GEORGE H. HOLLEY, Plaintiff,
NIPRO DIAGNOSTICS, INC., a Delaware corporation, f/k/a/ HOME DIAGNOSTICS, INC., a Delaware corporation, Defendant.
Submitted: August 6, 2014
Arthur L. Dent, Esq., Kevin P. Shannon, Esq., Matthew F. Davis, Esq., Potter, Anderson & Corroon LLP, Wilmington, Delaware; Kevin H. Marino, Esq., John D. Tortorella, Esq., John A. Boyle, Esq., Marino, Tortorella & Boyle, P.C., Chatham, New Jersey; Attorneys for Plaintiff George H. Holley.
Francis G.X. Pileggi, Esq., Eckert Seamans Cherin & Mellott, LLC, Wilmington, Delaware; Attorneys for Defendant Nipro Diagnostics, Inc.
Parsons, Vice Chancellor.
This is yet another advancement case in which a company disputes its obligation to pay the attorneys' fees of an officer or director during the course of litigation. The plaintiff pled guilty to two counts of criminal insider trading relating to tips given to family and friends about the impending acquisition of the company he founded. Previously, the plaintiff had signed an indemnification agreement specifically excluding any obligation of the company to indemnify the plaintiff for insider trading and other securities violations. Several civil suits have followed and continue to be litigated, including three initiated by the company's acquirer and one brought by the Securities and Exchange Commission ("SEC"), relating to various insider trading allegations and the plaintiff's rights to advancement and indemnification.
The defendant has moved to dismiss or stay this case in favor of an allegedly first-filed action in Florida that seeks to recoup money initially advanced to the plaintiff by the company. The plaintiff has moved for partial summary judgment on those counts of his Complaint that seek advancement of legal expenses incurred in defending against the related civil litigation and fees on fees. For the reasons that follow, I conclude that the defendant's motion to dismiss or stay should be denied and that the plaintiff's motion for partial summary judgment should be granted.
Plaintiff, George H. Holley, was the founder and chairman of Home Diagnostics, Inc. ("HDI"), a Delaware corporation.
Defendant, Nipro Diagnostics, Inc. ("Nipro" or the "Company"), is a Delaware corporation. On February 3, 2010, Nipro signed a merger agreement to acquire HDI through an all cash tender offer. The merger agreement became effective on March 15, 2010, at which time HDI's Certificate of Incorporation was amended and restated. Upon acquiring HDI, Nipro assumed its predecessor's obligations, which include the advancement provisions at issue here.
A. The Underlying Lawsuits
Shortly after the announcement of the Nipro–HDI merger, the SEC began an investigation of suspicious trading in the stock of HDI at or around the time of the merger announcement (the "SEC Investigation"). On May 20, 2010, Holley requested, by letter, that HDI advance his legal fees and expenses in the SEC Investigation. Concurrently, Holley executed an undertaking whereby he promised "to repay to the Company the amount of such expenses so advanced if it shall ultimately be determined that [he is] not entitled to be indemnified by the Corporation as authorized by the Company's Certificate of Incorporation, its Bylaws, any agreements of Indemnification, or applicable law." Nipro began advancing Holley's fees and expenses relating to the SEC Investigation in June 2010. By November 2010, Nipro had advanced roughly $175, 000 to Holley's counsel.
The first of several relevant lawsuits was filed in early 2011. On January 13, 2011, the SEC commenced an action against Holley in the U.S. District Court for the State of New Jersey in which it charged him with violating federal securities laws by disclosing material non-public information about the imminent Nipro–HDI merger to six friends, relatives, or employees (the "SEC Action"). The SEC Action, although it was stayed for a substantial period of time, is ongoing.
A contemporaneous criminal investigation by the New Jersey United States Attorney's Office ("NJ USAO") resulted in a grand jury indicting Holley on February 4, 2011, in the U.S. District Court for the State of New Jersey. The government accused Holley of, among other things, orchestrating and executing an insider trading scheme in violation of federal law (the "Criminal Action"). The N.J. USAO sought and, on August 19, 2011, obtained a stay of the SEC Action. Early procedural events led to the dismissal of certain counts against Holley in the Criminal Action. At trial, in August 2012, after the government had rested its case and before the defense began its case, the court granted Holley's motion for acquittal on two additional counts of the indictment. Thereafter, Holley and the government reached a plea agreement, pursuant to which Holley agreed to plead guilty to two counts of insider trading in exchange for the government dismissing three other counts, including wire fraud, witness tampering, and obstruction of justice. The judge in the Criminal Action sentenced Holley to probation.
