Confederate Motors, Inc. v. Terny, et al

Filing 139

Magistrate Judge Judith G. Dein: ORDER entered granting in part and denying in part 122 Defendant's Motion for Speedy Declaration Over Advancement of Fees. (Dambrosio, Jolyne)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CONFEDERATE MOTORS, INC.,
Plaintiff/
Counterclaim Defendant,
v.
FRANCOIS-XAVIER TERNY,
Defendant/
Counterclaim Plaintiff.

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CIVIL ACTION
NO. 11-10213-JGD

ORDER ON DEFENDANT’S RULE 57 MOTION SEEKING
SPEEDY DECLARATION OVER ADVANCEMENT OF FEES
April 19, 2012
DEIN, U.S.M.J
I. INTRODUCTION
This matter is before the court on Defendant’s “Rule 57 Motion Seeking Speedy
Declaration Over Advancement of Fees.” (Docket No. 122). By his motion, FrancoisXavier Terny (“Terny”) seeks a declaration, under Count VI of his Amended Counterclaim “that he is immediately entitled to advancement from Confederate of his costs and
fees paid to date in litigating this action, and that any such amounts that are incurred
going-forward will similarly be due and owed to him by Confederate upon demand.”
(Docket No. 122). Terny asserts that he is entitled to advancement based on Delaware
law, Del. Code Ann. tit. 8, § 145, and Article Tenth of Confederate’s Amended and
Restated Certificate of Incorporation. Confederate opposes the motion on the grounds

