

                                                3
         The Company’s Amended and Restated Bylaws (the “Bylaws”) also provide

for an advancement right in Section 8.2:

                [A]n Indemnitee shall also have the right to be paid by the
                Corporation to the fullest extent not prohibited by
                applicable law the expenses (including, without limitation,
                attorneys’ fees) incurred in defending or otherwise
                participating in any such proceeding in advance of its final
                disposition . . . provided, however, that, if the DGCL
                requires, an advancement of expenses incurred by an
                Indemnitee . . . shall be made only upon the Corporation’s
                receipt of an undertaking . . . .8

Unlike the advancement right established in the Charter, the Bylaws do not require

Board approval for advancement of expenses related to certain types of proceedings.

         B.     The Lawsuits and Investigation

         After the business combination closed, the United States Securities and

Exchange Commission launched an investigation into KBL’s business combination.

In April 2021, the SEC served Krauss with four subpoenas in connection with its

investigation.9 One subpoena directed Krauss to personally produce documents (the

“Krauss Subpoena”).10 The other three subpoenas were directed to entities affiliated

with Krauss that were involved in the business combination: KBL IV Sponsor LLC

8
    Pl.’s Opening Br. Ex. D (“Bylaws”) § 8.2(a).
9
    Compl. ¶¶ 1, 10; see Pl.’s Opening Br. Ex. E.
10
  Compare Pl.’s Opening Br. Ex. E at 080 (“The subpoena requires you to provide us with
documents.”), to, e.g., id. at 056 (“The subpoena requires KBL Sponsor to produce
documents to the SEC.”).

                                              4
(“KBL Sponsor”), KBL Healthcare Ventures LP, and KBL Healthcare Management,

Inc (together, the “KBL Entities”).11 Krauss was served with a follow-up subpoena

to the Krauss Subpoena in May 2021.12

         In April 2021, the Company initiated litigation against Tyche Capital, LLC in

New York state court (the “Tyche Action”), alleging breach of contract.13 In May

2021, Tyche asserted third-party claims and served Krauss with a third-party

summons.14

         On September 1, 2021, the Company filed a complaint against Krauss, KBL

Sponsor, and KBL Healthcare Management, Inc. in this court (the “Direct

Action”).15 The Company is pressing claims including breach of fiduciary duty and

alleges, among other things, that Krauss intentionally failed to disclose information

that rendered certain KBL disclosures materially false and misleading.16 Krauss and

the other named defendants filed their Answer and Verified Counterclaims and

Third-Party Complaint (the Counterclaim Complaint”) on October 5, 2021, asserting

11
     See id. at 008, 032, 056.
12
     Id. at 001-005.
13
  180 Life Sciences Corp. v. Tyche Cap. LLC is before the Supreme Court of the State of
New York, County of New York. See Index No. 652502/2021 (N.Y. Sup. Ct., New York
County).
14
     See Compl. ¶ 13.
15
     See C.A. No. 2021-0754-LWW, Dkt. 1 (“Company Compl.”).
16
     Id. ¶¶ 51-54.

                                           5
counterclaims against the Company and third-party claims against the Company’s

officers and directors.17

         C.      Krauss’s Demands and This Litigation
         On May 26, 2021, Krauss sent a letter to the Company demanding

advancement for legal fees in connection with the SEC subpoenas and Tyche

Action.18 The Company did not respond.

         On June 18, 2021, Krauss submitted a second demand for advancement. Her

letter contained an undertaking to repay amounts advanced to her if it was ultimately

determined that she was not entitled to indemnification by the Company.19 Again,

there was no response.20

         On August 2, 2021, Krauss sent a third demand to the Company, restating her

previous advancement requests and adding requests related to the then-threated

Direct Action. The August 2, 2021 demand also contained undertakings to repay

advanced funds.21 The Company did not respond.

17
     See C.A. 2021-0754-LWW, Dkt. 9. ¶¶ 142-72 (“Countercl. Compl.”).
18
     Compl. ¶ 15; Pl.’s Opening Br. Ex. G.
19
     Compl. ¶¶ 16-17, 19; Pl.’s Opening Br. Ex. H.
20
     Compl. ¶ 19.
21
     Id. ¶ 18; Pl.’s Opening Br. Ex. I.

