Patrick Mooney, M.D. v. Echo Therapeutics, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

:
PATRICK MOONEY, M.D., :
: C.A. No. 10054-VCP
Plaintiff, :
:
v. :
:
ECHO THERAPEUTICS, INC., :
:
Defendant. :
:

MEMORANDUM OPINION

Date Submitted: January 15, 2015
Date Decided: May 28, 2015

Barry M. Klayman, Esq., COZEN O‟CONNOR, Wilmington, Delaware; Edward S.
Mazurek, Esq., THE MAZUREK LAW FIRM, LLC, Philadelphia, Pennsylvania;
Attorneys for Plaintiff, Patrick Mooney, M.D.

Gregory B. Williams, Esq., Carl D. Neff, Esq., FOX ROTHSCHILD LLP, Wilmington,
Delaware; James A. Matthews, III, Esq., FOX ROTHSCHILD LLP, Philadelphia,
Pennsylvania; Attorneys for Defendant, Echo Therapeutics, Inc.

PARSONS, Vice Chancellor.
 This request for advancement asks the Court to determine the defendant

corporation‟s advancement obligations with respect to six categories of attorneys‟ fees.

The various proceedings for which the plaintiff seeks advancement arise out of the

plaintiff‟s termination as an officer and employee of the defendant corporation and the

contentious litigation that followed. The parties essentially submitted this matter on the

papers. For the reasons that follow, the plaintiff is entitled to advancement for some, but

not all, of the categories for which he requests it.

I. FACTUAL OVERVIEW1

Defendant, Echo Therapeutics, Inc. (“Echo,” or the “Company”), is a Delaware

corporation with its principal place of business in Philadelphia, Pennsylvania. Plaintiff,

Dr. Patrick Mooney (“Dr. Mooney”), served as Echo‟s CEO and Chairman of the Board

of Directors from sometime in 2007 through August 2013. Non-party Elizabeth Mooney

(“Mrs. Mooney”) is Dr. Mooney‟s wife.

On January 17, 2013, Echo responded to an investigation by the Financial Industry

Regulatory Authority (“FINRA”) into suspicious trading in Echo‟s stock (generally, the

“FINRA Investigation”). This is the first category for which Dr. Mooney requests

advancement. In August 2013, the Company commenced an internal investigation into

alleged misconduct by Dr. Mooney (generally, the “Internal Investigation”). The parties

vigorously dispute the justification for the Internal Investigation. While Echo maintains

1
The facts recited herein are drawn from the parties‟ Joint Stipulation of Facts
(“J.S.”) and any exhibits thereto, which will be cited as “JX [#].”

1
that the investigation was bona fide, Dr. Mooney dismisses it as a sham.2 The Internal

Investigation is the second advancement category.

On September 27, 2013, Echo terminated Dr. Mooney, purportedly for cause. The

Mooneys together filed suit against Echo and others in a case captioned Mooney, et al. v.

Grieco, et al.,3 in the Philadelphia County Court of Common Pleas (the “Philadelphia

Court”) on February 4, 2014. In that case, Dr. Mooney brings claims for breach of his

employment agreement, violation of various wage and payment statutes, defamation, and

loss of consortium (generally, “Mooney I”). The defendants in Mooney I, which include

Echo, filed preliminary objections—Pennsylvania‟s equivalent of a motion to dismiss—

on March 24, 2014 as to several of Dr. Mooney‟s claims (the “Preliminary Objections”).4

Two days later, Echo filed its Answer, New Matter and Counterclaims, which included

four counterclaims (the “Original Counterclaims”) and ten affirmative defenses.5 The

Original Counterclaims against Dr. Mooney included extensive allegations of

misconduct, the content of which fairly can be described as salacious. Dr. Mooney first

requested advancement as to the Original Counterclaims on March 31, 2014.6 The

2
J.S. ¶ 6.
3
Case ID 140200251.
4
JX 4.
5
JX 6.
6
Although not directly relevant here, Dr. Mooney‟s requests for advancement
engendered extensive communications between Dr. Mooney and Echo. Some of
those communications involved Dr. Mooney‟s original refusal to submit an
undertaking to repay, which is required under 8 Del. C. § 145(e). He eventually

2
Philadelphia Court denied the defendants‟ Preliminary Objections on May 19, 2014. The

defendants in Mooney I also sought to have the case reassigned to a different case

management track, but that request was denied as well.

On June 18, 2014, Echo and the other defendants in Mooney I filed an Amended

Answer with New Matter and Counterclaim (the “Amended Answer”).7 The Amended

Answer includes thirteen affirmative defenses and one condensed and revised

counterclaim (the “Amended Counterclaim”). Only two of the affirmative defenses are

relevant here (the “Amended Affirmative Defenses”). By this amended pleading, which

removed the specific factual allegations of misconduct by Dr. Mooney, Echo admittedly

sought to moot Dr. Mooney‟s advancement claims.8 The Mooney I Original

Counterclaims make up the third advancement category, and the Amended Counterclaim

and Amended Affirmative Defenses collectively comprise the fourth advancement

category.

On July 17, 2014, the Mooneys commenced a second lawsuit in the Philadelphia

Court captioned Mooney, et al. v. Burke, et al. (“Mooney II”).9 In Mooney II, the

plaintiffs allege wrongful use of civil proceedings by Echo and others in Mooney I.

did submit such an undertaking. Another point of contention between the parties
concerned Dr. Mooney‟s demand that Echo provide a large lump sum payment to
finance any advancement going forward. Dr. Mooney argued that such a payment
was necessary based on Echo‟s precarious financial condition at the time. He later
dropped that request, purportedly because Echo had received a capital infusion.
7
JX 40 [hereinafter “Amended Answer”].
8
JX 41.
9
Case ID 140701974.

