Ramsey v. Georgia Southern University Advanced Development Center, et al., No. 305, 2017, C.A. No. N14C-01-287 ASB (Del. June 27, 2018).

 

On June 27, 2018, the Supreme Court of the State of Delaware issued a fifty-seven-page opinion in the above-mentioned case, creating new precedent for Delaware employer liability in secondary or “take-home” asbestos cases. Below is a summary of both the relevant factual and procedural background, as well as Chief Justice Strine’s opinion.

 

The plaintiff’s spouse, Robert Ramsey, worked for Haveg Industries, Inc. at its industrial plant for twenty-four years. From 1967 to 1979, Mr. Ramsey regularly handled asbestos-containing products manufactured by Georgia Southern University Advanced Development Center and Hollingsworth and Vose Company as part of his job as a maintenance worker at Haveg. Throughout this period his wife, Plaintiff, Dorothy Ramsey, washed Mr. Ramsey’s asbestos-covered clothing. Mrs. Ramsey eventually developed lung cancer, from which she subsequently died in 2015. Her estate sued the manufacturers of the asbestos products, alleging that the cancer was caused by Mrs. Ramsey’s exposure to her husband’s asbestos-riddled clothing. In granting the appellee manufacturers’ motions for summary judgment and dismissing the claims, the Delaware Superior Court relied primarily on two previous Delaware Supreme Court cases, Riedel v. ICI Americas Inc., 968 A.2d 17 (Del. 2009), and Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162 (Del. 2011), in which the Delaware Supreme Court held that an employer owed no duty to non-employees, including their spouses, for failure to adequately warn of the dangers of handling clothing exposed to asbestos, minus a special relationship between the employer and the non-employee, because the failure to warn was nonfeasance rather than misfeasance. Mrs. Ramsey appealed, arguing that in distinguishing an employer from a manufacturer: 1) a manufacturer of asbestos products creates the danger of asbestos-related harm and therefore commits misfeasance by failing to warn foreseeable victims; and 2) to the extent the holdings in Riedel and Price would block recovery on take-home claims against manufacturers, those holdings should be overruled. The appellant defendants argued that Riedel and Price controlled, and prevented Mrs. Ramsey from recovering from manufacturers because they are even further removed from an employer’s spouse than the employer itself. Additionally, they argued that allowing such claims would impose upon manufacturers an essentially limitless duty to warn that would be both impractical and unfair.

 

The Supreme Court acknowledged the compelling arguments on each side, but ultimately agreed with Mrs. Ramsey. First, the Court held that manufacturers owe a duty to warn to reasonably foreseeable users of their products, stating that “[b]ecause the risk of harm from take-home asbestos exposure when laundering asbestos-covered clothing is reasonably foreseeable, a plaintiff in Mrs. Ramsey’s position has a viable claim against a manufacturer . . . . Ramsey. at p. 44 of 57. However, the Court limited this duty by stating that the “sophisticated purchaser” defense would cut off a manufacturer’s liability to ultimate end users once the manufacturer has warned the employer of the risk of harm, stating that such an approach would establish “a fair and efficient accountability system . . . by limiting the duty of asbestos product manufacturers and employers in take-home asbestos exposure cases to providing fair warning about the dangers of laundering to those with whom they have the most proximate relationship. Manufacturers may discharge their duty by warning employers, and employers may discharge their duty by warning employees.” Ramsey, p. 39 of 57.

 

The Court did not end its analysis there, however, recognizing that, without “further alteration to [Delaware’s] jurisprudence, manufacturers would face liability in circumstances when employers would not.” Id. at p. 50 of 57. Thus, the Court overruled, to the extent necessary, its holdings in Riedel and Price, finding that employers commit misfeasance, rather than nonfeasance, when exposing their employees to dangerous asbestos products. The Court differentiated between the classic case of nonfeasance – a passerby failing to save a person from harm not of the passerby’s making – from employers who have created the risk of harm to both the employee and the launderer of the employee’s clothes by putting them in contact with asbestos. In such a case, the Court stated that “[o]nce an employer has engaged in misfeasance, recognized principles of tort law impose upon it a duty to ‘act reasonably, as a reasonably prudent man (or entity) would,’ which ‘encompasses protecting against reasonably foreseeable events.’”  Id. at p. 55 of 57 (citation omitted).  In other words, the Court held that a household member who claims exposure to asbestos through laundering the clothing of an employee, may sue the household member’s employer for a failure to warn, though recovery may be denied if the employer can demonstrate that it took steps to warn the employee, protect the employee and address potential harms associated with asbestos exposure.

