COURT OF CHANCERY
OF THE
STATE OF DELAWARE
D ONALD F. PARSONS, J .
R New Castle County Courthouse
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734
Date Submitted: September 15, 2014
Date Decided: October 6, 2014
Philip A. Rovner, Esq. Brian M. Rostocki, Esq.
Jonathan A. Choa, Esq. Reed Smith LLP
Potter Anderson & Corroon LLP 1201 N. Market St., Suite 1500
1313 N. Market Street Wilmington, DE 19801
Wilmington, DE 19801
RE: Harry Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
Dear Counsel:
This is an advancement proceeding based on related litigation in
Pennsylvania. On May 29, 2014, this Court issued a memorandum opinion (the
“Exceptions Opinion”) addressing the exceptions of defendant Milso Industries
Corporation (“Milso”) to the Second Report of the Special Master on a number of
disputed advancement issues.1 The Court rejected most of Milso‟s arguments, but
partially agreed with Milso that for fees and expenses relating to counterclaims to
1
Pontone v. Milso Indus. Corp., 2014 WL 2439973 (Del. Ch. May 29, 2014)
(“Exceptions Op.”).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 2
be advanceable, the counterclaim must be compulsory. As a result, the Court held
that two of the counterclaims asserted by the plaintiff, Harry Pontone (“Pontone”),
in the Pennsylvania litigation and deemed advanceable by the Special Master, in
fact were not advanceable. Pontone timely sought reargument on the Exceptions
Opinion. On September 3, 2014, the Court denied Pontone‟s motion for
reargument (the “Reargument Opinion”).2
On September 15, each side moved for certification of an interlocutory
appeal.3 On September 25, both parties timely opposed the other side‟s motion.4
For the reasons set forth below, the Court grants both motions and certifies this
matter for an interlocutory appeal.
I. Contentions of the Parties
In resolving the issues presented in the Exceptions Opinion, this Court
analyzed the Delaware Supreme Court‟s decision in Citadel Holding Corp. v.
2
Pontone v. Milso Indus. Corp., 2014 WL 4352341 (Del. Ch. Sept. 3, 2014)
(“Rearg. Op.”).
3
Mot. for Certification of Interlocutory Appeal (“Pl.‟s Mot.”); Def. Milso
Indus. Corp.‟s Mot. for Certification of an Interlocutory Appeal (“Def.‟s
Mot.”).
4
These documents are cited as Defendant‟s Opposition (“Def.‟s Opp‟n”) and
Plaintiff‟s Opposition (“Pl.‟s Opp‟n”), respectively.
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 3
Roven.5 The Exceptions Opinion found that Roven established a two-pronged test
for determining whether counterclaims asserted by a party seeking advancement
are “in defense” of the affirmative claims and thus advanceable: (1) the
counterclaims must be “necessarily part of the same dispute” as the affirmative
claims; and (2) the counterclaims must be “advanced to defeat, or offset” those
affirmative claims.6 Both sides contend that, in different ways, the Court erred in
interpreting Roven. Pontone seeks certification as to the first prong of the
identified test; Milso seeks certification as to the second prong.
Both sides set forth similar arguments in support of certification. Each side
asserted that, for their client, the Exceptions Opinion decided a substantial issue,
determined a legal right, and satisfied the same two sub-criteria for certification
specified under Supreme Court Rule 42(b)(i)-(v). In opposition, Pontone contends
that Milso fails to meet any of the Rule 42 criteria. Milso, for its part, opposes
Pontone‟s request for certification, arguing that he has failed to meet any of the
sub-criteria under Rule 42(b)(i)-(v). Interestingly, each side alleges that it has
satisfied Rule 42(b)(i) via Rule 41(b)(ii): conflicting trial court decisions on the
5
603 A.2d 818 (Del. 1992).
6
Id. at 824.
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 4
issue. Both parties, however, deny the existence of a jurisprudential split as to the
Roven prong on which their opponent seeks certification. At the risk of
oversimplification, Pontone contends that there are a series of errant Court of
Chancery decisions on prong one, but not on prong two, while Milso avers that the
cases conflict on prong two, but not on prong one.
II. Rule 42 Requirements
Supreme Court Rule 42 governs interlocutory appeals. Under Rule 42(b), to
meet the criteria for an interlocutory appeal the opinion of the trial court must: (a)
determine a substantial issue; (b) establish a legal right; and (c) meet at least one of
the five additional sub-criteria enumerated in Rule 42(b)(i)-(v). “Applications for
interlocutory review are addressed to the sound discretion of [the Supreme] Court
and are granted only in exceptional circumstances.”7 One factor the Supreme
Court may consider in exercising its discretion is the opinion of the trial court.8
A. Substantial Issue
An order satisfies the substantial issue requirement when it decides a main
question of law relating to the merits of the case, as opposed to some collateral
7
State Farm Mut. Auto. Ins. Co. v. Patterson, 2008 WL 5008565, at *1 (Del.
Nov. 26, 2008).
