Grace v. Ashbridge LLC, C. A. No. 8348-VCN (Del. Ch. Dec. 31, 2013) (Noble, V.C.)

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In this memorandum opinion, the Court of Chancery dismissed an action seeking indemnification and advancement, finding that the plaintiff was not entitled to indemnification under the operating agreement of a Delaware limited liability company (the “LLC”) for acts relating to a predecessor corporation later converted into the LLC.

Charles B. Grace, Jr. (“Plaintiff”) is a co-trustee of a family trust that held shares of a Delaware corporation (the “Corporation”) that was later converted into the LLC.  Plaintiff was the chairman and a member of the board of the Corporation and served as the chairman and on the managing board of the LLC.  After the trustees of the trust filed accountings, beneficiaries of the trust filed objections in a Pennsylvania court (the “Pennsylvania Proceeding”) alleging breaches of fiduciary duties by the trustees and imprudent investments, improper loans, and self-dealing by Plaintiff.  The objections described various background transactions involving Plaintiff and the Corporation, including an allegedly improper cash transfer from the Corporation to an affiliate of the Corporation, but did not mention the Corporation’s successor entity, the LLC.  Plaintiff filed a complaint (the “Delaware Action”), later amended, seeking advancement and indemnification under the LLC’s operating agreement for, among other things, attorneys’ fees and other costs incurred in the Pennsylvania Proceeding, in a failed mediation, and in the Delaware Action. 

The Court granted the LLC’s motion to dismiss all claims arising out of the Pennsylvania Proceeding.  The LLC argued that Plaintiff was made a party to the Pennsylvania Proceeding by reason of the fact that he was a co-trustee of the trust and that Plaintiff did not request advancement and indemnification for acts taken on behalf of the LLC.  The Court noted that advancement and indemnification obligations of a limited liability company are determined by its operating agreement, and held the unambiguous language of the LLC’s operating agreement’s indemnification terms did not retroactively apply to the LLC’s predecessor entities or affiliates.  In refusing to impose retroactive obligations, the Court considered the ways in which limited liability companies and corporations differ with respect to indemnification.  The Court held that the Corporation’s advancement and indemnification scheme was re-written into the indemnification terms of the operating agreement “in a manner that substantially altered the rights and obligations of the parties.”  

The Court found that Plaintiff’s recitation of case law articulating broad indemnification rights failed to acknowledge that Delaware law permits entities to limit the scope of advancement and indemnification rights.  Plaintiff also argued that the Corporation’s bylaws “supported” his rights to advancement and indemnification, but the Court found the argument to be conclusory and insufficient to plead a basis for recovery under the predecessor Corporation’s bylaws.  Likewise, the Court found Plaintiff’s claims that he was entitled to indemnification for a failed mediation to be conclusory and dismissed those claims; Plaintiff had failed to describe the mediation or the factual circumstances underlying it.  Because Plaintiff was not entitled to advancement and indemnification under the operating agreement, and because Plaintiff’s allegations regarding the mediation failed to state a claim, the Court also denied recovery for costs in pursuing the Delaware Action.

The Court did grant Plaintiff’s motion to amend and supplement his complaint, but found that the amended and supplemented complaint also failed to state a claim.  In the supplemented complaint, Plaintiff argued that a petition filed by the beneficiaries of the trust to lift stay and for leave to file amended objections was material to the Delaware Action.  Because the amended objections still did not mention the LLC, the supplemented complaint did not alter the Court’s analysis or conclusions.

The full opinion is available here.