W. Jerome Frautschi v. Ecolab, Inc.

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 as it

relates to the claims of the Pleasant T. Rowland Revocable Trust and the W. Jerome

Frautschi Living Trust.1 For the reasons stated below, the Motion for Summary

Judgment is granted in part and denied in part.

1
I address the claims of Plaintiff W. Jerome Frautschi in a separate letter opinion.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 2 of 28

I. BACKGROUND
The facts in this opinion derive from the pleadings, the parties’ submitted

affidavits, and exhibits cited therein. 2

There are four groups of key actors: Ecovation, Inc. (“Ecovation” or the

“Company”) and Ecolab, Inc. (“Ecolab”); Diane C. Creel; W. Jerome Frautschi; and

the Pleasant T. Rowland Revocable Trust and the W. Jerome Frautschi Living Trust

(together, the “Trusts”). This action involves the Trusts’ requests for

indemnification from Ecolab. The Trusts’ relationship with Ecolab is based on

substantial loans from the Trusts to the corporation’s predecessor, Ecovation.

A. Ecovation Before the Merger
The corporation at the center of this dispute is Ecovation, a Delaware

corporation that was in the business of providing sustainable wastewater treatment

and renewable energy solutions.3 Ecolab, a Delaware corporation in the business of

providing water, hygiene, and energy technologies, acquired Ecovation in 2008

through a merger. 4

2
Ct. Ch. R. 56(c).
3
Compl. Ex. B ¶ 19.
4
Compl. ¶ 27; id. Ex. C.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 3 of 28

Creel served as Chief Executive Officer, President, and Chair of the Board of

Directors of Ecovation from May 2003 through February 2008.5 When Creel joined

Ecovation, it was struggling financially. 6 Frautschi, as trustee of one of the Trusts

and as agent of the other,7 caused the Trusts to extend a $30 million line of credit to

the Company; this agreement was memorialized in the Line of Credit Agreement

(the “LOC”) in June 2004.8 After Ecovation’s Board of Directors unanimously

approved the LOC, Frautschi joined the Board in May 2004, and he served in that

capacity until he resigned in November 2005.9

The $30 million line of credit proved insufficient to resolve the Company’s

financial problems, and the Trusts increased the LOC five times over the next four

years, eventually increasing the loan to $62 million in November 2007.10 With each

5
Compl. ¶ 30; id. Ex. B ¶ 27.
6
Id. Ex. A ¶ 25.
7
Frautschi is Trustee for the W. Jerome Frautschi Living Trust. Compl. ¶ 155. His
relationship to his wife’s trust, the Pleasant T. Rowland Trust, is unclear. I presume
an agency relationship. This presumption does not affect the issues addressed in
this letter opinion.
8
Id. Ex. G.
9
Compl. ¶ 30.
10
Nelson Aff. Exs. J-M; id. Ex. N, at 1-2.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 4 of 28

amendment, the Evocation Board acknowledged that the Trusts and their

representatives had “acted in good faith at all times” and fully performed their

obligations.11

B. The Underlying Actions
The requests for indemnification stem from litigation filed against Creel,

Frautschi, and the Trusts in the United States District Court for the Western District

of New York (the “ITV Action”) and in the New York Supreme Court (the “Ahlers

Action”).

1. The ITV Action
On May 27, 2008, an institutional investor, Industrial Technology Ventures

LP (“ITV”), sued Creel, Frautschi, and the Trusts, asserting claims for breaches of

fiduciary duties, lender liability for breach of fiduciary duty, aiding and abetting

breach of fiduciary duty, unjust enrichment, tortious interference with business

relationships, securities fraud, common law fraud, and civil conspiracy. 12 ITV

alleged that while Frautschi and Creel were directors of Ecovation, they, together

with the Trusts, schemed to “take advantage of the Company’s precarious financial

