Dore v. Sweports Ltd., CA 10513-VCL

Background

Sweports Ltd., a Delaware corporation controlled by George Clarke (based in Illinois), adopted Amended Bylaws (Article VII) providing mandatory indemnification to the fullest extent permitted by Delaware law; Clarke later purported to rescind grants to three individuals (Dore, O’Rourke, Moody) and circulated lengthy "Informal Actions" accusing them and their law firm of self-dealing.
The plaintiffs (Dore, O’Rourke, Moody) sued in Illinois asserting contract claims (a promissory note and a guaranty/stock purchase agreement) and sought damages; Sweports counterclaimed with fiduciary-duty and fraud allegations and repeatedly attempted to replead counterclaims (many dismissed as untimely).
Illinois courts granted summary judgment to plaintiffs on liability for the Note and later awarded collection expenses (three separate awards totaling payments to plaintiffs and satisfaction of the Note); a jury awarded damages on the stock/guarantee claim but that judgment was reversed on appeal and plaintiffs did not pursue remand claims; UMF’s mirror suit was dismissed on grounds preclusion.
Plaintiffs also filed involuntary bankruptcy proceedings against Sweports as a recovery/collection vehicle; the bankruptcy court rejected competing reorganization plans (including a creditors’ plan that would have created conflicts) and dismissed/converted the case.
Plaintiffs sued in Delaware seeking indemnification under Sweports’ Amended Bylaws and DGCL §145 for expenses incurred defending against Sweports’ counterclaims, for the UMF action, and (contentiously) for bankruptcy-related work and enforcement of indemnification in this chancery action; trial focused on which categories of expenses were covered and whether claimed time/expenses were actually and reasonably incurred.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether plaintiffs are entitled to mandatory indemnification under the Amended Bylaws/DGCL §145(c) for defense of Sweports’ counterclaims and UMF action	Plaintiffs: Article VII and §145(c) mandate indemnification because they were directors/officers and were successful defending the counterclaims and UMF claims	Sweports: many claimed expenses are not covered (personal contract claims), some proceedings (bankruptcy, valuation trial) fall outside §145, and plaintiffs’ time records were unreliable/manipulated	Court: Granted indemnification for defense of counterclaims and UMF appeal-related work; denied for contract-claim prosecution, the stock-valuation trial, and bankruptcy-related work; limited award to reasonable, proven expenses ($241,492.50)
Whether plaintiffs may recover expenses for prosecuting their personal contract claims (Note and Guarantee)	Plaintiffs: their contract claims were defensive and intertwined with fiduciary allegations; recovery needed to vindicate rights	Sweports: Those were purely personal creditor/guarantor claims, not acts in service to the corporation, so not indemnifiable	Court: Denied indemnification for contract claims — they were personal and lacked sufficient nexus to corporate duties
Whether plaintiffs’ bankruptcy-related expenses are indemnifiable as part of defending counterclaims or protecting corporate interests	Plaintiffs: bankruptcy was used to collect judgments and to oppose Sweports’ plans premised on counterclaims; thus indemnifiable	Sweports: Bankruptcy was a collection vehicle for plaintiffs’ personal contract recovery and too attenuated from counterclaims	Court: Denied indemnification for bankruptcy work — it was primarily collection and too attenuated from the indemnifiable counterclaims
Whether claimed fee/time records were actually and reasonably incurred (Scion Breckenridge issue)	Plaintiffs: amended and supplemented time entries corrected earlier recordings; they had an enforceable oral retainer with their law firm and therefore incurred liability	Sweports: Many entries were fabricated or added later; some fees were contingent or not incurred; per Scion Breckenridge, plaintiffs did not "incur" fees if no liability existed	Court: Found many later-added entries were fabricated and excluded them; concluded plaintiffs had an enforceable (oral) obligation to their firm for the recoverable work and therefore the expenses were "incurred" to the extent proved

Key Cases Cited

Von Feldt v. Stifel Fin. Corp., 714 A.2d 79 (Del. 1998) (Section 145 indemnification interpreted broadly to encourage service and protect corporate officials)
Stifel Financial Corp. v. Cochran, 809 A.2d 555 (Del. 2002) (Section 145 should be construed to further its remedial purposes)
Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68 A.3d 665 (Del. 2013) (plaintiff must have actually incurred payment liability to recover under fee-shifting/indemnity provisions)
O’Brien v. IAC/Interactive Corp., 26 A.3d 174 (Del. 2011) (standards for whether services were actually and reasonably incurred and reasonableness review)
Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992) (indemnification can include counterclaims that "defeat or offset" corporate claims)
Gentile v. Singlepoint Fin., Inc., 787 A.2d 102 (Del. Ch. 2001) (limits on indemnification where claims do not necessarily bar subsequent corporate claims)
Fasciana v. Electronic Data Systems Corp., 829 A.2d 178 (Del. Ch. 2003) (award of enforcement expenses must be proportionate to success)