3
According to Dr. Mooney, he felt compelled to initiate this second lawsuit to “vindicate

his reputation” against the now-abandoned allegations that were made in the Original

Counterclaims in Mooney I.10 Mooney II is the fifth advancement category. Finally, Dr.

Mooney seeks to recover fees on fees that are at least commensurate with his success in

this action, which is the sixth disputed category.

II. PROCEDURAL HISTORY

Dr. Mooney filed his Verified Complaint in this action (the “Complaint”) on

August 21, 2014. Echo moved to dismiss and the parties fully briefed that motion by

November 3. In a somewhat unusual tactic, Dr. Mooney then moved for a temporary

restraining order (“TRO”) and preliminary injunction requiring Echo to pay him the

advancement he claimed. Echo opposed that motion. On December 24, 2014, the parties

stipulated to dismiss the then-pending motions and instead proceeded to “trial.” Echo

answered the Complaint on December 31, and I entered a new scheduling order on

January 5, 2015. After the parties filed their pretrial briefs and a joint stipulation of facts

on January 9, I convened a one-day “trial” on January 15. The parties completed their

submission of evidence—which consisted solely of additional legal invoices—within

minutes, and proceeded immediately to present argument on their respective legal

positions. Accordingly, I refer to that proceeding as the “Argument.” The net result of

this procedural maneuvering is that the parties have briefed the propriety of advancement

10
Pl.‟s Pre-Trial Br. 18.

4
for the six disputed categories three separate times: on a motion to dismiss, in connection

with a TRO, and in their pretrial briefing.

III. STANDARD OF REVIEW

After a trial, the party seeking relief generally has the burden of showing

entitlement to that relief by a preponderance of the evidence. Here, the “trial” effectively

consisted of oral argument based upon a stipulated record. In that sense, this case

procedurally is more analogous to a matter submitted on cross motions for summary

judgment.

Pursuant to Court of Chancery Rule 56(h):

Where the parties have filed cross motions for summary
judgment and have not presented argument to the Court that
there is an issue of fact material to the disposition of either
motion, the Court shall deem the motions to be the equivalent
of a stipulation for decision on the merits based on the record
submitted with the motions.

That essentially is the situation here.11

“Summary judgment is granted if the pleadings, depositions, answers to

interrogatories and admissions on file, together with the affidavits, show that there is no

genuine issue as to any material fact and that the moving party is entitled to a judgment

11
As the Delaware Supreme Court has observed, however: “the existence of cross
motions for summary judgment does not act per se as a concession that there is an
absence of factual issues. Rather, a party moving for summary judgment concedes
the absence of a factual issue and the truth of the nonmoving party‟s allegations
only for purposes of its own motion, and does not waive its right to assert that
there are disputed facts that preclude summary judgment in favor of the other
party.” United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del.
1997).

5
as a matter of law.”12 “Advancement cases are particularly appropriate for resolution on

a paper record, as they principally involve the question of whether claims pled in a

complaint against a party . . . trigger a right to advancement under the terms of a

corporate instrument.”13

IV. ANALYSIS

I address in turn the six disputed categories of requested advancement: (1) the

FINRA Investigation; (2) the Internal Investigation; (3) the Mooney I Original

Counterclaims; (4) the Mooney I Amended Counterclaim and Amended Affirmative

Defenses; (5) Mooney II; and (6) fees on fees. First, however, I examine Echo‟s Bylaws,

which are the source of Dr. Mooney‟s advancement rights.

The Bylaws provide for both mandatory advancement and indemnification of the

Company‟s officers and directors:

7.1 Indemnification. Any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, including without
limitation actions by or in the right of the corporation, a class
of its security holders or otherwise, and whether civil,
criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the
Corporation . . . shall be indemnified by the Corporation
against expenses (including attorneys‟ fees), judgments, fines,
excise taxes and amounts paid in settlement actually and
reasonably incurred by such person in connection with such
action, suit or proceeding to the full extent not prohibited

12
Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14,
2007) (citing Ct. Ch. R. 56(c)).
13
DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058, at *6 (Del. Ch. Jan. 23,
2006).

6
 under Delaware law, as amended or modified from time to
time, if such person acted in good faith and in a manner
believed to be in, or not opposed to, the best interest of the
corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such conduct
was unlawful.14

7.2 Advances. Any person claiming indemnification within
the scope of Section 7.1 shall be entitled to advances from the
Corporation for payment of the expenses of defending actions
against such person in the manner and to the full extent not
prohibited under Delaware law, as amended or modified from
time to time.15

Echo‟s Bylaws provide for mandatory advancement to the “full extent not

prohibited by Delaware law.”16 The advancement provision in Article 7.2 explicitly

references the indemnification provision in Section 7.1. That provision similarly makes

indemnification available “to the full extent not prohibited under Delaware law.”

Furthermore, the language of Article 7.1 closely tracks the language of Section 145(a). I

conclude, therefore, that advancement under Echo‟s Bylaws is available to the full extent

allowable by 8 Del. C. § 145 and Delaware case law.

Dr. Mooney was a director and officer of Echo from 2007 until August 2013.

Nevertheless, depending on which of the six categories is at issue, Echo variously denies

that advancement is appropriate because: (1) Dr. Mooney is not a party and was not

threatened to be made a party to any “action, suit or proceeding,” as to the FINRA

14
J.S. Ex. 9 [hereinafter “Bylaws”] Art. 7.1.
15
Id. Art. 7.2.
16
Id.

7
Investigation; (2) the fees were not incurred in connection with any qualifying action (the

Internal Investigation); (3) the claims are not asserted “by reason of the fact” that Dr.