11
Id. Ex. J § 3.8; id. Ex. K § 3.7; id. Ex. L § 3.7; id. Ex. M § 3.7; id. Ex. N § 3.7.
12
Compl. ¶ 7; see generally id. Ex. A.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 5 of 28

position and looming default” on the LOC. 13 ITV further alleged that the Trusts

were in a position of significant power because they could threaten to foreclose on

the LOC.14 The Trusts also owned a significant amount of stock and stock warrants

in the Company. 15 Under the terms of the LOC, the Company issued warrants to the

Trusts to purchase shares of Company stock for $0.01 per share.16 Through the LOC

and the terms of the Trusts’ loans to the Company, the Trusts increased their

ownership of Series A Preferred Stock to over fifty percent, also increasing their

already substantial influence. 17 In 2007, allegedly after receiving inside information

from Creel regarding a potential merger, the Trusts purchased additional shares from

other investors, including ITV. 18

In February 2008, Ecolab acquired Ecovation pursuant to a Merger

Agreement dated February 1, 2008.19 As a consequence of the merger, the Trusts

13
Compl. Ex. A ¶ 35.
14
See, e.g., id. ¶ 61.
15
Id. ¶¶ 26, 29.
16
Id. ¶¶ 64, 71.
17
Id. ¶ 71.
18
See id. ¶ 107.
19
Compl. Ex. C.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 6 of 28

made a substantial profit on the shares they received through the LOC and the shares

they had purchased from ITV. 20 The Trusts were also repaid the outstanding loan

amounts related to the LOC. The ITV complaint followed.

2. Settlement of the ITV Action
In April 2016, the parties in the ITV Action reached an agreement in principle

for settlement.21 The total settlement amount would be $4.9 million; the parties

apportioned $2.94 million to Creel, $960,000 to Frautschi, and $500,000 to each of

the Trusts.22 The parties conditioned settlement on Ecolab’s full indemnification of

Creel for her portion of the settlement.23 This contingency reduced the certainty of

settlement, and the district court set trial for January 2018. 24

In October 2016, Ecolab denied Creel’s demand for indemnification. 25 The

parties in the underlying action therefore could not move forward with the negotiated

20
Id. Ex. A ¶ 128.
21
Compl. ¶ 84.
22
Id. Ex. F, at 1.
23
Id. at 1-2.
24
Compl. ¶ 16.
25
See Kearney Aff. Mot. for Summ. J. ¶¶ 34-35.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 7 of 28

settlement. 26 The parties agreed to modify the terms of the settlement to eliminate

the indemnification contingency. Specifically, the Trusts agreed to advance to Creel

her portion of the settlement. 27

To remove the contingency of indemnification from the settlement in the ITV

Action, ITV agreed to reduce the settlement amount to $4.65 million, a difference

of $250,000. 28 The parties reduced the Trusts’ portion of the settlement because the

Trusts were assuming the risk that Creel may not be successful in her

indemnification claim for her portion of the settlement.

On April 25, 2017, the parties signed a formal Settlement and Release

Agreement (the “Settlement”).29 Each of the Trusts paid $437,500 for its respective

portion of the Settlement. 30 The district court dismissed the underlying proceeding

on May 1, 2017.31

26
See Compl. ¶ 92.
27
See id. Ex. F, at 1.
28
See Nelson Aff. Ex. V, at 2.
29
Nelson Aff. Ex. V.
30
Id. § 3(a), (b).
31
Compl. ¶ 120.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 8 of 28

3. The Ahlers Action
In addition to the ITV Action, a second action commenced in August 2008 in

the New York Supreme Court when approximately 100 former common

stockholders filed their complaint against Creel, Frautschi, the Trusts, Ecovation,

and other defendants. 32 This action was largely based on the same allegations and

contained similar claims as the ITV Action. 33

Ecolab provided advancement to Frautschi throughout the Ahlers action.34 In

September 2016, all defendants prevailed on summary judgment in that action.35

The New York Appellate Division, Fourth Department, affirmed the trial court’s

order on June 30, 2017.36 The parties filed no further appeals.37

32
Compl. ¶ 126; see generally id. Ex. B.
33
See generally id. Ex. B.
34
Compl. ¶ 133.
35
Nelson Aff. Ex. E.
36
Id.
37
Compl. ¶ 23.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 9 of 28

