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White v. Curo Texas Holdings, LLC

Court of Chancery of Delaware

February 21, 2017

BRYAN K. WHITE and SURESH KUMAR, Plaintiffs,
v.
CURO TEXAS HOLDINGS, LLC, Defendant.

          Date Submitted: December 12, 2016

          Kevin G. Abrams, Daniel R. Ciarrocki, ABRAMS & BAYLISS LLP, Wilmington, Delaware; S. Michael McColloch, S. MICHAEL McCOLLOCH, PLLC, Dallas, Texas; Karen Cook, KAREN COOK, PLLC, Dallas, Texas; Attorneys for Plaintiff Bryan K. White.

          Kevin G. Abrams, Daniel R. Ciarrocki, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Dan C. Guthrie, Jr., LAW OFFICES OF DAN C. GUTHRIE, JR., Dallas, Texas; Attorneys for Plaintiff Suresh Kumar.

          William M. Lafferty, Thomas W. Briggs, Jr., Richard Li, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Kevin B. Huff, David L. Schwarz, Courtney S. Elwood, Daniel G. Bird, KELLOGG, HUBER, HANSEN, TODD, EVENS & FIGEL, PLLC, Washington, D.C.; Attorneys for Defendant Curo Texas Holdings, LLC.

          MEMORANDUM OPINION

          LASTER, Vice Chancellor.

         In the Texas Purchase Agreement, defendant Curo Holdings granted advancement rights to plaintiffs White and Kumar.[1] White and Kumar demanded advancements, but Curo Holdings refused to pay.

         White and Kumar sued to enforce their advancement rights. Curo Holdings moved to dismiss their complaint pursuant to Court of Chancery Rule 12(b)(6) for failure to state a claim on which relief could be granted. In the Rule 12(b)(6) Decision, this court rejected the arguments that Curo Holdings advanced in favor of dismissal. The Rule 12(b)(6) Decision characterized Curo Holdings' central contention-that White and Kumar's personal indemnification rights under the Texas Purchase Agreement were limited by provisions in a separate article governing deal-related indemnification-as "not even colorable." Id. at *21. The court subsequently granted summary judgment in favor of White and Kumar, holding that they were entitled to advancements. See Dkt. 49 (the "Entitlement Order").

         The Entitlement Order did not quantify the amounts of advancements that White and Kumar would receive. Instead, it directed the parties to determine the amounts by following a set of procedures described in Danenberg v. Fitracks, Inc. (Fitracks II), 58 A.3d 991 (Del. Ch. 2012) (the "Fitracks Procedures").

         Under the Fitracks Procedures, the senior Delaware counsel for the party seeking advancements oversees the preparation of a detailed submission supporting the advancement request and certifies that the amounts sought fall within the scope of the advancement right. If the responding party objects, the senior Delaware counsel for the responding party oversees the preparation of a similarly detailed set of objections and certifies that those amounts fall outside the scope of the advancement right. After the exchange of written materials, the senior Delaware lawyers confer in good faith in an effort to resolve disputes without court involvement.

         After engaging in this process, Curo Holdings took the position that 83% of the amounts that White and Kumar sought were not subject to advancement. Curo Holdings lodged many objections against White and Kumar's expenses, but also contended that its refusal to pay White and Kumar constituted a breach of the Texas Purchase Agreement. As Curo Holdings read the agreement, this meant that the agreement's cap on deal-related indemnification limited White and Kumar ability to receive advancements-a reprise of the agreement that the Rule 12(b)(6) Decision rejected as "not even colorable." Id. Relying on its objections, Curo Holdings only paid the undisputed 17%, even though the Fitracks Procedures require a minimum payment of 50%, with the excess over the undisputed amount held in escrow by Delaware counsel for the party seeking advancements.

         White and Kumar moved to recover the amounts they sought. This decision largely grants their motion. It also awards White and Kumar a proportionate amount of their enforcement expenses, including for time spent engaging in the Fitracks Procedures. In granting only a proportionate award, this decision strains to give Curo Holdings the benefit of the doubt, because a strong argument can be made that Curo Holdings acted in bad faith by raising serial and multitudinous objections to White and Kumar's demands for advancement, such that Curo Holdings should bear 100% of their enforcement expenses.

