Court Opinion

ID: 3148817
Source: CourtListenerOpinion
Date Created: 2015-10-22 21:03:45.254844+00
Date Added: 2024-06-11T11:55:24.233497
License: Public Domain

COURT OF CHANCERY
                                           OF THE
                                    STATE OF DELAWARE

D ONALD F. PARSONS, JR.                                         New Castle County Courthouse
   VICE CHANCELLOR                                              500 N. King Street, Suite 11400
                                                               Wilmington, Delaware 19801-3734

                             Date Submitted: June 24, 2015
                             Date Decided: October 22, 2015

   Raymond J. DiCamillo, Esq.                  John L. Reed, Esq.
   Susan M. Hannigan, Esq.                     Scott Czerwonka, Esq.
   J. Scott Pritchard, Esq.                    Harrison S. Carpenter, Esq.
   Rachel E. Horn, Esq.                        DLA Piper LLP
   Richards, Layton & Finger, P.A.             919 North Market Street, 15th Floor
   920 North King Street                       Wilmington, DE 19801-3046
   Wilmington, DE 19801

           Re:    In re Genelux Corporation
                  Civil Action No. 10612-VCP

   Dear Counsel:

           This is an advancement proceeding based on related litigation before this

   Court under 8 Del. C. §§ 205 and 225 (the “205/225 Action”) and an action in

   California. The detailed background of the underlying dispute in the 205/225

   Action is set out more fully in the opinion issued contemporaneous with this Letter

   Opinion, reflecting this Court‟s post-trial findings of fact and conclusions of law in

   that action.1 This opinion addresses whether a former director and officer of a

   1
           In re Genelux Corp., C.A. No. 10042-VCP (Del. Ch. 2015) [hereinafter
           205/225 Opinion].
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 2

corporation is entitled to summary judgment on his request for advancement of

fees and expenses incurred in the related 205/225 Action and the California

litigation from the corporation. For the reasons set forth below, I conclude the

former director and officer is entitled to advancement, and I grant the motion for

summary judgment.

                            I.      BACKGROUND

                                  A.      Facts
      On August 20, 2014, Genelux Corporation (“Genelux” or the “Company”),

together with Dr. Ron Simus, a Genelux Board member and stockholder, filed an

amended complaint against Dr. Albert Roeder and Byron Georgiou containing two

counts, seeking: (1) relief pursuant to 8 Del. C. § 205; and (2) relief pursuant to

8 Del. C. § 225. On October 13, 2014, Leslie Busick, trustee of the Busick Inter

Vivos Trust dated June 11, 1974, filed a complaint in California state court against

Dr. Aladar Szalay, among other defendants, seeking restitution based on a

$2,000,000 loan that Busick had made to Genelux (the “California Action”). On

October 31, 2014, Szalay moved to intervene in the 205/225 Action, which relates,

among other things, to the validity of 1.5 million shares of Series A Preferred

Stock in the Company that Szalay purportedly received in 2009. On November 21,

2014, Szalay submitted a request for indemnification and advancement to Genelux
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 3

pursuant to Article XI of the Company‟s First Amended and Restated Bylaws,

which provides:

         Each person who was or is made a party or is threatened to
         be made a party or is involved in any action, suit or
         proceeding, whether civil, criminal, administrative or
         investigative (hereinafter a “proceeding”), by reason of the
         fact that he or she, or a person of whom he or she is the legal
         representative, 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, shall be indemnified
         and held harmless by the Corporation to the fullest extent
         authorized by the Delaware General Corporation Law, . . .
         against all expense, liability and loss (including attorneys‟
         fees, judgments, fines, ERISA excise taxes or penalties and
         amounts paid or to be paid in settlement) reasonably
         incurred or suffered by such person in connection therewith
         and such indemnification shall continue as to a person who
         has ceased to be a director, officer, employee or agent . . .
         provided, however, that, except as provided in paragraph (b)
         hereof, the Corporation shall indemnify any such person
         seeking indemnification in connection with a proceeding (or
         part thereof) initiated by such person only if such proceeding
         (or part thereof) was authorized by the Board of Directors of
         the Corporation. The right to indemnification conferred in
         this Section shall be a contract right and shall include the
         right to be paid by the Corporation the expenses incurred in
         defending any such proceeding in advance of its final
         disposition: provided, however, that, if the Delaware
         General Corporation Law requires, the payment of such
         expenses incurred by a director or officer in his or her
         capacity as a director or officer (and not in any other
         capacity in which service was or is rendered by such person
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 4

