Citadel Holding Corp. v. Roven

Supreme Court of Delaware · Corporations

CorporationsIndemnificationAdvancement of expensesAttorney-client privilegePrejudgment interestdirector advancementindemnification agreementreasonable expenses

Facts

Citadel, a Delaware corporation, entered into an indemnity agreement with director Alfred Roven to provide him protection greater than that available under Citadel’s charter, bylaws, and insurance. Paragraph 7 of the agreement required Citadel to pay in advance costs and expenses, including attorneys’ fees, incurred by Roven in defending any action, so long as he gave a written undertaking to repay if it were ultimately determined he was not entitled to indemnification. After Citadel sued Roven in federal court under Section 16(b), Roven sought reimbursement of substantial legal fees and expenses, but Citadel refused. In the advancement litigation, the trial court ordered payment, limited Citadel’s discovery of descriptive billing entries on privilege grounds, and denied prejudgment interest.

Issue

Whether the agreement required Citadel to advance Roven’s reasonable litigation expenses incurred in the federal Section 16(b) action notwithstanding disputes over ultimate indemnification, whether those advances covered affirmative defenses and counterclaims asserted in that action, whether privilege could block discovery into billing descriptions relevant to reasonableness, and when prejudgment interest began to accrue.

Rule

When a contract makes advancement of defense expenses mandatory, the right to advancement is separate from and not conditioned on the present availability of indemnification, except for the director’s written promise to repay if indemnification is ultimately denied. The advancement obligation extends to all reasonable costs incurred in defending the covered action, including affirmative defenses and compulsory counterclaims arising from the same dispute, and a party seeking such expenses waives privilege as to the subject matter of fee reasonableness. Prejudgment interest on such contractual payment runs from the date of demand, meaning the date the claimant specified the amount demanded and produced the required written undertaking to repay.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Harbor Systems, Inc., a Delaware corporation based in Seattle, signed an agreement with director Lena Morales stating that the company shall advance expenses incurred in defending any action if she provides a written undertaking to repay if it is ultimately determined that she is not entitled to indemnification under the agreement. The agreement elsewhere excludes indemnification for certain short-swing trading claims. After North Harbor sues Lena in federal court on such a claim, she requests advancement and gives the required undertaking.

If North Harbor refuses to pay because it believes the indemnification exclusion will ultimately bar recovery, which is the best answer?

Explanation. The majority held that a contractual advancement right is separate from indemnification. Language requiring repayment if indemnification is ultimately denied conditions only the undertaking, not the initial right to advancement. So a present dispute about ultimate indemnification does not defeat mandatory advancement of reasonable defense costs once the required undertaking is given. (Derived from Citadel Holding Corp. v. Roven (n.d.).)