Mooney was an officer and director of Echo (Mooney I); or (4) Dr. Mooney is not

“defending” an action (Mooney II).

A. The FINRA Investigation

At the Argument, Dr. Mooney represented that there are no currently pending fee

reimbursement requests with respect to the FINRA Investigation and that he seeks to

have the Court determine whether the FINRA Investigation is an advanceable

proceeding.17 I conclude that Dr. Mooney is not entitled to advancement with respect to

the FINRA Investigation, as it has progressed to date.

Echo contends that Dr. Mooney neither is a “party” to the FINRA Investigation

nor has he been “threatened to be made a party.” The record reflects that FINRA

requested information from Echo relating to suspicious trading in the Company‟s stock

and that, in response, Echo supplied some information to FINRA.18 Dr. Mooney,

apparently believing that Echo‟s submissions to FINRA reflected negatively on him,

attempted to involve himself in the investigation. Whether or not Echo replied to FINRA

in a way that may have implicated Dr. Mooney in some form of misconduct, however,

there is no evidence in the record that FINRA ever made Dr. Mooney a party to the

investigation, threatened to make him a party or, indeed, required him to do anything.

17
Arg. Tr. 54.
18
JX 2.

8
 Dr. Mooney‟s conclusory allegation that he “is an object of the investigation to at

least some degree” is insufficient to show that Dr. Mooney is a party or has been

threatened to be made a party to the FINRA Investigation. 19 Perhaps FINRA will make

or threaten to make Dr. Mooney a party to its investigation in the future. It has not done

so to date, however. Thus, Dr. Mooney has no right to advancement for that

investigation.

B. The Internal Investigation

Echo advanced some of Dr. Mooney‟s fees relating to the Internal Investigation.20

The outstanding fees remaining are from the Console Law Offices for services performed

between October 9 and December 19, 2013. Those invoices amount to $11,418.21 Dr.

Mooney alleges that these fees were incurred “in connection with attempting to resolve

the dispute arising out of the investigation.”22

Dr. Mooney was terminated on September 27, 2013, after the Internal

Investigation concluded. Echo filed the Preliminary Objections on March 24, 2014.

These contested fees were incurred after the Internal Investigation but before Echo

responded to the complaint in Mooney I. In support of his advancement claim, Dr.

Mooney argues that the fees were incurred in “defense of the accusations and termination

19
Pl.‟s Pre-Trial Br. 29.
20
JX 48; JX 59. These fees amounted to $13,951.69.
21
JX 48.
22
Pl.‟s Pre-Trial Br. 28-29.

9
allegedly for cause.”23 The parties have not cited, and I am not aware of, any case

standing for the proposition that the retention of counsel to perform work after a

termination, perhaps in anticipation of filing suit against a former employer, would

constitute an officer or director “defending” himself within the meaning of 8 Del. C.

§ 145(e). The term “defending” requires more than an impression by a director that he

has been wronged and wishes to strike back.24 There was no qualifying action, suit, or

proceeding to which Dr. Mooney was or could have been made a party by reason of the

fact that he was a director or officer and in connection with which he might have incurred

the fees of the Console Law Offices between October and December 2013. I conclude,

therefore, that these fees are not advanceable.

C. Mooney I

When a corporation provides for broad, mandatory advancement—as Echo does in

its bylaws—an individual‟s entitlement to advancement often depends on whether the

expenses in question were incurred in “defending”25 against an action, suit or proceeding

brought “by reason of the fact that such person is or was a director or officer of the

23
Arg. Tr. 62.
24
See Baker v. Impact Hldg., Inc., 2010 WL 2979050, at *4 (Del. Ch. July 30, 2010)
(“Baker preemptively filed these affirmative actions to offensively counter the
perceived negative effects of the Investigation. That tactic, while fully within
Baker‟s rights, does not entitle him to advancement of attorneys‟ fees he incurred
in those Related Actions.”).
25
Bylaws Art. 7.2.

10
Corporation.”26 In some situations, a corporation will sue a former director or officer and

the former director or officer will assert counterclaims against the corporation. Under

certain fact patterns, our law has found the fees incurred in connection with such

counterclaims to be advanceable.27 This area of advancement law has been the subject of

some dispute recently.28 Here, however, Dr. Mooney filed suit first, and Echo asserted

counterclaims against him. This scenario more readily satisfies the “defending”

requirement.29 The question before me in this case is whether the counterclaims in

Mooney I were asserted by Echo against Dr. Mooney “by reason of the fact” that he was a

former director and officer of Echo. In that regard, I note that “courts often can

determine whether the „by the reason of the fact‟ requirement has been satisfied solely by

26
Id. Art. 7.1.
27
See, e.g., Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 824 (Del. 1992)
(concluding that counterclaims asserted by a former officer against the former
employer were “necessarily part of the same dispute and were advanced to defeat,
or offset, [the corporation‟s] Section 16(b) claim,” and thus asserted in “defense”
of the affirmative claims, and ordering advancement); Pontone v. Milso Indus.
Corp., 2014 WL 2439973, at *7 (Del. Ch. May 29, 2014) (holding “the governing
standard to be the one established in Roven, under which compulsory
counterclaims „advanced to defeat, or offset‟ affirmative claims may be subject to
advancement”) (quoting Roven, 603 A.2d at 824 (emphasis added)).
28
See Pontone v. Milso Indus. Corp., 2014 WL 4967228 (Del. Ch. Oct. 6, 2014)
(certifying interlocutory appeal on an issue concerning the counterclaim standard
articulated in Roven and subsequent cases from the Court of Chancery interpreting
that standard). The Pontone case ultimately settled before merits review by the
Delaware Supreme Court.
29
E.g., Paolino v. Mace Sec. Int’l, Inc., 985 A.2d 392, 401 (Del. Ch. 2009)
(awarding advancement in a situation where former officer sued corporation and
corporation asserted counterclaims, noting that, “When a corporation plays
offense, the covered person it claims against is „defending‟”).