                                             6
         On August 19, 2021, Krauss filed her Verified Complaint for Advancement,

seeking advancement under the Company’s Charter and Bylaws.22 She subsequently

supplemented that complaint to pursue advancement in connection with the Tyche

Action and Direct Action.23 The Company answered the amended complaint on

September 23, 2021, denied that that it owed advancement to Krauss, and asserted a

number of affirmative defenses.24

         On November 15, 2021, Krauss filed a motion for partial summary

judgment.25 The Company did not cross-move for summary judgment. After

briefing on Krauss’s motion was complete, I heard argument on December 7, 2021.26

II.      LEGAL ANALYSIS

         Under Court of Chancery Rule 56, summary judgment is appropriate when

“there is no genuine issue as to any material fact and . . . the moving party is entitled

to judgment as a matter of law.”27 “[T]he facts must be viewed in the light most

favorable to the nonmoving party and the moving party has the burden of

22
     Dkt. 1.
23
     Dkt. 7.
24
     Dkt. 11.
25
     Dkt. 35.
26
     Dkt. 45.
27
     Ct. Ch. R. 56(c).

                                           7
demonstrating that there is no material question of fact.”28 “Advancement cases are

particularly appropriate for resolution on a paper record, as they principally involve

the question of whether claims pled in a complaint against a party . . . trigger a right

to advancement under the terms of a corporate instrument.”29

         A.     Entitlement to Advancement

         Krauss seeks advancement under both the Charter and Bylaws. General rules

of contract interpretation apply when construing the provisions of a company’s

charter or bylaws.30 I must “give language which is clear, simple, and unambiguous

the force and effect required.”31

         The Charter and Bylaws unambiguously provide for mandatory advancement.

Advancement is available to Krauss for expenses incurred in connection with “any

threatened, pending, or completed action, suit or proceeding, whether civil, criminal,

administrative or investigative . . . by reason of the fact that . . . she is or was a

28
  Senior Tour Players 207 Mgmt. Co. v. Golftown 207 Hldgs. Co., 853 A.2d 124, 126 (Del.
2004).
29
  Int’l Rail P’rs LLC v. Am. Rail P’rs, LLC, 2020 WL 6882105, at *2 (Del. Ch. Nov. 24,
2020) (quoting DeLucca v. KKAT Mgmt., LLC, 2006 WL 224058, at *2 (Del. Ch. Jan. 23,
2006)).
30
     Hill Int’l, Inc. v. Opportunity P’rs L.P., 119 A.3d 30, 38 (Del. 2015).
31
     Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983).

                                                8
director [or] officer of the Company.”32 When advancement is mandatory, the

company carries the ultimate burden of proving that advancement is not required.33

         The “by reason of the fact” language found in the Charter and Bylaw

provisions replicates language in Section 145 of the Delaware General Corporation

Law.34 The “by reason of the fact” standard is satisfied when “a nexus or causal

connection” exists between the underlying proceeding and the official’s “corporate

capacity.”35 This court construes such provisions broadly to effectuate Delaware’s

policy of providing temporary relief from substantial expenses.36 “By reason of the

fact” language has been interpreted to include proceedings brought against an

32
   Charter § 8.2(a) (“The Corporation shall to the fullest extent applicable by law pay
expenses (including attorneys’ fees) incurred by an indemnitee in defending or otherwise
participating in any proceeding in advance of its final disposition . . . .” (emphasis added));
see Bylaws § 8.2 (“[A]n Indemnitee shall also have the right to be paid by the Corporation
to the fullest extent not prohibited by applicable law the expenses (including, without
limitation, attorneys’ fees) incurred in defending or otherwise participating in any such
proceeding in advance of its final disposition . . . .” (emphasis added)). The Delaware
Supreme Court found that near-identical language created a mandatory and unconditional
advancement right in Homestore, Inc. v. Tafeen. 888 A.2d 204, 212-13 (Del. 2005)
(finding that bylaws providing that “[t]he Corporation shall pay all expenses” to “the fullest
extent permitted” by the Delaware General Corporation Law created a mandatory and
unconditional advancement provision).
33
  See Stockman v. Heartland Indus. P’rs, L.P., 2009 WL 2096213, at *13 (Del. Ch. July
14, 2009) (“[I]n the case of a mandatory indemnification provision, the burden rests on the
party from whom indemnification is sought to prove that indemnification is not required.”).
34
     See 8 Del. C. § 145.
35
  Tafeen, 888 A.2d at 213. The proceedings contemplated by Section 145(e) are “any
civil, criminal, administrative or investigative action, suit or proceeding.” 8 Del C.
§ 145(e).
36
     See Brown v. LiveOps, Inc., 903 A.2d 324, 327-28 (Del. Ch. 2006).

