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Meyers v. Quiz-Dia LLC

Court of Chancery of Delaware

June 6, 2017

PATRICK E. MEYERS et al., Plaintiffs,
v.
QUIZ-DIA LLC et al., Defendants. QUIZ-DIA LLC et al., Third-Party Plaintiffs,
v.
ROCKFORD MANAGER LLC et al., Third-Party Defendants.

          Date Submitted: April 7, 2017

          John T. Dorsey, Richard J. Thomas, Emily V. Burton, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Bruce S. Bennett, Christopher Lovrien, Nathaniel P. Garrett, Sarah G. Conway, JONES DAY, Los Angeles, California; Counsel for Plaintiffs.

          Brock E. Czeschin, Blake Rohrbacher, Susan M. Hannigan, Elizabeth A. DeFelice, Brian F. Morris, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for Defendants and Third-Party Plaintiffs.

          MEMORANDUM OPINION

          LASTER, V.C.

          In their operating agreements, defendants Quiz-DIA LLC, Quizmark LLC, and QCE Gift Card LLC (collectively, the "Subs") granted their officers a right to mandatory indemnification. Plaintiffs Greg MacDonald and Dennis Smythe claim that they are entitled to indemnification from each of the Subs for losses they incurred in connection with a lawsuit filed in Colorado (the "Colorado Action"). At this point, the Colorado Action has been dismissed, and the order dismissing the case has become final.

         MacDonald and Smythe successfully defended the Colorado Action. They are therefore entitled to indemnification from Quizmark and QCE Gift Card for losses they incurred in connection with the Colorado Action, which they suffered by reason of their status of former officers of the Subs. The covered losses encompass the expenses that MacDonald and Smythe incurred first investigating and later defending against the claims that were asserted against them in the Colorado Action. Summary judgment on these issues is entered in favor of MacDonald and Smythe and against Quizmark and QCE Gift Card.

         MacDonald and Smythe are not entitled to indemnification from Quiz-DIA. The right to mandatory indemnification in Quiz-DIA's operating agreement only extended to members and officers of that entity. MacDonald and Smythe were neither. Summary judgment on this issue is entered in favor of Quiz-DIA and against MacDonald and Smythe.

         I. FACTUAL BACKGROUND

         The issues addressed in this decision were presented on cross motions for summary judgment. The parties have not identified any material disputes of fact, so the cross motions are deemed "the equivalent of a stipulation for decision on the merits based on the record submitted with the motions."[1]

         A. The Parties

         At the time of the events giving rise to this decision, QCE LLC ("OpCo") was the primary operating entity for the Quiznos sandwich shop empire. The Subs were direct and indirect subsidiaries of OpCo. Quiz-DIA and Quizmark were Delaware limited liability companies. QCE Gift Card was an Arizona limited liability company.

         MacDonald was the Chief Executive Officer of OpCo. Smythe was the Chief Financial Officer of OpCo. MacDonald and Smythe claim that they were also officers of all of the other entities in the Quiznos enterprise, including the Subs.

         Each of the Subs had an operating agreement that granted its officers a right to mandatory indemnification. Framed in identical terms, the provisions stated as follows:

To the full extent permitted by applicable law, a Member or Officer shall be entitled to indemnification from the Company for any loss, damage or claim incurred by such Member or Officer by reason of any act or omission performed or omitted by such Member or Officer in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of the authority conferred on such Member or Officer by this Agreement, except that no Member or Officer shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Member or Officer by reason of willful misconduct with respect to such acts or omissions; provided, however, that any indemnity under this Section . . . shall be provided out of and to the extent of Company assets only, and the Member shall not have personal liability on account thereof.[2]

         Because the three agreements are identical, this decision refers to the provisions singularly as the "Indemnification Provision."[3]

         B. The Threatened Claims

         In 2006, Quiznos engaged in a leveraged recapitalization. To fund the transaction, OpCo borrowed a total of $875 million. OpCo subsequently suffered financial reversals.

         By 2012, various funds affiliated with Avenue Capital Management II, L.P. and Fortress Investment Group LLC (the "Funds") had accumulated a substantial position in OpCo's debt. Their holdings gave them the power to declare a default under OpCo's loan agreements and pursue remedies as creditors. To neutralize that threat, Quiznos entered into a complex out-of-court restructuring with its creditors (the "Restructuring"). In practical terms, the Restructuring transferred ultimate ownership of Quiznos and its subsidiaries, including the Subs, to the Funds.

         MacDonald and Smythe left Quiznos in July 2012. In summer 2013, the Funds asked MacDonald and Smythe to attend meetings with Fund representatives in New York City and Denver. Suspecting that the Funds were contemplating litigation, MacDonald and Smythe retained Jones Day to investigate potential claims that the Funds might pursue. At the meetings, the Funds interrogated MacDonald and Smythe about the Restructuring, and they expressed frustration with the Restructuring and Quiznos' post-transaction performance.