11
examining the pleadings in the underlying litigation.”30 I therefore turn next to the

pleadings in Mooney I.

1. The Original Counterclaims

Echo apparently did not dispute that Dr. Mooney was entitled to advancement for

some of its Original Counterclaims, and it, in fact, paid most of Dr. Mooney‟s related

requests for advancement. Only a relatively small portion of those fees—roughly

$34,000—is contested here. Echo contends that Dr. Mooney has not sufficiently tied

those fees to his defense of the Original Counterclaims to satisfy his burden of showing

that the fees are advanceable.

Based on the current record, I cannot determine whether these fees are

advanceable. With the following comments as guidance, I would hope the parties can

confer and reach agreement on this issue. Otherwise, any remaining disputes over all or

part of the $34,000 requested shall be dealt with pursuant to the dispute resolution

mechanism detailed in Section V infra and the accompanying Order.

I begin with several general observations. “A party making a fee application bears

the burden of justifying the amounts sought.”31 Fee requests must be reasonable. At the

same time, our law is clear that the Court will not engage in a line-item review of

invoices and second-guess with hindsight the appropriateness of an attorney‟s

30
Holley v. Nipro Diagnostics, Inc., 2014 WL 7336411, at *8 (Del. Ch. Dec. 23,
2014).
31
Danenberg v. Fitracks, Inc., 58 A.3d 991, 995 (Del. Ch. 2012).

12
judgment.32 “Determining reasonableness does not require that this Court examine

individually each time entry and disbursement.”33 As then-Vice Chancellor Strine wrote:

[T]he function of a § 145(k) advancement case is not to inject
this court as a monthly monitor of the precision and integrity
of advancement requests. Unless some gross problem arises,
a balance of fairness and efficiency concerns would seem to
counsel deferring fights about details until a final
indemnification proceeding.34

The same principles apply to this dispute.

With respect to the specific fees at issue here, I make two more targeted

comments. First, some of these fees allegedly relate to Dr. Mooney‟s attempt to obtain

fees on fees. To the extent any of the $34,000 relates to fees on fees, that amount is not

advanceable at this time because those requests would have been premature. Fees on fees

are paid in connection with a successful effort in this Court to demonstrate that a

corporation wrongfully has withheld advancement. Second, to the extent these disputed

fees relate to Dr. Mooney‟s underlying claims, and not the counterclaims, those fees are

not advanceable. This would include, for example, any fees Dr. Mooney incurred before

Echo asserted the Original Counterclaims. If, however, the fee requests relate to both

advanceable claims and non-advanceable claims, i.e., the work is useful for both types of

claims, that work is entirely advanceable if it would have been done independently of the

32
Id. at 997.
33
Aveta Inc. v. Bengoa, 2010 WL 3221823, at *6 (Del. Ch. Aug. 13, 2010).
34
Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 177 (Del. Ch. 2003).

13
existence of the non-advanceable claims.35 Finally, I reiterate that any doubts should be

resolved in favor of advancement. The policy of Delaware favors advancement when it

is provided for, with the Company‟s remedy for improperly advanced fees being

recoupment at the indemnification stage.36

2. The Amended Counterclaim and Amended Affirmative Defenses

The more substantial dispute with respect to Mooney I concerns the Amended

Counterclaim and Amended Affirmative Defenses. Echo deliberately amended its

Original Counterclaims in an effort to moot Dr. Mooney‟s claims for advancement and

has made no secret of its motive.37 Delaware law recognizes the ability of a defendant

corporation to moot an advancement dispute by removing any counterclaims that would

trigger an advancement right for a former director or officer.38 Invoking that precedent,

35
See, e.g., Danenberg, 58 A.3d at 997-98 (noting that the nature of the
advancement right counsels against granular review of each and every charge);
Paolino v. Mace Sec. Int’l, 985 A.2d 392, 408 (Del. Ch. 2009); see also
Konstantino v. Angioscore, C.A. No. 9681-CB (Del. Ch. Feb. 16, 2015)
(TRANSCRIPT) at 10-12 (concluding that fees need not be apportioned among
co-defendants if the legal work would have been done regardless of the existence
of co-defendants).
36
Holley, 2014 WL 7336411, at *13-14; Danenberg, 58 A.3d at 998.
37
J.S. Ex. 41 (letter to Dr. Mooney‟s counsel informing him of Echo‟s position that
the advancement claims were mooted upon the filing of the Amended Answer).
38
See Danenberg v. Fitracks, Inc., 2012 WL 11220, at *6 (Del. Ch. Jan. 3, 2012)
(recognizing concept, but concluding that it was not possible at the advancement
stage to “parse finely” between advanceable and non-advanceable claims against
former officer and finding inconclusive opposing counsel‟s representations that
they were only pursuing non-advanceable claims); Xu Hong Bin v. Heckmann
Corp., 2010 WL 187018, at *2 (Del. Ch. Jan. 8, 2010) (concluding that a

14
Echo has represented that it is not pursuing any official capacity claims against Dr.

Mooney and will not do so.

In making this argument, Echo relies heavily on Xu Hong Bin v. Heckmann Corp.