                                              9
official for wrongdoing allegedly “committed in [her] official capacity” and “in the

course of performing [her] day-to-day . . . duties.”37

       The Company presents several arguments intended to defeat Krauss’s motion:

first, that just one of the four SEC subpoenas was directed to Krauss, which was not

served “by reason of the fact” that she is a former Company fiduciary; second, that

Krauss was not named as a third-party defendant in the Tyche Action as a result of

any conduct she undertook in her capacity as a director or officer of the Company;

and third, that although parts of the Direct Action are advanceable, expenses incurred

in connection with certain defenses and Krauss’s Counterclaim Complaint are not.

I address each argument in turn.

              1.      The SEC Subpoenas

       Regarding the subpoenas served by the SEC on Krauss and the KBL Entities,

Krauss asserts that she is entitled to advancement because the SEC investigation and

subpoenas arise out of the business combination and her former role as a director

and officer of the Company. Krauss acknowledges that she is not entitled to

advancement in connection with the subpoenas directed to the KBL Entities.38 The

37
  Imbert v. LCM Int. Hldg. LCC, 2013 WL 1934563, at *5 (Del. Ch. May 7, 2013) (quoting
Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761, at *6 (Del. Ch. June 18, 2002)).
38
  Krauss has asked that the Company advance all expenses incurred in connection with
the subpoenas now and that allocation be addressed in a subsequent stage of the case. See
Reply Br. in Supp. of Pl.’s Mot. for Partial Summ. J. (“Pl.’s Reply Br.”) 8-9 (Dkt. 41); Oral
Arg. on Pl.’s Mot. for Partial Summ. J. Tr. Dec. 7, 2021 (“Oral Arg. Tr.”), at 27-28 (Dkt.
45).

                                             10
KBL Entities that received the SEC subpoenas are not “indemnitees” as defined in

the Company’s Charter or Bylaws. One must be, or have been, a “director or officer

of the Corporation” to be indemnified or have their expenses advanced.39

         As to the Krauss Subpoena, the Company contends that Krauss’s expenses are

not advanceable because the subpoena does not specify the capacity in which Krauss

was served. That argument does not give rise to a genuine issue of material fact.

Even viewing the evidence in the light most favorable to the Company, a causal

nexus exists between the SEC’s investigation and Krauss’s former fiduciary roles.

         The SEC sought, among other things, “[a]ll Communications and other

Documents Concerning KBL’s merger discussions and negotiations with 180 Life

Sciences Corp.” and “[a]ll Communications and other Documents Concerning

KBL’s preparation or filing of its Forms 10-Q for the fiscal quarters ended June 30,

2020 and September 30, 2020.”40 It is self-evident that these documents were

requested from Krauss by virtue of her former KBL positions and not (as the

Company suggests might be the case) because she was a Company stockholder.41

          Because only one of the four subpoenas is advanceable, the parties debate

how Krauss’s expenses for responding to the subpoenas should be allocated for

39
     See Charter § 8.2(a); Bylaws §§ 8.1-8.2.
40
     Pl.’s Opening Br. Ex. E at 089.
41
     Def.’s Answering Br. 26-27.

