Edmond Costantini, et al.
Swiss Farm Stores Acquisition LLC
Date Submitted: August 22, 2013
Michael P. Kelly, Andrew S. Dupre, McCarter & English, LLP
Louis J. Rizzo, Esquire Reger Rizzo & Darnall LLP
In this matter, the Plaintiffs Edmond D. Costantini, Jr. and James Kahn seek indemnification for their fees and costs in underlying litigation involving the Defendant, Swiss Farm Stores Acquisition LLC ("Swiss Farm"). In that action, Swiss Farm sought damages against Costantini and Kahn for breach of fiduciary duty. After finding that the applicable limitations period had run, I dismissed that litigation based on laches; the case was appealed and affirmed by the Delaware Supreme Court. Now, Costantini and Kahn seek indemnification for their fees and costs in the fiduciary duty action. Because Costantini was a member of the board of managers of Swiss Farm and Kahn was not, I will examine their indemnification claims individually.
It is axiomatic that a corporation is run by its directors, and through powers delegated by the directors to officers and agents. To encourage able people to serve in these positions, public policy, expressed through statute, provides indemnification rights for corporate actors. Corporations may indemnify any such actor "who was or is a party or is threatened to be made a party" to any action brought by a third party "by reason of the fact that the person is or was a director, officer, employee or agent of the corporation" so long as "the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation. . . ."
A corporation may also choose to indemnify similar individuals in case of suit "by or in the right of the corporation to procure a judgment in its favor, " again, so long as the individual acted in good faith. In addition to these permissive indemnifications, 8 Del. C. § 145 also provides for mandatory indemnification:
To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith.
The same policy reasons supporting indemnification for corporate actors apply to actors for other entities, including LLCs such as Swiss Farm. However, LLCs are creatures of contract, and our law provides broad latitude for LLCs to allocate the rights and responsibilities of its members. Swiss Farm, however, chose to import into its Operating Agreement, near verbatim, the permissive and mandatory indemnification rights for its managing members, officers, employees or agents as provided to corporate actors in 8 Del. C. § 145. Costantini argues that the mandatory indemnification provisions of Section 145 apply by analogy to the LLC; or that, having chosen to import its language, Swiss Farm is bound by the case law that interprets the statute. Swiss Farm, on the other hand, argues that it is free to import statutory language without importing case law decisions on the meaning of the language therein; that in any event, language in its Operating Agreement modifies the language of the statute in a way that makes the case law inapplicable; and that a fair reading of its Operating Agreement indicates that Costantini is not entitled to indemnification. Because I find that Article 14 of the Operating Agreement unambiguously provides for indemnification for Mr. Costantini under the undisputed facts here, I need not consider the issue of whether the statute itself is binding on Swiss Farm.
In seeking indemnification, Costantini relies on the rights conferred on him by Article 14, paragraph 3 of Swiss Farm's Operating Agreement, which provides:
To the extent that a member of the Board of Managers, an officer, an employee, or an agent of the Company has been successful on the merits or otherwise in defense of any proceeding referred to in this Article 14, or in defense of any claim, issue, or matter therein, he or she shall be indemnified against expenses actually and reasonably incurred by him or her in connection therewith.
Swiss Farm, surprisingly, first argues that, because Costantini prevailed on a technical defense—laches by analogy to the statute of limitations—he has not prevailed "on the merits" and therefore is not entitled to indemnification. The plain language of paragraph 3, quoted above, provides for indemnification where a member of the Board of Managers (such as Costantini) prevails "on the merits or otherwise." Swiss Farm's argument is that "or otherwise" should be read either as surplusage, or to mean "in a manner similar to on the merits." But this complies neither with the canons of construction nor common sense. The language "on the merits or otherwise" is meant to indicate that where a managing member prevails in any manner, she is entitled to indemnification.
Swiss Farm's next argument is more substantial, although still unavailing. Article 14 contains three paragraphs analogous to the two permissive indemnification provisions of 8 Del. C. § 145(a) and (b) (set out at paragraphs 1 and 2 of Article 14 of the Operating Agreement) and to the mandatory indemnification provision of 8 Del. C. § 145(c) (set out at the third paragraph of Article 14). As in the statute, the language of paragraphs 1 and 2 indicates that the indemnification rights contained therein, rather than being conditioned on success on the merits or otherwise, are instead conditioned on the good faith actions of the indemnitee. Again, analogous to 8 Del. C. § 145, the provisions of paragraph 3 are not conditioned on ...