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Brown v. Rite Aid Corp.

Court of Chancery of Delaware

May 24, 2019

FRANKLIN BROWN, Plaintiff,
v.
RITE AID CORPORATION, Defendant.

          Date Submitted: February 1, 2019

          John M. Seaman and Matthew L. Miller, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Ray Shepard, THE SHEPARD LAW FIRM LLC, Pasadena, Maryland; Attorneys for Plaintiff Franklin Brown

          David J. Margules, Jessica C. Watt, and Evan W. Krick, BALLARD SPAHR LLP, Wilmington, Delaware; William A. Slaughter and William B. Igoe, BALLARD SPAHR LLP, Philadelphia, Pennsylvania; Attorneys for Defendant Rite Aid Corporation

          MEMORANDUM OPINION

          ZURN, VICE CHANCELLOR.

         The plaintiff seeks mandatory indemnification based on success in underlying litigation. That litigation has a knotty history and spans over a decade and across several jurisdictions. But the analysis on the presented facts is straightforward. The plaintiff is undisputedly a covered person who was embroiled in a covered proceeding. And under the simple test for determining success, he prevailed. His motion for partial summary judgment concerning entitlement to indemnification is therefore granted.

         I. BACKGROUND

         Plaintiff Franklin Brown is a former officer and director of Rite Aid, having served as Executive Vice President, Chief Legal Counsel, and Vice Chairman of Rite Aid's board.[1] In the late 1990's, government and internal investigations uncovered that rampant wrongdoing had inflated Rite Aid's earnings.[2] Rite Aid drastically restated its earnings, and it and its officers and directors faced many lawsuits.[3] The corporate scandal has been described in several opinions.[4] What matters for this indemnification lawsuit is that Brown was sued and faced both civil and criminal liability for the corporate scandal. "Brown was convicted at [a] jury trial of conspiracy to commit accounting fraud, filing false statements with the SEC, conspiracy to obstruct justice, obstruction of grand jury proceedings, obstruction of government agency proceedings, and witness tampering."[5] He was sentenced to prison and his conviction was affirmed on appeal.[6]

         The many federal suits concerning the corporate scandal at Rite Aid were combined into a single multi-district litigation in the United States District Court for the Eastern District of Pennsylvania.[7] Rite Aid settled that case in December 2000, with the Eastern District entering a final order of dismissal in August 2001.[8] The final order included language barring certain suits (the "Bar Order"). Rite Aid was "PERMANENTLY BARRED, ENJOINED AND RESTRAINED from commencing, prosecuting, or asserting any other claim, however styled, whether for indemnification, contribution or otherwise, and whether arising under state, federal or common law, against the Released Parties based upon, arising out of or relating to the Settled Claims."[9] The definition of Released Party included directors and officers, and so extended to Brown.

         Notwithstanding the Bar Order, in 2002, Rite Aid also sued Brown for his misdeeds in the Court of Common Pleas for Cumberland County, Pennsylvania. The operative complaint describes Brown's role as "Vice Chairman of the Board of Directors and Chief Counsel," his criminal proceedings and conviction, and how his actions harmed Rite Aid.[10] Rite Aid asserted eight causes of action against Brown: breach of fiduciary duty (Count I); aiding and abetting breach of fiduciary duty (Count II); fraud (Count III); conspiracy (Count IV); breach of contract related to Brown's obligations as an officer and director (Count V); breach of contract related to Brown's deferred compensation agreement (Count VI); and breach of contract related to Brown's advancement and indemnification claims (Count VII).[11] Finally, in Count VIII, Rite Aid sought a declaration that, "[a]s a result of the conduct of which Brown has been convicted …, and for the other reasons averred herein, Brown is not entitled to any further payment from the Company."[12]

         Brown turned to this Court for advancement of his fees incurred in the Cumberland County Action. Rite Aid attached its complaint in the Cumberland County Action, incorporated the assertions therein, and asserted the same arguments as counterclaims.[13] In 2004, this Court denied Brown's motion to expedite his advancement claim, [14] and deferred decision on Brown's motion to dismiss Rite Aid's counterclaims until the conclusion of the Cumberland County Action.[15]Eventually, in 2008, this Court dismissed the Delaware advancement action for failure to prosecute.[16]