that Delaware courts allegedly have exclusive jurisdiction over such claims, that Terny’s
status as a director is disputed, that the claims in this litigation do not relate to Terny’s
conduct as a director, and that Terny has not established that the fees for which he is
requesting advancement are reasonable. (See Docket Nos. 124, 137).
For the reasons detailed below, Terny’s “Rule 57 Motion Seeking Speedy
Declaration Over Advancement of Fees” (Docket No. 122) is ALLOWED IN PART and
DENIED IN PART. This court holds that it has jurisdiction over the request for
advancement, and that Terny is entitled to an advancement for fees incurred in connection
with challenges to his actions as an alleged director of Confederate. However, a great
deal of this litigation, including all of Terny’s counterclaims, relate to his status as either
a shareholder or an independent consultant. Therefore, further proceedings are necessary
to determine what fees should be reimbursed and advanced, in accordance with this
court’s order detailed below.
II. STATEMENT OF FACTS
“The key question” in a summary advancement action such as this “is whether the
plaintiff seeking advancement is facing claims that are subject to his advancement right, a
determination that can, in this case and in most cases, be based on a review of the
pleadings against him in the actions for which advancement is sought.” Fasciana v. Elec.
Data Sys. Corp., 829 A.2d 160, 167 (Del. Ch. 2003). See also DeLucca v. KKAT Mgmt.,
L.L.C., No. Civ.A. 1384-N, 2006 WL 224058, at * 6 (Del. Ch. Jan. 23, 2006) (“Advancement cases are particularly appropriate for resolution on a paper record”), and cases cited.
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Consequently, the facts described herein are derived principally from the Third Amended
Complaint (“Compl.”) (Docket No. 70) and the First Amended Counterclaim (“CC”)
(Docket No. 119), with some supplementation with undisputed facts.
Confederate is a publicly traded corporation involved in designing and manufacturing handcrafted street motorcycles. H. Matthew Chambers was the Chief Executive
Officer of Confederate and the Chairman of the Board of Directors. (See Compl. ¶ 1;
CC at Introduction). According to Terny, in late 2008, Confederate and Chambers
contacted him to provide financing for the company in exchange for stock. (CC ¶ 10).
Terny accepted the offer and, as Confederate acknowledges, “[o]n April 16, 2009,
Defendant Terny was appointed by the Chairman of the Board, Matt Chambers, to fill a
vacant Board of Directors Position[.]” (Compl. ¶ 1). By September 2009, Terny had
invested $450,000 in exchange for 300,000 shares of stock. (CC at ¶ 28).
Also in September 2009, Terny and Confederate entered into a Consulting Agreement, pursuant to which Terny acquired an additional 505,000 shares of Confederate
stock. (Id. at ¶ 32). According to Terny, the Consulting Agreement called for him to
“work with the Company to form the distribution channels for all the worldwide retail
stores for distribution of the Company’s motorcycles, work with the company to decrease
the material costs necessary to produce its motorcycles, and such other services to and for
the Company as may be reasonably requested from time to time by the Company.” (Id.).
Soon thereafter, disagreements arose between Terny and Chambers regarding
Confederate’s business operations. (Id. at ¶¶ 44-49). In particular, Terny objected to
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Chambers’ proposal for a new motorcycle line, the appointment of new directors, and the
acceptance of a $750,000 loan to relocate the company to New Orleans, Louisiana. (Id.).
As a result of this disagreement, on January 5, 2010, Terny sent an email to Chambers,
which stated in relevant part as follows:
I have no intention to continue working like this, and certainly no
intention to be part of the plan outlined below .... I’ve hence decided
to quit as a “consultant” (and give back any share), publicly resign as
Boardmember, and put back my shares on the market to liquidate my
investment in Confederate.
(Docket No. 1, Ex. D). Confederate argues that the email constituted Terny’s official
resignation from the Board of Directors, which Terny denies. (CC ¶ 50; Compl. ¶ 1)
Despite this email, on March 12, 2010, Terny was given an agenda for an
upcoming annual Board meeting scheduled to be held on March 16, 2010, along with a
waiver of notice of the meeting for him to sign. (CC ¶ 52, Ex. B). Terny attended the
meeting on March 16, 2010, where the parties discussed a new motorcycle line, the
appointment of new directors and a $750,000 loan to relocate to New Orleans, Louisiana.
(Compl. ¶ 1). According to Confederate, Terny asserted his disapproval of the new plan
and refused to provide his consent, which was needed for the company to move forward.
(Id.). According to Terny, Chambers refused to listen at the meeting, but rather ranted
and raved at Terny, and the meeting “essentially dissolved without any action” being
taken. (CC ¶ 57).
By letter dated April 5, 2010, Confederate purported to “confirm and accept in
writing [Terny’s] resignation of January 5th, 2010 as director and consultant of
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Confederate Motors, Inc. effective as of said date.” (Docket No. 1, Ex. E). A few days
later, on April 8, 2010, Confederate commenced this suit against Terny in the United
States District Court for the Northern District of Alabama, Southern Division, which was
eventually transferred to this court.1 (Docket No. 1). While the litigation was pending, in
late April 2010, Terny was sent a notice of an annual shareholder meeting scheduled for
May 15, 2010. (CC ¶ 52). He was also listed as a holder of 805,000 shares of
Confederate stock in the company’s 10K which was filed with the SEC and dated May
17, 2010. (Id.). It was not until Confederate filed an 8K with the SEC on November 17,
2010, that it was reported to the SEC that Terny had been replaced on the Board. (Id.
¶ 83).
As described more fully below, Confederate’s Amended and Restated Certificate
of Incorporation authorizes the company to advance expenses, including attorneys’ fees,
incurred by present or former directors in defending civil or criminal actions. (Pl. Ex. 8).2
Terny has made several demands for payment under this provision, but has not itemized
the amounts he is seeking.
Claims Asserted By the Parties

1

Suit was commenced in the jurisdiction in which Confederate’s principal place of
business was located. The case was transferred to this court on January 24, 2011 due to the
forum selection clause in the Consulting Agreement. (See Docket No. 80).
2

Plaintiff filed a number of exhibits with the court on March 5, 2012 as part of its
Supplemental Opposition to Terny’s Motion. (Docket No. 137).