         I. FACTUAL BACKGROUND

         The Entitlement Order determined that the Qui Tarn Action and the Government Investigation were covered proceedings under the Texas Purchase Agreement. It also determined that White and Kumar were Indemnified Persons for purposes of the Qui Tarn Action and the Government Investigation. It concluded that White and Kumar were "entitled to advancement under Section [8.03(a)] of the Texas Purchase Agreement for the reasonable fees and expenses they have incurred and will incur for the Qui Tarn Action and the Government Investigation." Entitlement Order ¶¶ 5-7, 10. The court separately concluded that White and Kumar were not entitled to indemnification of expenses incurred in defending the Brown Action because they had agreed in the settlement of that proceeding to bear their own expenses. Dkt. 48 ¶ 2.

         The Entitlement Order did not quantify the amount of advancements that Curo Holdings owed to White and Kumar. It stated: "To determine the amount of advancements presently due and to address advancement requests on an ongoing basis, the parties shall follow the [Fitracks Procedures]." Id. ¶ 11. The court directed that "[f]or purposes of the [Fitracks Procedures], the currently outstanding demands shall be treated as having been submitted on October 1, 2016." Id.

         The Fitracks Procedures contemplate the following steps:

1. Before the 10th calendar day of each month, counsel to the party seeking advancements (the "Covered Person") must submit an advancement demand for fees and expenses incurred during the previous month. Any fees or expenses not included in the demand are deemed waived. The advancement demand must include the following:
a. A detailed invoice identifying the fees and expenses for which advancement is sought. The invoice must provide for each time entry the date, timekeeper, billing rate, task description, time incurred, and amount charged. The invoice must provide for each expense the date of the charge, its nature, and the amount incurred.
b. A certification signed by the most senior member of the Delaware bar ("Responsible Delaware Counsel") representing the Covered Person. The certification must include a representation that Responsible Delaware Counsel for the Covered Person personally reviewed the invoice and determined in her good faith professional judgment that (i) each time entry and expense falls within the scope of the client's advancement right, (ii) the fees and expenses charged are reasonable in light of the factors listed in Rule 1.5(a), and (iii) the services rendered were thought prudent and appropriate.
2. Before the 20th calendar day of the month, counsel to the party obligated to pay advancements (the "Advancing Party") must respond to the advancement demand in writing. The response must identify each specific time entry or expense to which the Advancing Party objects and explain the nature of the objection. The response must include a certification signed by Responsible Delaware Counsel for the Advancing Party. The certification must include a representation that Responsible Delaware Counsel for the Advancing Party personally reviewed the advancement demand and determined in her good faith professional judgment that the disputed fees and expenses are not reasonable or otherwise fall outside the scope of the Covered Person's advancement right. The response must cite any legal authority on which the Advancing Party relies. Any objection not included in the response is deemed waived.
3. The Advancing Party must pay the undisputed amount contemporaneously with the response. If the Advancing Party disputes more than 50% of the amount sought in an advancement demand, then the Advancing Party must pay 50% of the amount sought, and the Covered Person's Delaware counsel must hold the portion exceeding the undisputed amount in its escrow account pending resolution of the dispute over that portion.
4. Before the 25th calendar day of each month, the Covered Person's counsel must reply to the advancement response in writing and provide supporting information and authority.
5. Before the last calendar day of the month, the Responsible Delaware Counsel for each side must meet, in person, and confer regarding any disputed amounts. Any additional advancement that results from the meet-and-confer session must be paid with the next month's payment of undisputed amounts.
6. Not more frequently than quarterly, the Covered Person may file an application pursuant to Court of Chancery Rule 88 seeking a ruling on the disputed amounts. Briefing shall consist of a motion, an opposition filed within fifteen days of the motion, and a reply filed within ten days of the opposition. A party may not raise any new arguments not previously raised with the other side in the applicable demand, response, reply, or meet-and-confer. The parties may only cite authorities identified in writing in the applicable demand, response, or reply. The court will determine if a hearing is warranted.
7. If the court grants an application in whole or part, then pre-judgment interest is due on the adjudicated amount from the date of the applicable advancement demand. In addition, in parallel with the next advancement demand, the Covered Person may demand indemnification for the fees and expenses incurred in connection with the granted application, proportionate to the extent of success achieved. The parties shall address the indemnification demand in the same manner as the advancement demand. Except in connection with a successful application, the Covered Person may not seek or receive advancement or indemnification for time spent preparing invoices and advancement demands, addressing responses, or conferring regarding advancement requests.