        while a director or officer, including, without limitation,
        service to an employee benefit plan) in advance of the final
        disposition of a proceeding, shall be made only upon
        delivery to the corporation of an undertaking, by or on
        behalf of such director or officer, to repay all amounts so
        advanced if it shall ultimately be determined that such
        director or officer is not entitled to be indemnified under this
        Section or otherwise.2

Szalay also seeks advancement pursuant to Section 5 of the indemnification

agreement dated July 25, 2011 between the Company and Szalay (the

“Indemnification Agreement”), which provides:

        Notwithstanding any other provision of this Agreement, the
        Company shall advance all Expenses incurred by or on
        behalf of Indemnitee in connection with any Proceeding by
        reason of Indemnitee‟s Corporate Status within thirty (30)
        days after the receipt by the Company of a statement or
        statements from Indemnitee requesting such advance or
        advances from time to time, whether prior to or after final
        disposition of such Proceeding.        Such statement or
        statements shall reasonably evidence the Expenses incurred
        by Indemnitee and shall include or be preceded or
        accompanied by a written undertaking by or on behalf of
        Indemnitee to repay any Expenses advanced if it shall
        ultimately be determined that Indemnitee is not entitled to be
        indemnified against such Expenses. Any advances and
        undertakings to repay pursuant to this Section 5 shall be
        unsecured and interest free. . . .3

2
     Compl. Ex. B, Art. XI § 1(a).
3
     Compl. Ex. C § 5.
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 5

      On February 5, 2015, Szalay filed this action after the Company refused to

advance his expenses and also moved for expedited treatment thereof (the “Motion

to Expedite”). On February 18, 2015, the Company moved to consolidate this

action with the 205/225 Action (the “Motion to Consolidate”). On February 24,

2015, Szalay submitted to the Company evidence of his expenses and the written

undertaking as required to make a demand for advancement under Section 5 of the

Indemnification Agreement. On February 26, 2015, Szalay moved for summary

judgment of advancement and filed an opening brief in support thereof (the

“Motion for Summary Judgment”). On April 2, 2015, I granted in part and denied

in part the Motion to Consolidate and the Motion to Expedite. Those motions were

granted only to the extent that I ordered that: (1) the parties could present

additional evidence regarding Szalay‟s Motion for Summary Judgment at trial; and

(2) briefing on the Motion for Summary Judgment could proceed promptly. Trial

on the issues presented in the 205/225 Action and any additional evidence on

Szalay‟s Motion for Summary Judgment was held April 7-8, 2015. On April 20,

2015, Genelux filed its brief in opposition to Szalay‟s Motion for Summary

Judgment, and on April 27, Szalay submitted his reply brief. On June 24, 2015, I

heard post-trial argument on all issues.   Having considered all of the recited
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 6

submissions and observed the relevant portions of the trial and post-trial

arguments, I present my ruling on the Motion for Summary Judgment in this Letter

Opinion.

