EDWARD M. WEIL, WILLIAM M. KAHANE, NICHOLAS S. SCHORSCH, and PETER M. BUDKO, Plaintiffs,
VEREIT OPERATING PARTNERSHIP, L.P., Defendant.
Submitted: November 21, 2017
Kenneth J. Nachbar, John P. DiTomo, Elizabeth A. Mullin,
MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington,
Delaware; Attorneys for Plaintiffs.
Stephen B. Brauerman, Sara E. Bussiere, BAYARD, P.A.,
Wilmington, Delaware; Scott A. Edelman, Alan J. Stone,
MILBANK, TWEED, HADLEY & MCCLOY LLP, New York, New York;
Attorneys for Defendant.
plaintiffs sued to enforce their advancement rights. They
moved for summary judgment on a variety of issues. This
decision grants partial summary judgment in their favor.
facts are drawn from the pleadings and the fifty-five
exhibits submitted in connection with the motion for summary
judgment. Because of the procedural posture, this decision
assumes for purposes of analysis that any disputes of fact
will be resolved against the movants.
Parties And Relevant Non-Parties
Inc. is a publicly traded real estate investment trust
organized under the laws of the State of Maryland. VEREIT
conducts all of its business through VEREIT Operating
Partnership, L.P., a Delaware limited partnership (the
"Partnership"). VEREIT serves as the sole general
partner of Partnership. The Third Amended and Restated
Agreement of Limited Partnership (the "Partnership
Agreement") governs the business and affairs of the
four plaintiffs previously served as senior officers of
• Nicholas S. Schorsch co-founded VEREIT and served as
its Chairman of the Board and Chief Executive Officer from
2011 through the last quarter of 2014.
• William M. Kahane served as President and Chief
Operating Officer from December 2010 through February 2012.
• Edward M. Weil served as an Executive Vice President
beginning in December 2010 and as Chief Operating Officer
from February 2012 through February 2013.
• Peter M. Budko served as Chief Investment Officer and
Executive Vice President from December 2010 through January
employed as executive officers of VEREIT, the four plaintiffs
also served as members of its board of directors (the
VEREIT's founding until January 2014, non-party AR
Capital, LLC provided management services to VEREIT,
primarily through a subsidiary called ARC Advisors. During
their tenure at VEREIT, the plaintiffs also held positions at
The Underlying Matters
September 7, 2014, the Audit Committee of the Board commenced
an investigation into alleged financial reporting
irregularities at VEREIT (the "Internal
Investigation"). On October 29, VEREIT filed a Form 8-K
with the Securities and Exchange Commission which announced
that the Audit Committee had identified errors in
VEREIT's securities filings. The Form 8-K warned
investors not to rely on VEREIT's annual report for 2013
and its quarterly reports for the first and second quarters
of 2014. In March 2015, VEREIT announced that the Audit
Committee had completed the Internal Investigation and that
VEREIT had restated its annual results for fiscal years 2012
and 2013, its quarterly results for the first three quarters
of 2013, and its quarterly results for the first two quarters
of 2014. AR Capital and ARC Advisors provided management
services to VEREIT during certain of the restated periods.
disclosures prompted a range of lawsuits. Investors filed a
consolidated class action, thirteen direct actions, and four
shareholder derivative actions (collectively, the "Civil
Actions"). Many of the Civil Actions named the
plaintiffs and AR Capital as defendants.
speaking, the complaints in the Civil Actions allege that
Schorsch made intentionally false statements about
VEREIT's financial results and internal controls. The
plaintiffs allege that Schorsch, Budko, Kahane, and Weil
caused VEREIT to pay more than $900 million to entities that
they controlled, including AR Capital and ARC Advisors.
November 2014, the SEC served a subpoena on VEREIT. The
subpoena requested information about the plaintiffs'
knowledge and activities in connection with the subject
matter of the Internal Investigation and the Civil Actions.
Subsequently, the Department of Justice and certain state
regulators commenced investigations into AR Capital. This
decision refers to the SEC, DOJ, and state regulator
investigations as the "Government Investigations."
At this point, it is unclear to what extent the Government
Investigations involve the plaintiffs in their capacities as
former directors and officers of VEREIT. It is also unclear
whether the plaintiffs are targets of the Government
decision refers collectively to the Internal Investigation,
the Civil Actions, and the Government Investigations as the
"Underlying Matters." The Internal Investigation
has been completed. The Civil Actions and Government
Investigations remain pending.
The Plaintiffs Request Advancement From
November 2014, the plaintiffs retained counsel to represent
them in the Underlying Matters. Budko, Kahane, and Weil
retained Kellogg, Hansen, Todd, Figel & Frederick PLLC.