                                                11
purposes of calculating advancement. The Company argues that “no more than 25%

of the fees incurred” should be advanced “given that only one of the four SEC

Subpoenas is directed to Dr. Krauss.”42 Krauss proposes, instead, that her counsel

“make a good faith effort” to allocate expenses between those incurred by Krauss

and those incurred by the KBL Entities, with any expenses “benefitting both

[Krauss] and any other party to the proceeding . . . included [as] if they would have

been incurred on behalf of Krauss.”43

          In Danenberg v. Fitracks, this court approved the procedure proposed by

Krauss.44 There, the plaintiff’s “counsel’s good faith estimate of work solely

performed for [other defendants] that [the] counsel would not have been forced to

address if [the plaintiff] was the sole defendant” was excluded from an

advancement.45 The same procedure will be followed here.

                  2.    The Tyche Action
          Krauss next asserts that she is entitled to advancement with respect to the

Tyche Action because she was named as a third-party defendant as a result of her

former position as an officer and director of the Company. Krauss contends that

42
     Id. at 29.
43
  [Proposed] Order Granting Pl.’s Mot. for Partial Summ. J. and Establishing Procedure
for Payment of Advancement to Pl. ¶ 4(a) (Dkt. 37).
44
     58 A.3d 991 (Del. Ch. 2012).
45
     Id. at 999-1000.

                                           12
allegations in the Tyche Action about the Company’s disclosures are connected to

her role as a former fiduciary, causing her to be served with the Tyche third-party

complaint. In support of that position, she cites to background portions of the Tyche

third-party complaint that reference her former status as a Company fiduciary.46

         The Company disagrees, asserting that Krauss was named as a third-party

defendant only because of her conduct as the principal of KBL Sponsor relating to

its personal contractual obligation. A review of the third-party claims in the light

most favorable to the Company supports that assertion. Krauss is named in one

count of the Tyche third-party complaint solely in her capacity as KBL Sponsor’s

principal.47 In particular, Tyche seeks a declaration that Krauss “as the principal . . .

of [KBL] Sponsor” was obligated to instruct KBL Sponsor to authorize the transfer

of certain shares to Tyche.48 That claim implicates the “specific and personal

contractual obligation” of KBL Sponsor.49

         Had the Company cross-moved for summary judgment—as is typical in

advancement proceedings—it might have succeeded in demonstrating that Krauss is

46
  See Pl.’s Opening Br. 10; Pl.’s Opening Br. Ex. F ¶ 111 (stating that “Krauss falsely
represent[ed] to the SEC and investing public that she already transferred” the shares as
context for a breach of contract claim against the Sponsor and a transfer agent).
47
     Pl.’s Opening Br. Ex. F ¶¶ 117-24.
48
     Id. ¶¶ 119, 124.
49
  See Charney v. Am. Apparel, Inc., 2015 WL 5313769, at *16 (Del. Ch. Sept. 11, 2015)
(quoting Paolino v. Mace Sec. Int’l Inc., 985 A.2d 392, 403 (Del. Ch. 2009)).

                                           13
not entitled to advancement for the Tyche Action as a matter of law. The alleged

wrongdoing in the third-party claim against Krauss seems divorced from her former

responsibilities or actions as a Company officer and director and explicitly concerns

her role as the principal of KBL Sponsor.50 Any purported misconduct by Krauss

with regard to the Company’s disclosures appears “essentially immaterial” to the

claim she is defending against in the Tyche Action.51

         But only Krauss has sought summary judgment and the Company has not

conceded that there are no material facts in dispute.52 I therefore must deny summary

judgment on this issue. If Krauss determines to continue to press for advancement

in connection with the Tyche Action, the matter of her entitlement must be resolved

at trial.53

         Krauss has proposed that any “close” question should be decided in favor of

advancement at this phase—with a final decision to be rendered in the

50
 See Imbert, 2013 WL 5313769, at *5, *8 (distinguishing between conduct as a manager,
which was advanceable, and conduct as a member, which was not advanceable).
51
   Lieberman v. Electrolytic Ozone, Inc., 2015 WL 5135460, at *6 (Del. Ch. Aug. 31, 2015)
(resolving cross-motions for summary judgment); see also Charney, 2015 WL 5313769,
at *16-18 (determining, on cross-motions for summary judgment, that a former director
and officer was not entitled to advancement because his former status merely “formed part
of the narrative leading to” the claim and was not necessary for the alleged violations at
issue).
52
     See Oral Arg. Tr. at 40-41.
53
     See Evans v. Avande, Inc., 2021 WL 4344020, at *9 n.86 (Del. Ch. Sept. 23, 2021).