 

While the Court clarified that “plaintiffs in cases like this will be of the most foreseeable kind: those who for many years laundered the dirty clothes of the employee with whom they shared a household,” it also acknowledged Defendants’ concern that “claims from plaintiffs with more momentary exposure to and tenuous relationship to an exposed employee [may be] filed in the future.” Id. at p. 56 of 57. The Supreme Court’s holding in Ramsey, although attempting to limit the scope of its impact, has likely opened the door to a new array of take-home asbestos claims against manufacturers and employers, which were previously unavailable under Delaware law. However, it is important to note that this holding will not affect asbestos claims filed in Delaware where the alleged asbestos exposure took place outside of the state and Delaware substantive law does not apply.

 

If you have questions regarding the Delaware Supreme Court’s opinion in Ramsey or litigation in general, we invite you to contact The MG+M Law Firm’s Wilmington, Delaware office.

DelawareUnder Delaware law, when a derivative plaintiff loses its stockholder status as the result of a merger, the plaintiff usually also loses its standing to pursue a derivative suit on behalf of the corporation.  This rule is subject to only two limited exceptions: (1) when “the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive shareholders of the standing to bring a derivative action,” and (2) when “the merger is in reality merely a reorganization which does not affect plaintiff’s ownership in the business enterprise.”  Lewis v. Ward, 852 A.2d 896, 902 (Del. 2004) (clarifying exceptions identified in Lewis v. Anderson, 477 A.2d 1040 (Del. 1984)).  In a decision revisiting a 2010 mining tragedy in which dozens of miners were killed, the Delaware Court of Chancery recently concluded that neither exception applied to preserve the standing of stockholders of Massey Energy Company (“Massey”) to bring derivative claims, and that plaintiffs had not brought direct claims for an “inseparable fraud.”  In re Massey Energy Co. Derivative & Class Action Litig., Consol. C.A. No. 5430-CB (May 4, 2017).

Backstory: The Court of Chancery Refuses To Enjoin The Massey-Alpha Merger

In 2011, stockholder plaintiffs attempting to enjoin a merger between Massey and Alpha Natural Resources, Inc. (“Alpha”) argued that Massey should be forced to assume and transfer derivative claims against certain Massey fiduciaries to a trust for the benefit of Massey stockholders, rather than allowing the claims to pass to Alpha.  While finding “little doubt” that plaintiffs’ derivative claims could survive a motion to dismiss, the Court also concluded that plaintiffs were likely to lose standing to pursue those claims if the merger was consummated.

The Court of Chancery noted that a corporation reasonably may conclude that the risks arising from a lawsuit outweigh the potential risk-weighted recovery, even when the corporation clearly has been harmed.  As a practical matter, a corporation with strong claims against former executives may choose not to pursue those claims for valid reasons, including a wish to avoid pleading formal admissions that potentially could be used against the corporation by third parties, such as insurance carriers, government agencies, and employees and other individuals with personal injury and other claims.  Delaware courts have declined to hold that these kinds of dilemmas – which arise because the corporation itself is conflicted, and not because the directors suffer a personally disabling conflict of interest – justify excusing a would-be plaintiff from the requirement of a pre-suit demand.  In its injunction opinion, the Court in Massey similarly refused to create another exception to the general rule that a merger extinguishes the ability of a former stockholder plaintiff to pursue claims derivatively on behalf of the corporation.  In addition, the Court noted that if a potential buyer cannot rely on the fact that a merger will eliminate derivative claims, bids for troubled assets will be reduced, if not deterred completely, because the buyer must discount the value of the assets to reflect the uncertainty.  As a result, the Court could not conclude that the Massey-Alpha merger was unfairly priced.  “That Massey might be selling to Alpha at a price lower than it would have had the company been better managed is an idea one can embrace without also then concluding that there is a basis to conclude that the Merger with Alpha ought to be enjoined.”

