Background of the case
In Cantor Fitzgerald, LP v. David Demos, C.A. No. 2019-0193-MTZ (Del. Ch. Apr. 28, 2020; filed June 1, 2020) (Transcript), the plaintiff, Cantor Fitzgerald, LP (Cantor) brought suit against a former limited partner and trader, David Demos (Demos), seeking a declaration that Cantor had no duty under its limited partnership agreement (the Agreement) to indemnify Demos for legal expenses incurred in defending against federal securities fraud charges. Demos asserted counterclaims for breach of contract, promissory estoppel, indemnification, and breach of the implied covenant of good faith and fair dealing.
The Agreement required Cantor to indemnify limited partners for losses, including attorneys’ fees, arising out of authorized partnership business. The Agreement provided the general partner with “sole and absolute discretion” to deny indemnification for losses arising from an act or omission that, in the opinion of the general partner, constituted a material breach of the Agreement (regardless of whether material breach was found by a court), willful misconduct, or any violation of any policy or procedure of the partnership. Another provision in the Agreement prohibited limited partners from taking action that would harm the partnership, which the general partner was authorized to determine in good faith and in its sole and absolute discretion.
At issue in the case was the general partner’s denial of Demos’ requests for indemnification for criminal claims brought against him in connection with allegedly manipulating and falsifying price disclosures in residential mortgage-backed securities deals. Demos initially sought indemnification prior to his indictment, and again after he was acquitted of the criminal charges. Despite acquittal, Demos admitted some wrongdoing in connection with the charges. The general partner denied both indemnification requests on grounds that Demos engaged in willful misconduct, violated partnership policies, and took actions that harmed the partnership (e.g., involving the partnership in governmental investigations and causing loss of business and reputational damage to the partnership).
Cantor moved for summary judgment on all claims and counterclaims, arguing that there was no issue of material fact and that the indemnification denial was proper because Demos breached the Agreement and violated partnership policies. Demos argued that the indemnification provision was ambiguous and that summary judgment was foreclosed by factual disputes (e.g., whether the general partner’s reasons for denial were pretextual).
The Court of Chancery’s holding
In a bench ruling, the court granted Cantor’s motion. The court concluded, among other things, that the general partner had sole discretion under the Agreement and Delaware partnership law to deny indemnification once the general partner concluded that Demos’ conduct breached his obligation not to harm the partnership. The court noted that the general partner’s denial of indemnification was “final and binding” under the Agreement because it was made in good faith, regardless of whether the general partner’s determination was incorrect. The court also noted that the determination was final and binding regardless of whether the general partner had also asserted a pretextual basis for denial because the general partner offered at least one explicable reason, other than bad faith, for the determination.
The court’s decision emphasized that the Delaware Revised Uniform Limited Partnership Act (DRULPA) gives maximum effect to freedom of contract. Unlike section 145 of the Delaware General Corporation Law, which creates mandatory indemnification rights for corporate indemnitees in some circumstances and bars indemnification in others, section 17-108 of DRULPA defers completely to the limited partnership to create and delimit rights and obligations with respect to indemnification and advancement (which otherwise do not exist by default under DRULPA).
The court also reiterated a well-established principle of Delaware law that advancement and indemnification disputes are particularly appropriate for resolution on a motion for summary judgment. The relevant question in proceedings for which advancement or indemnification is sought turns on the application of the terms of the limited partnership agreement (or other similar corporate instrument) setting forth the purported right to advancement or indemnification and the pleadings.
Key takeaways
- Delaware law gives limited partnerships wide freedom to contract for their own advancement and indemnification scheme for partners.
- Where plain terms of a limited partnership agreement delegate sole discretion to a general partner to deny indemnification based on a good-faith determination that a potential indemnitee’s conduct breached the partnership’s policies, Delaware courts will give deference to, and will not upend, such determination, even if it was incorrect.
- Advancement and indemnification cases are particularly appropriate for resolution on a motion for summary judgment because they principally involve the question of whether claims pled in a complaint trigger a right to advancement or indemnification under a corporate instrument, such as a partnership agreement or corporate bylaws.
Client Alert 2020-583
