Judge Brian Stagner
The Business Court has denied a former company director’s motion to compel the advancement of defense costs in a lawsuit brought by entity to whom the director was obliged to transfer his membership units.
Energy Founders Fund, LP v. Phillip Daskevich and Cris Curnutt Daskevich (No. 2026 Tex. Bus. 17) arose from a dispute over whether a company agreement entitled a director’s claim to advancement of defense costs. Defendant Daskevich moved to compel advancement of the fees for his claims against third-party defendant Gage Western.
In an opinion by Judge Stagner, the court denied the motion. First, the court examined whether Gage Western, of which Daskevich was both a member and director, was governed by a company agreement. The answer was yes, and that agreement included provisions for indemnification and advancement of expenses for directors. Specifically, the agreement required Gage to “pay a director’s defense costs as they are incurred, subject to repayment if it is later determined the director is not entitled to indemnification.” But there are two conditions: (1) the director must provide a written undertaking to repay any amounts advanced but unowed; and (2) the board must determine that the director is financially able to repay those amounts.
In this case, Daskevich voted against the majority of Gage’s diretors in the approval of the sale of Gage and the transfer of membership units under the agreement’s “drag-along” provisions. After the board approved the deal, counsel for Plaintiff Energy Founders and other members of Gage sent Daskevich correspondence “questioning his conduct and, at times, characterizing that conduct as inconsistent with his duties as a director. They also warned of potential legal action, including the possibility of derivative claims.” In the event, Daskevich refused to transfer his units. Energy Founders sued Daskevich and his wife. On the same day, Gage adopted an amended company agreement eliminating the board of directors and removing the indemnification and advancement of expenses provisions. When Daskevich requested advancement, Gage declined.
As the court observed, “advancement operates before any determination of liability,” as opposed to indemnification….Courts therefore treat advancement as a separate contractual right and enforce it according to its terms, without regard to the merits of the underlying claim.” But which company agreement applied here? Daskevich urged the earlier, Gage the later. The court sided with Daskevich on this question, holding that the amended contract should not operate retroactively to “alter the parties’ bargain after the fact.” Since the claims against Daskevich arose from conduct occurring during the prior company agreement, that agreement governed.
Next up the court had to determine whether the conditions precedent to advancement were either satisfied or excused. As noted above, the agreement imposed two such conditions: a written undertaking agreeing to repay amounts later determined not to be owed and a board determination of the director’s ability to repay those expenses. Daskevich provided the required undertaking, but on the same day Plaintiffs filed suit, Gage adopted the new agreement and eliminated the board. Since Daskevich couldn’t satisfy the second condition by virtue of the board’s elimination, Gage prevented “the occurrence of a condition precedent upon which its liability under a contract depend[ed]” and could “not rely on the nonoccurrence to escape liability.” Daskevich’s non-performance was thus excused.
But Daskevich stubbed his toe on the dispositive issue of whether Plaintiffs’ claims against Daskevich were brought “by reason” of his service on Gage’s board. Looking to the eight corners of the company agreement and the petition, the court observed that the adancement provision was narrower than the indemnification provision, in that it applied only to “claims” as opposed to “claims or threats thereof.” The court read this provision to limit the advancement provision to causes of action actually asserted in litigation, that is, pleaded claims. Plaintiffs pleadings did not “target conduct undertaken by Daskevich in his capacity as a director or in the discharge of any director-level duties, but instead arise from his alleged refusal, in his capacity as a member, to transfer—or to acknowledge the transfer of—his ownership units.” Those claims thus “sound in shareholder rights and contractual obligations—not fiduciary conduct.” In short, Plaintiffs’ lawsuit had nothing to do with Daskevich’s service as a director of Gage. Motion denied.
