Reed Smith Client Alerts

In Brick v. The Retrofit Source, LLC, No. 311, 2020 (Del. Mar. 26, 2021) (Order), the Delaware Supreme Court recently affirmed the Court of Chancery’s decision that a plaintiff, who served as an officer of the operating limited liability company and board member of the managing limited liability company, was not entitled to advancement of legal expenses incurred in connection with conduct solely in his officer capacity.

Nathan Brick (the plaintiff) served as chief operating officer of The Retrofit Source, LLC (the Operating LLC). The plaintiff also served as a member of the board of managers (Holding LLC Board) of the sole owner and manager of the Operating LLC, TRS Holdco, LLC (the Holding LLC).

The issue before the Delaware Court of Chancery in Brick v. The Retrofit Source, LLC, 2020-0254-KSJM (Del. Ch. Aug. 18, 2020) (Order), and later the Delaware Supreme Court, arose from a discovery by the Operating LLC’s officers that the company was running a “double-invoicing scheme,” which was causing it to underpay its duties to U.S. Customs and Border Protection (Customs). The officers subsequently reported the underpayment of duties to Customs and initiated an internal investigation at the Operating LLC. The Holding LLC Board terminated the plaintiff’s employment with the Operating LLC after the investigation revealed the plaintiff as a suspect who engaged in the invoicing scheme. The plaintiff also resigned as a member of the Holding LLC Board.

In response to the investigation and the plaintiff’s termination/resignation from the companies, the plaintiff submitted a letter to the companies demanding advancement for his legal fees and expenses. The companies argued that the plaintiff was not entitled to advancement or indemnification and that they reserved all rights and defenses with respect to any such claims.

The plaintiff filed an action for advancement under the Holding LLC Operating Agreement (the LLC Agreement), and the companies jointly responded through counsel that they did not believe the plaintiff was entitled to any advancement or indemnification. Shortly thereafter, the Holding LLC Board held a formal meeting and passed a board resolution denying the plaintiff’s advancement and indemnification demand.