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Frautschi v. Ecolab, Inc.

Court of Chancery of Delaware

October 31, 2018

W. Jerome Frautschi et al.
v.
Ecolab, Inc.

          Date Submitted: July 12, 2018

          Kurt M. Heyman, Esquire Aaron M. Nelson, Esquire Heyman Enerio Gattuso & Hirzel LLP

          Eric Lopez Schnabel, Esquire Robert W. Mallard, Esquire Alessandra Glorioso, Esquire Dorsey & Whitney LLP

         Dear Counsel:

         This letter opinion addresses Plaintiffs' Motion for Summary Judgment. For the reasons stated below, the motion is denied as to W. Jerome Frautschi's claims. [1]

         I. BACKGROUND

         The facts in this opinion derive from the pleadings, the parties' submitted affidavits, and exhibits cited therein.[2]

         This action involves Frautschi's request for indemnification from Ecolab, Inc. ("Ecolab"), a Delaware corporation in the business of providing water, hygiene, and energy technologies.[3] In February 2008, Ecolab acquired Ecovation, Inc. ("Ecovation" or the "Company") through a merger.[4] Ecovation was a Delaware corporation in the business of providing sustainable wastewater treatment and renewable energy solutions.[5] Diane C. Creel was the President, Chief Executive Officer, and Chair of the Board of Directors of Ecovation.[6] Frautschi served Ecovation as a director from May 2004 until November 2005.[7] Two trusts, the Pleasant T. Rowland Revocable Trust and the W. Jerome Frautschi Living Trust (together, the "Trusts"), invested significantly in the Company when it was struggling financially.[8]

         Ecovation provided for indemnification of directors and officers in its Amended and Restated Certificate of Incorporation (the "Charter") and its Bylaws (the "Bylaws").[9] As part of the merger, Ecolab agreed to provide advancement and indemnification to Ecovation's current and former directors and officers, including Frautschi, to the same extent as those current and former directors and officers were entitled to advancement and indemnification under Ecovation's Charter and Bylaws.[10]

         This case involves Frautschi's right to indemnification for fees and expenses incurred in actions filed in the New York Supreme Court (the "Ahlers Action") and in the United States District Court for the Western District of New York (the "ITV Action").[11] Both underlying actions involved allegations that Creel provided material nonpublic inside information to Frautschi and the Trusts regarding Ecolab's desire to acquire Ecovation.[12] Allegedly using that information, the Trusts purchased stock from other investors who were not privy to the highly confidential information.[13] According to those investors, the Trusts made a large profit from the inside information when Ecolab acquired Ecovation in February 2008.[14]

         In the Ahlers Action, the plaintiffs asserted claims for breach of fiduciary duty, interested director transactions, breach of the Charter, and unjust enrichment against Creel, Frautschi, and the Trusts.[15] The defendants prevailed on summary judgment.[16] The New York Appellate Division, Fourth Department, affirmed the trial court's order on June 30, 2017.[17] The parties filed no further appeals.[18]

         In the ITV Action, the plaintiff asserted claims against Creel, Frautschi, and the Trusts.[19] The claims against Frautschi included claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, securities fraud, common law fraud, and civil conspiracy.[20]

         In April 2017, the parties to the ITV Action reached a settlement agreement.[21]The total settlement amount was $4.65 million.[22] Frautschi paid $835, 000 of the settlement, [23] and the parties apportioned the remaining amounts to Creel and the Trusts.[24] Ecolab did not contribute any money to the settlement.[25]

         Throughout both actions, Ecolab provided advancement of defense costs to Frautschi, first through its directors' and officers' liability policy and later, when that policy was exhausted, from its own funds.[26]

         II. ANALYSIS

         In their Motion for Summary Judgment, Frautschi and the Trusts seek summary judgment on all counts of their Verified Amended and Supplemental

          Complaint, including full indemnification of Frautschi's portion of the settlement, indemnification for his attorneys' fees in the Ahlers and ITV Actions at his counsel's standard hourly rates, and fees-on-fees for this action to enforce his indemnification rights.[27]

         A. Standard of Review

         Summary judgment will be "granted if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, show 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."[28] The movant bears the initial burden of demonstrating that there is no question of material fact.[29] When the movant carries that burden, the burden shifts to the nonmoving party "to present some specific, admissible evidence that there is a genuine issue of fact for a trial."[30] When considering a motion for summary judgment, this Court must view the evidence and the inferences drawn from the evidence in the light most favorable to the nonmoving party.[31] Even so, the non-moving party may not rely on allegations or denials in the pleadings to create a material factual dispute.[32]

         B. Indemnification for Frautschi's Portion of the Settlement

         Frautschi claims that under 8 Del. C. § 145(a) and Ecovation's Charter and Bylaws, as a former director, he is entitled to indemnification from Ecolab for his portion of the settlement.[33] Ecolab argues that (1) Frautschi's entitlement to indemnification is limited to claims against him by reason of his former director status, (2) Frautschi has no right to indemnification as a trustee of one of the Trusts, and (3) Frautschi is not entitled to indemnification because the settlement was not "reasonable."[34]

         Some of the claims in the ITV Action are based on Frautschi's role as a director of Ecovation. For example, the ITV Complaint alleges that Frautschi breached the fiduciary duty that he, as a director, owed to the stockholders of Ecovation because he allegedly worked with Creel to induce Ecovation's Board of Directors to accept agreements that were unfavorable to Ecovation's stockholders.[35]

         Other claims, however, include allegations that occurred much later in time than the period when Frautschi served as a director, May 2004 to November 2005. For example, the ITV Complaint alleges that Frautschi intentionally omitted and actively concealed that Ecovation was negotiating a merger with Ecolab.[36] These alleged negotiations did not start until January 2007, over a year after Frautschi was no longer a director.[37] If Frautschi had such information, it ...


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