Court Opinion

ID: 4102705
Source: CourtListenerOpinion
Date Created: 2016-11-28 22:06:51.910558+00
Date Added: 2024-06-11T07:45:38.874133
License: Public Domain

IN THE SUPREME COURT OF THE STATE OF DELAWARE

TRASCENT MANAGEMENT                   §
CONSULTING, LLC,                      §    No. 126, 2016
                                      §
     Plaintiff-Below,                 §    Court Below: Court of Chancery
     Appellant,                       §    of the State of Delaware
                                      §
     v.                               §
                                      §    C.A. No. 10915-VCM
GEORGE BOURI,                         §
                                      §
     Defendant-Below,                 §
     Appellee.                        §
                                      §

                          Submitted: October 19, 2016
                          Decided:   November 28, 2016

Before STRINE, Chief Justice; HOLLAND and SEITZ, Justices.

Upon appeal from the Court of Chancery. AFFIRMED.

Michael W. Arrington, Esquire, Michael W. Teichman, Esquire, Parkowski,
Guerke & Swayze, P.A., Wilmington, Delaware; Michael S. Gardner, Esquire
(Argued), Eric P. Haas, Esquire, Jeremy D. Camp, Esquire, Gardner Haas PLLC,
Dallas, Texas, for Appellant.

Todd C. Schiltz, Esquire (Argued), Ryan T. Costa, Esquire, Drinker Biddle &
Reath LLP, Wilmington, Delaware; Damian Christian Shammas, Esquire, Law
Offices of Damian Christian Shammas LLC, Morristown, New Jersey, for
Appellee.

STRINE, Chief Justice:
                               I.     INTRODUCTION

       An LLC—Trascent—hired a top executive—George Bouri—and installed

him as a part owner, Managing Principal, and member of the Board of Managers of

Trascent with responsibility for human resources, IT, and finance, positions Bouri

occupied for about sixteen months.1 When Trascent terminated Bouri and sued

him, for among other things, violating his employment agreement, Bouri sought

advancement to defend himself in accordance with the plain language of both his

employment agreement and Trascent’s LLC agreement.2 Belatedly in the process

of defending Bouri’s motion for summary judgment, Trascent argued that the same

employment contract on which many of its claims against Bouri were premised

was induced by fraud and that Bouri could not receive advancement because the

employment agreement was thereby invalid (and presumably that he would not

have become a member of Trascent’s board, and thus be entitled to advancement,

under the LLC agreement absent that contract). The Court of Chancery refused to

countenance that defense to advancement, relying on the plain language of the

agreements, which required that advancement be provided until a court made a

final, nonappealable determination that indemnification was not required, and on

the summary nature of the proceedings under 6 Del. C. § 18-108, the LLC
1
  Appellant’s Opening Brief Ex. C at 4, 6 (Transcript of January 29, 2016 Court of Chancery
Oral Ruling on Defendant-Counterclaim Plaintiff’s Motion for Partial Summary Judgment)
[hereinafter Chancery Ruling]. Bouri had also been involved with Trascent’s predecessor for a
short period of time.
2
  Id. at 7–10.
analogue to 8 Del. C. § 145. Trascent has appealed, alleging that the Court of

Chancery erred in making that ruling.

      But we find it did not. Where a party has employed an officer under a

contract where that party agreed to provide for advancement for certain claims

until a court’s final judgment that the officer is not entitled to indemnification, that

party may not escape the obligation by injecting into a summary advancement

proceeding a defense based on the argument that the underlying contract under

which the parties are operating is invalid altogether, because of fraud in the

inducement. As the Court of Chancery properly found, to allow such a defense,

identical to what is properly a plenary claim on which Trascent has the burden of

persuasion, would permit Trascent to escape its clear promise to make

advancement until a court found indemnification inappropriate. Sanctioning a

defense of that kind would undermine the clear statutory purpose for providing a

summary proceeding for advancement cases, by allowing entities to employ

officers and directors under a promise of contractual rights and then seek to deny

them those advancement rights in their contracts of employment by injecting into a

statutory summary proceeding, by way of defense, a plenary claim that the

underlying contract was induced by fraud.           Sanctioning that defense would

undermine the General Assembly’s purpose in making advancement proceedings

summary in nature, by enabling an employer to engage a key manager on a

                                           2
promise of advancement, and then introduce into summary proceedings for the

enforcement of that right, a complicated plenary claim the basis for which will, as

in this case, often overlap with the merits of the very claims triggering the

manager’s advancement rights.           Thus, this Court agrees with the Court of

Chancery’s decision and affirms.