On November 19, 2012, Nipro commenced an action against Holley (the "2012 Florida Action") in the U.S. District Court for the Southern District of Florida (the "Florida Court"). In the 2012 Florida Action, Nipro sought, among other relief, to recoup the funds advanced to Holley in connection with the SEC Investigation under theories of breach of contract and unjust enrichment, notwithstanding the fact that the SEC Action was still pending. Nipro argued that Holley was precluded from receiving indemnification, and therefore advancement as well, in defending against the actions taken by the SEC due to the terms of a previously executed indemnification agreement he had with HDI (the "Indemnity Agreement"). Nipro further asserted that keeping the advanced funds would be a violation of Holley's undertaking and, therefore, amount to unjust enrichment.
On May 15, 2013, Holley sought advancement from Nipro relating to the ongoing SEC Action and partial indemnification commensurate with his success in the Criminal Action. An undertaking to repay accompanied his demand letter. Nipro did not provide Holley with any of the requested advancement or indemnification. On June 19, 2013, the Florida Court dismissed the 2012 Florida Action without prejudice for lack of subject matter jurisdiction, apparently based on a pleading error. The Florida Court subsequently denied a motion by Nipro to reopen the 2012 Florida Action. Holley renewed his requests for advancement and indemnification on July 16, 2013.
On April 21, 2014, Nipro filed another action against Holley in the Florida Court (the "2014 Florida Action I"). In that litigation, Nipro reasserted only its claims for breach of contract and unjust enrichment based on Holley's retention of the previously advanced funds. On June 17, 2014, the Florida Court dismissed the 2014 Florida Action I because the civil action form filed with the complaint failed to identify a substantially related, previously filed case—i.e., the 2012 Florida Action.
Not to be deterred, on the same day, June 17, 2014, Nipro filed another action in the Florida Court (the "2014 Florida Action II"), reasserting the same complaint that it had filed in the 2014 Florida Action I. On June 20, 2014, Holley demanded that Nipro advance him the legal fees and expenses he would incur in defending the 2014 Florida Action II. Although Holley had provided the requisite undertaking, Nipro rejected his demand.
B. Procedural History of This Case
On May 21, 2014, after the filing of the 2014 Florida Action I, but before it was dismissed, Holley filed his complaint in this action. In that complaint, Holley asserted the right to receive advancement from Nipro for the SEC Action and the 2014 Florida Action I, as well as indemnification for certain fees and expenses he incurred in the Criminal Action and the 2012 Florida Action. On June 20, following the Florida Court's dismissal of the 2014 Florida Action I and Nipro's filing of the 2014 Florida Action II, Holley filed the currently operative Complaint in this action, which was amended to include a claim for indemnification for fees incurred in the 2014 Florida Action I and a claim for advancement for the 2014 Florida Action II.
Minutes before Holley filed his amended Complaint here, Nipro had moved to dismiss or stay this action in favor of the 2014 Florida Action I. Nipro later amended its motion to seek instead to have this action dismissed or stayed in favor of the 2014 Florida Action II. Also on June 20, Holley moved for partial summary judgment on his advancement claims. The parties fully briefed in parallel both Nipro's motion to dismiss or stay and Holley's motion for partial summary judgment. I heard argument on those two motions on August 6, 2014 (the "Argument").
II. MOTION TO DISMISS OR STAY
A. Standard of Review
"It has long been held in Delaware that, 'as a general rule, litigation should be confined to the forum in which it is first commenced, and a defendant should not be permitted to defeat the plaintiffs choice of forum in a pending suit by commencing litigation involving the same cause of action in another jurisdiction of its own choosing.'" Thus, "[u]nder the [McWane] first-filed rule, this Court freely exercises its broad discretion to grant a stay 'when there is  a prior action pending elsewhere,  in a court capable of doing prompt and complete justice,  involving the same parties and the same issues.'"
Under McWane, however, the parties and issues need not be identical. "Instead, the courts examine whether the ultimate legal issues to be litigated will be determined in the first-filed action, and thus, repeatedly have held that McWane requires only a showing of '[s]ubstantial or functional identity.'" Similar issues are those that arise out of a "common nucleus of operative facts." Likewise, parties are considered substantially the same for purposes of McWane "where related entities are involved but not named in both actions, " such that the exclusion is "'more a matter of form than substance.'"
Several Court of Chancery cases have granted a stay under McWane in a summary proceeding. For summary proceedings, however, there need to be special circumstances warranting a stay. Overall, the Court "must weigh 'the need for swift and expeditious resolution' of these summary proceedings 'against the McWane policies of comity and promoting the efficient administration of justice.'" The present dispute is a summary proceeding for advancement under 8 Del. C. § 145. This context, therefore, warrants the Court considering a fourth factor in its McWane analysis, namely: whether a balance of the harms weighs in favor of staying the Delaware action. 
I address the McWane factors in turn. For the reasons stated below, I find that Nipro has not shown that this case should be stayed or dismissed ...