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Confederate filed its Third Amended complaint on October 29, 2010. In Count I,
Confederate is seeking, inter alia, a declaratory judgment as to the parties’ “rights, duties,
obligations, status, and legal relations . . . under the subject agreements and corporate
documents.” (Compl. at Count I, prayer for relief ¶ 1). Count II also is for declaratory
relief, and seeks, among other things, “an Order outlining the rights of the plaintiff, the
proper appointment procedure for directors, and the names of all current and valid
director[s] according to the corporate documents, appointments, and agreements.”
(Compl. at Count II, prayer for relief ¶ 2). In Count III, Confederate alleges that Terny
breached the Consulting Agreement, and in Count IV Confederate alleges that Terny’s
email of January 5, 2010 and its “acceptance” of his resignation constituted an enforceable contract obligating Terny to remit his shares to Confederate. Confederate has also
sought the return of the stock Terny was given under the Consulting Agreement under
theories of unjust enrichment (Count V), and fraudulent inducement (Count VI). Finally,
in Count VII, Confederate alleges that Terny is liable for fraud because after his resignation as a Board member on January 5, 2010 he held himself out as a Board member of
Confederate.
Terny’s First Amended Counterclaim raises a number of counts, all of which, with
the exception of his claim to advancement of legal fees and expenses, are premised on his
status as a shareholder of or consultant to Confederate, and not as a director. Thus, in
Count I, he alleges a breach of the fiduciary duty owed to him as a shareholder (CC ¶ 86);
in Count II, he alleges a violation of federal securities law in connection with his acquisi-6-

tion of stock (id. ¶ 90); Count III contains a claim of violation of the blue sky laws
relevant to his purchase of Confederate stock (id. ¶ 103); and Count IV, for common law
fraud, and Count V, for negligent misrepresentation, relate to actions taken in connection
with his acquisition of stock. (E.g., id. ¶¶ 107, 118). In Count VI, Terny is seeking a
declaratory judgment in connection with the enforceability of the Consulting Agreement,
as well as his right “to recover advancement of his attorneys’ fees and indemnification
from Confederate to cover any loss that may be incurred as a result of this lawsuit.” (Id.
¶ 121). Finally, in Count VII, Terny contends that Confederate breached its contract as
found in the Certificate of Incorporation “to provide for advancement of his attorneys’
fees and indemnification of any loss that may be incurred as a result of a lawsuit that
arises out of the fact that such person was a director of the corporation.” (Id. at ¶ 124).
Terny has filed a motion entitled “Rule 57 Motion Seeking Speedy Declaration
Over Advancement of Fees from Plaintiff Confederate Motors to Defendant FrancoisXavier Terny.” (Docket No. 122). Therein he asserts, and Confederate does not dispute,
that he has “undertaken to repay all reimbursed costs and fees” if appropriate “consistent
with the explicit provisions of Confederate’s certificate of incorporation[.]” (Id.).
Additional facts will be provided below where applicable.
III. ANALYSIS
A.