In the only other Delaware case addressing the same issue, Danenberg v. Fitracks, the

Court declined to follow the Xu Hong Bin principle, because the Court found it

unworkable in the circumstances of the Fitracks case. Likewise, I find the facts of Xu

Hong Bin distinguishable from the situation here. In Xu Hong Bin, only claims relating

to pre-merger conduct gave rise to an advancement obligation on the part of the

corporation. In that context, the corporation declined to assert pre-merger claims and

instead challenged only post-merger conduct. Thus, there was a bright-line, temporal

standard and by not asserting any claims relating to conduct before a set date, the

corporation was able to defeat a claim for advancement. Here, there is no such clear

demarcation. In addition, the Amended Counterclaim, by its very language, concerns Dr.

Mooney‟s conduct while he was CEO and Chairman of the Board. Under these

circumstances, a representation from counsel that the counterclaim involves only non-

advanceable subject matter is inconclusive. Instead, I must examine the Amended

Counterclaim and Affirmative Defenses to determine the nature of the issues raised by

those pleadings.

corporation could avoid advancement by representing that it “is not pursuing, and
will not pursue” certain pre-merger claims).

15
 As relevant here, the Amended Counterclaim alleges:

During the course of his employment with Echo, without the
express or implied approval of the Board of Directors, other
officers or other proper authority, and affirmatively
concealing his actions from them, Dr. Mooney intentionally
and improperly caused Echo to pay or reimburse him for
personal expenses unrelated to the business of Echo.39

Of the thirteen affirmative defenses currently interposed by Echo, only two, which I refer

to as the Amended Affirmative Defenses, appear potentially relevant. They are as

follows:

Counts I, II, III and IV fail as a matter of law because of Dr.
Mooney‟s material breach of one or more of the personal
obligations of his Employment Agreement which exist, as
does his claim for severance pay, solely as a matter of
personal contract between him and Echo and not as a result of
his legal status as an employee, officer or director of Echo.40

* * * *

Any harm alleged in the Complaint to have been suffered by
Dr. Mooney or his wife is the direct result of his own breach
of the personal obligations of his written Employment
Agreement, which exist solely as a matter of personal
contract between him and Echo and not as a result of his legal
status as an employee, officer or director of Echo, and not as
the result of any act or omission of any Defendant and/or
actions taken by Dr. Mooney solely for his personal benefit
and outside the scope of his duties as an employee, officer or
director of Echo.41

39
Am. Answer ¶ 130.
40
Id. ¶ 117.
41
Id. ¶ 127.

16
The other affirmative defenses, on their face, do not implicate any advancement

obligations. Those defenses consist mostly of arguments that Dr. Mooney‟s claims fail

because of, for example, the inapplicability of certain wage and hour statutes to those

claims.

The language of the Amended Counterclaim and the Amended Affirmative

Defenses reflect Echo‟s conscious effort to allege only personal capacity claims, as

opposed to claims relating to Dr. Mooney‟s official capacity, in order to avoid triggering

his advancement rights. Whether Echo has succeeded, however, depends on whether the

Amended Counterclaim and Amended Affirmative Defenses implicate Dr. Mooney‟s

corporate role as an officer or director.

The “by reason of the fact” element requires that the claims be asserted because of

the director or officer‟s status as a director or an officer, i.e., his official capacity. This

Court recently stated that, “In advancement cases, the line between being sued in one‟s

personal capacity and one‟s corporate capacity generally is drawn in favor of

advancement with disputes as to the ultimate entitlement to retain the advanced funds

being resolved later at the indemnification stage.”42 Nevertheless, “certain suits between

a corporation and its directors or officers do involve solely personal, and not corporate,

obligations, such that the „by reason of the fact‟ requirement is not satisfied.”43 Echo

42
Holley, 2014 WL 7336411, at *9.
43
Id.

17
contends that the Amended Counterclaim and Amended Affirmative Defenses fall into

this latter category.

Preliminarily, I note that Echo relies primarily on Weaver v. ZeniMax Media Inc.44

and Cochran v. Stifel Financial Corp.45 Those cases, authored over a decade ago, often

are relied upon by defendant corporations seeking to avoid paying advancement

obligations to which they previously agreed.46 The effort, however, usually fails. Since

Weaver and Cochran, Delaware courts generally have eschewed attempting to resolve

disputes over whether claims relate to a potential indemnitee‟s personal or official

capacity at the advancement stage unless the answer can be discerned swiftly, accurately,

and consistent with the summary nature of an advancement proceeding. Deferring

resolution of less clear-cut disputes to the indemnification stage helps avoid excessive

litigation over advancement. In addition to saddling the parties with unnecessary costs,

litigation-related delays over advancement threaten to undermine the summary nature of

the proceedings envisioned by 8 Del. C. § 145, as well as the policy of providing prompt

reimbursement to present and former directors and officers who have had to incur

44
2004 WL 243163 (Del. Ch. Jan. 30, 2004).
45
2000 WL 1847676 (Del. Ch. Dec. 13, 2000), aff’d in relevant part, 809 A.2d 555
(Del. 2002).
46
Paolino, 985 A.2d at 404 (“[C]orporations bent on limiting their exposure to
mandatory indemnification and advancement provisions sought to read Cochran
broadly as saying that if an individual agrees to serve in a covered capacity
pursuant to an employment agreement, then his duties become a personal
contractual obligation . . . . This is not what Cochran held.”). Additionally, I note
that Cochran was an indemnification case, not an advancement case.