                                             14
indemnification proceeding—because she has signed an undertaking.54               That

approach would surely be more efficient. But that benefit is “outweighed by the

unreasonableness of requiring a corporation like [the Company] to bear a credit risk

that it did not contract to assume.”55

                3.      The Direct Action

         Finally, Krauss seeks “advancement of expenses related to her full defense of

the Direct Action, which includes her affirmative defenses, her counterclaims, and

[] third-party claims.”56       The Company concedes that Krauss is entitled to

advancement for portions of the Company’s complaint against her. It contests

advancement related to Krauss’s counterclaims, third-party claims, and certain of

her defenses.

                        a.    Defenses and Affirmative Defenses

         The Company argues that Krauss is not entitled to advancement for three of

her affirmative defenses and any defenses related to allegations that she caused

unauthorized transfers of Company funds after her resignation. But its arguments

do not give rise to a genuine issue of material fact. Summary judgment is granted

54
     Oral Arg. Tr. at 30.
55
     Fasciana v. Electronic Data Sys. Corp., 829 A.2d 160, 175 (Del. Ch. 2003).
56
     Pl.’s Opening Br. 20.

                                             15
as to the advancement of expenses for Krauss’s defenses in the Direct Action. It is

also granted with regard to her affirmative defenses.

          With respect to Krauss’s defenses to the unauthorized transfer allegations, the

associated causes of action—for ultra vires acts, unjust enrichment, and associated

declaratory relief—all satisfy the “by reason of the fact” requirement.57            The

Company accuses Krauss of, for example, “falsely attesting to KBL’s Consolidated

Financial Statements,” “engaging in [improper] Money Transfers,” and

“conspir[ing] to misappropriate . . . and misapproriat[ing]” monies belonging to the

Company.58 It is unclear how Krauss could have signed off on the Company’s

financial statements or (allegedly) embezzled funds if she had not been a director or

officer. And the Company’s complaint in the Direct Action notes that Krauss was

“responsible for all aspects of [the Company’s] operations, finances, and procedures,

including without limitation, those relating to the financial health” and “reporting

and disclosure obligations” of the Company and the “proper use and payment of [the

Company’s] monetary assets.”59 The Company cannot withhold advancement for

Krauss’s defense (effectively) by its own admission.

57
     Company Compl. ¶¶ 55-60, 66-69.
58
     Id. ¶¶ 56, 59.
59
     Id. ¶ 62.

                                            16
         Given the broad view of a defense in the advancement context, Krauss is also

entitled to advancement for her affirmative defenses.60 The Company contends that

Krauss’s affirmative defenses should be viewed as “offensive arguments” that do

not warrant advancement.61 The only case cited in support of that proposition is

Mooney v. Echo Therapeutics, Inc., which does not equate affirmative defenses to

offensive litigation but focuses on whether advancement is triggered by affirmative

defenses asserted by the indemnitor (rather than the indemnitee).62 Each of the

defenses raised by Krauss—in pari delicto, unclean hands, and fraud—are

traditional affirmative defenses. Even viewing the facts in the light most favorable

to the Company, they have been raised to defeat allegations in the Direct Action that

implicate Krauss’s former corporate capacity.63

                      b.        Counterclaims and Third-Party Claims

         The Company’s arguments against advancing Krauss’s counterclaims and

third-party claims in the Direct Action are more nuanced.

         First, the Company contends that Krauss’s claims are “proceedings . . .

initiated by” Krauss that, according to the Charter, are advanceable “only if such

60
    See Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992) (noting that “[i]n a
litigation context the term ‘defense’ has broad meaning,” and finding that an indemnity
agreement “clear[ly]” covered affirmative defenses).
61
     Def.’s Answering Br. 46.
62
     2015 WL 3413272, at *2, *11 (Del. Ch. May 28, 2015).
63
     See Countercl. Compl. at 31-33.

