COURT OF CHANCERY
OF THE
STATE OF DELAWARE
TAMIKA R. MONTGOMERY-REEVES Leonard Williams Justice Center
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734
Date Submitted: July 12, 2018
Date Decided: October 31, 2018
Kurt M. Heyman, Esquire Eric Lopez Schnabel, Esquire
Aaron M. Nelson, Esquire Robert W. Mallard, Esquire
Heyman Enerio Gattuso & Hirzel LLP Alessandra Glorioso, Esquire
300 Delaware Avenue, Suite 200 Dorsey & Whitney LLP
Wilmington, DE 19801 300 Delaware Avenue, Suite 1010
Wilmington, DE 19801
RE: W. Jerome Frautschi et al. v. Ecolab, Inc.
Civil Action No. 12951-VCMR
Dear Counsel:
This letter opinion addresses Plaintiffs’ Motion for Summary Judgment. For
the reasons stated below, the motion is denied as to W. Jerome Frautschi’s claims. 1
I. BACKGROUND
The facts in this opinion derive from the pleadings, the parties’ submitted
affidavits, and exhibits cited therein. 2
1
I address the claims of the Pleasant T. Rowland Revocable Trust and the W. Jerome
Frautschi Living Trust, plaintiffs in this action, in a separate letter opinion issued
today.
2
Ct. Ch. R. 56(c).
Frautschi et al. v. Ecolab, Inc.
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This action involves Frautschi’s request for indemnification from Ecolab, Inc.
(“Ecolab”), a Delaware corporation in the business of providing water, hygiene, and
energy technologies. 3 In February 2008, Ecolab acquired Ecovation, Inc.
(“Ecovation” or the “Company”) through a merger. 4 Ecovation was a Delaware
corporation in the business of providing sustainable wastewater treatment and
renewable energy solutions. 5 Diane C. Creel was the President, Chief Executive
Officer, and Chair of the Board of Directors of Ecovation. 6 Frautschi served
Ecovation as a director from May 2004 until November 2005. 7 Two trusts, the
Pleasant T. Rowland Revocable Trust and the W. Jerome Frautschi Living Trust
(together, the “Trusts”), invested significantly in the Company when it was
struggling financially. 8
Ecovation provided for indemnification of directors and officers in its
Amended and Restated Certificate of Incorporation (the “Charter”) and its Bylaws
3
Verified Am. and Supplemental Compl. for Indemnification ¶ 27 (“Compl.”).
4
Id. ¶ 4; id. Ex. C.
5
Nelson Aff. Ex. C ¶ 19.
6
Compl. ¶ 30.
7
Id.
8
See id. ¶ 3.
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(the “Bylaws”). 9 As part of the merger, Ecolab agreed to provide advancement and
indemnification to Ecovation’s current and former directors and officers, including
Frautschi, to the same extent as those current and former directors and officers were
entitled to advancement and indemnification under Ecovation’s Charter and
Bylaws. 10
This case involves Frautschi’s right to indemnification for fees and expenses
incurred in actions filed in the New York Supreme Court (the “Ahlers Action”) and
in the United States District Court for the Western District of New York (the “ITV
Action”). 11 Both underlying actions involved allegations that Creel provided
material nonpublic inside information to Frautschi and the Trusts regarding Ecolab’s
9
Nelson Aff. Ex. F art. V, § 1, at 9; id. Ex. G, at 16-17. Ecovation was formerly
known as AnAerobics, Inc.; the Charter and Bylaws reflect the former name.
10
Id. Ex. H § 7.5(a) (“[Ecolab] and [Empire Acquisition, Inc.] jointly and severally
agree that all rights to indemnification and advancement of expenses for acts or
omissions occurring prior to the [merger] (including acts or omissions in connection
with this Agreement and the consummation of the transactions contemplated
hereby) now existing in favor of the Company’s current and former directors and
officers (each a ‘D&O Indemnified Party’) as provided in the Company’s Governing
Documents, and in any indemnification agreements with the D&O Indemnified
Parties, will survive the Merger and will thereafter continue in full force and effect
in accordance with their terms. [Ecolab] and [Empire Acquisition, Inc.] jointly and
severally will advance expenses to and indemnify the D&O Indemnified Parties to
the same extent as the Indemnified Parties currently are entitled to advancement of
expenses and indemnification.”).
