Corporate

Delaware Court of Chancery Alters Procedure for Interim Review in Fee Advancement Case

In Fuhlendorf v. Isilon Systems, Inc., C.A. No. 5772-VCN (Del. Ch. July 22, 2011), the Court of Chancery explains in this letter ruling, available here, the latest procedure used by the Court for the interim review of fees sought in connection with the enforcement of a right by officers and directors to have their fees advanced when they are sued in connection with their corporate roles. Two prior rulings in this case were highlighted on this blog here and here. The advancement of fees is a frequent topic of Chancery decisions, many of which have been reviewed on these pages. A collection of those reviews is available here.

Specific Issue Addressed: The specific issue in this long-running advancement case is whether the corporation should pay all the costs of the special master or if the parties should split the cost.

Background: In addition to the background available from the prior decisions in this case at the above two links, the following overview of the prior procedure put in place in this case for the review of the reasonableness of the fees advanced is helpful to put this ruling in context.

In a prior opinion in this case, the Court of Chancery relied on the procedure previously announced in the case of Duthie v. CorSolutions Medical, Inc., 2008 WL 4173850 (Del. Ch. Sept. 10, 2008). That case set forth an appropriate procedure to follow when advancement was established but there was a dispute about the amount of fees to be paid on a monthly basis.

In sum, in a prior ruling in this matter, the Court described the 5-step process to be employed by the parties (in order to avoid the unseemly involvement of the Court in reviewing monthly bills), as follows: (1) Plaintiff's counsel certifies in good faith that the fees and expenses for which advancement has been sought were incurred reasonably as a matter of sound professional judgment; (2) The opposing party will identify those fees which it asserts fall outside the standard of Delaware law for advancement, and its counsel shall certify their good faith belief that the advancement of such fees is not appropriate; (3) The fees as to which there is no dispute shall be promptly paid; (4) The fees as to which any dispute remains shall be submitted to a Special Master; (5) The costs of the Special Master will be divided equally between the parties, except that the entire cost of the Special Master will be borne by the opposing party if it turns out that its objections to payment of the fees for which advancement has been sought have been made without good cause.

Bottom line in the current ruling: The Special Master appointed in this case determined that the parties should share equally the fees of the Special Master, but Mr. Fuhlendorf filed an exception under Court of Chancery Rule 144 challenging that recommendation. The Court agreed with the arguments in the exception and determined, (despite arguments that the "law of the case doctrine" prevented a reconsideration of the Court's prior ruling), that based on the contractual provisions of the agreement between the parties on which the advancement rights were based (in addition to DGCL Section 145), the fees of the Special Master were "expenses" which the corporation was obligated to pay in full based on the facts of this case.

Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

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