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Delaware Chancery Court Rules In Favor of Bayard Client in Advancement and Indemnification Action

David Stockman, former member of Congress and director of the Office of Management and Budget from 1981 to 1985, represented by Peter B. Ladig and Stephen B. Brauerman, recently obtained an opinion and order from the Court of Chancery finding that Mr. Stockman was entitled to advancement of the legal fees and expenses incurred in defending multiple lawsuits filed against him arising out of his service as a director and officer of Collins & Aikman Corporation (“C&A”).

From 2001 through 2005 Mr. Stockman, a co-founder and managing director of Heartland Industrial Partners, L.P. (“Heartland”), had served on the board of directors and held various positions at C&A, one of Heartland’s portfolio companies. In March of 2005, C&A announced and corrected certain historical accounting errors that had been revealed in an internal management review. Two months later C&A filed a bankruptcy petition.

The announcement of the accounting correction was followed by the commencement of multiple civil actions in various jurisdictions in which Mr. Stockman was named as a defendant. In addition, Mr. Stockman was named as a defendant in a criminal proceeding in the United States District Court for the Southern District of New York. The criminal proceeding, however, was dismissed through a nolle prosequi order on January 9, 2009.

Initially, the fees and expenses incurred by Mr. Stockman in defending these actions were paid through C&A’s insurance policies until those policies were exhausted after which Heartland’s insurance policies paid the fees and expenses. By the fall of 2008, however, Heartland’s insurance policies were exhausted. Relying on language in Heartland’s partnership agreement, Mr. Stockman then requested that Heartland directly advance to Mr. Stockman the fees and expenses incurred in defending these actions. Heartland indicated it would not be willing to advance fees and expenses to Mr. Stockman unless he agreed to certain conditions. Mr. Stockman found the conditions to be unacceptable and commenced an action in the Court of Chancery against Heartland seeking a determination that he was entitled to advancement for his fees in defending the civil proceedings and to be indemnified for the fees and expenses incurred in defending the now dismissed criminal proceeding. Heartland moved to dismiss both claims, while Mr. Stockman moved for summary judgment on his advancement claim.

In an opinion released on July 14, 2009, the Court of Chancery granted summary judgment to Mr. Stockman on his advancement claim and denied Heartland’s motion to dismiss the indemnification claim. The Court found that the language of the partnership agreement, which expressly stated that fees incurred “shall be advanced” by the partnership, required the partnership to advance Mr. Stockman’s fees. The Court held that the right of the general partner of Heartland to approve requests for advancement in writing did not mean that the general partner had discretion to deny requests, but was merely a means for the general partner to review requests for advancement to ensure they met the express prerequisites of the right to advancement.

In denying Heartland’s motion to dismiss Mr. Stockman’s claim for indemnification, the Court addressed several issues. First, the Court determined that although the filing of the nolle prosequi was the equivalent of a dismissal without prejudice, under recent Delaware case law the criminal proceeding was now complete and ripe for a claim of indemnification. The Court also indicated, but did not expressly decide, that because Mr. Stockman had achieved “success on the merits” in the criminal action, his subjective state of mind should not be an issue in a claim for indemnification notwithstanding the fact that the language of the partnership agreement implied that any person requesting indemnification meet certain subjective standards set forth in the partnership agreement. The Court hinted it was likely to agree with Mr. Stockman’s argument that it would go against Delaware public policy to put his subjective state of mind at issue when he had already achieved success in the underlying proceeding.

Peter Ladig and his co-counsel for Mr. Stockman, Andrew Weissman of WilmerHale, were interviewed by the American Lawyer Litigation Daily web site in a story about the Court’s opinion. A link to that story can be found here.

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