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Unlike Del. Code Ann. tit. 8, § 145(e), which is a permissive grant of authority that a corporation can make mandatory, the Continuation Clause in § 145(j) is a mandatory provision that requires an explicit opt-out. The Continuation Clause establishes a default rule that indemnification and advancement rights shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Moreover, the provision contemplates not only continuation for a living individual who has ceased to be a director, officer, employee, or agent, but also continuation for the benefit of the heirs, executors, and administrators of an individual who has, in all senses, ceased to be. Far from implying that the rights to indemnification and advancement that protect a current director or officer cease when the individual leaves office and becomes a former director and officer, the Continuation Clause says exactly the opposite: Unless the right specifically stated otherwise when the coverage was authorized or ratified, the protection continues.
From 2004 until June 18, 2012, Marino served as Chairman, President, and CEO of the Company. He indirectly owned 23.75% of its equity. Patriot Rail Holdings LLC ("Parent") owned all of the stock of the Company. Patriot Rail LLC ("Grandparent") owned all of the member interests of Parent. Patriot Equity LLC ("Great-Grandparent") owned 23.75% of the member interests of Grandparent and served as its managing member. Marino owned 100% of Great-Grandparent. Marino previously owned another 25.5% of Grandparent, which he held either directly or through Great-Grandparent. At some point, he transferred those interests to the Marino Family Dynasty Trust for no consideration. Together, Marino and the Marino Family Dynasty Trust owned nearly 60% of the member interests in Grandparent.
Sierra Railroad Company provides railroad-related services. At various points, Marino discussed the possibility [**3] of the Company acquiring Sierra with Sierra's management team. As part of those discussions, Patriot Rail Company LLC (“Company”) and Sierra entered into a non-disclosure agreement dated September 29, 2005. ierra had a contract with McClellan Business Park to provide rail switching services (the "Switching Contract"). It was scheduled to expire on February 29, 2008. In 2007, as part of the periodic discussions about a business combination, Sierra provided the Company with confidential information about the Switching Contract. At the time, Sierra was negotiating with McClellan to extend the Switching Contract. To reassure McClellan that Sierra had an industry partner that could back Sierra in fulfilling an extended agreement, Sierra took Marino and other Company employees to meet with McClellan representatives. McClellan decided not to extend the Switching Contract and instead issued a request for proposals. Both Sierra and the Company submitted bids. In January 2008, McClellan awarded the contract to the Company.
In March 2008, Sierra sued the Company in the United States District Court for the Eastern District of California for breach of the non-disclosure agreement, misappropriation of trade secrets, and interference with prospective business relationships, but later on dismissed its claims without prejudice after entering a letter of intent for an asset purchase (even if the deal did not eventually close). On December 31, 2008, the Company filed suit against Sierra for breaching the letter of intent. Sierra filed counterclaims, including the claims it previously had dismissed without prejudice, plus a new claim that the Company had breached the letter of intent. Sierra filed an amended pleading that sought to add Parent, Grandparent, and Great-Grandparent to the litigation.
In 2012, while the 2008 action was pending, Patriot Funding LLC (the "Buyer") purchased 100% of the Company's stock from Parent (the "Stock Sale"). The transaction was governed by a stock purchase agreement dated May 4, 2012 (the "Stock Purchase Agreement" or "SPA"). The Stock Sale closed on June 18, 2012. Effective upon closing, Marino resigned from all of his positions with the Company. Buyer paid Parent $230 million for the stock of the Company. Not surprisingly, the parties to the Stock Sale bargained over the Underlying Action and allocated the risk of an adverse outcome in the Stock Purchase Agreement. The Stock Purchase Agreement created a special indemnification procedure for claims related to the Underlying Action, secured by an escrow fund of $20 million. Over the course of three distributions, Parent transferred $112.6 million of net sale proceeds to the investors in Grandparent. According to Sierra, Marino and the Marino Dynasty Trust received approximately $48 million. Sierra alleged Parent used different mechanisms to transfer funds to Marino, the Marino Dynasty Trust, and other investors in Grandparent because Grandparent was a defendant in the Underlying Action and Marino did not want the funds flowing through its accounts. The jury awarded compensatory and punitive damages in favor of Sierra against the Company and the Grandparent. The lower court also awarded additional exemplary damages against the Company.
After the rendering of this decision, Sierra moved to add Marino, Parent and Great-Grandparent as judgment debtors, alleging that this Post-Judgment Motion was necessary because the Company and Grandparent reduced their combined net worth during the pendency of the action, making them judgment proof. It relied on Sec. 187 of the California Code of Civil Procedure, which has been interpreted to confer on a trial court the general equitable power to amend a judgment to add additional debtors who were alter egos of parties already liable under the judgment and who controlled the litigation that resulted in the judgment. The lower court has not yet ruled on this motion.