18
attorneys‟ fees and related expenses.47 This approach is similar to the practice of

postponing line-item disputes over invoices to the indemnification stage, which also

fosters the underlying nature of advancement and places the credit risk on the corporation

and not on the individual director or officer.48

With these principles in mind, I turn to the issue at hand and address first the

Amended Counterclaim and then the Amended Affirmative Defenses. The “by reason of

the fact” requirement is satisfied if there is “a nexus or causal connection between any of

the underlying proceedings . . . and one‟s corporate capacity.”49 Our courts interpret that

standard broadly in favor of advancement and have held that the “requisite connection is

established „if the corporate powers were used or necessary for the commission of the

alleged misconduct.‟”50

The Amended Counterclaim alleges that, “[d]uring the course of his employment

with Echo,” Dr. Mooney improperly caused Echo to “pay or reimburse him for personal

47
See Danenberg, 58 A.3d at 1002-04 (adopting new procedure that called for
mandatory payment of a certain percentage of advancement requests,
notwithstanding objections, instead of incurring an additional level of review by
referring disputes to a special master, with the goal of effectuating the “summary
and efficient proceeding contemplated by statute”). Indeed, the multiple rounds of
briefing in this case exemplify the wasteful and burdensome tactics all too
common in advancement proceedings.
48
Id. at 997-98 (Del. Ch. 2012) (describing advancement as an extension of credit
giving rise to no net liability on the part of the corporation) (quoting Advanced
Mining Sys., Inc. v. Fricke, 623 A.2d 82, 84 (Del. Ch. 1992)).
49
Homestore, Inc. v. Tafeen, 888 A.2d 204, 214 (Del. 2005).
50
Pontone v. Milso Indus. Corp., 100 A.3d 1023, 1050-51 (Del. Ch. 2014) (quoting
Bernstein v. TractManager, Inc., 953 A.2d 1003, 1011 (Del. Ch. 2007)).

19
expenses unrelated to the business of Echo.”51 To support its argument, Echo relies on

Weaver, which held that “[t]aking too much vacation time and submitting fraudulent

travel expenses are examples of personal conduct by employees,” which do not satisfy

the “by reason of the fact” requirement.52 Weaver relied heavily on Cochran, which, as

noted above, was an indemnification case. More recently, in Paolino, this Court

determined that, to succeed on a Cochran argument at the advancement stage, “the claim

for which the corporation seeks to avoid advancement must clearly involve a specific and

limited contractual obligation without any nexus or causal connection to official

duties.”53 Paolino described Weaver as an example of a “limited, garden variety dispute

between an employer and employee.”54 The teaching of Paolino is that a defendant

corporation cannot avoid its advancement obligations by recasting litigation regarding an

officer‟s corporate actions as merely a dispute about an employment agreement, at least

where that agreement calls for the individual to serve as a corporate officer.

In Weaver, the counterclaims were directed toward separate and discrete issues.

The corporation conceded it was obligated to advance the former officer‟s fees with

respect to its breach of fiduciary duty claims relating to mismanagement of the officer‟s

department, but disputed paying advancement on its claims relating to excessive vacation

51
Am. Answer ¶ 130.
52
Weaver, 2004 WL 243163, at *5.
53
Paolino, 985 A.2d at 407 (emphasis added).
54
Id.

20
time and improper expense reimbursements. The Court there concluded that the fees for

the disputed claims could be separated into discrete categories.55 Furthermore, it does not

appear that the alleged filing of fraudulent expense reports in Weaver implicated any of

the issues that were raised in the breach of fiduciary duty claims.

Here, by contrast, it is not clear that such distinctions can be made.56 Although the

Amended Counterclaim appears straightforward on its face—and seemingly was drafted

to take advantage of the holding of Weaver—Echo‟s answers to Plaintiffs‟ Second Set of

Interrogatories in Mooney I indicate that the counterclaim likely will implicate official

capacity issues.57 For example, in response to Interrogatory No. 5, Echo describes a

series of fraudulent reimbursements. Some of these, such as improper reimbursements

for personal meals and personal computers, arguably might be non-advanceable claims

under Weaver, but it is unlikely that such extensive, and expensive, reimbursements

could have been obtained other than by reason of the fact that Dr. Mooney was CEO. I

note, in particular, the claim that “Dr. Mooney placed a friend who was not an employee

on Echo‟s health insurance plan for a period of approximately four years and paid most

55
Weaver, 2004 WL 243163, at *4-5.
56
See Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761, at *7-8 (Del. Ch. June 18,
2002) (rejecting argument that only the employment agreement was breached,
ordering advancement, and distinguishing Cochran, stating: “Critically, the
Cochran case did not involve any claim for advancement, nor did it involve a
situation in which the officer‟s alleged breach of his employment agreements was
argued to be the identical conduct that was also averred to be a breach of fiduciary
duty”).
57
JX 58 [hereinafter “Echo‟s Interrogatory Responses”].

21
of the premiums for such health insurance using Echo‟s funds.”58 I consider it reasonable

to infer that such a feat, proper or not, could not have been accomplished without the use

of Dr. Mooney‟s corporate powers.

Equally significant, Echo alleges that Dr. Mooney effected his improper

reimbursement scheme through a campaign of concealment that undoubtedly involved

the exercise of corporate powers.59 For example, Echo avers that “Dr. Mooney

frequently threatened Echo employees, particularly employees at the Vice President level

and above, with termination if they did not do what he wanted them to do.” 60 The power

to terminate other officers implicates Dr. Mooney‟s official capacity as CEO.

Accordingly, despite Echo‟s effort to assert only personal capacity claims, I conclude that

the Amended Counterclaim alleges official capacity claims or, at least that it would be

unproductive and inappropriate in this advancement proceeding to attempt to differentiate

between such “personal” and “official” claims.61 The Company‟s remedy for any

improperly advanced fees is to seek recoupment in future indemnification proceedings.

58
Id. No. 5, at vi.
59
Id. No. 6.
60
Id. at v(f).
61
See Reddy, 2002 WL 1358761, at *6 (“But, the negligence, gross negligence,
common law fraud, and contract claims brought against [the former officer] all
could be seen as fiduciary allegations, involving as they do the charge that a senior
managerial employee failed to live up to his duties of loyalty and care to the
corporation.”).