The Right To Advancement of Expenses

“Section 145(a) and (b) of the Delaware General Corporation Law gives corporations the power to indemnify their current and former corporate officials from expenses
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incurred in legal proceedings ‘by reason of the fact that the person is or was a director,
officer employee or agent of the corporation.’” Homestore, Inc. v. Tafeen, 888 A.2d 204,
211 (Del. Supr. 2005) (quoting, with emphasis added, Del. Code Ann. tit. 8, § 145(a) &
(b)). These statutory provisions provide that such expenses, which include attorneys’
fees, must be “actually and reasonably incurred by the person in connection with such
action, suit or proceeding[.]” Del. Code Ann. tit. 8 § 145(a) (emphasis added).
Consequently, a corporate official’s right to indemnification is not established “until after
the defense to legal proceedings has been successful on the merits or otherwise.”
Homestore, 888 A.2d at 211 (internal quotation omitted). In order to provide “corporate
officials with immediate interim relief from the personal out-of-pocket financial burden
of paying the significant on-going expenses inevitably involved with investigations and
legal proceedings[,]” the statutory scheme also allows for the advancement of expenses to
the corporate officials. Id. Thus, Del. Code Ann. tit. 8, § 145(e) provides in relevant
part:
Expenses (including attorneys’ fees) incurred by an officer or director of the corporation in defending any civil, criminal, administrative
or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the
corporation as authorized in this section. Such expenses (including
attorneys’ fees) incurred by former directors and officers ... may be
so paid upon such terms and conditions, if any, as the corporation
deems appropriate.
(Emphasis added).
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The right to advancement is considered to be “an especially important corollary to
indemnification as an inducement for attracting capable individuals into corporate
service.” Homestore, 888 A.2d at 211. Significantly, the rights to indemnification and
advancement are “separate and distinct,” with the former being dependent on the merits
of the claims and the latter being dependent on the scope of the claims asserted against
the corporate official, not the merits. See Ridder v. Cityfed Fin. Corp., 47 F.3d 85, 87
(3d Cir. 1995) (“Under Delaware law, appellants’ right to receive the costs of defense in
advance does not depend upon the merits of the claims asserted against them, and is separate and distinct from any right of indemnification they may later be able to establish.”).
Nevertheless, only those fees which may ultimately be eligible for indemnification may
be advanced: a demand for expenses for which indemnification would not be possible
would not be reasonable. See Underbrink v. Warrior Energy Serv. Corp., No. 2982-VCP,
2008 WL 2262316, at *16 & n.148 (Del. Ch. May 30, 2008) (unpub. op.) (while eligible
for advancement for some claims, plaintiffs were not entitled to advancement of expenses
incurred in defending claims which were not made by reason of their status as directors as
indemnification was not possible for such claims), and cases cited.
Although the authority of corporations to advance expenses is permissive under
§ 145(e), “mandatory advancement provisions are set forth in a great many corporate
charters, bylaws and indemnification agreements.” Homestore, 888 A.2d at 212 (citation
omitted); see also Advanced Mining Sys., Inc. v. Fricke, 623 A.2d 82, 83 (Del. Ch. 1992)
(stating “most corporations . . . have by by-law exercised the authority recognized by
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Section 145 so as to mandate the extension of indemnification rights in circumstances in
which indemnification would be permissible under Section 145”). In the instant case,
Confederate’s Amended and Restated Certificate of Incorporation, Article Tenth,
provides, in relevant part, that the Corporation “shall” “(a) indemnify to the fullest extent
permitted by” Delaware law, “any present or former director of the Corporation,” for any
expenses, including attorneys’ fees, which were “actually and reasonably incurred” “by
reason of the fact that such person is or was a director” of the Corporation. In addition,
in Article Tenth the Corporation further has agreed that it “shall”
(e) pay expenses (including attorneys’ fees) incurred by a present or
former director ... in defending a civil or criminal action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be
determined that such director or officer is not entitled to be
indemnified by the Corporation as authorized in Article TENTH
herein[.]
(Pl. Ex. 8) (emphasis added). Thus, unlike § 145(e)’s permissive language, Confederate’s
Article Tenth provides a mandatory right to advancement.
Under Delaware law, “[a]n advancement action is a summary proceeding.” Kaung
v. Cole Nat’l Corp., 884 A.2d 500, 509 (Del. Supr. 2005). Unlike proceedings to
determine the right to receive final indemnification, the scope of an advancement
proceeding “is limited to determining the issue of entitlement according to the
corporation’s advancement provisions and not to issues regarding the movant’s alleged
conduct in the underlying litigation.” Id. (internal quotation and citation omitted). As
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detailed below, applying these principles to the instant case compels the conclusion that
Terny is entitled to the advancement of some of his expenses, although the scope of such
advances will require further development of the record.
B.

Jurisdiction

As an initial matter, Confederate argues that Delaware law grants exclusive jurisdiction to the Delaware courts to determine whether a party is entitled to advancement.
(Pl. Opp. (Docket No. 124) at 1-2). Confederate relies on Del. Code Ann. tit. 8, § 145(k)
which provides as follows:
The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw,
agreement, vote of stockholders or disinterested directors, or
otherwise. The Court of Chancery may summarily determine a
corporation's obligation to advance expenses (including attorneys'
fees).
(Emphasis added). However, Confederate has cited no cases, and none have been found,
that hold that § 145(k) divests a federal court of jurisdiction to hear advancement claims.
Rather, § 145(k) was necessary to grant jurisdiction to the Delaware Chancery Court due
to the separation in Delaware between courts of law and equity: “[t]he Court of
Chancery, which exercises jurisdiction over claims at law, did not have subject matter
jurisdiction over indemnification and advancement claims until § 145 was amended.”
Westar Energy Inc. V. Lake, 493 F. Supp. 2d 1126, 1140 (D. Kan. 2007), aff’d in part,
rev’d in part on other grounds, 552 F.3d 1215 (10th Cir. 2009). “Such an intra-state
allocation has no effect on federal litigation, which merged law and equity long ago.”
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Truck Components Inc. v. Beatrice Co., 143 F.3d 1057, 1062 (7th Cir. 1998) (citing NBD
Bank, N.A. v. Bennett, 67 F.3d 629, 634 (7th Cir.1995)). Moreover, and without
belaboring the point, “[n]o state may prevent a federal court from exercising jurisdiction
created by Congress.” Truck Components, 143 F.3d at 1061 (citations omitted).
Confederate’s contention that only the courts of Delaware may decide an advancement
claim is without merit.
C.