Flash Forward:  The Court of Chancery Confirms Its Preliminary Analysis

On May 4, 2017, the Court of Chancery issued an opinion granting a post-bankruptcy motion to dismiss fiduciary duty claims in the Massey case.  Plaintiffs alleged that fourteen former directors and officers of Massey breached their fiduciary duties by “causing Massey to employ a deliberate and systematic business plan of willfully disregarding both internal and external safety regulations.”  Plaintiffs conceded that the merger deprived them of standing to pursue derivative claims, but argued they should be allowed to pursue claims directly, relying on dicta in Arkansas Teacher Retirement System v. Caiafa, 996 A.2d 321 (Del. 2010).  In Caiafa, the Delaware Supreme Court approved a settlement of claims against Countrywide directors and officers, which did not carve out derivative claims into a separate litigation trust.  The Court noted that the derivative claims – which were dismissed after a merger – were “functionally worthless.”  However, the Court also commented that “Delaware law recognizes a single, inseparable fraud when directors cover massive wrongdoing with an otherwise permissible merger,” and that “[a]n otherwise pristine merger cannot absolve fiduciaries from accountability for fraudulent conduct that necessitated the merger.”  The Supreme Court later clarified in another Countrywide opinion that this language did not create a new exception to the rule of Lewis v. Anderson, and concerned only direct claims, not derivative claims.

The Court in Massey found that plaintiffs had failed to state a direct claim under the dicta in Caiafa.  The Court read this language as requiring a plaintiff to plead facts showing that (1) a defendant engaged in serious pre-merger misconduct that would support a direct claim, and (2) the merger was “necessitated” or made “inevitable” by that misconduct.  The Court viewed plaintiffs’ claims as focusing on “prototypical examples of corporate harm that can be pursued only derivatively,” i.e., mismanagement, not direct harm to individual stockholders.  Defendants allegedly violated laws intended to protect third parties, but were not alleged to have acted to enrich themselves at the expense of other stockholders.  Moreover, defendants were alleged to have acted with open hostility to regulators and were not alleged to have attempted to conceal their actions.  As for the second prong of this standard, the Court referred to the 2001 finding that the Massey-Alpha merger was not “necessitated” by the alleged misconduct, but also concluded it did not need to reach this issue because the claims were clearly derivative.

The Court also stated that although plaintiffs would not be able to pursue viable derivative claims, the result was equitable because Alpha had in 2011 paid “a substantial sum” to acquire all of Massey’s assets, including the derivative claims at issue.

Finally, the Court in Massey remarked in dicta that it did not believe that stockholder ratification was at all relevant to the motion to dismiss:

The policy underlying Corwin, to my mind, was never intended to serve as a massive eraser, exonerating corporate fiduciaries for any and all of their actions or inactions preceding their decision to undertake a transaction for which stockholder approval is obtained.  Here, in voting on the Merger, the Massey stockholders were asked simply whether or not they wished to accept a specified amount of Alpha shares and cash in exchange for their Massey shares or, alternatively, to stay the course as stockholders of Massey as a standalone enterprise, which would have allowed plaintiffs to press derivative claims.  Massey’s stockholders were not asked in any direct or straightforward way to approve releasing defendants from any liability they may have to the Company for the years of alleged mismanagement that preceded the sale process.  Indeed, the proxy statement for the Merger implied just the opposite in stating that control over the derivative claims likely would pass to Alpha as a result of the Merger.  To top it off, if defendants’ view of Corwin were correct, it would have the disconcerting and perverse effect of negating the value of the derivative claims that Alpha paid to acquire along with Massey’s other assets.

 

Practice Point: Which Mergers Fail to Eliminate Claims?

The exceptions to the Lewis v. Anderson rule all concern mergers which are “otherwise permissible,” which generally means that they are mergers that comply with the statutory requirements of Delaware law.  Although every case is subject to its own analysis, and specific facts may lead to a different result in a particular case, certain generalizations are possible, and the following types of mergers should be viewed as more risky than others.