By letter dated July 30, 2015, Marino's counsel asked the Company to advance the fees and expenses that Marino would incur to oppose the Post-Judgment Motion. Marino's counsel regarded the Post-Judgment Motion as a continuation of Sierra's claims in the Underlying Action, which meant that the Post-Judgment Motion related to actions that Marino had taken while an officer and director of the Company. By letter dated August 7, 2015, the Company took the position that the Post-Judgment Motion focused primarily on the Fund Transfers, which took place when Marino was no longer an officer or director of the Company. Despite another request and even a signed undertaking to repay any advancements in case of an unfavorable judgment, the Company denied Marinos’ request. Thus, Marino commenced the instant action, seeking advancements of attorneys' fees and expenses for the claims asserted against him in the Post-Judgment Motion.
It bears noting that Article VIII of the Company's certificate of incorporation states: "This Corporation shall indemnify and shall advance expenses on behalf of its officers and directors to the fullest extent permitted by law in existence either now or hereafter." Through this provision, the Company bound itself to "advance expenses on behalf of" Marino in his capacity as one "of its officers and directors." Once the Stock Sale closed, however, Marino resigned from his positions with the Company and ceased to be an officer or director.
Does Article VIII of the Company’s certificate of incorporation continue to cover Marino for the same type of claims?
Under the statutory framework, the Company's charter conferred indemnification and advancement rights on Marino that work as follows. When Marino agreed to serve in a covered capacity, he became entitled to receive mandatory indemnification and advancements to the fullest extent of Delaware law. That coverage was part of the consideration that the Company offered in exchange for his service. Through service, his coverage vested. The Company's charter provision did not state up front that it could be amended retroactively or that Marino would lose coverage when he ceased to serve. The Company therefore could not amend the coverage retroactively (Section 145(f)), and the coverage continues to protect Marino even though he has ceased to serve (Section 145(j)). Marino's continuing coverage is retrospective, not prospective. The coverage only covers Marino for his period of service as an officer and director and protects him against lawsuits brought "by reason of" his service. Marino is not covered for actions taken after he stopped serving, once he became a former officer and director. Notably, although the coverage that the Company provided to Marino vested as a result of his service, the coverage did not ripen into an enforceable right until triggered by a covered claim. The point at which a covered claim triggers an enforceable right is different for advancement and indemnification. Marino's mandatory advancement right ripened upon the existence of the covered claim. For these purposes, a covered claim is not limited to actual litigation. It extends to "any civil, criminal, administrative, or investigative action, suit or proceeding" for which the covered person might receive indemnification. Importantly, because the advancement right extends "to the fullest extent permitted by law," it encompasses not only any proceeding for which Marino might later be indemnified under Section 145(a) or (b), but also any proceeding for which he might later be indemnified under Section 145(c).
Relating to the Post-Judgment Motion, the analysis of the Post-Judgment Motion in turn required distinguishing between (i) portions of the Post-Judgment Motion in which Marino is being pursued by reason of his service as a director and officer of the Company and actions he took in those capacities and (ii) portions of the Post-Judgment Motion relating to Marino's actions after he resigned. Marino was entitled to advancement for the former. He was not entitled to advancement for the latter. The Post-Judgment Motion focuses in large part on action that Marino took in a covered capacity while serving as a director and officer of the Company, but it also involves some conduct that took place after Marino resigned from his positions with the Company. In the Post-Judgment Motion, Sierra states that "Marino personally participated in the conduct underlying the judgment." Sierra also contends in the Post-Judgment Motion that Marino received confidential information from Sierra in his capacity as the Company's CEO, then caused the Company to use Sierra's confidential information to bid in response to and win McClellan's request for proposal. This is covered conduct. A separate aspect of the Post-Judgment Motion, however, rests only partially on Marino's conduct in a covered capacity. Sierra argued that Section 187 permits a party to be added as a judgment debtor when the party participated in the litigation that gave rise to the judgment. Before the Stock Sale, Marino supervised and controlled the litigation in his capacity as the senior officer at the Company. He remained in that role for the first four years of the proceedings. After the Stock Sale, however, Marino resigned from his positions with the Company. At that point, he may have participated in the litigation through his control of Grandparent, but his involvement was not "by reason of" his service to the Company. He is entitled to advancement for his pre-resignation control over the litigation but not for his post-resignation involvement. A final aspect of the Post-Judgment Motion does not involve covered conduct. The Pre-Judgment Motion asserts that Marino engaged in the Fund Transfers to defraud Sierra. Sierra further alleges that Marino caused the Company and Grandparent to represent to the California Court that "there would be no shifting or moving of assets to avoid judgment," then contradicted that representation by effecting the Fund Transfers. Id. at 23. These representations were made in June 2013, after the Stock Sale closed and Marino resigned from all positions with the Company. Likewise, the Fund Transfers occurred after the Stock Sale closed. The Company never received any funds. Parent sold the Company's stock to Buyer, and Parent received the money. Marino did not exercise Company authority in connection with any of these actions, and he is not entitled to advancements for defending this aspect of the Post-Judgment Motion.