Scope of Advancements
Terny’s Status as a Director

Confederate argues that Terny’s status as a director is at issue, and, therefore, that
any advancement of fees is premature. (Pl. Opp. (Docket No) 124 at 1-2). This argument
is unpersuasive. “Inherent in the very nature of a summary advancement action is the
necessity for the court to act in the face of some factual uncertainty.” Fasciana, 829 A.2d
at 167. Therefore, “the scope of an advancement proceeding under Section 145(k) of the
[Delaware General Corporation Law] is limited to determining the issue of entitlement
according to the corporation’s advancement provisions and not to issues regarding the
movant’s alleged conduct in the underlying litigation.” Kaung, 884 A.2d at 509 (internal
quotation and citation omitted). Here, there is sufficient evidence that Terny served as a
director of Confederate to allow him to seek an advancement of expenses.
Significantly, in the instant case, both Confederate and Terny agree that Terny
served as a director of the company, although there is a factual dispute as to whether he
resigned by his email of January 5, 2010. However, Confederate argues, since Terny
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challenges Chambers’ right to unilaterally appoint directors and Chambers unilaterally
appointed Terny, if Terny prevails in this litigation, his appointment as a director would
be invalid. (See Pl. Supp. Mem. (Docket No. 137) at 4). To address the merits of this
argument, Confederate suggests that this court treat this case as having been brought
under Del. Code Ann. tit. 8, § 225(a), even though “the instant action was not
commenced as a § 225 proceeding[.]” (Pl. Supp. Mem. at 3-4). That statute provides in
relevant part:
Upon application of any stockholder or director, or any officer
whose title to office is contested, the Court of Chancery may hear
and determine the validity of any election, appointment, removal or
resignation of any director or officer of any corporation, and the
right of any person to hold or continue to hold such office[.]
Del. Code Ann. tit. 8 § 225(a).
Confederate’s argument is based on a faulty premise and does not invalidate
Terny’s claim for an advancement. First of all, the “fact” that Terny challenged
Chambers’ actions in attempting unilaterally to add Board members after Terny acquired
his stock and was on the Board may not be controlling as to Chambers’ authority to act
before Terny was a major stockholder and at a time when the Board was configured
differently — that issue would require further development. In addition, there is ample
evidence, including pleadings filed with this court and filings with the SEC, which
confirm Confederate’s belief that Terny was appointed to the Board. Therefore, even if
his appointment was somehow defective, it is possible that an argument could be made
that the appointment was subsequently ratified. Finally, Confederate may well believe
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that a summary proceeding under § 225(a) is the best way to resolve the parties’ dispute,
but the bottom line is that it did not bring such an action. Based on the facts presented to
this court, there is sufficient evidence that Terny was a director so that his claim for
advancement should proceed.
The parties do dispute if and when Terny resigned from his position as a director.
While Confederate argues that Terny’s January email constituted his resignation,3 Terny
points to the fact that Confederate continued to treat him as a member of the Board after
his email, he attended a Board meeting in March, Confederate did not purport to accept
his resignation until April, and the company did not report his “resignation” in filings
with the SEC until November — thereby negating any conclusion that he resigned in
January, if at all. This issue does not need to be resolved at this juncture. First of all,
Delaware law and Confederate’s Articles of Incorporation provide for advancement of
expenses to former directors as well as to those currently holding that position. In
addition, the Delaware legislature has determined that the director’s agreement to repay
3

