Court Opinion

ID: 3165654
Source: CourtListenerOpinion
Date Created: 2015-12-28 08:02:32.219781+00
Date Added: 2024-06-11T12:00:09.836819
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

                                December 23, 2015

Brock E. Czeschin, Esquire                   Steven L. Caponi, Esquire
Richards, Layton & Finger, P.A.              Blank Rome LLP
920 North King Street                        1201 N. Market Street, Suite 800
Wilmington, DE 19801                         Wilmington, DE 19801

      Re:   Tulum Management USA LLC v. Casten
            C.A. No. 11321-VCN
            Date Submitted: November 10, 2015

Dear Counsel:

      Plaintiff George Polk (“Polk”) is embroiled in multi-fora litigation regarding

RED Parent LLC (“RED Parent”),1 a Delaware limited liability company, of which

he is a Manager.2 By its Operating Agreement, RED Parent agreed to “indemnify

each Manager for all costs, losses, liabilities and damages paid or incurred by such

Person in connection with the business of [RED Parent] to the fullest extent

1
  See, e.g., RED Parent, LLC v. Polk, No. 2015 CH 08634 (Cook County Cir. Ct.
Ill. filed July 15, 2015) (the “Illinois Action”); RED Capital Inv. L.P. v. RED
Parent, LLC, C.A. No. 11575-VCN (Del. Ch. filed Oct. 5, 2015).
2
  Defs.’ Mot. for Summ. J., Ex. 1 (Amended and Restated Operating Agreement of
RED Parent, LLC (“Operating Agreement”)) § 5.9 (designating Polk as a
“Preferred Interest Manager”).
Tulum Management USA LLC v. Casten
C.A. No. 11321-VCN
December 23, 2015
Page 2

provided or permitted by the [Delaware Limited Liability Company] Act and the

other laws of the State of Delaware.”3 RED Parent also agreed to advance to

Managers “as and when they are paid or incurred, all expenses arising in

connection with the defense of any matter as to which [RED Parent] is required to

indemnify such person.”4 Polk now seeks advancement for expenses incurred in

the Illinois Action.5

      The parties agree that Polk’s demand for advancement is in proper form.

The question is whether litigation expenses incurred in the Illinois Action are

subject to advancement. RED Parent argues that Polk was not sued in Illinois

3
  Id. § 5.4.
4
  Id. The Operating Agreement provides that RED Parent “shall advance.” Thus,
the Operating Agreement contemplates mandatory advancement. See Schoon v.
Troy Corp., 948 A.2d 1157, 1169 (Del. Ch. 2008). Based on the plain language of
Section 5.4 of the Operating Agreement, Polk must establish the following in order
to obtain advancement: (1) that he was a Manager of RED Parent at the relevant
times; (2) that the expenses paid or incurred by him were “in connection with the
defense of any matter as to which [RED Parent] is required to indemnify” him; and
(3) that those expenses were incurred “in connection with the business of [RED
Parent].”
5
  An initial dispute about Polk’s right to advancement of pre-litigation expenses is
no longer before the Court. The parties currently debate whether Polk is entitled to
advancement. Polk has requested advancement of expenses incurred after the start
of the Illinois Action. Disputes about the reasonableness of the expenses for which
he seeks advancement have yet to come before the Court.
Tulum Management USA LLC v. Casten
C.A. No. 11321-VCN
December 23, 2015
Page 3

because of his status as a Manager. It also asserts that Polk’s conduct that resulted

in the filing of that action was not “in connection with the business” of RED

Parent. Instead, it contends that he was sued because he was a member of RED

Parent’s Investment Committee and the Illinois Action involves questions about

the work of the Investment Committee.              No separate advancement or

indemnification provision relates to one’s status as a member of the Investment

Committee.

      In the Illinois Action,6 RED Parent “seeks a declaratory judgment to resolve

an actual controversy between the parties by making a binding determination of

their rights under [the Operating Agreement].”7 RED Parent, through a subsidiary,

“develops, owns and operates power projects that harness waste energy and

dramatically reduce manufacturers’ greenhouse gas emissions and power costs.”8

The Illinois Complaint “concerns the proper valuation method for projects

undertaken by RED Parent, and the proper party to engage the accounting firm

6
  These allegations are drawn from the First Amended Complaint for Declaratory
Judgment (the “Illinois Complaint”) filed in the Illinois Action. Defs.’ Mot. for
Summ. J. Ex. 2.
7
  Id. ¶ 1.
8
  Id. ¶ 6.
Tulum Management USA LLC v. Casten
C.A. No. 11321-VCN
December 23, 2015
Page 4

conducting the valuation and provide the relevant information to the accounting

firm under the Operating Agreement.”9 Polk is accused of “seek[ing] to conduct a

valuation that is in contravention of the clear terms of the Operating Agreement.”10

RED Parent alleges that it—and not Polk and other defendants in the Illinois

Action—“engages the accounting firm that performs the valuation at issue and

supplies information for that valuation.”11 RED Parent focuses on Polk’s actions

as a member of the Investment Committee. The valuation efforts involve the work

of the Investment Committee. For the outcome of the Illinois Action, RED Parent

proposes that: “any valuation . . . must specifically comply with [certain] terms

of . . . the Operating Agreement; . . . any valuation engagement . . . be solely with

[RED Parent]; and . . . the cash flow for valuation purposes [be] determined by

RED Parent.”12 Notably, RED Parent seeks no monetary relief from Polk; its

objectives are limited to declaratory relief.