                          B.      Parties’ Contentions
      Defendant Genelux asserts that Szalay is not entitled to advancement under

the Company‟s governing documents and Delaware law, because: (1) Szalay

intervened in the 205/225 Action for personal reasons and not as part of any duty

to the Company or its stockholders; (2) Szalay was not involved in the 205/225

Action by reason of his Corporate Status, as defined in the Indemnification

Agreement and referenced in Section 13(a); (3) the Company‟s Director and

Officer (“D&O”) insurer agreed to cover his attorneys‟ fees incurred in the

California Action; therefore, any of Szalay‟s claims related to advancement for that

action are moot; and (4) Szalay failed to comply with Section 5 of the

Indemnification Agreement, because he did not submit the requisite evidence of

expenses and a written undertaking with, or before submitting, his demand for

advancement.4

4
      See Genelux Corp.‟s Ans. Br. in Opp. to Pl.‟s Mot. Summ. J. (“Def.‟s Ans.
      Br.”), Docket Item (“D.I.”) 17.
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 7

      Szalay argues that he is entitled to advancement of the legal fees and

expenses he has incurred and continues to incur in the 205/225 Action, because his

involvement relates to his “Corporate Status.”5 In addition, Szalay contends that

the fact that he was forced to intervene in the 205/225 Action does not extinguish

his advancement rights.6 Further, Szalay claims that he still may be entitled to

advancement for fees incurred in the California Action beyond any

reimbursements received pursuant to the Company‟s D&O insurance.7 I address

each of these arguments in turn, below.

                               II.     ANALYSIS

A.     Szalay’s Failure to Get Board Authorization Does Not Extinguish His
                                Advancement Rights
       Genelux first claims that Szalay is not entitled to advancement, because he

intervened in the 205/225 Action for purely personal reasons. 8 Section 13(f) of

the Indemnification Agreement defines a “Proceeding” as:

             any threatened, pending or completed action, suit,
             arbitration, alternate dispute resolution mechanism,
             investigation, inquiry, administrative hearing or any other

5
      Pl.‟s Reply Br. in Supp. of Mot. Summ. J. (“Pl.‟s Reply Br.”), D.I. 20, at 6.
6
      Id. at 14.
7
      Id. at 21.
8
       Def.‟s Ans. Br. 9.
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 8

              actual, threatened or completed proceeding, whether
              brought by or in the right of the Company or otherwise
              and whether civil, criminal, administrative or
              investigative, in which Indemnitee was, is or will be
              involved as a party or otherwise, by reason of his or her
              Corporate Status, by reason of any action taken by him or
              her or of any inaction on his or her part while acting in
              his or her Corporate Status; in each case whether or not
              he or she is acting or serving in any such capacity at the
              time any liability or expense is incurred for which
              indemnification can be provided under this Agreement;
              including one pending on or before the date of this
              Agreement, but excluding one initiated by an Indemnitee
              pursuant to Section 7 of this Agreement to enforce his or
              her rights under this Agreement.9

      The Delaware Supreme Court broadly has interpreted the language “party

or otherwise” to include “an individual who acts as an intervenor or amicus

curiae in any particular case.” 10 Thus, Szalay‟s right to advancement under the

Indemnification Agreement is not extinguished by virtue of his status as an

intervenor.

      Genelux also contends that Szalay is not entitled to advancement based on

his status as an intervenor, because he initiated his involvement in the 205/225

Action without authorization from the Genelux board of directors, contrary to

9
      Compl. Ex. C § 13(f) (emphasis added).
10
      Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983).
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 9

Section 9(c) of the Indemnification Agreement. 11 Section 9 provides in relevant

part:

              Notwithstanding any provision in this Agreement, the
              Company shall not be obligated under this Agreement to
              make any indemnity in connection with any claim made
              against Indemnitee: . . . (c) in connection with any
              Proceeding (or any part of any Proceeding) initiated by
              Indemnitee, including any Proceeding (or any part of any
              Proceeding) initiated by Indemnitee against the Company
              or its directors, officers, employees or other indemnitees,
              unless (i) the Board authorized the Proceeding (or any
              part of any Proceeding) prior to its initiation or (ii) the
              Company provides the indemnification, in its sole
              discretion, pursuant to the powers vested in the Company
              under applicable law.12