The “laundering” merger

Under the first exception to the rule of Lewis v. Anderson, a merger that is undertaken merely to deprive stockholders of standing will not, in fact, deprive stockholders of standing.  Importantly, none of the parties in Massey argued that the merger between Massey and Alpha was such a merger.  To the contrary, the Court referred to record evidence that Massey’s board of directors had considered several strategic alternatives, including a “standalone” plan in which Massey would continue to operate its business without a merger or other business combination.  The board concluded that the standalone plan was less preferable for reasons including Massey’s “tarnished reputation and history of missing management projections,” but still considered it to be “viable.”  Moreover, even if Massey had undertaken the merger because it had been weakened by the alleged misconduct of defendants, that is not the same as a merger undertaken for the purpose of limiting the liability of the directors approving it.

The “deja vu” merger

In the “mere reorganization” merger, a stockholder continues to have the same ownership interest as before, only in a newly reorganized corporation.  This issue did not arise in Massey.

The “fruits of fraud” merger

Under Caiafa as interpreted in Massey, a plaintiff may continue to pursue direct claims based on serious pre-merger misconduct, where that misconduct makes a merger “inevitable.”  (With the subsequent limitation to direct claims in Countrywide II, this observation has become somewhat obvious, as mergers generally do not extinguish standing to bring any claims directly.)  The merger between Massey and Alpha was not deemed to be an “inevitable” merger, despite the fact that, as noted above, Massey was seriously weakened by the alleged misconduct.  The Court was persuaded by the record that Massey’s board viewed the standalone plan as “a viable option,” even though it was “not the best choice available.”

supreme-court-building-1209701_1280 On February 28, 2017, the Missouri Supreme Court joined a growing list of tribunals to apply a strict reading of the United States Supreme Court’s seminal ruling in Daimler AG v. Bauman, 134 S. Ct. 746 (2014). In State ex rel. Norfolk So. Ry. Co. v. Hon. Colleen Dolan, No. SC95514, the Missouri Supreme Court held that Missouri courts lack the requisite personal jurisdiction, either specific or general, over a non-resident defendant, Norfolk Southern Railway Company, in a claim brought by a non-resident plaintiff who asserted a Federal Employer’s Liability Act (FELA) violation arising from his employment by Norfolk Southern in the State of Indiana. The ruling marks a significant victory for corporate defendants seeking to combat forum shopping by plaintiffs, the practice of bringing cases in jurisdictions which are more likely to provide a favorable judgment or a more lucrative verdict.

The plaintiff, Indiana resident Russell Parker, argued that Missouri courts had both general and specific jurisdiction over Norfolk based on the company’s contacts with the state. Specifically, the plaintiff cited Norfolk’s ownership of approximately 400 miles of railroad track in the state, 590 employees in the state, and approximately $232,000,000 in annual revenue from the company’s operations in Missouri. As grounds for its decision, the court found that the plaintiff’s allegations did not arise from or relate to Norfolk’s activities in Missouri so as to give rise to specific jurisdiction, nor were Norfolk’s operations in the State sufficient to give rise to a Missouri court’s exercise of general jurisdiction over a defendant such as Norfolk; a company incorporated in and with principal place of business in Virginia.

Citing the Second Circuit’s decision in Brown v. Lockheed Martin Corp., 814 F.3d 619, 627-30 (2d Cir. 2016), wherein .05 percent of the defendant’s employees and no more than .107 percent of total revenue were derived from the defendant’s activities in the state of Connecticut, the Missouri Supreme Court concluded that Norfolk’s activity in Missouri represents “a tiny portion” of the company’s business activities nationwide. Specifically, the court noted that the revenue derived from Missouri is approximately 2 percent of Norfolk’s total revenues; the tracks owned and operated in Missouri constitute approximately 2 percent of the tracks Norfolk owns and operates nationally; and the company’s Missouri-based employees account for only about 2 percent of its total employees.

The Missouri Supreme Court’s decision is particularly newsworthy for its refusal to find general personal jurisdiction based on a non-resident company’s appointment of a registered agent in the state. In its ruling, the court rejected the plaintiff’s argument that Norfolk’s compliance with Missouri’s mandatory business registration requirements for foreign corporations amounted to consent to the exercise of general personal jurisdiction by Missouri courts. To the contrary, the court held that as the relevant section of law provided only that registration is consent to service of process against non-resident corporations, “the registration statute does not provide an independent basis for broadening Missouri’s personal jurisdiction to include suits unrelated to the corporation’s forum activities when the usual bases for general jurisdiction are not present.” This finding echoes the recent ruling of the Delaware Supreme Court in Genuine Parts Company v. Cepec, 137 A.3d 123, 147 n.125 (Del. 2016), which held that a broad inference of consent based on a non-resident corporation’s registration to do business in a state would allow national corporations to be sued in every state, rendering Daimler pointless.