11
Compl. ¶ 1.
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desire to acquire Ecovation.12 Allegedly using that information, the Trusts
purchased stock from other investors who were not privy to the highly confidential
information.13 According to those investors, the Trusts made a large profit from the
inside information when Ecolab acquired Ecovation in February 2008.14
In the Ahlers Action, the plaintiffs asserted claims for breach of fiduciary duty,
interested director transactions, breach of the Charter, and unjust enrichment against
Creel, Frautschi, and the Trusts.15 The defendants prevailed on summary
judgment. 16 The New York Appellate Division, Fourth Department, affirmed the
trial court’s order on June 30, 2017. 17 The parties filed no further appeals.18
In the ITV Action, the plaintiff asserted claims against Creel, Frautschi, and
the Trusts.19 The claims against Frautschi included claims for breach of fiduciary
12
Nelson Aff. Ex. A ¶¶ 96-102; id. Ex. C ¶ 328.
13
Id. Ex. A ¶¶ 106-22; id. Ex. C ¶¶ 325-28.
14
Id. Ex. A ¶¶ 128; see id. Ex. C ¶¶ 375.
15
Id. Ex. C ¶¶ 391-442.
16
Id. Ex. E, at 29-30; see generally id. Exs. D, E.
17
Id. Ex. E.
18
Compl. ¶ 23.
19
See generally Nelson Aff. Ex. A.
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duty, aiding and abetting breach of fiduciary duty, securities fraud, common law
fraud, and civil conspiracy. 20
In April 2017, the parties to the ITV Action reached a settlement agreement.21
The total settlement amount was $4.65 million. 22 Frautschi paid $835,000 of the
settlement, 23 and the parties apportioned the remaining amounts to Creel and the
Trusts.24 Ecolab did not contribute any money to the settlement. 25
Throughout both actions, Ecolab provided advancement of defense costs to
Frautschi, first through its directors’ and officers’ liability policy and later, when that
policy was exhausted, from its own funds. 26
II. ANALYSIS
In their Motion for Summary Judgment, Frautschi and the Trusts seek
summary judgment on all counts of their Verified Amended and Supplemental
20
Id. ¶¶ 134-39, 155-61, 186-215.
21
See generally Nelson Aff. Ex. V.
22
Id. § 2.
23
Id. § 3(c).
24
Id. § 3(a), (b), (d).
25
Compl. ¶ 92.
26
Id. ¶¶ 75, 77.
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Complaint, including full indemnification of Frautschi’s portion of the settlement,
indemnification for his attorneys’ fees in the Ahlers and ITV Actions at his counsel’s
standard hourly rates, and fees-on-fees for this action to enforce his indemnification
rights.27
A. Standard of Review
Summary judgment will be “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 as a matter of law.”28 The movant bears the initial burden of demonstrating
that there is no question of material fact. 29 When the movant carries that burden, the
burden shifts to the nonmoving party “to present some specific, admissible evidence
that there is a genuine issue of fact for a trial.” 30 When considering a motion for
27
Pls.’ Opening Br. 2. Plaintiffs also seek full indemnification of the Trusts’ portions
of the settlement, payment of the Trusts’ attorneys’ fees in the ITV and Ahlers
Actions, and fees-on-fees for this action to enforce their indemnification rights. Id.
I address those portions of their motion in a separate letter opinion.
28
Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14,
2007) (citing Ct. Ch. R. 56(c)).
29
Deloitte LLP v. Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009).
30
Id. (citing Watson v. Taylor, 829 A.2d 936 (TABLE), 2003 WL 21810822, at *2
(Del. Aug. 4, 2003)).
