Meyers v. Quiz-Dia LLC
CA 9878-VCL
| Del. Ch. | Jun 6, 2017Background
- Plaintiffs Patrick E. Meyers et al. (specifically Greg MacDonald and Dennis Smythe) are former CEO and CFO of OpCo (Quiznos) who sought indemnification from three subsidiary LLCs (Quiz-DIA, Quizmark, QCE Gift Card) under each subsidiary’s identical operating agreement indemnification provision.
- The Funds (Avenue and Fortress affiliates) threatened and then filed the Colorado Action alleging misconduct related to the 2006 leveraged recapitalization and related projections; that federal action was dismissed for lack of securities-jurisdiction and the Tenth Circuit affirmed; no certiorari was sought.
- MacDonald and Smythe had retained counsel and incurred pre-suit investigative and defense costs; they demanded indemnification and advancement from the Subs; suit in Delaware followed and the parties cross-moved for summary judgment.
- Quiz-DIA, Quizmark (Delaware entities) and QCE Gift Card (Arizona entity) each had an indemnification clause granting mandatory indemnity to "Members and Officers" "to the full extent permitted by applicable law." Plaintiffs were not members and claimed officer status for each Subsidiary.
- Court held (1) MacDonald and Smythe were not officers of Quiz-DIA (no formal appointment and additional local requirements for officers they did not satisfy) and thus no indemnification from Quiz-DIA; (2) they were officers of Quizmark and QCE Gift Card and are entitled to mandatory indemnification for investigation and defense expenses incurred "by reason of" acts on behalf of those companies, once the Colorado dismissal became final.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Delaware dismissal order should be vacated so this action can resolve indemnification now | Plaintiffs: court should vacate prior dismissal and decide indemnification on existing record to avoid duplicative litigation | Subs: prior dismissal without prejudice requires a new, separate indemnification action | Court vacated the prior dismissal as just, permitting resolution on the existing fully briefed record |
| Whether MacDonald and Smythe were officers of Quiz-DIA entitled to indemnity | Plaintiffs: served as de facto officers for all Quiznos entities and thus covered | Quiz-DIA: no formal appointment; Quiz-DIA had additional officer requirements (liquor-license background checks) not satisfied | Court: not officers of Quiz-DIA (no designation, did not meet local requirements); no indemnity from Quiz-DIA |
| Whether the Colorado Action falls within the subsidiaries’ indemnification provisions | Plaintiffs: Colorado claims arose from negotiating Restructuring and projections done on behalf of the Quiznos enterprise, so losses were incurred "by reason of" their officer status | Subs: argued limits on coverage (e.g., defense must be actual litigation) and good-faith requirement | Court: nexus exists; actions were on behalf of the companies, so Colorado Action-related losses are covered, including pre-suit investigation costs |
| Whether plaintiffs must prove good faith to obtain mandatory indemnification after the Colorado dismissal | Plaintiffs: once successful "on the merits or otherwise," they need not prove good faith under a clause providing indemnity "to the fullest extent permitted by law" | Subs: contended good-faith inquiry remains despite dismissal; urged additional fact-finding | Court: applying Delaware law, mandatory indemnification to the fullest extent covers those successful "on the merits or otherwise" without separate good-faith proof; applied same result to QCE Gift Card (Arizona) because parties did not argue otherwise |
Key Cases Cited
- Homestore, Inc. v. Tafeen, 888 A.2d 204 (Del. 2005) (establishes the required nexus "by reason of" corporate capacity for indemnification)
- Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992) (litigation "defense" can be given a broad meaning)
- Lorillard Tobacco Co. v. American Legacy Foundation, 903 A.3d 728 (Del. 2006) (courts interpret contracts to effectuate parties’ intent; plain meaning controls)
- City Investing Co. Liquidating Trust v. Continental Casualty Co., 624 A.2d 1191 (Del. 1993) (a clear writing is the sole source for understanding intent)
- Vichi v. Koninklijke Philips Electronics, N.V., 85 A.3d 725 (Del. Ch. 2014) (applying governing-state-law choice principles when parties do not press contrary arguments)