                                  II.     ANALYSIS

      The sole argument of Trascent on appeal is that the Court of Chancery erred

by enforcing the plain language of the employment agreement and LLC agreement,

which contain almost identical language, giving Bouri a right to advancement:

      Unless a determination has been made by final, nonappealable order
      of a court of competent jurisdiction that indemnification is not
      required, [Trascent] shall, upon the request of Executive, advance or
      promptly reimburse Executive’s reasonable costs of investigation,
      litigation or appeal, including reasonable attorneys’ fees; provided,
      however, that Executive shall, as a condition of Executive’s right to
      receive such advances or reimbursements, undertake in writing to
      repay promptly the Company for all such advancements and
      reimbursements if a court of competent jurisdiction determines that
      Executive is not entitled to indemnification . . . .3

The LLC Agreement’s advancement provision varies only in its use of ―Covered

Person‖ instead of ―Executive.‖4 Trascent argues that Bouri fraudulently induced

3
 App. Appellant’s Opening Br. at A-198 (George Bouri Employment Agreement).
4
 Id. at A-221 (Trascent Management Consulting, LLC Operating Agreement). The parties do
not dispute that Bouri is an ―Executive,‖ ―Covered Person,‖ or that he incurred losses for
purpose of these proceedings. Chancery Ruling at 12.
                                            3
the employment contract and LLC agreement5 by making misrepresentations to

Trascent’s founder during employment negotiations.6                   Specifically, Trascent

alleges that Bouri was not truthful about the circumstances surrounding his

departure from his previous employer,7 and materially misstated his personal

financial situation.8 Trascent argues that it relied on these misrepresentations and

never would have entered into the employment agreement or made him a manager

under the LLC agreement if it had known the truth.9 Yet, in the over sixteen

months Bouri was associated with Trascent and its predecessor—much less the

longer period where Rakesh Kishnan, Trascent’s founder, had engaged with Bouri

to encourage Bouri to join the firm—Trascent did not become aware of the alleged

fraud.

5
   During oral arguments, Trascent made a puzzling argument that the LLC agreement that
formed Trascent and to which Rakesh Kishnan—Trascent’s founder—and Itay Fastovsky—
Trascent’s other principal employee—were also parties in addition to Bouri was generally
unenforceable. Trascent bases this argument on the premise that Bouri fraudulently procured his
status as manager—and therefore a Covered Person entitled to advancement under the LLC
agreement—through the same misrepresentations Trascent alleged Bouri employed to procure
his employment agreement. But, in reality, taking into account the contents of the briefs and the
Court of Chancery record, Trascent’s argument more reasonably appears to be that absent
Bouri’s alleged misrepresentations of his background, which led to his employment agreement,
Bouri would not have been appointed Manager under Article IV of the LLC agreement or
otherwise been granted a position falling within the definition of Covered Person under the LLC
agreement’s Article VI and that therefore Bouri should not receive the benefit of the LLC
agreement’s protections for principal employees.
6
  Appellant’s Opening Br. at 23–24.
7
  Id. at 8.
8
  Id. at 7–8.
9
  Id. at 24.
                                               4
       In rejecting Trascent’s plea that it was entitled to refuse advancement until

its newly minted claim for fraud in the inducement was adjudicated, the Court of

Chancery relied on authority including Tafeen v. Homestore, Inc.10 and DeLucca v.