                                             17
proceedings (or part thereof) w[ere] authorized by the [Company’s] Board.”64 But

the Bylaws provide for a separate, exclusive right to advancement—one that does

not conflict with and is not limited by the Charter.65 Section 8.2(b) of the Charter

states that “[t]he rights to indemnification and advancement of expenses conferred

on any indemnitee . . . shall not be exclusive of any other rights that any indemnitee

may have or hereafter acquire under the law . . . the Bylaws . . . or otherwise.”66

         Section 8.2 of the Bylaws creates an advancement right “to the fullest extent

not prohibited by applicable law” with no limiting language and in addition to the

advancement right provided in the certificate of incorporation.67 By contrast,

Section 8.1 of the Bylaws—related to indemnification—includes a limitation

64
     Charter § 8.2(a); see Def.’s Answering Br. 40-41.
65
   See, e.g., Katzman v. Comprehensive Care Corp., C.A. No. 5892-VCL, at 4-5 (Del. Ch.
Dec. 28, 2010) (TRANSCRIPT) (“The basic principle is that indemnification and
advancement rights from one source are nonexclusive of other sources unless there is a
specific agreement otherwise. What that means is a statutory right under Section 145(c) is
independent and nonexclusive of a charter right, which in turn is independent and
nonexclusive of any bylaw right, which in turn is independent and nonexclusive of any
contract right, absent specific agreement to the contrary.”); Evans v. Avande, Inc., C.A.
2018-0454-LWW, at 76-78 (Del. Ch. June 25, 2021) (TRANSCRIPT) (finding a director’s
right to indemnification under a company’s bylaws separate from other indemnification
rights).
66
     Charter § 8.2(b).
67
   Bylaws § 8.2. The Company argues that the limiting language in Section 8.1 of the
Bylaws applies to Section 8.2 by virtue of the defined term “Indemnitee” being used in
both sections. See Def.’s Answering Br. 41. I find that argument unpersuasive. The board
authorization language in Section 8.1 is not related to the defined term, and there is no
reason to read it into Section 8.2 simply because both sections refer to “Indemnitees.” See
Bylaws §§ 8.1, 8.2; Paolino, 2009 WL 4652894, at *10 (declining to extend a limitation in
an indemnification bylaw to the subsequent advancement bylaw).

                                             18
identical to the one in Section 8.2(a) of the Charter.68 In Homestore, Inc. v. Tafeen,

the Delaware Supreme Court explained that Section 145 “expressly contemplates

that corporations may confer a right to advancement that is greater than the right to

indemnification.”69 Accordingly, Krauss can seek advancement for her claims

pursuant to the Bylaws, which do not require Board approval.

         Next, the Company argues that advancement for the Counterclaim Complaint

is unavailable because they are not brought by reason of the fact that Krauss was a

Company fiduciary. That may well be so regarding Count V of the Counterclaim

Complaint, which is brought by KBL Sponsor.70 KBL Sponsor is not an indemnitee

under the Company’s Bylaws.71 I therefore must deny Krauss’s motion for summary

judgment on advancement for Count V of the Counterclaim Complaint.

         Krauss’s remaining counterclaims consist of breach of contract claims related

to a “Sponsor Registration Rights Agreement,” a breach of contract claim in

connection with Krauss’s resignation agreement, and a request for declaratory

judgment.72 The Company contends that these counterclaims are not advanceable

68
     See Bylaws § 8.1.
69
     888 A.2d at 212.
70
     Countercl. Compl. ¶¶ 167-72.
71
     See supra note 39 and accompanying text.
72
     Countercl. Compl. ¶¶ 147-66, 173-76.