        Although I am not aware of any Delaware case that squarely examines board

authorization as a limitation on advancement rights under an indemnification

agreement of a party that successfully intervenes in an action without asserting

affirmative claims, Delaware courts have examined the advancement rights of a

party that: (1) initiates a suit against the corporation; and (2) asserts a compulsory

counterclaim in a suit brought against it. Specifically, Delaware courts recognize

that “permissible indemnification claims will include those deriving from lawsuits

brought by directors . . . only insofar as the suit was brought as part of the
11
        Def.‟s Ans. Br. 10-11.
12
        Compl. Ex. C § 9(c) (emphasis added).
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 10

employee’s duties to the corporation and its shareholders.”13            In addition,

Delaware courts recognize a counterclaim as a “defense” within the meaning of an

express indemnification agreement that authorizes advancement for indemnitees

who are required to defend an action, if the counterclaim is “(1) „necessarily part of

the same dispute,‟ in the sense that it qualifies as a compulsory counterclaim under

the prevailing Delaware and federal procedural standard, and (2) [is] „advanced to

defeat, or offset‟ the affirmative claims.”14

      Szalay‟s intervention in the 205/225 Action cannot fairly be said to have

been carried out exclusive of, or entirely outside of, his “duties to the corporation

and its shareholders,”15 because Genelux sought to invalidate certain resolutions

previously passed by the board of directors effectively confirming that Szalay had

13
      Shearin v. E.F. Hutton Gp., Inc., 652 A.2d 578, 594 (Del. Ch. 1994) (citing
      Hibbert v. Hollywood Park, 457 A.2d at 344).
14
      Pontone v. Milso Indus. Corp., 100 A.3d 1023, 1054-55 (Del. Ch. 2014)
      (citing Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992)).
15
      See Gentile v. SinglePoint Fin., Inc., 787 A.2d 102, 107-09 (Del. Ch. 2001)
      (A former officer and director sought advancement from the corporation as
      to his attempted intervention in the corporation‟s lawsuit against the
      corporation‟s client and as to his initiation of a lawsuit against the
      corporation to recover certain stock of the corporation‟s client. The court
      held he was not entitled to advancement under the Shearin/Hibbert analysis,
      because he was not a defendant in the underlying actions and merely was
      asserting personal property rights in his action against the corporation.)
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 11

the right, as a stockholder of 3 million Series A Preferred shares, to elect two

directors to the board. Szalay, then, did not “plainly [seek] to advance [his] own

interest” exclusive of the “interest of the corporation” by intervening to defend the

validity of those resolutions.16   Further, Szalay‟s intervention in the 205/225

Action is akin to a compulsory counterclaim in that it was “necessarily part of the

same dispute.” Specifically, were the Court to rule in favor of Genelux in the

205/225 Action, Szalay could be barred on collateral estoppel grounds from

arguing that he had discharged his fiduciary duties properly in connection with the

challenged actions.17

      Genelux and Simus named only Roeder and Georgiou, the directors elected

by Szalay, as defendants in the 205/225 Action. Not surprisingly, neither of those

defendants were inclined to expend personally the potentially substantial resources

that would be required to defend that action. The party whose interests were most

16
      See Shearin, 652 A.2d at 594 (refusing a director‟s request for advancement
      for fees incurred in lawsuits she initiated against the corporation, alleging
      defamation and breach of employment contract, because she merely asserted
      personal rights).
17
      Op. Br. in Supp. of Pl.‟s Mot. Summ. J., D.I. 12, at 28. See also Gentile,
      787 A.2d at 110 (The former director‟s intervention in the corporation‟s
      action against its client was not the same as a compulsory counterclaim
      under Citadel, because the director “was not faced with a „use-it-or-lose-it‟
      scenario . . .”).
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 12

threatened was Szalay. The Company, however, did not name him as a defendant.