22
 With respect to the two Amended Affirmative Defenses identified above, I know

of no case squarely holding that affirmative defenses can trigger a corporation‟s

advancement obligations. I am convinced, however, that the policies underlying

advancement justify the payment of fees when an officer defends against affirmative

defenses that implicate his performance as a corporate official, much in the same way the

assertion of counterclaims by a corporation can require advancement. A recent report by

Master LeGrow addressed this issue, albeit in the limited liability company context.

There, she observed that:

Indemnification and the subsidiary concept of advancement
are intended to encourage persons to serve in a company,
“secure in the knowledge that expenses incurred by them in
upholding their honesty and integrity will be borne by the
corporation they serve.” In resisting the affirmative defenses
that accuse him of egregious misconduct when serving as [the
company‟s] CEO, [the plaintiff] unquestionably seeks to
uphold his reputation. Although [the plaintiff] may not face
monetary liability if [the company] prevails on these
affirmative defenses, a judgment that he breached his
fiduciary duties will have substantial implications for [the
plaintiff] and his future employment prospects.62

The gist of the Amended Affirmative Defenses is that relief for any harm allegedly

suffered by Dr. Mooney is barred by his own breach of his Employment Agreement. The

interrogatory responses, however, flesh out the import of these affirmative defenses.

They state that:

62
Fillip v. Centerstone Linen Servs., LLC, 2013 WL 6671663, at *12 (Del. Ch. Dec.
11, 2013) (LeGrow, M.) (quoting Hibbert v. Hollywood Park, Inc., 457 A.2d 339,
344 (Del. 1983)), aff’d and remanded, 2014 WL 793123 (Del. Ch. Feb. 27, 2014),
initial report confirmed and expanded on remand to reflect new developments,
2014 WL 1821299 (Del. Ch. May 1, 2014) (LeGrow, M.).

23
 Dr. Mooney‟s violation of company policies approved by the
Board governing business entertainment (expenses should be
modest), contracts and agreements (all contracts and
agreements must be in writing and approved as to form by the
General Counsel), confidential information (maintained as
confidential and not disclosed without an appropriate
(meaning written) non-disclosure agreement) and workplace
harassment constituted breaches of the employment
agreement.63

Several of these categories involve a nexus between the alleged wrongdoing and Dr.

Mooney‟s official capacity, like the improper reimbursement issues I previously

discussed. In addition, it is unlikely that Dr. Mooney would have been able to enter into

improper contracts of the kind alleged64 unless he was a high-ranking corporate officer

with the power to execute such contracts. Similarly, Dr. Mooney‟s access to Echo‟s

confidential information came from his position as CEO and Chairman. 65 Litigating

these Amended Affirmative Defenses will require Dr. Mooney to defend his conduct as

an officer and director of the Company. If they had been asserted as affirmative claims

by the Company, these defenses would be tantamount to claims for declaratory

63
Echo‟s Interrog. Resp. No. 12.
64
E.g., id. No. 13, at vii (alleging that Dr. Mooney hired, without permission, two
individuals at salaries of $200,000 each).
65
Id. No. 9 (describing various alleged instances of disclosing “confidential,
nonpublic information”); see also Holley, 2014 WL 7336411, at *8.

24
judgments of fiduciary duty breaches and, to some extent, breaches of contract as well.

Although differently styled, the underlying substance of the allegations is quite similar. 66

For all of these reasons, I conclude that the Amended Counterclaim and the

Amended Affirmative Defenses quoted above are asserted by reason of the fact that Dr.

Mooney was an officer and director of Echo. I therefore hold that the Company must

advance Dr. Mooney‟s reasonable fees and expenses incurred in defending against the

Amended Counterclaim and those two Amended Affirmative Defenses. To the extent

Plaintiff seeks advancement as to any of the remaining eleven affirmative defenses, that

portion of his request is denied.

D. Mooney II

Mooney II, on the other hand, is a different story. Dr. Mooney contends that the

term “defending” encompasses actions taken to vindicate one‟s honesty and integrity.67

The outer boundaries of such an interpretation, if they exist, would be difficult to define.

Although the language quoted from the Master‟s report in Centerstone Linen arguably

might support Dr. Mooney‟s sweeping interpretation of the term “defending,”

advancement is not quite so broad in the corporate context as it potentially could be in the

66
Reddy, 2002 WL 1358761, at *6 (“Most critically, all of the misconduct alleged by
[the company] involves actions [the former officer] took on the job in the course
of performing his day-to-day managerial duties.”).
67
Pl.‟s Pre-Trial Br. 33-34.

25
LLC context.68 In the affirmative defense context, Dr. Mooney still is “defending” within

the same action against allegations asserted against him by reason of the fact he was a

director and officer. Mooney II, however, involves a second lawsuit, brought by Dr.

Mooney, against his former employer. In that regard, I note that Dr. Mooney does not

seriously contend that he was entitled to advancement for the underlying claims he

asserted in Mooney I, even though, under his expansive understanding of the term, those

claims could be characterized as “defensive” because they contest whether Dr. Mooney

was fired for cause. Similarly, I conclude that Dr. Mooney is not entitled to advancement

for the claims he has asserted in Mooney II.