8
Del. Supr. Ct. R. 42(d)(v).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 5
matter, such as a discovery dispute.9 Pontone spends approximately forty percent
of his opposition arguing that Milso has failed to establish the existence of a
“substantial issue.” In this regard, Pontone misinterprets the standard. The focus
is not on the merits of Milso‟s legal argument, but rather on whether the trial
court‟s order determined a substantial issue.10 This case involves advancement
issues. The Exceptions Opinion made a determination about a disputed and
uncertain legal question pertaining to the propriety of Pontone‟s advancement
requests. I conclude, therefore, that the substantial issue criterion is met in the case
of both Pontone‟s and Milso‟s requests for certification.
B. Legal Right
“A legal right is established when a court determines an issue essential to the
positions of the parties regarding the merits of the case, i.e., „where one of the
9
See, e.g., In re CNX Gas Corp. S’holders Litig., 2010 WL 2705147, at *13
(Del. Ch. July 5, 2010) (“An interlocutory ruling determines a „substantial
legal issue‟ for purposes of Rule 42(b) if it „relate[s] to the merits of the
case,‟ not to collateral matters such as discovery.”) (quoting Castaldo v.
Pittsburgh-Des Moines Steel Co., 301 A.2d 87, 87 (Del. 1983)); Sprint
Nextel Corp. v. iPCS, Inc., 2008 WL 2861717, at *1 (Del. Ch. Sept. 26,
2007) (“The „substantial issue‟ requirement is met when an interlocutory
order decides a main question of law which relates to the merits of the case,
and not to collateral matters.”).
10
“No interlocutory appeals will be . . . accepted by this Court unless the order
of the trial court determines a substantial issue . . . ” Del. Sup. Ct. R. 42(b)
(emphasis added).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 6
parties‟ rights has been enhanced or diminished as a result of the order.‟” 11
Pontone argues that the Exceptions Opinion did not establish a legal right because
Milso‟s bylaws require Milso to advance Pontone‟s fees; thus, Pontone contends
that the legal obligation to advance Pontone‟s fees existed all along and the
Exceptions Opinion did not affect that obligation. The Court rejects this argument.
Increasing or decreasing the parties‟ obligations with respect to the contested
issue—advancement of fees—establishes a legal right. The parties disputed the
extent of Milso‟s advancement obligation. Depending on whether viewed through
the eyes of Milso or Pontone, the legal obligation to advance fees and the legal
right to receive advancement was either expanded or diminished by the Exceptions
Opinion. In either case, the legal right criterion is satisfied.
C. The Five Additional Criteria
Not infrequently, a party‟s sole legitimate basis for proceeding on an
interlocutory appeal will be Rule 42(b)(i). In such a case, even if a party satisfies
factors (a) and (b) described above, it also must meet the requirements for
certification of a question of law under Supreme Court Rule 41. Rule 41(b)
11
Sprint Nextel, 2008 WL 2861717, at *1 (quoting Donald J. Wolfe, Jr. &
Michael A. Pittenger, CORPORATE AND COMMERCIAL PRACTICE IN THE
DELAWARE COURT OF CHANCERY § 14-4(b) (2008)).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 7
requires a showing, with particularity, of the “important and urgent reasons for an
immediate determination” by the Delaware Supreme Court. Illustrative reasons are
set forth in Rule 41(b)(i)-(iii). Here, the parties rely on Rule 41(b)(ii), which
recognizes that one reason for certification is that: “The decisions of the trial courts
are conflicting upon the question of law.”
The Exceptions Opinion addressed both prongs of the Roven test.12 As to
the first prong, the Exceptions Opinion stated that “Delaware courts repeatedly
have held that the baseline requirement for a counterclaim to be advanceable is that
it qualify as compulsory.”13 As to the second prong, the Exceptions Opinion
rejected Milso‟s argument favoring a more narrow understanding of the standard
for finding counterclaims advanceable.14 Both parties primarily dispute the
meaning of a decision by Chief Justice Strine, then writing as a Vice Chancellor, in
Zaman v. Amedeo Holdings, Inc.15 For his part, Pontone argues the Supreme
Court‟s decision in Roven never required that counterclaims be compulsory to be
advanceable. Instead, he asserts that Zaman “grafted onto the controlling standard
12
Exceptions Op. at *3-7
13
Id. at *4.
14
Id. at *4-7.
15
2008 WL 2168397 (Del. Ch. May 23, 2008).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 8
enunciated in Roven a new „compulsory counterclaim‟ requirement.”16 Zaman‟s
holding, according to Pontone, “appears to have been influenced by the Supreme
Court‟s cursory analysis of Roven‟s counterclaims.” 17 Milso, on the other hand,
interprets Zaman as applying a narrower standard for the advancement of
counterclaims. Milso also characterizes Zaman as part of a larger chain of
purportedly conflicting Court of Chancery opinions18 that collectively provide only
muddled guidance on the proper standard for the advanceability of counterclaims.
