Citadel Holding Corp. v. Roven
1992 Del. LEXIS 64, 603 A.2d 818 (1992)
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Rule of Law:
A corporate director's contractual right to the advancement of legal expenses is separate and distinct from the ultimate right to indemnification. An agreement can mandate advancement even for claims where indemnification is explicitly excluded, subject to an undertaking to repay if indemnification is ultimately denied.
Facts:
- Alfred Roven served as a director for Citadel Holding Corporation from 1985 to 1988.
- In May 1987, Roven and Citadel entered into an Indemnity Agreement to provide Roven with greater protection than was available under Citadel's bylaws or by statute, in order to induce him to continue serving as a director.
- Paragraph 7 of the Agreement required Citadel to advance Roven's legal expenses for defending 'any action,' provided Roven undertook in writing to repay the funds if he was ultimately found not entitled to indemnification.
- Paragraph 5(e) of the Agreement specifically excluded Citadel's obligation to indemnify Roven for liability related to Section 16(b) of the Securities Exchange Act of 1934.
- Citadel later filed a lawsuit against Roven in federal court, alleging that he violated Section 16(b) through certain stock option purchases.
- Roven incurred significant legal expenses defending the federal lawsuit and demanded that Citadel advance these costs pursuant to the Agreement.
- Citadel refused to advance the funds, prompting Roven's legal action against the company.
Procedural Posture:
- Citadel Holding Corporation sued Alfred Roven in the U.S. District Court for the Central District of California, alleging violations of Section 16(b).
- Roven subsequently sued Citadel in the Delaware Court of Chancery for breach of their Indemnity Agreement, seeking advancement of his legal fees.
- By stipulation of the parties, the case was transferred to the Delaware Superior Court, a trial court.
- The Superior Court granted partial summary judgment in favor of Roven, ruling that Citadel was required to advance his reasonable defense costs.
- In a subsequent discovery dispute, the Superior Court upheld Roven's claim of attorney-client privilege, preventing Citadel from seeing the descriptive portions of his lawyers' time sheets.
- After a hearing on reasonableness, the Superior Court entered a judgment against Citadel for over $986,000 but denied Roven's request for prejudgment interest.
- Citadel, as appellant, appealed the judgment to the Delaware Supreme Court, and Roven, as appellee/cross-appellant, cross-appealed the denial of prejudgment interest and the reasonableness requirement.
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Issue:
Does a corporate indemnification agreement require a corporation to advance a director's legal expenses for defending a Section 16(b) lawsuit brought by the corporation, when the agreement mandates advancement for 'any action' but excludes indemnification for Section 16(b) liability?
Opinions:
Majority - Walsh, Justice
Yes. The indemnification agreement requires the corporation to advance the director's legal expenses. The contractual right to advancement is independent of the ultimate right to indemnification. The court's analysis began by distinguishing the advancement provision (Paragraph 7) from the indemnification provisions (Paragraphs 1 and 5). The language of the advancement clause does not make the right to receive advances contingent on the right to final indemnification; it only requires an undertaking to repay if it is 'ultimately determined' that the director is not entitled to be indemnified. The court looked to the agreement's recitals, which expressed an intent to provide Roven with 'greater protection.' This greater protection was achieved by making advancement mandatory ('shall be paid') under the contract, whereas the Delaware statute makes it permissive ('may be paid'). Furthermore, the court interpreted the phrase 'in defending' broadly to include expenses for counterclaims and affirmative defenses, as these are integral parts of defeating a plaintiff's claim. However, the court also held that by seeking payment for his legal fees, Roven put their 'reasonableness' at issue, thereby effecting a partial waiver of the attorney-client privilege as to the descriptive time records necessary for Citadel to assess that reasonableness.
Analysis:
This decision reinforces the legal distinction between the advancement of legal fees and the final right of indemnification under Delaware corporate law. It establishes that a director's contractual right to advancement can be a powerful, independent protection that survives even when the company itself is the plaintiff and the underlying claim is one for which indemnification is contractually barred. This provides directors with significant security, ensuring they can mount a defense without being financially depleted by the corporation they serve. The ruling also balances corporate interests by confirming that advancement is limited to 'reasonable' expenses and that corporations may obtain discovery of otherwise privileged billing records to verify reasonableness.
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