To Mel Brooks’ collection of hit films, Oscars, and countless other comedic works and awards can now be added the distinction of having his 1987 Star Wars parody, Spaceballs, cited by the decidedly non-comedic Delaware Court of Chancery in support of its construction of an LLC agreement’s provision for advancement and indemnification in a lawsuit arising from a soured business relationship between the majority and minority members of a Delaware company formed in 2007 called Quivus Systems, LLC.
The transcript decision by Vice Chancellor Tamika Montgomery-Reeves in Harrison v Quivus Systems, LLC, C.A. No. 12084-VCMR [Del Ch Aug. 5, 2016], granted summary judgment on a claim for advancement of legal expenses in favor of the plaintiff Harrison, a principal of Quivus’s 45% member and its former CEO who was terminated in 2014 and then sued the following year in Washington D.C. Superior Court by the 55% member, Soroof International Corp., allegedly for mismanagement, incompetence, and looting.
Harrison filed his Chancery Court action after Soroof rejected his demand for advancement for all expenses, including legal fees, he incurred and would continue to incur in defending against all but one count in the D.C. action, as well as in prosecuting his counterclaims in the D.C. action.
The court’s analysis stressed that Section 18-108 of the Delaware LLC Act “defers completely to the contracting parties [to the LLC agreement] to create and to limit rights and obligations with respect to indemnification and advancement” and that the restrictions on advancement in Quivus’ LLC agreement “are few, if any.” Here’s the provision at issue:
Subject to any limitations set forth in the [Delaware LLC] Act, the Company shall indemnify and advance expenses to each present and future Member or Manager of the Company (and, in either case, his heirs, estate, personal representatives or administrators) to the full extent allowed by the laws of the State of Delaware, both as now in effect and as hereafter adopted. The Company may indemnify and advance expenses to any employee or agent of the Company who is not a Member or Manager (and his heirs, estate, personal representatives or administrators) to the same extent as to a Member or Manager, if the disinterested Members determine that it is in the best interests of the Company to do so. The Company shall also have the power to contract with any individual Member, Manager, employee, or agent for whatever additional indemnification the Members shall deem appropriate.
I’ve italicized the words “present and future Member or Manager of the Company” in the quoted provision because they formed the primary basis for Soroof’s defense that Harrison was ineligible for advancement because he was neither a present nor a future manager, but merely a former manager having been terminated as CEO a year prior to Soroof’s commencement of its D.C. action. According to Soroof, advancement rights granted under the LLC agreement vest the moment a claim is made against a present manager.
The court found Soroof’s argument “unreasonable . . . because it reads ‘future’ out of the LLC agreement.” The court further explained:
If one becomes a present manager upon one’s election by the members, then no future manager has rights under the LLC agreement because, by definition, they have not yet been elected. Alternatively, if a future manager is akin to a manager-elect, could that future manager petition this Court to protect his or her advancement rights? Under defendant’s construction, a claim must be made against a future manager for acts taken or events occurring in his or her capacity as a future manager before his or her rights to indemnification and advancement vest under the LLC agreement. But defendant explains neither who falls into this covered class nor how a future manager could be subject to liability for actions taken or events occurring in that capacity.
Enter Mel Brooks. Apparently the time-warping character of Soroof’s argument triggered in Vice Chancellor Montgomery-Reeves a cinematic memory of the scene in Spaceballs in which actor Rick Moranis, wearing his ridiculously oversized headgear as the antagonist character Dark Helmet, is able to exploit “breakthrough technology” in home video marketing allowing him to watch the entire Spaceballs film while it is still being made. Here’s the court’s description of the hilarious scene (watch it here), which includes Dark Helmet’s exasperated cry, “When will then be now?!” (“Soon,” Colonel Sandurz replies):
Dark Helmet fast forwards to learn the location of the protagonists, Lone Starr and Princess Vespa, but becomes confused when he sees himself watching himself in that exact present moment. His second-in-command, Colonel Sandurz, says, “You’re looking at now, sir. Everything that happens now is happening now,” and explains that they passed then just now, they’re at “now” now, and they can’t go back to then because they missed it, but then will be now soon.
Vice Chancellor Montgomery-Reeves next channeled her inner Mel Brooks by comparing Soroof’s argument to the scene:
Similarly, under defendant’s interpretation, the Court can explore breakthrough technology to fast-forward time. According to defendant, Harrison was a present manager in the past, not the present. Instead, in the present, where everything that happens now is happening now, Harrison is a former manager, or at least became one just now, but we can’t go back to then — when Harrison was a present manager — because we missed it. As explained, however, this interpretation is not reasonable because it reads “present” and “future” out of the LLC agreement.
The court also found that Soroof’s interpretation rendered meaningless the provision’s parenthetical phrase, “his heirs, estate, personal representatives or administrators” because “a present manager could die or become incapacitated before or after vesting.” In other words, said the court, “vested rights already succeed to a present manager’s heirs, estate, personal representatives, or administrators by operation of law, and a former manager still has no rights to advancement under defendant’s interpretation.”
“In this case,” the Vice Chancellor summed up:
the simplest interpretation is not only reasonable and unambiguous, but also uncontroversial. When the parties adopted the LLC agreement, Quivus became bound to provide each then-present member or manager of the company with mandatory indemnification and advancement. Quivus also became bound to provide mandatory indemnification and advancement to anyone who became a member or manager of the company sometime thereafter — that is, in the future. Thus, the class covered by the advancement provision includes anyone who was a member or manager when the parties adopted the LLC agreement — a present manager or member — or anyone who later became a manager or member — a future member or manager.
Finally, with a nod to the public policy foundation for advancement and indemnification rights “to encourage capable men and women to serve as corporate directors,” Vice Chancellor Montgomery-Reeves reminded the business community and those who counsel them that,
[time] and time again, this court has pointed out that sage businesspersons who wish to avoid situations like this must exercise the contractual freedom afforded to them under Delaware law to delimit the circumstances in which they are obligated to advance funds to, or ultimately indemnify, employees and other officials. There is no requirement that advancement provisions be written broadly or in a mandatory fashion. But when an advancement provision is, by its plain terms, expansively written and mandatory, it will be enforced as written. The advancement provision here is such a provision.
My thanks to Meghan Adams of Morris James LLP for sending me the decision in Harrison in which Ms. Adams and Morris James partner Peter Ladig represented the plaintiff.