KKAT Mgmt.11 In Tafeen, the Court of Chancery rejected an argument that an

officer’s alleged fraudulent inducement of his employment contract meant that he

was not entitled to advancement provided under the company’s bylaws. 12 Instead,

the Court of Chancery distinguished between underlying conduct that might give

rise to a fraud-in-the-inducement action against the officer and facts relevant to the

court’s limited analysis establishing the officer’s right to advancement in summary

proceedings, observing that the purpose of an advancement proceeding was ―to

determine [the officer’s] entitlement to advancement under [the company’s]

governing rules.‖13 The Tafeen court ignored conduct-related allegations that could

form substantive causes of action for the purposes of the advancement proceeding,

even when those allegations, if true, suggested the officer obtained the benefit of

10
   2004 WL 556733 (Del. Ch. Mar. 22, 2004), aff’d 888 A.2d 204 (Del. 2005). See Chancery
Ruling at 16–19 (discussing Tafeen).
11
   2006 WL 224058 (Del. Ch. Jan. 23, 2006). See Chancery Ruling at 18–19 (discussing
DeLucca).
12
   2004 WL 556733 at *5.
13
   Id. As was the case in Tafeen, even if Trascent’s fraud in the inducement claim on Bouri’s
employment agreement was cognizable in a summary advancement proceeding, it would not
defeat Bouri’s claim for entitlement to advancement under the LLC agreement. Id. As the
Tafeen court observed, ―[t]he Advancement Bylaw is not dependent upon Tafeen’s employment
contract.‖ Id. at *5. As in Tafeen, allowing the substantive claims to be adjudicated now would
encourage any employer offering advancement at the outset of an employment relationship to
turn around and add a fraud in the inducement claim to a dispute to avoid making good on that
obligation by injecting considerations of the merits of a deeper plenary claim into what ought to
be summary proceedings.
                                               5
advancement improperly, and instead only analyzed the obligations to advance

expenses the employer had to the officer at the outset of the litigation.14

       Similarly, in DeLucca, the Court of Chancery confronted a former employer

making various arguments, both about the text of the advancement provision and

the former employee’s underlying conduct, to avoid providing advancement to the

former employee. The Court of Chancery declined to credit those arguments,

observing that ―when an advancement provision is, by its plain terms, expansively

written and mandatory, it will be enforced as written.‖15

       Here, the Court of Chancery reasoned that a plaintiff—Trascent—who had

plainly promised its officer—Bouri—advancement could not escape that important

obligation by suggesting that the employment contract was invalid, thereby

delaying the officer’s right to receive advancement until the plaintiff’s plenary

claim could be adjudicated.16 Rather, the Court of Chancery held that the right to

advancement should be honored and enforced in accordance with the contract’s

plain terms to which Trascent and Bouri agreed at the beginning of Bouri’s work,

leaving Trascent with the right to proceed to prove that the contract was invalid

and to recoup any improperly paid advancement in a plenary proceeding, such as a

proceeding on indemnification or in the underlying suit for which advancement

14
   Id.
15
   2006 WL 224058 at *13.
16
   Chancery Ruling at 18–20.
                                           6
Bouri seeks to fund his defense. The Vice Chancellor tied this ruling to the plain

language of the contract, stating ―the contract language is clear: until a court

determines that Trascent is not obligated to indemnify Mr. Bouri, Trascent must,

upon Mr. Bouri’s request and undertaking, cover both the legal fees and costs Mr.

Bouri has incurred and those that he will incur as this litigation continues.‖17

         Trascent knew when it entered the contract that Bouri would be entitled to

advancement ―[u]nless a determination has been made by final, nonappealable

order of a court of competent jurisdiction that indemnification is not required.‖18

Thus, Trascent knew it agreed to provide a right, subject to expedited specific

enforcement, and it could not reasonably believe that it could deny that right

simply by alleging that the contract was invalid. Trascent may later show that

Bouri is not entitled to indemnification by proving that the entire employment

agreement or the advancement provision was invalid and fraudulently induced.