Szalay asserts that was done to deny him his advancement rights, among other

things. Whatever Genelux‟s motivations, I conclude that it would be inequitable to

deny Szalay his claimed right to advancement under the Indemnification

Agreement based on his failure to get board authorization to intervene in the

205/225 Action.      To hold otherwise would allow the Company to allege

misconduct of a director in his capacity as a fiduciary and to attempt to invalidate

his personal property rights and related corporate rights without naming him a

defendant, thereby forcing him either to intervene in the action at his own expense

or risk losing important rights.

B.     Szalay Was Involved in the 205/225 Action by Reason of His Corporate
                                       Status
      Genelux next asserts that Szalay is not entitled to advancement pursuant to

Section 5 of the Indemnification Agreement, because he intervened in the 205/225

Action on the basis of his interest as a stockholder and was not involved in that

action by reason of his Corporate Status.18 The “by reason of” limitation in

Section 5 is consistent with the statutory language in Section 145(a) of the

18
      Section 13(a) of the Indemnification Agreement defines “Corporate Status”
      to include “the status of a person who is or was a director, officer, employee,
      agent or fiduciary of the Company.” Compl. Ex. C § 13(a).
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 13

Delaware General Corporation Law (“DGCL”), which authorizes indemnification

when a person is made or threatened to be made a party to an action or proceeding

“by reason of the fact” that the person is or was a director or officer. 19 Under

Delaware law, “[t]he „by reason of the fact‟ standard, or the „official capacity‟

standard, is interpreted broadly and in favor of indemnification and

advancement.”20 As the Delaware Supreme Court held in Homestore, Inc. v.

Tafeen, “if there is a nexus or causal connection between any of the underlying

proceedings . . . and one‟s official corporate capacity, those proceedings are „by

reason of the fact‟ that one was a corporate officer, without regard to one‟s

motivation for engaging in that conduct.”21 The requisite connection is established

“if the corporate powers were used or necessary for the commission of the alleged

misconduct.”22

      Szalay was involved in the 205/225 Action not merely as a putative holder

of the 1.5 million shares of Series A Preferred Stock Genelux sought to invalidate,
19
      8 Del. C. 145(a).
20
      Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316, at *7 (Del.
      Ch. May 30, 2008) (citing Weaver v. ZeniMax Media, Inc., 2004 WL
      243163 (Del. Ch. Jan. 30, 2007)).
21
      888 A.2d 204, 214 (Del. 2005).
22
      Bernstein v. TractManager, Inc., 953 A.2d 1003, 1011 (Del. Ch. 2007).
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 14

but also by reason of his Corporate Status. Genelux alleged in its Verified Petition

for Relief that the 1.5 million shares were “improperly issued” to Szalay by reason

of his alleged wrongdoing in his capacity as CEO, President, and Chairman of the

Board.23 Virtually all of the relevant facts and allegations of the 205/225 Action

pertain to Szalay‟s actions in his capacity as a director of Genelux; therefore, I

conclude that Szalay meets the requirements for advancement of fees incurred in

the 205/225 Action in that he is involved in that action by reason of his Corporate

Status.

C.        Szalay Is Entitled to Advancement for Fees in the California Action to
           the Extent They Reasonably Exceed the Reimbursements from the
                                     D&O Insurance
      Genelux argues that Szalay‟s claims related to advancement for fees

incurred in the California Action are moot, because the Company‟s D&O

insurance provider has agreed to cover those fees.24 The fact that Szalay‟s fees and

expenses in the California Action may be covered under the Company‟s insurance

policy is irrelevant to Szalay‟s entitlement to advancement for those fees under

Delaware law and the Indemnification Agreement. This Court has recognized an

23
      205/225 Op. 34.
24
      Def.‟s Ans. Br. 2 n.1.
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 15

indemnitee‟s ability to seek advancement and indemnification from multiple

sources with which it has contractual rights to do so.25 Szalay‟s advancement

rights are limited in the sense that he may not seek double recovery, but Szalay has

represented to the Court that he is not seeking to recover any amounts already

reimbursed by the insurance carrier. Szalay contends, however, that the insurance

policy has a $3 million limit, and the insurer has imposed a cap on the hourly rates

of Szalay‟s counsel such that he will not be reimbursed fully by the insurer for the

fees and expenses incurred in the California Action. Szalay would be entitled,

therefore, to seek advancement from Genelux for reasonable fees and expenses he

incurred in the California Action that are not paid by the D&O insurer.