         On March 14, 2014, OpCo and many of its affiliates-but not the Subs-filed for bankruptcy. Their filings disclosed that "[t]he Reorganized Debtors [and the Funds] w[ould] enter into [a] Specified Litigation Agreement" to pursue "Specified Litigation Claims" against various individuals, including MacDonald and Smythe.[4] The plan of reorganization defined the term "Specified Litigation Claims" as encompassing "all claims and causes of action made, or which could be made, on behalf of the Debtors [or the Funds] against" the named individuals. An exhibit to the plan stated that the Funds intended to pursue "any claims and rights they or their affiliates may have against former management and former owners of the Company relating to the [Restructuring] and any forecasts, projections, models, representations, or warranties made or provided in connection therewith . . . ."[5]

         On July 1, 2014, Jones Day demanded indemnification and advancement on behalf of MacDonald and Smythe for "all expenses incurred in connection with the threatened claims."[6] The letter asked the Subs to "respond within 10 days of th[e] letter indicating whether [they] agree[d] to indemnify [MacDonald and Smythe] and advance costs."[7] On July 10, just before the ten-day period expired, the plaintiffs filed this lawsuit. In their original complaint, MacDonald and Smythe sought indemnification and advancement under a range of agreements, but not the Subs' operating agreements.

         C. The Colorado Action

         Less than two weeks later, on July 22, 2014, the Funds filed the Colorado Action. The complaint alleged that MacDonald and Smythe induced the Funds to participate in the Restructuring by creating financial projections that "made it appear that the debt burden and capital structure that would remain in place post-[Restructuring] would be sustainable and appropriate."[8] It also alleged that the projections that MacDonald and Smythe provided were false or misleading. The Funds asserted claims for violations of the federal securities laws and common law fraud.

         On September 17, 2015, the United States District Court for the District of Colorado (the "District Court") dismissed the Colorado Action, holding that federal jurisdiction did not exist because the claims did not fall within the scope of the Securities Exchange Act of 1934. The Funds appealed the ruling to the United States Court of Appeals for the Tenth Circuit (the "Court of Appeals").

          D. The Cross Motions

         On September 9, 2015, the plaintiffs amended their complaint to include claims for indemnification and advancement under the Subs' operating agreements. On June 22, 2016, the Subs moved for summary judgment. MacDonald and Smythe cross-moved for summary judgment.

         On November 30, 2016, this court dismissed the claims for indemnification as premature (the "Delaware Dismissal Order").[9] The order explained that because the Court of Appeals had not yet ruled, the disposition of the claims in the Colorado Action was not yet final for purposes of indemnification under Delaware law.

         Less than two weeks later, on December 13, 2016, the Court of Appeals affirmed the District Court's dismissal of the Colorado Action. On December 14, MacDonald and Smythe moved to vacate the Delaware Dismissal Order. By order dated January 10, 2017, the court denied their motion as premature because the Funds could still petition the United States Supreme Court for a writ of certiorari.[10] The order also described a path forward for the litigation:

If the Funds petition for certiorari and the United States Supreme Court grants it, then this court will rule on [MacDonald and Smythe's] entitlement to advancement. If the writ is not sought or if the petition is denied, then this court could rule on [MacDonald and Smythe's] entitlement to indemnification, assuming [MacDonald and Smythe] still want the court to do so in the context of this action and on the current record.[11]

         On March 13, 2017, the deadline to petition for a writ of certiorari passed. The Funds did not file a petition. Instead, they filed a new lawsuit in Colorado state court that advanced substantially similar allegations against MacDonald and Smythe.[12] With the passing of the deadline, the dismissal of the Colorado Action became final for purposes of indemnification under Delaware law, and MacDonald and Smythe's claims for indemnification became ripe.

         II. LEGAL ANALYSIS

         Summary judgment may be granted when the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."[13]

         A. The Need For A New Action

         As a threshold procedural objection, the Subs argue that MacDonald and Smythe can no longer seek indemnification in this action because this court dismissed their claims without prejudice. They assert that MacDonald and Smythe must file a separate action asserting a claim for indemnification and that the parties must brief the matter anew. That would be a waste of judicial and litigant resources. To dispose of this issue, this decision grants relief from the Delaware Dismissal Order.

         "On motion and upon such terms as are just, the Court may relieve a party or a party's legal representative from a final judgment, order, or proceeding" for any "reason justifying relief from the operation of the judgment."[14] "The decision to vacate a dismissal and reopen a judgment is left to the discretion of the trial court."[15] In exercising its discretion, the court "construe[s] and administer[s] [the Rules] to secure the just, speedy and inexpensive determination of every proceeding."[16]

         Vacating the Delaware Dismissal Order is just under the circumstances. The parties have fully briefed the scope of the Subs' indemnification obligation. The Subs have not identified any prejudice that would ensue if the court ruled on the issues now. When the court issued the Delaware Dismissal Order, the court recognized the possibility of issuing a future ruling on MacDonald and Smythe's rights to indemnification in this action, once the issue became ripe.[17] In a letter to the court dated March 15, 2017, MacDonald and Smythe asked to ...


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