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Posted: November 18, 2013

First Department Affirms Enforcement of Contractual Obligations to Advance Litigation Expenses

On November 14, 2013, the First Department issued a decision in TMR Bayhead Securities, LLC v. Aegis Texas Venture Fund II, LP, 2013 NY Slip Op. 07578, affirming New York County Commercial Division Justice Bransten’s order compelling defendant venture capital funds to reimburse and advance legal fees and costs incurred by plaintiffs (who had run the funds) in defending an earlier lawsuit brought by defendants against plaintiffs.

The relevant facts and procedural history in the TMR Bayhead Securities decision are sparse. More detail can be found in Justice Bransten’s November 2010 decision construing the defendants’ operating agreements as requiring them to advance and reimburse plaintiffs’ litigation expenses incurred in defending the related action and in Justice Bransten’s May 2012 decision compelling defendants to pay advances requests that was the subject of the TMR Bayhead Securities decision.

In TMR Bayhead Securities, the First Department rejected the defendants’ argument that the payments ordered by Justice Bransten should have been cut in half to reflect the fact that only one of the two plaintiffs was entitled to advancement of his expenses.  In rejecting this argument, the court relied on the good faith affirmation submitted by plaintiffs’ counsel that she would have billed the same amount of time had she just been defending the plaintiff who was entitled to advances, which the First Department had held in Ficus Investments v. Private Capital Management, LLC, 63 A.D.3d 611 (1st Dep’t 2009), was sufficient to obtain 100% of the advances sought based on Delaware cases that had reached the same result.  The First Department also rejected defendants’ argument that Justice Bransten should not have ordered advancement of litigation expenses with respect to plaintiffs’ counterclaims against the defendants in the related action because the broad language in the operating agreements, as well as Delaware case law interpreting similar language, required advancement of fees related to counterclaims that arose from the same facts as the claims asserted in the related litigation.

This is case is one of many (including the Ficus action cited above) where New York’s courts have followed the lead of Delaware’s courts in strictly enforcing mandatory contractual advances provisions for the benefit of corporate officers and directors on the ground that, had the corporations not wanted to advance expenses to their officers and directors in litigation brought by the corporation against them (as opposed to litigation brought by third parties), the corporations could have drafted language in these agreements prohibiting such advances.

This case also highlights another significant procedural difference between advances litigation in New York and Delaware.  In Delaware, the legislature has provided for an expedited summary proceeding that a corporate officer or director can bring to enforce her contractual right to advancement.  New York has no such remedy.  Thus, in some cases (such as Ficus), the officer or director makes a motion to enforce their advancement rights in the litigation where they are being sued.  In other cases, such as TMR Bayhead Securities, the officer or director brings a separate plenary action for breach of the relevant agreement containing the mandatory advances provision and seeking a remedy of specific performance, and then immediately after the defendant files an answer, moves for summary judgment to enforce the advances provision.  Justice Bransten’s earlier decisions in TMR Bayhead Securities provide a useful roadmap to practitioners seeking to vindicate their clients’ contractual advances rights in the context of a separate plenary action.

For a useful comparison of the alternative approach taken in Ficus, practitioners can review the decision of former New York County Commercial Division Justice Bernard Fried that was the subject of the Ficus appeal.

[Editors’ Note:  Schlam Stone represented the officers who obtained advancement of their litigation expenses in Ficus.  On January 29, 2014, Schlam Stone partner David Katz will speak at a New York State Bar Association Commercial and Federal Litigation Section CLE panel that will include a discussion of the similarities and differences between New York and Delaware litigation to enforce advances and indemnification rights of corporate officers and directors.]

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