Despite the parties‟ apparent agreement that a conflict may exist between
Zaman and Roven, each side denies the existence of any material conflict when
opposing their adversary‟s motion for an interlocutory appeal. Milso, for instance,
argues that Roven and the later Court of Chancery decisions consistently hold that
counterclaims must be compulsory to be advanceable. The real conflict, according
16
Pl.‟s Mot. 12.
17
Id. at 13.
18
Milso relies on the following cases in addition to Zaman: Paolino v. Mace
Sec. Int’l, Inc., 985 A.2d 392 (Del. Ch. 2009); Sun-Times Media Gp., Inc. v.
Black, 954 A.2d 380 (Del. Ch. 2008); and Reinhard & Kreinberg v. Dow
Chem. Co., 2008 WL 868108 (Del. Ch. Mar. 28, 2008). Milso further
argues that the Supreme Court adopted Zaman‟s narrower interpretation of
Roven in Baker v. Impact Holding, Inc., 2011 WL 2118979 (Del. May 26,
2011). This Court previously rejected the latter argument. Exceptions Op.
at *6-7.
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 9
to Milso, is between “Pontone‟s own subjective interpretation of Roven” and the
rest of Delaware precedent.19 Conversely, Pontone stands by his argument that
Roven controls, and that, at least as Pontone understands it, Roven forecloses
Milso‟s position. As a result, Pontone contends that “[w]hether subsequent
decisions misapply or reject such precedent does not create a conflict.”20
Pontone and Milso each seek certification of an interlocutory appeal, but for
different parts of the Roven standard. Taken together, the Court faces cross
motions for certification of an interlocutory appeal that collectively seek
clarification by the Supreme Court of the entire Roven test. When it serves their
interests, both parties to this dispute recognize the existence of tension in the case
law on this legal issue. Likewise, the Exceptions Opinion expressly acknowledged
at least part of the potential conflict,21 and the Reargument Opinion referenced the
same possibility.22 Based on these facts and circumstances, I conclude that the
19
Def.‟s Opp‟n 3.
20
Pl.‟s Opp‟n 11.
21
Exceptions Op. at *6 (“At the outset, however, I acknowledge that Zaman
can be read to suggest a standard for the advancement of counterclaims that
appears somewhat more restrictive than the standard used in Roven.”).
22
Rearg. Op. at *2 (“Subsequent cases from the Court of Chancery potentially
added an interpretive gloss on the Supreme Court‟s [Roven] standard.”).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 10
requirements of Supreme Court Rule 42(b)(i) are satisfied here by way of Rule
41(b)(ii), and that the parties before me, as well as corporate defendants and their
directors and officers generally, would benefit from greater clarity on the issue of
when counterclaims are advanceable.
This brings me to my final point. Both parties argue, as an alternative
ground for meeting one of the five sub-criteria of Rule 42(b)(i)-(v), that an
interlocutory appeal here would serve considerations of justice.23 As with the
previous issues, each party argues that certifying their own interlocutory appeal
would serve the interests of justice, but certifying the other party‟s interlocutory
appeal would not. Both parties highlight Delaware‟s public policy of promoting
prompt resolution of disputes about advancement issues. They also snipe at the
justifications proffered by their adversary and suggest that only their issues deserve
interlocutory consideration.
In my view, the parties to this action have litigated to a conclusion a legal
dispute as to the proper standard for determining when a counterclaim is
advanceable, depending also, of course, on the language of the operative corporate
documents. One side or the other may have a slightly stronger argument that only
23
Del. Sup. Ct. R. 42(b)(v).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 11
their issue regarding one of the two prongs of the Roven standard merits an
interlocutory appeal. If the Roven standard is to be considered on such an appeal,
however, I am convinced that the interests of justice would be served best if both
parties‟ issues were considered at the same time. Thus, I find that certifying this
interlocutory appeal in fact would serve the interests of justice.
Advancement cases can be quite contentious, time-consuming, and
expensive. A decision clarifying when counterclaims are advanceable would avoid
unnecessary litigation and resolve at least some potential advancement disputes
before they occur. As a practical matter, this problem seems capable of repetition,
but easily could evade review because parties frequently settle these types of cases
before completing a final and appealable accounting of the money owed in either
direction at the indemnification phase. Thus, an interlocutory appeal may be the
most effective method of ensuring resolution of the important questions the parties
have moved to certify.
III. CONCLUSION
For the reasons stated in this Letter Opinion, I conclude that both parties
have sustained their burdens of showing that the Exceptions Opinion and the
Reargument Opinion satisfy the requirements of Supreme Court Rule 42 for an
interlocutory appeal. Accordingly, I grant Pontone‟s motion, and Milso‟s
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 12
motion, for certification of an interlocutory appeal to the Supreme Court of
Delaware from this Court‟s Opinion and Order of May 29, 2014, and September
3, 2014, constituting the Excluded Counterclaim Advancement Decision.
IT IS SO ORDERED.
Sincerely,
/s/ Donald F. Parsons, Jr.
Donald F. Parsons, Jr.
Vice Chancellor
DFP/ptp