Confederate alleges that Terny’s “electronic resignation was proper and it was effective
upon receipt” pursuant to Del. Code Ann. tit. 8, § 141. (Compl. ¶ 39). That statute provides in
part that
any director may resign upon notice given in writing or by electronic
transmission to the corporation. A resignation is effective when the
resignation is delivered unless the resignation specifies a later date or an
effective date determined upon the happening of an event or events.
Del. Code Ann. tit. 8, § 141(b). The issue will have to be resolved by a jury. The email was not
directed to the corporation but rather was to “Matt.” Further, it appears to contemplate actions
in the future (e.g., to “publicly resign”) and there are facts which indicate that any resignation was
not accepted. Thus, at this juncture, the court cannot find that Terny resigned on January 5, 2010
as a matter of law.

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amounts advanced if it is ultimately determined that he is not entitled to be reimbursed
provides sufficient safeguard for the corporation in the event of overpayments. See
Ridder, 47 F.3d at 87 (obligation to repay eliminates any argument that the merits of a
claim should be decided prior to advancements being made). For present purposes, the
record is clear that Terny did, in fact, serve as a director of the company and, therefore, is
of the class who qualifies for advancement of fees if the other criteria are satisfied.
The Claims Against Terny
The fact that Confederate has sued Terny for allegedly harming the company does
not preclude Terny from receiving advancements. The “right to advancement does not go
away simply because the entity from which advancement is sought is alleging that the
[defendant] has committed perfidious acts against it.” DeLucca, 2006 WL 224058, at
*11. However, Confederate argues that Terny is not entitled to any advances since he has
not been sued as a director, but rather in his capacity as a shareholder or consultant. (Pl.
Opp. at 3). While this argument may limit the scope of work for which Terny is entitled
to advancement, it does not eliminate the right to advancements in their entirety.
Terny is only entitled to seek advancement of those fees incurred in connection
with proceedings which are “by reason of the fact” that he was a director of Confederate.
See Homestore, 888 A.2d at 214 (recognizing the need for a “nexus or causal connection”
between the claim against the officer and “once’s official corporate capacity”). In
addition, “all contracts providing for the advancement of expenses are implicitly limited
to those that are reasonably incurred.” Id. at 218 (citation omitted). Among the
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consequences of this limitation is that Terny is only entitled to the advancement of fees
for which he ultimately may be entitled to indemnification. See Underbrink, 2008 WL
2262316, at *6. Finally, “[a]lthough advancement is generally associated with the
defense of claims, there are instances in which affirmative claims, asserted as part of a
defensive strategy involving the same dispute, may be funded through advancement.”
Duthie v. CorSolutions Med., Inc., C.A. No. 3048-VCN, 2008 WL 4173850, at *1 (Del.
Ch. Sept. 10, 2008 ) (unpub. op.) (citation omitted). Applying these principles to the
instant case compels the conclusion that while Terny is entitled to advancement of his
reasonable legal fees in defense of the claims brought against him as a director, a number
of Confederate’s claims and Terny’s counterclaims clearly are not related to his status as
a director, and raise separate factual and legal issues for which he is not entitled to
advancement. See Fasciana, 829 A.2d at 163 (plaintiff only entitled to advancement of
fees relating to limited claim brought against him as an agent for the company).
A fair reading of the Complaint establishes that it is based in large part on actions
which Terny took in his role as a director. While Confederate challenges Terny’s
authority to have taken such actions after his January “resignation,” the merit of that
position will have to await the trial on the merits. For present purposes, it is sufficient
that there is a nexus between Terny’s role as a director and many of Confederate’s
claims. For example, Confederate challenges Terny’s actions at the March 16, 2010
meeting, which was noticed as a Board of Directors meeting. (See Compl. p. 2; CC
¶ 52). Confederate claims that Terny was trying to “deadlock” the company — obviously
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referring to actions he took in his official corporate capacity. (Compl. ¶ 8). Confederate
also challenges actions Terny took while allegedly “falsely claiming” that he was a
director of the company and all of Count VII, alleging fraud, is based on actions Terny
took while holding himself out as a director. (Compl. at p. 3, ¶¶ 37-54). The declaratory
judgment claims (Counts I and II) seek orders relating to the parties’ rights and obligations under “the subject agreements” as well as the “corporate documents.” (See Compl.
Counts I and II). Finally, in Count IV, Confederate alleges, in part, that Terny breached
his “contract” to resign as a director and to remit his stock to the company. (See Compl.
¶¶ 21-23). Thus, there is clearly a nexus between Terny’s role as a director and the
claims raised by Confederate in Counts I, II, IV and VII of the Complaint.
On the other hand, there are a number of claims, as well as Terny’s counterclaims,
which do not relate to Terny’s status as a director, and involve such factually and legally
distinct situations that it would be inappropriate to require Confederate to advance funds
for the defense or prosecution of such claims. Thus, in Counts III and V of its Complaint,
Confederate alleges that Terny breached the Consulting Agreement by failing to bring in
business (Compl. ¶¶ 16-17); in Count IV, Confederate alleges that Terny breached his
January 5, 2010 agreement to quit as a consultant and give back his shares4 (id. at ¶¶ 2125); and, in Count VI, Confederate claims that Terny fraudulently induced it to enter into