         Brown and Rite Aid litigated the Cumberland County Action for over a decade. In 2016, Brown resuscitated the 2001 Bar Order and moved to enjoin Rite Aid from continuing the Cumberland County Action. On June 7, 2016, the Eastern District granted Brown's motion to enforce the Bar Order, stating:

Rite Aid has brought the Cumberland County Action against Brown in violation of the [] Bar Order in the Settlement Agreement which it freely agreed to fifteen years ago in this PSLRA class action. But we cannot allow a violation of this Court's Order to continue. We will grant Brown's motion to enforce the permanent injunction order and enjoin Rite Aid from further pursuing the Cumberland County Action.[17]

         Importantly, Rite Aid requested, and the Eastern District agreed, that the ruling enforcing the Bar Order would not preclude Rite Aid from pursuing Count VIII of the Cumberland County Action.[18]

         Accordingly, in July 2016 Brown moved to dismiss Count VIII for lack of subject matter jurisdiction because Rite Aid failed to join his wife as an indispensable party.[19] The Cumberland County Court granted Brown's motion to dismiss on July 13, 2017.[20]

         Around the same time, on June 30, 2017, Brown filed this action in pursuit of indemnification and advancement. On August 9, 2017, the parties agreed to stay the case to allow Brown to provide Rite Aid "with invoices and supporting documentation relating to [Brown's] asserted entitlement to indemnification and advancement" and to allow "the Parties [to] explore a resolution or narrowing of the issues."[21] The stay was in effect until one of the parties notified the Court "that the Parties have concluded their negotiations and/or have been unable to reach a resolution."[22]

         Brown filed such a notice on March 8, 2018.[23] The parties then spatted over an appropriate schedule. The Court reviewed the competing positions and bifurcated the case, allowing Brown to move for partial summary judgment regarding his entitlement to indemnification. If the Court ruled for Brown as a matter of law, then Brown would file affidavits itemizing the fees he was requesting indemnification for, and the parties would proceed toward "adjudicating the Damages Motion."[24]The parties followed this procedure, with Rite Aid adding its own motion for judgment on the pleadings.[25] Briefing on Brown's motion for partial summary judgment and Rite Aid's motion for judgment on the pleadings was completed in the summer of 2018, and the case was reassigned to me on October 17.

         I heard argument on the motions on November 16 and issued a bench ruling that denied Rite Aid's motion for judgment on the pleadings and granted Brown leave to amend an advancement claim to seek indemnification.[26] I also asked the parties for supplemental submissions on Brown's entitlement to indemnification. The parties provided those submissions on December 21, 2018, January 18, 2019, and February 1, 2019.[27] This opinion provides my ruling on Brown's motion for partial summary judgment.

         II. ANALYSIS

         Court of Chancery Rule 56 governs. If "there is no genuine issue as to any material fact … the moving party is entitled to a judgment as a matter of law."[28]"When considering a motion for summary judgment, the evidence and the inferences drawn from the evidence are to be viewed in the light most favorable to the non-moving party."[29] "The moving party bears the initial burden of demonstrating that even with the evidence construed in the light most favorable to the non-moving party there are no genuine issues of material fact."[30] "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.'"[31] "Where both sides put forth conflicting evidence such that there is an issue of material fact, summary judgment must be denied."[32]

         A. Sources Of Indemnification

         Brown claims indemnification from three separate sources.[33] For purposes of this case, those three separate sources are guided by a single analysis. Brown's first claimed source of indemnification is statutory. Section 145(c) of the DGCL provides:

To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith.

         The second claimed source is Article VIII of Rite Aid's bylaws. Section 3 of that Article contains nearly identical language as Section 145:

To the extent … that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described [in Sections 1 and 2 of Article VIII], or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.[34]

         This language is complemented by Section 7, which states it was the "policy of the Corporation that indemnification … shall be made to the fullest extent permitted by law."[35]

         The same is true for Rite Aid's charter, the third source of indemnification. Section (B)(1) of Article Tenth of the charter states:

Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer shall be indemnified and held harmless by the corporation to the fullest extent authorized by the General Corporation Law[.][36]

         The charter does not as closely track the language of Section 145(c), but the substance is the same. It applies to individuals acting in certain capacities and where they are a party "in any action, suit, or proceeding … by reason of the fact that he or she … is or was a director or officer of the corporation."[37] And once again, the indemnification runs "to the fullest extent authorized by the" DGCL.[38]

