Marino v. Patriot Rail Company LLC
131 A.3d 325
| Del. Ch. | 2016Background
- Marino served as Patriot Rail Company CEO/Chairman (2004–June 18, 2012) and owned substantial indirect equity; Patriot later converted to an LLC and Parent sold the company in a 2012 stock sale.
- While Marino was CEO, Patriot won a switching contract from McClellan after discussions with Sierra Railroad; Sierra sued Patriot (and later counterclaimed) in California federal court alleging NDA breach, trade-secret misappropriation, and interference.
- A jury entered a large judgment against Patriot and Grandparent; Sierra moved post-judgment to add Marino, Parent, and Great‑Grandparent as judgment debtors under California Code § 187, alleging alter‑ego/control and post‑sale asset transfers to frustrate collection.
- After the stock sale Marino resigned; Sierra’s post‑judgment motion alleges both covered (pre‑resignation) and non‑covered (post‑resignation fund transfers and representations) conduct by Marino.
- Marino demanded advancement from Patriot to defend the post‑judgment motion; Patriot refused and Marino sued in Delaware Chancery. Parties cross‑moved for summary judgment; court treated facts as undisputed per Ct. Ch. R. 56(h).
- Court interpreted Delaware indemnification/advancement law (8 Del. C. §145) and granted Marino partial summary judgment ordering monthly advancement procedures for fees tied to covered conduct (actions while he served), denying advancement for post‑resignation conduct.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Marino is entitled to advancement for costs defending Sierra’s post‑judgment motion | Marino argued his charter’s mandatory advancement (to fullest extent permitted by law) covers suits "by reason of" acts he took while serving and Section 145(j)/(f) preserve those rights after he ceased service | Patriot argued the charter’s language applies only to then‑serving officers/directors and coverage ended when Marino resigned | Held: Rights vested while Marino served and, absent an express reservation, continue for litigation over acts during service; Marino entitled to advancement for claims premised on covered (pre‑resignation) conduct, not for post‑resignation conduct such as fund transfers |
| Whether the DGCL allows continuation of advancement/indemnification after cessation of service | Marino relied on Section 145(j) continuation and Section 145(f) No Termination protections; advancement ripens when a covered claim arises | Patriot emphasized Section 145(e) language distinguishing "officers and directors" from "former" officers and argued coverage is limited to current service | Held: Section 145(j) mandates continuation unless the original grant said otherwise; Section 145(f) prevents retroactive elimination of rights after the act/omission occurred; Section 145(e) does not defeat continuation rule |
| Scope of advancement (what parts of the post‑judgment motion are "by reason of" service) | Marino contended Sierra’s alter‑ego/control and misrepresentation allegations directly implicate acts taken while he was CEO/Chairman, so they are covered | Patriot argued portions of Sierra’s motion concern post‑sale actions (asset transfers, representations) for which Marino was not acting in a Company capacity and thus not covered | Held: Allegations that depend on Marino’s corporate authority and actions while serving (e.g., use of confidential information, control of litigation pre‑sale, dominance of Company) are covered; allegations of post‑resignation transfers and representations are not covered |
| Remedy/process for resolving disputed advancement demands and entitlement to fees‑on‑fees | Marino sought immediate, full repayment advances and fees‑on‑fees for suit to obtain advancement | Patriot sought to limit or deny advancement and resisted fees‑on‑fees | Held: Court ordered a monthly claim/response/meet‑and‑confer process, interim payment rules for disputed amounts, limited Rule 88 applications quarterly to resolve disputes, and awarded Marino proportionate fees‑on‑fees for partially successful claim (subject to application procedure) |
Key Cases Cited
- Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) (prompted statutory reforms addressing director risk and indemnification)
- Schnell v. Chris‑Craft Indus., Inc., 285 A.2d 437 (Del. 1971) (equitable review can constrain statutory authority)
- Michaelson v. Duncan, 407 A.2d 211 (Del. 1979) (Section 144 does not foreclose fiduciary review of statutory compliance)
- Stifel Fin. Corp. v. Cochran, 809 A.2d 555 (Del. 2002) (Delaware law recognizes entitlement to advancement and fees‑on‑fees under §145)
- Homestore, Inc. v. Tafeen, 888 A.2d 204 (Del. 2005) (advancement authority under §145(e) is permissive but coverage can extend to former officers for acts during service)
- Mesler v. Bragg Mgmt. Co., 702 P.2d 601 (Cal. 1985) (en banc) (California alter‑ego/post‑judgment debtor principles require participation in defense and due diligence)
- Katzir’s Floor & Home Design, Inc. v. M‑MLS.com, 394 F.3d 1143 (9th Cir. 2004) (interpreting Cal. Civ. Proc. Code § 187; requires alter‑ego and control of litigation to add post‑judgment debtors)
- Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008) (discussed vesting of advancement rights; prompted 2009 statutory amendment that limited retroactive amendment of indemnification/advancement rights)