                                            19
because they are brought in Krauss’s personal capacity as a stockholder or arise out

of her personal contractual obligations.73

         But certain of these counterclaims are compulsory. Where the underlying

action is brought against a defendant “by reason of such person being or having been

a director or officer,” her counterclaims are advanceable if they are (1) “necessarily

part of the same dispute” as the underlying action (i.e., compulsory) and (2)

“advanced to defeat, or offset” the underlying claims.74             Counterclaims are

compulsory under Delaware law where they “arise[] out of the transaction or

occurrence that is the subject matter of the opposing party’s claim.”75 In such a

scenario, advancement is owed. This court has held, for instance, that a company

was required to advance fees in connection with a books and records action—

naturally brought in the plaintiff’s capacity as a stockholder—because the “books

and records [were sought] to defend claims against him as a Manager.”76

         The claims against Krauss in the Direct Action concern her alleged false

attestation regarding KBL financial statements, self-dealing monetary transfers,

73
     Def.’s Answering Br. 42-43.
74
   Pontone v. Milso Indus. Corp., 2014 WL 2439973, at *3, *7 (Del. Ch. May 29, 2014);
id. at *4 (“Delaware courts repeatedly have held that the baseline requirement for a
counterclaim to be advanceable is that it qualify as compulsory.”); see Roven, 603 A.2d at
824.
75
     Ct. Ch. R. 13(a).
76
     Imbert, 2013 WL 1934563, at *11.

                                           20
improper redemption of KBL shares before the closing of the business combination,

and improper issuance of shares to an investment bank for services rendered to

KBL.77 These allegations all stem from events taking place in and around November

2020.

          Krauss’s resignation agreement is part of the transactions or occurrences

underlying the Direct Action. The Direct Action complaint alleges that “Krauss’[s]

signing of the Resignation Agreement on behalf of both herself individually and on

behalf of KBL constituted a conflict of interest” and that it created one of the

“liabilities of KBL which were not recorded and/or disclosed as contingent liabilities

payable . . . in the Consolidated Financial Statements.”78 The Company contends

that Krauss had “actual knowledge” of the liabilities, and the alleged intentional

exclusion of the resignation agreement liability from KBL’s financial statements

forms one of the bases for its claims against Krauss in Counts I and II of the Direct

Action complaint.79

          Further, the Company’s list of alleged unauthorized transfers in the Direct

Action complaint includes a transfer that is tied to Krauss’s resignation counterclaim

in its amount and timing.80 Krauss’s resignation agreement counterclaim against the

77
     Company Compl. ¶¶ 51-69.
78
     Id. ¶¶ 31, 33.
79
     Id. ¶ 32.
80
     Id. ¶¶ 34, 53, 56.

                                           21
Company—Count IV of the Counterclaim Complaint—therefore meets the first

prong of the test to determine whether it is advanceable: it is compulsory. Because

it is also brought to offset the underlying claims, it is advanceable.81

         Whether the counterclaims related to the Sponsor Registration Rights

Agreement—Counts II and III—are compulsory is a closer call. Krauss reads

“transactions or occurrences” broadly by linking any breach of a contract signed in

connection with the business combination—regardless of the time—with the

business combination itself.82 The Company’s claims in the Direct Action are

centered around events connected to the business combination in November 2020.

Krauss’s counterclaims, however, pertain to February and August 2021 Form S-1

registration statements and an alleged triggering of notice rights under the Sponsor

Registration Rights Agreement in July 2021.83 The Company’s claims and Krauss’s

81
  The term “offset” is broad. Pontone, 2014 WL 2439973, at *4-5 (declining to limit the
“advanced to defeat, of offset” prong and implying that the breadth of what constitutes
“defending” an action means that “offset” should be read broadly as well); see Roven, 603
A.2d at 824 (finding that “defending” a suit includes pursuing and affirmative defenses and
certain counterclaims).
82
   See, e.g., Pl.’s Reply Br. at 23-24 (“Each of the claims against Dr. Krauss in the Direct
Action is related to actions she took in connection with the Business Combination, and all
of the Counterclaims and Third-Party claims similarly relate to actions the Company and
its officers and directors took in relation to that transaction.”).
83
     Countercl. Compl. ¶¶ 124-26, 136, 152, 159.

                                            22
Sponsor Registration Rights Agreement counterclaims are not “necessarily part of

the same dispute.”84 She is not entitled to summary judgment on that basis.

         I likewise cannot conclude that summary judgment is warranted on Krauss’s

entitlement to advancement for her declaratory judgment counterclaim (Count VI).