See generally Fitracks II, 58 A.3d at 1002-04.

         White and Kumar's demands for advancement totaled $5, 121, 651.73. They encompassed invoices from the following five law firms:

• S. Michael McColloch, PLLC, who represented White in the Brown Action, the Qui Tarn Action, and the Government Investigation;
• Karen Cook, PLLC, who also represented White in the Brown Action, the Qui Tarn Action, and the Government Investigation;
• The Law Offices of Dan C. Guthrie, Jr., Esq., who represented Kumar in the Brown Action, the Qui Tarn Action, and the Government Investigation;
• Duane Morris LLP, who represented entities controlled by White and Kumar and relatives of White and Kumar in connection with the Qui Tarn Action, then began representing Kumar on February 24, 2016; and
• Hunton & Williams LLP ("Hunton"), who represented Be Gentle HomeHealth Inc. ("Be Gentle") in connection with the Qui Tarn Action and the Government Investigation.

         They also included amounts that the McColloch firm paid as out-of-pocket expenses to a sixth law firm, Stanton Law Firm PC, who represented White and Kumar during the Brown Action.

         As contemplated by the Fitracks Procedures, White and Kumar's Responsible Delaware Counsel provided the requisite certification. White and Kumar also submitted supporting certifications from S. Michael McColloch, Karen Cook, and Dan Guthrie.

         Curo Holdings agreed to advance $858, 898.20. Curo Holdings otherwise rejected the demands. This response violated the Fitracks Procedures, which required Curo Holdings to advance at least half of the amount sought, with White and Kumar's Delaware counsel holding in escrow the portion that exceeded the undisputed amount.

         After reviewing Curo Holdings' objections, White and Kumar reduced their demand by $8, 430.50 to account for clerical errors that Curo Holdings had identified. After conferring with Curo Holdings, White and Kumar also agreed to produce separate invoices for expenses incurred in connection with the Brown Action, the Qui Tarn Action, and the Government Investigation. The production did not satisfy Curo Holdings, which continued to object to the amounts sought.

         As contemplated by the Fitracks Procedures, White and Kumar filed this motion pursuant to Court of Chancery Rule 88. In total, Curo Holdings withheld $4, 262, 753.53, or 83.2%, of the amount sought. White and Kumar seek immediate payment of the amount withheld, plus interest.

         II. LEGAL ANALYSIS

         The party seeking advancement "bears the burden of justifying" the amounts sought. Citadel Hldg. Corp. v. Roven, 603 A.2d 818 823-24 (Del. 1992). Rule 88 provides that

[i]n every case in which an application to the court is made for a fee or for reimbursement for expenses or services[, ] the Court shall require the applicant to make an affidavit or submit a letter, as the Court may direct, itemizing (1) the amount which has been received, or will be received, for that purpose from any source, and (2) the expenses incurred and services rendered, before making such an allowance. .. .

Ct. Ch. R. 88. The court has discretion in determining the extent of the submissions required under Rule 88. Cohen v. Cohen, 269 A.2d 205, 207 (Del. 1970). In the Entitlement Order, this court determined that the submissions should comply with the Fitracks Procedures.

         Advancement is a form of contractual fee-shifting. See Fitracks II, 58 A.2d at 997. When determining a reasonable amount under a contractual provision, the Delaware Supreme Court has instructed the trial courts "to consider the factors set forth in the Delaware Lawyers' Rules of Professional Conduct." Mahani v. EDIX Media Gp., Inc., 935 A.2d 242, 245-46 (Del. 2007). They are:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar ...

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