Further, the Missouri Supreme Court declined to go along with the plaintiff’s argument that FELA itself provides an independent basis for specific jurisdiction any place that a railroad corporation has tracks. Here too, the court rejected the contention that FELA confers specific jurisdiction on the grounds that such an interpretation would turn specific jurisdiction on its head, subjecting corporations to personal jurisdiction in every state regardless of the facts of the case or the defendant corporation’s contacts with the state.

The Missouri Supreme Court’s decision adds a significant brick in the Daimler wall, bolstering the protection it provides corporations against forum shopping and excessive litigation in magnet jurisdictions. The true measure of Daimler’s longevity will, however, come next month, as the United States Supreme Court hears oral arguments on two challenges involving the application of Daimler in BNSF Railway Co. v. Tyrrell, and Bristol-Myers Squibb Co. v. The Superior Court of San Francisco County. Stay tuned!

architecture-22039_960_720“Veil piercing” is an equitable remedy that allows a plaintiff with a claim against an entity to obtain relief from the entity’s owners, in spite of laws providing for limited liability.  When the owners provide personal guarantees or otherwise contract around liability protections, or when the owners are sued in their own right based on their own conduct, it is not necessary to pierce a veil of limited liability.  True veil piercing – where the owners are asked to stand in for acts of the entity – is an extraordinary remedy to be reserved for the most extreme cases.

Courts generally have reviewed several factors, with varying degrees of emphasis, when determining whether to pierce the veil of a corporation.  These have included the existence of fraud, adherence to “corporate formalities” such as holding and documenting meetings, the level of capitalization, whether a dominant stockholder siphoned funds from the corporation, and whether investors are so active in the management of the corporation that the corporation is their “alter ego” or “instrumentality.”  Fraud may, depending on the circumstances, provide an independent basis for the liability of stockholders and others on the grounds that individuals are being found liable based on their own conduct.  Other factors supporting veil piercing also often stand in as proxies for fraud, or reasons to suspect fraudulent behavior.

As has become increasingly clear, Delaware “alternative entities” such as limited partnerships and limited liability companies are not the same thing as corporations.  While many of the same fiduciary principles applicable to corporate fiduciaries may apply under certain circumstances to the fiduciaries of an alternative entity, courts must remain sensitive to distinctions in entity law.  In the context of veil piercing, these distinctions suggest that a Delaware LLC should not be subject to true veil piercing at all, as opposed to the imposition of liability under standard concepts of fraud, fraudulent conveyance, etc.; and that assuming the LLC’s veil may be pierced, any piercing should be subject to different standards than those applicable to piercing the corporate veil.

Section 102(b)(6) of the Delaware General Corporation Law (“DGCL”) states that a certificate of incorporation “may” contain “[a] provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts.”  8 Del. C. § 102(b)(6).  Thus, under the DGCL, the default rule is that stockholders are not personally liable for corporate debts based on their ownership of stock, but may be liable as a result of their own conduct, and may also agree in the charter to be liable to a specified extent and upon specified conditions.

Section 18-303(a) of the Delaware Limited Liability Company Act (“DLCCA” or “Delaware LLC Act”) states that

Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company, and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company.

Section 18-303(b) of the DLCCA goes on to state that:

Notwithstanding the provisions of subsection (a) of this section, under a limited liability company agreement or under another agreement, a member or manager may agree to be obligated personally for any or all of the debts, obligations and liabilities of the limited liability company.

Thus, just as a stockholder may agree voluntarily in a charter provision to be liable for corporate debts to a certain extent under certain conditions, a member or manager of an LLC may agree voluntarily in the LLC agreement or another contract to be obligated personally for the LLC’s obligations.

Unlike section 102(b)(6) of the DGCL, section 18-303(a) does not contain the “except as they may be liable by reason of their own conduct or acts” proviso.  However, section 18-303(a) refers only to debts, obligations, and liabilities of the LLC, and also states that members and managers shall not be liable “solely” by reason of being a member or acting as a manager.  Courts have interpreted this language to mean that managers and members may continue to be liable for their own independent debts, obligations, and liabilities.  Again, when such a determination is made it is unclear that there is any “veil piercing” at all, as opposed to the plain vanilla application of tort and contract liability principles.