9
  Id. ¶ 2.
10
   Id. ¶ 3.
11
   Id.
12
   Id. Wherefore clause.
Tulum Management USA LLC v. Casten
C.A. No. 11321-VCN
December 23, 2015
Page 5

       The projects to be valued are owned by RED Investment LLC (“RED

Investment”), RED Parent’s operating subsidiary. The outcome of the valuation

effort may be a change in control of RED Investment. Whether there is a change

in control of RED Investment, RED Parent argues, has nothing to do with the

“business” of RED Parent, and, thus, litigation costs associated with the valuation

effort are not subject to advancement or indemnification. In essence, RED Parent

seeks to differentiate between the business of RED Parent and the efforts required

to determine who controls RED Parent’s operating subsidiary.

      Under Section 3.8 of the Operating Agreement, if a Trigger Event occurs,

control of RED Investment could pass to Polk (and his affiliates). A Trigger

Event, defined by Section 1.47 of the Operating Agreement, relates to adverse

financial circumstances of RED Parent’s various projects, most of which are held

by RED Investment. Under certain conditions, any member of the Investment

Committee (such as Polk) may request that RED Investment (and other assets of

RED Parent) be “revalued on the basis provided for in Exhibit G [of the Operating

Agreement] as determined by an independent accounting firm agreed to by all the

Investment Committee Members or, if they are unable to agree, drawn by lot from
Tulum Management USA LLC v. Casten
C.A. No. 11321-VCN
December 23, 2015
Page 6

one firm recommended by each Member.”13 This is the valuation process that

resulted in the Illinois Action where Polk is a defendant because of his role on the

Investment Committee.

        Although control of RED Investment is the ultimate outcome, one presumes,

of the revaluation effort undertaken by the Investment Committee, that revaluation

effort is part of the business of RED Parent. The term—“business of” RED

Parent—is not defined, but a function of RED Parent, acting through the

Investment Committee, includes the revaluation effort. It requires participation of

Investment Committee members, selection of a valuation professional, and

development of information to assist the valuation professional. Those duties are

defined by the Operating Agreement and agreed to by RED Parent’s members.

        Perhaps RED Parent believes that its “business” should be limited only to

those matters that directly generate income. No definition along these lines can be

found in the Operating Agreement, and the functions prescribed by the Operating

Agreement provide the best understanding of what RED Parent (or those acting on

its behalf) is expected to do. No principled basis has been offered for somehow

13
     Operating Agreement § 1.47(b).
Tulum Management USA LLC v. Casten
C.A. No. 11321-VCN
December 23, 2015
Page 7

segregating what RED Parent must do from what constitutes the “business of”

RED Parent. Thus, Polk has been sued “in connection with the business of [RED

Parent].”

        RED Parent argues that Polk is not entitled to advancement because he has

been sued for his work on the Investment Committee, not in his capacity as a

Manager.       The Operating Agreement does not limit advancement (or

indemnification) to conduct carried out in the capacity of Manager, although one

must be a Manager in order to be entitled to advancement. Yet, the Operating

Agreement conditions advancement on actions “in connection with the business of

[RED Parent].” Polk’s status as a defendant in the Illinois Action stems from his

efforts regarding the business of RED Parent. In short, the capacity in which a

Manager is acting, as long as the underlying conduct is “in connection with the

business,” does not determine his right to advancement.14

        Indemnification is available for “all costs, losses, liabilities and damages

paid or incurred” by an indemnified person.15 RED Parent points out that Polk has

not suffered losses or damages, in part, because it does not seek to impose

14
     See DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058 (Del. Ch. Jan. 23, 2006).
15
     Operating Agreement § 5.4.
Tulum Management USA LLC v. Casten
C.A. No. 11321-VCN
December 23, 2015
Page 8

monetary liability through the Illinois Action. Although the Illinois Complaint

does not expressly seek an award of costs, they are routinely part of the litigation

process. Such costs, as far as the record demonstrates, have not yet been imposed.

However, the legal fees incurred by Polk are fairly characterized as “liabilities.”

There is no reason to exclude these “liabilities” from the liabilities contemplated

by Section 5.4 of the Operating Agreement.        Because Polk is burdened with

liabilities and will be burdened with costs, he is entitled to indemnification and,

thus, advancement of “all expenses arising in connection with the defense of” the

Illinois Action.

      Accordingly, Polk is entitled to advancement of his defense costs in the

Illinois Action because he is a Manager of RED Parent, and RED Parent is

required to indemnify him for those costs because they are being incurred for what

he did in connection with the business of RED Parent.

      Polk also seeks “fees-on-fees”; that is, he seeks to recover the expenses

incurred in bringing this action in which he was able to vindicate his right to

advancement. Section 5.4 of the Operating Agreement provides advancement “to

the fullest extent provided or permitted by the [Limited Liability Company] Act
Tulum Management USA LLC v. Casten
C.A. No. 11321-VCN
December 23, 2015
Page 9

and the other laws of the State of Delaware.” Although the drafters of limited

liability company agreements have freedom to tailor such agreements to their

specific needs,16 there is no limitation on the right of a person entitled to

advancement to recover his legal fees incurred in seeking advancement. Under

established law, Polk is entitled to “fees-on-fees.”17

      For the foregoing reasons, Polk is entitled to advancement by RED Parent of

his expenses incurred in defending the Illinois Action and to “fees-on-fees” for

pursuing this action.18

      IT IS SO ORDERED.

                                        Very truly yours,

                                        /s/ John W. Noble

JWN/cap
cc: Register in Chancery-K

16
   See 6 Del. C. § 18-108.
17
   DeLucca, 2006 WL 224058, at *15; see also Stifel Fin. Corp. v. Cochran, 809
A.2d 555, 561 (Del. 2002).
18
    The facts are not in dispute. Whether the process is viewed as summary
judgment or trial on a paper record, the outcome is the same. This conclusion
resolves Polk’s claims under Counts VI and VII of his complaint in this action.