For convenience, this decision calls them the "Kellogg
Plaintiffs." Schorsch retained Paul, Weiss, Rifkind,
Wharton & Garrison LLP.
plaintiffs initially requested advancement from VEREIT. They
did not also request advancement from the Partnership. That
decision made sense, because in September 2011, each of the
plaintiffs had entered into a detailed indemnification
agreement with VEREIT that also provided for advancement. As
is customary, the indemnification agreements contained a
variety of specific provisions addressing aspects of the
indemnification and advancement process.
providing VEREIT with the proper documentation to support
their advancement requests, both Kellogg Hansen and Paul
Weiss began sending VEREIT monthly invoices. VEREIT raised a
slew of objections, delayed making payments, and paid only
parts of the amounts requested.
objections to the Kellogg Plaintiffs' requests included
• Kellogg Hansen's invoices failed to identify
expenses incurred solely on behalf of AR Capital or for the
Kellogg Plaintiffs in their roles as representatives of AR
• Kellogg Hansen failed to provide adequate explanations
for amounts paid to third-party vendors.
• The Kellogg Plaintiffs failed to account for amounts
received from one of AR Capital's insurers when
submitting bills to VEREIT.
• Kellogg Hansen failed to follow VEREIT's billing
guidelines, which asked law firms to apply a 10% discount on
• The Kellogg Plaintiffs sought advancement for their
defense in the derivative actions, which VEREIT claimed to
have already paid.
on these objections, VEREIT refused to advance more than $12
million to the Kellogg Plaintiffs.
objections to Schorsch's requests included the following:
• Paul Weiss charged excessive rates for its staff
• Paul Weiss charged excessive fees for document review
during the first six months of 2017.
• Paul Weiss consistently overstaffed the
• Paul Weiss's invoices provided inadequate
descriptions of the work performed.
• Paul Weiss increased its billing rates during the
second year of its representation of Schorsch without
receiving VEREIT's approval.
• Paul Weiss charged for amounts that were not covered
under VEREIT's billing guidelines.
on these objections, VEREIT refused to advance more than $5.9
million to Schorsch.
August 24, 2017, the plaintiffs filed this lawsuit. Earlier
that day, the Kellogg Plaintiffs had sent advancement demands
to the Partnership, invoking an advancement provision in the
Partnership Agreement. The lawsuit named both VEREIT and the
Partnership as defendants.
August 29, Schorsch served the Partnership with his
advancement request. That same day, the plaintiffs filed an
amended complaint, which remains the operative pleading (the
Complaint focused primarily on VEREIT. Counts I-IV asserted
claims for breach of the indemnification agreements or sought
declaratory judgments establishing rights under the
indemnification agreements. Only Count V focused on the
Partnership. It sought a declaratory judgment that the
Partnership was obligated to provide advancements under the
September 8, 2017, VEREIT and the Partnership answered the
Complaint. The Partnership took the same positions as VEREIT
and made clear that it was asserting the same objections to
the plaintiffs' advancement requests as VEREIT had
September 29, 2017, the plaintiffs moved for summary
judgment. VEREIT and the Partnership cross-moved to dismiss
or stay this case in deference to litigation pending in other
jurisdictions, and VEREIT moved for dismissal for lack of
personal jurisdiction. By orders dated December 13, 2017, I
denied the defendants' motion to dismiss or stay the case
and granted the motion to dismiss VEREIT for lack of personal
jurisdiction. VEREIT's dismissal rendered moot the claims
asserted in Counts I-IV.
motion for summary judgment remained pending as to Count V.
This decision rules on particular objections raised initially
by VEREIT and maintained by the Partnership. It does not
determine a specific amount to which the plaintiffs are
judgment is appropriate 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." On a motion for summary judgment,
"[t]he moving party bears the burden of establishing
that there are no issues of material fact, and the court must
review all evidence in the light most favorable to the
non-moving party." "Advancement cases are
particularly appropriate for resolution on a paper record, as
they principally involve the question of whether claims pled
in a complaint . . . trigger a right to advancement under the
terms of a corporate instrument."
17-108 of the Delaware Revised Uniform Limited Partnership
Act (the "LP Act") states that "[s]ubject to
such standards and restrictions, if any, as are set forth in
its partnership agreement, a limited partnership may, and
shall have the power to, indemnify and hold harmless any
partner or other person from and against any and all claims
and demands whatsoever." The statute "is broadly
empowering and deferential to the contracting parties'
wishes regarding indemnification and
advancement." "In fact, Section 17-108 defers
completely to the contracting parties to create and delimit
rights and obligations with respect to indemnification and
advancement of expenses." "Section § 17- 108 of
the [LP Act] gives limited partnerships wider freedom of
contract to craft their own indemnification scheme for a
partnership's indemnitees than is available to
corporations under § 145 of the DGCL, which creates
mandatory indemnification rights for corporate indemnitees in
some circumstances and also bars indemnification in
others." Drafters can "exercise their
freedom of contract to eschew the Delaware statutory approach
to corporate indemnification and create an indemnification
scheme" that uses different requirements. The same is true
6.03(b) of the Partnership Agreement grants mandatory
advancement rights on the following terms:
The Partnership shall reimburse an Indemnitee for reasonable
expenses incurred by an Indemnitee who is a party to a
proceeding in advance of the final disposition of the
proceeding upon receipt by the Partnership of (i) a written
affirmation by the Indemnitee of the Indemnitee's good
faith belief that the standard of conduct necessary for
indemnification by the Partnership as authorized in this
Section 6.03 has been met, and (ii) a written undertaking by
or on behalf of the Indemnitee to repay the amount if it
shall ultimately be determined that the standard of conduct
has not been met.