The general rule is that offensive litigation is not advanceable.69 Delaware case

law only considers such litigation to be “defensive” in the limited context of compulsory

counterclaims asserted to defeat or offset affirmative claims by the corporation. 70 If the

term defending were construed more broadly, advancement would have the potential to

become an unfettered license enabling disgruntled former officers and directors to litigate

at the Company‟s expense. Vindicating one‟s reputation may serve important personal

objectives, but that does not mean that filing an offensive lawsuit qualifies as

68
See Centerstone Linen Servs., 2014 WL 1821299, at *6 (noting that advancement
is less restrictive under the Delaware LLC Act than under 8 Del. C. § 145).
69
E.g., Baker v. Impact Hldg., Inc., 2010 WL 2979050, at *4 (Del. Ch. July 30,
2010) (“Baker preemptively filed these affirmative actions to offensively counter
the perceived negative effects of the Investigation. That tactic, while fully within
Baker‟s rights, does not entitle him to advancement of attorneys‟ fees he incurred
in those Related Actions.”).
70
See supra notes 27-29.

26
“defending,” within the meaning of 8 Del. C. § 145, against claims asserted by reason of

the fact that one was an officer or director. Indeed, the only affirmative litigation that

Delaware case law sanctions as “defending” and, therefore, advanceable has occurred in

the context of certain counterclaims asserted by an officer or director in response to

claims against that person by the company. In allowing advancement for those

counterclaims, the courts have recognized that “defending” in the litigation setting

sometimes involves affirmative maneuvers.71 Furthermore, as noted supra, not all

counterclaims are advanceable. Because Mooney II involves a separate lawsuit, it is

neither compulsory nor would it defeat or offset any affirmative claim of Echo. In that

regard, the only relevant affirmative claims asserted by the Company appear to be the

Original Counterclaims, which Echo withdrew before Mooney II was filed.72

Granting advancement for Mooney II would require a finding that, in that action,

Dr. Mooney is “defending” against the counterclaims Echo formerly asserted against

him, but later withdrew in Mooney I. Our advancement law simply does not stretch that

far. I hold, therefore, that Echo is not required to advance the fees and expenses incurred

in Mooney II.

71
Paolino, 985 A.2d at 401.
72
Notably, regardless of the precise standard under Roven for the advanceability of
counterclaims, Mooney II fails to satisfy any of the three possible requirements,
because it: (1) is not compulsory; (2) does not defeat the Original Counterclaims;
and (3) does not offset the Original Counterclaims.

27
 E. Fees on Fees

A portion of the early dispute between the parties that preceded this lawsuit

concerned fees on fees. This Court awards fees on fees when a plaintiff successfully

shows an entitlement to advancement wrongfully withheld by the defendant corporation.

Moreover, “[p]ursuant to [8 Del. C. § 145] . . . this Court „will only award that amount of

fees that is reasonable in relation to the results obtained.‟”73

As for this action, Dr. Mooney successfully has argued for advancement in

Mooney I as to the Amended Counterclaim and the two Amended Affirmative Defenses.

Dr. Mooney failed to show, however, that advancement was improperly withheld for fees

relating to the FINRA Investigation, the Internal Investigation, or Mooney II.74 The

status of the approximately $34,000 in disputed fees related to the Original

Counterclaims remains unresolved. Overall, of the four categories of disputed claims I

have addressed in this Memorandum Opinion, Dr. Mooney prevailed in only one such

category. Given the relative importance of that category, however, as compared to the

Internal Investigation, the FINRA Investigation, and Mooney II, I award him 40% of his

fees on fees reasonably incurred in the prosecution of this case.

73
Holley, 2014 WL 7336411, at *15 (quoting Pontone, 100 A.3d at 1176) (internal
quotations omitted).
74
Dr. Mooney also asserted a few arguments in the earlier stages of the parties‟
advancement disputes that are contrary to law and, therefore, either were
abandoned or rejected. These include his initial refusal to provide the undertaking
required by 8 Del. C. § 145(e) and his efforts to obtain an upfront payment of
$100,000 akin to a retainer.

28
 I arrived at this amount through a comparison of the invoices in the record and

their respective amounts, as well as by considering the likely future importance of

Mooney I and Mooney II.75 The Internal Investigation includes a relatively small amount

of fees, a fact likely also true for the FINRA Investigation, although an exact amount

could not be discerned for that proceeding. Both Mooney I and Mooney II remain

ongoing, but the expenditures incurred at or about the time of trial in Mooney I, which

was commenced on February 4, 2014, significantly exceeded the expenditures incurred in

Mooney II, which began on June 18, 2014. After considering all of the circumstances, I

conclude that Dr. Mooney succeeded in convincing the Court to award somewhat less

than half of what he originally sought to have advanced by Echo.

V. MOVING FORWARD

At the Argument, reference was made to the Fitracks procedure.76 Apparently, the

parties came close to implementing such a procedure, but failed to reach agreement on it.

As an alternative to the Fitracks approach, the parties also discussed the appointment of a

special master. At this point, I believe that using a special master would increase the

costs to both parties and lead to unnecessary delay. Accordingly, I adopt a Fitracks-like

procedure for this case. An Order accompanying this Memorandum Opinion details the

method to be used for resolving future advancement disputes.

75
E.g., JX 49, JX 56.
76
Danenberg, 58 A.3d at 1002-04.

29
 VI. CONCLUSION

For the foregoing reasons, I conclude that Dr. Mooney is entitled to advancement

for fees and expenses reasonably incurred in defending against the Amended

Counterclaim and the two Amended Affirmative Defenses that I identified. Dr. Mooney

also is entitled to 40% of the reasonable fees and expenses he incurred in bringing this

action. The parties shall resolve all remaining advancement disputes, including the

disagreement over the Original Counterclaims, in accordance with the guidance provided

in this Memorandum Opinion and the procedure set forth in the accompanying Order. In

all other respects, Dr. Mooney‟s request for advancement is denied.

IT IS SO ORDERED.

30