         The statute, charter, and bylaws present different paths to the same place: mandatory indemnification. The Section 145(c) framework provides "mandatory indemnification" in that "an officer or director who meets the requirements of the statutory provision has an absolute right to indemnification."[39] In short, a covered person defending himself in a covered proceeding[40] who succeeds "on the merits or otherwise" is entitled to indemnification.[41]

         Though the rationale behind a mandatory requirement is clear, it is worth restating. "Rights to indemnification and advancement are deeply rooted in the public policy of Delaware corporate law in that they are viewed less as an individual benefit arising from a person's employment and more as a desirable mechanism to manage risk in return for greater corporate benefits."[42] "The invariant policy of Delaware legislation on indemnification is to promote the desirable end that corporate officials will resist what they consider unjustified suits and claims."[43]Section 145(c) does this by allowing "corporate officials to defend themselves in legal proceedings 'secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation.'"[44] This achieves a "larger purpose" of encouraging "capable [individuals] to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve."[45]

         B. Count I: Mandatory Indemnification For Counts I-VIII Of The Cumberland County Action

         Rite Aid asserted eight counts against Brown in the Cumberland County Action. For the reasons discussed below, Brown is entitled to mandatory indemnification for his defense of each count because he is a covered person, each count constituted a covered proceeding, and he succeeded in defending himself against all eight counts.

         i. Counts I-VII

         Rite Aid's post-argument submission conceded three points. First, that "Counts I-VII asserted claims arising from misconduct in Mr. Brown's former capacity as a Rite Aid director and executive."[46] Second, Rite Aid conceded that "Brown was successful with regard to Counts I-VII."[47] Third, Rite Aid explained it would no longer "argue he is not a 'covered person'" for purposes of Counts I-VII.[48]

         Still, Rite Aid argues Brown has no right to indemnification because he advanced "unsuccessful arguments in furtherance of a winning case."[49] From the initiation of the Cumberland County Action in 2002 through Brown's successful enforcement of the Bar Order in 2016, Brown raised several unsuccessful defenses. Brown even lost a motion for summary judgment on liability for some counts.[50]According to Rite Aid, Brown's intervening strategies in the Cumberland County Action failed, and he should only be indemnified for his successful arguments.[51]Rite Aid contends that Brown simply should have raised the Bar Order earlier, which would have avoided the expenses and fees incurred in pursuing other defenses.[52]

         Rite Aid's arguments conflict with the language of Section 145(c) and precedent. The "on the merits or otherwise" language of Section 145(c) means an indemnitee is "indemnified as a matter of right" even "if he or she successfully asserts a 'technical' defense, such as a defense based upon a statute of limitations."[53]In "determining whether indemnification is mandatory under Section 145(c), this Court looks strictly at the outcome of the underlying action."[54] The indemnitee need not be "adjudged innocent in some ethical or moral sense."[55] "This approach is consistent with the language of the DGCL and avoids, where possible, prolonged and expensive discovery into the facts behind a particular dismissal, settlement, or plea."[56]

         Brown has a right to be indemnified for the expenses he incurred in defending against Counts I through VII of the Cumberland County Action, regardless of his path to victory. Brown persuaded the Cumberland County Court to dismiss those Counts. That he obtained this result based on only one technical argument presented after years of litigation does not diminish his right to mandatory indemnification.

         ii. Count VIII

         1. Rite Aid Asserted Count VIII Against Brown "By Reason Of The Fact" That He Was A Rite Aid Officer.

         In Count VIII, Rite Aid sought a declaration that, "[a]s a result of the conduct of which Brown has been convicted …, and for the other reasons averred herein, Brown is not entitled to any further payment from the Company."[57] The "conduct" and "other reasons" referenced in Rite Aid's complaint included Brown's alleged breaches of fiduciary duty and misuse of corporate powers:

• A summary of the criminal indictment against Brown, including that he had "defrauded Rite Aid and its Board of Directors."[58]
• That Brown "fraudulently concealed these criminal activities from Rite Aid and its Board of Directors" in an effort "to obstruct the Company's and the Government's investigations."[59]
• That "[b]y virtue of his position as an officer and director of the Company, Brown owed the Company and its shareholders a fiduciary duty of undivided loyalty."[60]
• "The conduct of which Brown was charged in the Indictment and convicted constituted a breach of his contractual obligations to Rite Aid as a Company officer and director. Such obligations are not documented in a written contract, but arise by virtue of Brown's ...

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