Partnership Agreement defines the term "Indemnitee,
" as any person "made a party to a proceeding by
reason of its status as . . . a director, manager or member
of the General Partner or an officer or employee of the
Partnership or the General Partner.
the events giving rise to the Underlying Proceedings took
place, the General Partner was VEREIT. The
definition of Indemnitee thus includes both persons made
party to a proceeding by reason of their status as officers
or employees of the Partnership and persons made party to a
proceeding by reason of their status as directors, managers,
members, officers, or employees of VEREIT. Critically, the
definition of Indemnitee does not include AR Capital, nor
does it specifically call out persons made party to a
proceeding by reason of their roles with AR Capital.
term "Indemnitee" suggests, the advancement right
in Section 6.03(b) builds upon an indemnification right that
appears in Section 6.03(a). It states:
To the fullest extent permitted by law, the Partnership shall
indemnify an Indemnitee from and against any and all losses,
claims, damages, liabilities, joint or several, expenses
(including reasonable legal fees and expenses), judgments,
fines, settlements, and other amounts arising from any and
all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, that relate to the
operations of the Partnership as set forth in this Agreement
in which any Indemnitee may be involved, or is threatened to
be involved as a party or otherwise, unless it is established
that: (i) the act or omission of the Indemnitee was material
to the matter giving rise to the proceeding and either was
committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the Indemnitee actually received
an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or
omission was unlawful . . . .
the two sections are read together, Section 6.03(b) provides
an Indemnitee with a right to mandatory advancement as long
as (i) it is possible that the Indemnitee later could be
entitled to indemnification and (ii) the Indemnitee provides
the written affirmation and the written undertaking required
by Section 6.03(b).
aside the requirements of a written affirmation and
undertaking, the resulting structure establishes a series of
requirements before an individual can receive advancements.
First, the proceeding must qualify for coverage. To meet this
test, the proceeding must "relate to the operations of
the Partnership as set forth in this Agreement." This
decision sometimes refers to a proceeding that satisfies this
test as a "covered proceeding."
the individual seeking coverage must qualify as an
Indemnitee. For the individuals in this case, they must be
involved "by reason of [their] status as . . . a
director, manager or member of [VEREIT] or an officer or
employee of the Partnership or [VEREIT]." This decision
sometimes refers to this concept as a "covered
capacity" or an "official capacity."
the Indemnitee must have a sufficient degree of involvement
in the proceeding to trigger coverage. For advancement, the
Indemnitee must be "a party to" the proceeding. The
party requirement for advancement is notably stricter than
the degree of involvement that is sufficient for
indemnification, where coverage extends to any proceeding
"in which any Indemnitee may be involved, or is
threatened to be involved as a party or otherwise." For
purposes of indemnification, a degree of tension exists
between this language and the definition of Indemnitee, which
speaks of a person who is "made a party to a
proceeding." This decision need not examine that tension
further, because it deals with advancement, not
indemnification. For advancement, both the language of
Section 6.03(b) and the definition of "Indemnitee"
require that the Indemnitee be "a party to" the
purposes of this case, the Partnership accepts that the
Partnership Agreement provides for mandatory
advancement. The Partnership accepts that the
plaintiffs have provided the requisite written affirmations
and undertakings. The Partnership agrees that many of the
Civil Actions are covered proceedings and that, for certain
aspects of those proceedings, the plaintiffs have been sued
in a covered capacity. Nevertheless, the Partnership has
raised a series of objections to the plaintiffs' claim
for advancements. This decision does not address the
plaintiffs' entitlement to specific amounts in dollars
and cents. Instead, it addresses the categorical objections
that the Partnership has raised and, where possible, resolves
them as a matter of law. As the Partnership has recognized,
many of its objections do not require "the court to
engage in a 'granular review'" and "can be
resolved in broad strokes."
The Civil Actions
Partnership argues that the Kellogg Plaintiffs cannot recover
all of the advancements they have sought for the Civil
Actions. The Partnership contends that some of the amounts
sought relate to claims brought against the Kellogg
Plaintiffs' in non-covered capacities. It contends that
other amounts relate to work for AR Capital.
determine whether the Kellogg Plaintiffs are entitled to
advancement, the first question is whether the Civil Actions
are covered proceedings. As noted, a lawsuit is a Covered
Proceeding if it "relate[s] to the operations of the
Partnership." All of the Civil Actions, including the
aspects relating to AR Capital, clearly relate to the
operations of the Partnership.
next question is whether the Kellogg Plaintiffs are
Indemnitees. To qualify, each of the Kellogg Plaintiffs must
be a "party" to the covered proceeding "by
reason of" his status as an officer or employee of the
Partnership or as an officer, director, manager, member, or
employee of VEREIT. The Delaware Supreme Court has explained
that to meet the "'by reason of" test, there
must be "a nexus or causal connection" between the
underlying proceeding and the function or capacity that the
individual performed on behalf of the entity. Elaborating,
the high court held that "if there is a nexus or causal
connection between any of the underlying proceedings
. . . and one's official corporate capacity, those