Other provisions of the Delaware LLC Act represent public policy choices that are inconsistent with the rote application of corporate veil piercing standards to an LLC.  For example, the policy of the DLLCA is “to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”  6 Del. C. § 18-11011(b).  More specifically, the DLLCA contemplates that an LLC agreement may restrict or even eliminate all duties or liabilities of a member or manager other than for the implied contractual covenant of good faith and fair dealing.  6 Del. C. § 18-11011(c),(e).  Taken together, these provisions stand for the proposition that “contract is king” for the LLC.  The organizers of an LLC are permitted to borrow concepts from a corporation, but are not required to, and can organize themselves in potentially infinite ways.

Thus, Delaware LLCs lack “corporate formalities” by design.  Even in a corporation, “corporate formalities” exist for the protection of stockholders, not third parties, and are a relatively weak justification for veil piercing.  Corporate formalities may be relevant to veil piercing to the extent that they suggest a corporation is a sham entity that exists only to facilitate fraud or other inappropriate conduct.  However, evaluating LLC management with the same jaundiced eye is inconsistent with the fundamental principle that an LLC is not the same thing as a corporation and is to be operated however the parties choose in their LLC Agreement.

Even more significantly, section 18-1101(j) of the DLCCA provides that “[t]he provisions of this chapter shall apply whether a limited liability company has 1 member or more than 1 member.”  The statute expressly contemplates that many LLCs will have only one member, and provides that the same principles (which include maximum freedom of contract and limited liability) are to apply equally to those LLCs.  It is currently estimated that the vast majority of Delaware LLCs are not publicly traded and are closely held.  As with a lack of “corporate formalities,” then, LLCs are likely to have a “unity of interest” by design.  In a small start-up company formed as an LLC, the same person often will be the single member and manager of the LLC, and will make all decisions for the business.  If that is not an acceptable state of affairs, then the LLC cannot have limited liability in most circumstances, thus thwarting legislative policy.

Corporations and LLCs also are generally formed for different reasons.  The primary reason for forming a corporation is to amass large amounts of capital through the capital markets.  The primary reason for forming an LLC is to limit the liability of its members for decisions they make themselves.  Although one can debate the efficiency of conferring limited liability on single-member start-up companies, that is a decision best made by a legislature and not by judges on an ad hoc basis.

 

Delaware Supreme Court
Delaware Supreme Court

The Delaware Supreme Court recently held that the plain language of an employment agreement and an LLC agreement prevented an LLC from interjecting a fraudulent inducement defense into a summary proceeding for the advancement of litigation expenses under Section 18-108 of the Delaware LLC Act.

Trascent Mgmt. Consulting, LLC v. Bouri, No. 126, 2016 (Del. Nov. 28, 2016). In Trascent, an LLC brought claims against a terminated executive for breach of his employment agreement. The executive then counterclaimed for advancement of his litigation expenses under his employment agreement and the operating agreement of the LLC, both of which contained nearly identical language stating that, “[u]nless a determination has been made by final, nonappealable order of a court of competent jurisdiction that indemnification is not required, [the LLC] shall, upon the request of [the indemnitee], advance or promptly reimburse [the indemnitee’s] reasonable cost of investigation, litigation or appeal, including reasonable attorneys’ fees [subject to the condition that the indemnitee provide a written undertaking to repay advancements if a court of competent jurisdiction ultimately decided he was not entitled to indemnification].” Having agreed to this language, the LLC “knew it agreed to provide a right, subject to expedited specific enforcement, and it could not reasonably believe that it could deny that right simply by alleging that the contract was invalid.”

Under those circumstances, the Court explained, allowing the LLC to interpose a defense of fraudulent inducement would be inconsistent with the contractual language, would defeat the purpose of a statutory advancement proceeding by inserting a “plenary claim” into what the Court noted should be a summary proceeding, and would impair the public policy interests served by contractual advancement provisions. In dicta, the Court also noted that equity supported its ruling because the LLC had employed the executive for 16 months and then sued him under the same contract that it claimed was invalid.

Link to ruling:

http://courts.delaware.gov/Opinions/Download.aspx?id=249390