PATRICK E. MEYERS et al., Plaintiffs,
QUIZ-DIA LLC et al., Defendants. QUIZ-DIA LLC et al., Third-Party Plaintiffs,
ROCKFORD MANAGER LLC et al., Third-Party Defendants.
Submitted: April 7, 2017
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
E. Czeschin, Blake Rohrbacher, Susan M. Hannigan, Elizabeth
A. DeFelice, Brian F. Morris, RICHARDS, LAYTON & FINGER,
P.A., Wilmington, Delaware; Counsel for Defendants and
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.
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.
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.
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
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.
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.
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
the three agreements are identical, this decision refers to
the provisions singularly as the "Indemnification
The Threatened Claims
2006, Quiznos engaged in a leveraged recapitalization. To
fund the transaction, OpCo borrowed a total of $875 million.
OpCo subsequently suffered financial reversals.
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
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'
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. 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 . . . ."
1, 2014, Jones Day demanded indemnification and advancement
on behalf of MacDonald and Smythe for "all expenses
incurred in connection with the threatened
claims." 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." 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.
The Colorado Action
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." 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.
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
D. The Cross Motions
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.
November 30, 2016, this court dismissed the claims for
indemnification as premature (the "Delaware Dismissal
Order"). 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.
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. 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.
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. 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.
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
The Need For A New Action
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
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." "The decision to vacate a dismissal
and reopen a judgment is left to the discretion of the trial
court." In exercising its discretion, the court
"construe[s] and administer[s] [the Rules] to secure the
just, speedy and inexpensive determination of every
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. In a letter
to the court dated March 15, 2017, MacDonald and Smythe asked