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summary judgment, this Court must view the evidence and the inferences drawn
from the evidence in the light most favorable to the nonmoving party. 31 Even so, the
non-moving party may not rely on allegations or denials in the pleadings to create a
material factual dispute. 32
B. Indemnification for Frautschi’s Portion of the Settlement
Frautschi claims that under 8 Del. C. § 145(a) and Ecovation’s Charter and
Bylaws, as a former director, he is entitled to indemnification from Ecolab for his
portion of the settlement. 33 Ecolab argues that (1) Frautschi’s entitlement to
indemnification is limited to claims against him by reason of his former director
status, (2) Frautschi has no right to indemnification as a trustee of one of the Trusts,
and (3) Frautschi is not entitled to indemnification because the settlement was not
“reasonable.”34
Some of the claims in the ITV Action are based on Frautschi’s role as a
director of Ecovation. For example, the ITV Complaint alleges that Frautschi
31
Judah v. Del. Tr. Co., 378 A.2d 624, 632 (Del. 1977); Fike v. Ruger, 754 A.2d 254,
260 (Del. Ch. 1999), aff’d, 752 A.2d 112 (Del. 2000).
32
Ct. Ch. R. 56(e).
33
Compl. ¶¶ 138-39, 148.
34
Def.’s Opp’n Br. 27-32, 36-38, 40-48.
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breached the fiduciary duty that he, as a director, owed to the stockholders of
Ecovation because he allegedly worked with Creel to induce Ecovation’s Board of
Directors to accept agreements that were unfavorable to Ecovation’s stockholders.35
Other claims, however, include allegations that occurred much later in time
than the period when Frautschi served as a director, May 2004 to November 2005.
For example, the ITV Complaint alleges that Frautschi intentionally omitted and
actively concealed that Ecovation was negotiating a merger with Ecolab.36 These
alleged negotiations did not start until January 2007, over a year after Frautschi was
no longer a director.37 If Frautschi had such information, it most likely was because
he was trustee or agent of the Trusts and in that role helped Ecovation obtain
financing from the Trusts.38
Frautschi is a trustee of the W. Jerome Frautschi Living Trust.39 Frautschi
argues that any actions he allegedly took after he resigned as director were as trustee
35
Nelson Aff. Ex. A. ¶¶ 135, 137-38.
36
Id. ¶¶ 188-90.
37
Id. ¶¶ 96-100.
38
See id. ¶ 102.
39
Compl. ¶ 155.
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of his Trust and that these actions are indemnifiable under the terms of the Trusts’
financing to Ecovation. 40 Frautschi, however, cites no law to support this claim. 41
Further, Frautschi is a trustee for only one of the two Trusts. 42 The parties do
not explain whether, and in what capacity, Frautschi acted for the second Trust, the
Pleasant T. Rowland Revocable Trust. He may have been acting as trustee or agent,
but again, the parties have not provided any documents or law to support or refute
Frautschi’s claim that he is entitled to indemnification for his actions related to the
second Trust.
The Trusts have their principle places of business in Wisconsin, 43 and I
presume that Wisconsin trust and agency law governs. However, neither party has
cited any relevant Wisconsin law or argued that another state’s law governs.
Because the parties address this issue in such a cursory fashion without
supporting documents and law, I am unable to determine whether there is a genuine
40
Pls.’ Opening Br. 26 n.16; see Compl. ¶ 157.
41
See Pls.’ Opening Br. 26, 29-30. Frautschi cites only to the Trusts’ source of
indemnification. He fails to explain why that source of indemnification also applies
to him. Id. 29-30.
42
Compl. ¶¶ 155-56.
43
Id. ¶¶ 25-26.
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dispute of material fact, nor can I decide whether one of the parties is entitled to
judgment as a matter of law. This issue directly controls Frautschi’s claim for
indemnification. Further, this issue affects Frautschi’s other two claims, his claim
for attorneys’ fees incurred in the Ahlers and ITV Actions and his claim for fees-on-
fees in this action.
III. CONCLUSION
For the foregoing reasons, I DENY the Motion for Summary Judgment as to
Frautschi’s claims.
IT IS SO ORDERED.
Sincerely,
/s/Tamika Montgomery-Reeves
Vice Chancellor
TMR/jp