But, Trascent cannot refuse to provide advancement by arguing that Bouri has the

duty in an advancement proceeding to disprove Trascent’s belated allegations.

That is especially so in this case when Trascent sued Bouri to enforce its rights

under the same contract in which Bouri’s right to advancement is set forth, when it

was Trascent’s own decision to sue that triggered Bouri’s right to advancement,

and when there is a great deal of overlap with Trascent’s substantive claims which

17
     Id. at 13.
18
     App. Appellant’s Opening Br. at A-221 (George Bouri Employment Agreement).
                                              7
seek to deprive Bouri of the benefits of his previous employment and lose any

further rights under the employment agreement and LLC agreement, including

advancement, on the grounds that he induced his hire by fraud.

       Equity requires that any fraud in the inducement claim be brought with

alacrity, because it hazards great prejudice to allow a party to reap the benefits of a

contract for itself while reserving the right to claim the contract is invalid. Here,

Trascent not only employed Bouri as a Managing Principal for sixteen months19

without seeking to rescind the contract but then sued Bouri on the contract.20

Recognizing that allowing Trascent to avoid its contractual duty to make

immediate advancement payments by making a belated fraudulent inducement

claim would impede the efficiency of the summary mechanism provided by 8 Del.

C. § 145(k) and impair the public policies served by contractual advancement

provisions made in reliance upon that provision of the DGCL as well as the

Limited Liability Company Act, the Court of Chancery properly refused to delay

enforcing the plain language of the contract. This determination was sound and in

keeping with our state’s public policies.21               ―Advancement is an especially

19
   Chancery Ruling at 4, 6 (noting that Bouri entered the Employment Agreement on January 1,
2014, and was terminated on April 8, 2015); see also id. at 8–9.
20
   App. Appellant’s Opening Br. at A-84 to -86 (Plaintiff Trascent Management Consulting,
LLC’s First Amended Complaint) (alleging Bouri’s breach of his Employment Agreement).
21
   The Court of Chancery’s sensible decision has an analogy in another context, where similar
incentives for unproductive gamesmanship arise. Parties to agreements to arbitrate disputes
often have second thoughts when a dispute actually comes. To escape their promise to arbitrate,
these parties then argue that the contract requiring arbitration was induced by fraud and that they
                                                8
important corollary to indemnification as an inducement for attracting capable

individuals into corporate service.‖22 Thus, we affirm the Court of Chancery’s

well-reasoned decision.

therefore do not have to arbitrate, at least until the contract is shown to be untainted by fraud.
Much like contracts for advancement, this state’s public policy favors enforcement of valid
arbitration agreements and therefore these arguments have been rejected by our courts (and the
federal courts). See, e.g., Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286, 292, 295
(Del. 1999); SBC Interactive, Inc. v. Corporate Media Partners, 714 A.2d 758, 761 (Del. 1998).
―A claim of fraud in the inducement of the contract generally—as opposed to the arbitration
clause itself—is for the arbitrators and not for the courts.‖ Karish v. SI Intern., Inc., No. 2002
WL 1402303 at *4 (Del. Ch. June 24, 2002) (quoting Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395, 400 (1967)); see also Carlyle Inv. Mgmt. L.L.C. v. Nat’l Indus. Grp.
(Holding), 2012 WL 4847089, at *10 (Del. Ch. Oct. 11, 2012), aff'd, 67 A.3d 373 (Del. 2013)
(―Under Delaware and federal law, a party cannot escape a valid forum selection clause, or its
analogue, an arbitration clause, by arguing that the underlying contract was fraudulently induced
or invalid for some reason unrelated to the forum selection or arbitration clause itself.‖). This
practice rightly avoids parties attaching an attack on the validity of the underlying agreement to
every contract dispute to avoid its previously made promise to arbitrate. As illustrated by
Trascent’s late-arriving claims in this case, the temptation to renege exists for those who initially
promised advancement too.
22
   Homestore, Inc. v. Tafeen, 888 A.2d 204, 211 (Del. 2005).
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