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Bankruptcy Court in Delaware Rejects Claim for Advancement Under Delaware Law After Claim Removed to Federal Court

By Francis G. X. Pileggi, Esq.

Street v. The End of The Road Trust, et al., (D. Del., Bankr., Sept. 17, 2008), read opinion here. Thanks to Delaware lawyer David Finger for bringing this decision to my attention.

A quote from the court's opinion highlighted the issues addressed:

There are a number of basic propositions in Delaware corporate cases that are helpful in clarifying the distinction between (1) indemnification and advancement, and (2) a mandatory advancement and discretionary advancement, with the former
constituting an enhanced benefit to an indemnitee.

Danielle Blount, an associate in our Wilmington office, prepared the following case summary:

 The United States Bankruptcy Court for the District of Delaware denied Plaintiff’s request for advancement for expenses arising out of acts related to his duties as Trustee. Plaintiff claimed that he incurred fees and expenses in excess of $169,049 prosecuting the petition to recover fees and $1.25 million defending an adversary proceeding.

On January 9, 2007, Plaintiff filed a petition in the Chancery Court asserting claims for advancement and indemnification. Thereafter, an adversary proceeding was filed against the Plaintiff alleging breaches of fiduciary and contractual duties. Subsequently, the Debtor removed the Chancery Court action to the District Court for the District of Delaware, thus bringing it before the Bankruptcy Court for the District of Delaware.

Notably, the court relied on Delaware Chancery Court and Delaware Supreme Court cases which clarify the distinction between (1) indemnification and advancement; and (2) mandatory advancement and discretionary advancement. Among the cases cited ihn this opinion by Bankruptcy Judge Walsh on these issues include the following: Majowski v. American Imaging Management Services, LLC, 913 A.2d 572 (Del. Ch. 2006), Advanced Mining Systems, Inc. v. Frincke, 623 A.2d 82, 84 (Del. Ch. 1992), and Havens v. Ahar, 1997 WL 695579 (Del. Ch. 1997).

 Delaware Court of Chancery decisions were helpful in the court's determination about how to assess an indemnitee’s entitlement under a discretionary advancement provision. In utilizing the precedent from the Court of Chancery, the court here held that in the context of an non-corporate entity that either a successor Trustee or Trust Advisory Committee can exercise the kind of judgment that a board of directors can undertake in a corporate discretionary advancement context. This case involved a trust as opposed to a corporation. 

ASIDE: For those involved in trust litigation, there is a helpful discussion at pages 19 to 20 of this opinion that addresses the factors that should be considered when a trust decides to pay for attorneys' fees that it incurs--out of the trust corpus.
 

Full post as published by Delaware Corporate and Commercial Litigation Blog on September 26, 2008 (boomark / email).