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This count raises the issue as to whether Terny resigned as a director and/or as a
consultant. A jury may find that he resigned one and not the other, or both, or neither position.
This court expresses no opinion as to whether the January 5th email constitutes an enforceable
contract in any respect.

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the Consulting Agreement. (Id. at ¶¶ 31-36). As detailed above, all of Terny’s counterclaims, with the exception of his demand for the payment of expenses, are based on his
status as a consultant or shareholder. This is not a situation where the counterclaims are
so entwined with the direct claims that “it is neither practicable nor reasonable to attempt
to draw some line” between the two in determining which fees should be advanced.
Contrast Duthie, 2008 WL 4173850, at *1 (plaintiffs entitled to advancement of fees
necessary to defend against fraud and breach of contract claims, as well as claims in
connection with their affirmative contention that public statements concerning such
claims constituted defamation). Rather, the claims are “sufficiently discrete that experienced counsel will know when they are addressing it[.]” Fasciana, 829 A.2d at 176.
This court acknowledges that as a general statement “[a]dvancement is not the
proper stage for a detailed analytical review of the fees, whether in terms of the strategy
followed or the staffing and time committed.” Duthie, 2008 WL 4173850, at *2. Moreover, “some level of imprecision will be involved in the retrospective” analysis of which
fees are properly advanced. Fasciana, 829 A.2d at 177. Nevertheless, given that a large
portion of this litigation relates to claims for which Terny is not entitled to recovery, he
must review his bills and submit only those that are related to the recoverable claims, in
accordance with the order below.
ORDER
This court adopts the procedure ordered by the Fasciana court, 829 A.2d at 177,
and the Duthie court, 2008 WL 4173850, at *2. Thus, Terny’s attorneys shall submit
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bills for claimed expenses to counsel for Confederate with enough detail so that
Confederate’s counsel can determine if the charges are compensable in accordance with
this decision. The bills shall be accompanied by Terny’s counsel’s sworn affidavit
certifying his good faith, informed belief that the identified litigation expenses relate
solely to activities relating to those allegations for which Terny is owed advancement, in
accordance with this decision. Terny’s subsequent advancement requests shall be
submitted in this format as well.
Confederate shall, in turn, identify those fees which it asserts fall outside the scope
of appropriately advanced fees, and plaintiff’s counsel shall certify by sworn affidavit his
good faith belief that the advancement of such fees is not appropriate.
Fees that are not in dispute shall be paid promptly. If the parties cannot resolve
any outstanding dispute, any party may file a motion with this court seeking to have the
dispute resolved. This court shall determine in connection with ruling on any such
dispute whether an award of fees to the prevailing party is appropriate.
IV. CONCLUSION
For all the reasons detailed herein, the Defendant’s “Rule 57 Motion Seeking
Speedy Declaration Over Advancement of Fees” (Docket No. 122) is ALLOWED IN
PART and DENIED IN PART. The parties shall proceed in accordance with the Order
detailed herein.

/ s / Judith Gail Dein
Judith Gail Dein
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United States Magistrate Judge

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