          D.     Szalay Properly Made a Demand for Advancement
      Section 5 of the Indemnification Agreement requires the party‟s request for

advancement to be accompanied or preceded by evidence of expenses and a

written undertaking on behalf of the party to repay any expenses advanced if it is

determined he is not entitled to be indemnified. The Company then has thirty

days to advance payment for those expenses. 26 In this case, Szalay requested

advancement from Genelux on November 21, 2015, but he did not submit the

25
      See Pontone v. Milso Indus. Corp., 100 A.2d 1023, 1040 (Del. Ch. 2014).
26
      Compl. Ex. C § 5.
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 16

requisite documentation and undertaking until February 24, 2015.              Genelux

argues, therefore, that “even if the Court finds that Dr. Szalay is entitled to

advancement, there remain triable issues concerning his failure to comply with

the   Indemnification   Agreement     before   initiating    this   lawsuit   and    the

reasonableness of the fees for which Szalay has requested advancement.” 27

      I do not find Genelux‟s argument persuasive. Because this action relates

to the somewhat expedited 205/225 Action and has been expedited itself, in part,

I conclude that it would exalt form over substance to dismiss this action based on

the fact that it was filed before Szalay submitted evidence of his expenses and a

written undertaking. The Company‟s contention regarding the reasonableness of

the requested fees is premature, because that issue is not currently before me. In

a separate order entered today in this action, I prescribe the procedure to be used

for seeking payment for amounts as to which advancement is sought.                  That

procedure includes steps relating to a reasonableness review.

      Finally, as a consequence of the timing of Szalay‟s submissions regarding

his advancement claims, I deem February 24, 2015 to be the effective date of his

request for advancement based on the expenses for which he submitted

documentation by that time. The earliest date a payment would have been due on

that request would be thirty days later or March 26, 2015.

27
      Def.‟s Ans. Br. 8 n.3.
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 17

                                 E.       Fees on Fees
      In addition to advancement for fees and expenses incurred in the 205/225

and California Actions, Szalay also seeks his reasonable attorneys‟ fees and

expenses incurred in this proceeding. This Court awards fees on fees when a

plaintiff successfully shows an entitlement to advancement that wrongfully was

withheld by the defendant corporation.         Moreover, “[p]ursuant to [8 Del. C.

§ 145] . . . this Court „will only award that amount of fees that is reasonable in

relation to the results obtained.‟” 28

      Szalay successfully has argued for a summary judgment that he is entitled to

advancement; therefore, I award him the entirety of his fees on fees reasonably

incurred in the prosecution of this case to date.

                              III.       CONCLUSION
      For the reasons stated in this Letter Opinion, I grant Szalay‟s Motion for

Summary Judgment that he is entitled to advancement from Genelux as to the

205/225 Action and the California Action. 29

28
      Holley v. Nipro Diagnostics, Inc., 2014 WL 7336411, at *15 (Del. Ch. Dec.
      23, 2014) (quoting Pontone, 100 A.3d at 1176).
29
      A separate Order Establishing Procedure for Payment of Advancement is
      being entered concurrently with this Letter Opinion.
In re Genelux Corporation
Civil Action No. 10612-VCP
October 22, 2015
Page 18

     IT IS SO ORDERED.

                             Sincerely,

                             /s/ Donald F. Parsons, Jr.

                             Donald F. Parsons, Jr.
                             Vice Chancellor

DFP/ptp