That counterclaim does not reference the resignation agreement claim but rather

seeks an order declaring that the Company breached Krauss’s rights under the

Sponsor Registration Rights Agreement, that its directors and officers breached their

fiduciary duties, that certain Company shares should be registered pursuant to the

Sponsor Registration Rights Agreement, and that Krauss did not breach her fiduciary

duties.85 The first three declarations are simply declaratory judgment parallels of

claims that were found not to be advanceable. And a declaration that “Dr. Krauss

did not breach her fiduciary duties while she was both a director and the CEO of the

Company” is effectively equivalent to defending herself in the underlying claim.

         That leaves the question of whether Krauss’s third-party claim is advanceable.

It is difficult to see how her third-party claim—which is essentially a new action

against previously-unnamed parties—are compulsory. “The general rule is that

offensive litigation is not advanceable.”86 I cannot conclude, as a matter of law, that

84
     Pontone, 2014 WL 2439973, at *7.
85
     Countercl. Compl. ¶ 176.
86
     Mooney, 2015 WL 3413272, at *11.

                                           23
Krauss was acting to defeat claims against her by pleading an additional claim

against third-party defendants. Krauss cites no authority that would support a

different result. Summary judgment with regard to Krauss’s third-party claim is

denied.

                                      *      *      *

         Regarding Krauss’s defense to the Direct Action, the motion for summary is

granted in part. Krauss is owed advancement in connection with her defenses,

including affirmative defenses, and Count IV of the Counterclaim Complaint as a

matter of law. The motion is otherwise denied as to advancement for the Direct

Action.

         B.    Fees-on-Fees and Prejudgment Interest

         Absent an agreement otherwise, parties who successfully prosecute an

advancement action are typically entitled to an award of fees for their expenses in

litigating the suit.87 The Company acknowledges that Krauss is entitled to fees-on-

fees relating to this advancement action “proportionate to her success.”88 Section 8.3

of the Bylaws states that, “[i]f successful in whole or in part in [bringing] any

87
  See Stifel Fin. Corp. v. Cochran, 809 A.2d 555, 560-62 (Del. 2002) (noting that “without
an award of attorneys’ fees for the indemnification suit itself, indemnification would be
incomplete”); Weaver v. ZeniMax Media, Inc., 2004 WL 243163, at *7 (Del. Ch. Jan. 30,
2004) (“‘Fees on fees’ are an inherent right of the party materially successful in asserting
a claim for indemnification or advancement.”).
88
     Def.’s Answering Br. 49.

                                            24
[advancement] suit . . . [an] Indemnitee shall also be entitled to be paid the expense

of prosecuting or defending such suit.”89 Krauss is therefore owed fees-on-fees in

accordance with the findings of the court above.

         The Company also owes Krauss prejudgment interest.90 The Company argues

that the interest is not owed until Krauss submits unredacted copies of all invoices

for which she claims entitlement to advancement.91 But Krauss has stipulated that

she is not seeking advancement for the redacted portions of the invoices.92 Pre-

judgment interest is awarded “for the period of time when [the Company]

unjustifiably refused to provide advancement”93—that is, starting twenty days after

Krauss’s demands for advancement.94

III.     CONCLUSION

         Partial summary judgment is entered for Krauss, in part. The Company must

advance to Krauss her fees and expenses incurred in connection with the Krauss

Subpoena and her defenses (including affirmative defenses) and one counterclaim

89
     Bylaws § 8.3.
90
     Roven, 603 A.2d at 826 (“[P]re-judgment interest is a matter of right.”).
91
     See Def.’s Answering Br. 19, 49-50.
92
     Pl.’s Reply Br. 25.
93
     Citrin v. Int’l Airport Ctrs. LLC, 922 A.2d 1164, 1167 (Del. Ch. 2006).
94
     See Bylaws § 8.3 (requiring advancement of expenses to be paid in full within 20 days).

                                               25
in the Direct Action. The parties are to confer and, within ten days, submit an

implementing order consistent with this decision.

      Because summary judgment is also denied in part, questions of entitlement

remain to be decided. The parties are directed to submit a joint letter within ten days

setting forth their respective positions on a procedure for resolving the outstanding

entitlement issues and for the payment of advancement consistent with Fitracks,

insofar as Krauss has been found entitled to advancement as a matter of law.

                                          26