C. The Trusts’ Demands for Indemnification and This Litigation
Shortly after the Actions were filed, the Trusts sent letters to Ecolab to provide

notice of the Trusts’ indemnification claims. 38 In those letters, the Trusts referenced

the indemnification provision of the LOC:

Except for harm arising from the [Trusts’] willful
misconduct or wanton or malicious disregard of its rights,
[Ecovation] hereby indemnifies and agrees to defend and
hold each [Trust] harmless from any and all losses, costs,
damages, claims and expenses of any kind suffered by or
asserted against the Lender relating to claims by third
parties arising out of the financing provided under the
Loan Documents or related to any collateral . . . . This
indemnification and hold harmless provision will survive
the termination of the Loan Documents . . . . 39

Ecolab responded by letter to the Trusts’ demand related to the ITV Action.

In that letter, Ecolab refused to indemnify the Trusts or provide a defense for them. 40

“[Ecolab did] not believe [the Trusts] are entitled to indemnification under any of

the . . . agreements referenced in [the Trusts’] January 30, 2009 letter. . . . [Ecolab]

thus reserve[d its] rights to contest whether [the Trusts] are entitled to

38
Nelson Aff. Ex. Q (dated Sept. 3, 2008) (“This is a notice of an indemnification
claim . . . .”); id. Ex. R (dated Jan. 30, 2009) (“This is notice of an indemnification
claim . . . .”).
39
Compl. Ex. G § 6.6.
40
Nelson Aff. Ex. S.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 10 of 28

indemnification under the . . . agreements (including the [LOC]) referenced in [the

Trusts’] letter . . . .” 41 It appears that Ecolab failed to respond with a similar letter

to the Trusts’ request for indemnification for the Ahlers Action.

The Trusts, together with Frautschi, filed this action on November 30, 2016.42

On September 19, 2017, they filed their Verified Amended and Supplemental

Complaint (the “Complaint”). 43

II. ANALYSIS
In their Motion for Summary Judgment, Frautschi and the Trusts (together,

the “Frautschi Parties”) seek summary judgment on all counts of the Complaint,

including payment of the Trusts’ defense costs in the ITV and Ahlers Actions, full

indemnification of the Trusts’ portions of the Settlement, and attorneys’ fees in this

action. 44

41
Id.
42
D.I. 1.
43
D.I. 44.
44
The Frautschi Parties also seek (1) full indemnification of Frautschi’s portion of the
Settlement and (2) reimbursement of certain defense costs for Frautschi. Compl.
Counts I, III, IV. I address those portions of their motion in a separate letter opinion.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 11 of 28

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.”45 The movant bears the initial burden of demonstrating

that there is no question of material fact. 46 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.” 47 When considering a motion for

summary judgment, this Court must view the evidence and the inferences drawn

from the evidence in the light most favorable to the nonmoving party. 48 Even so, the

non-moving party may not rely on allegations or denials in the pleadings to create a

material factual dispute. 49

45
Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14,
2007) (citing Ct. Ch. R. 56(c)).
46
Deloitte LLP v. Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009).
47
Id. (citing Watson v. Taylor, 829 A.2d 936 (TABLE), 2003 WL 21810822, at *2
(Del. Aug. 4, 2003)).
48
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).
49
Ct. Ch. R. 56(e).
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 12 of 28

A. The Trusts’ Defense Costs in the ITV and Ahlers Actions
The Trusts contend that Ecolab must indemnify them in the ITV and Ahlers

Actions because Ecolab failed to meet its duty to defend the Trusts. 50

1. Wisconsin Law Governs the LOC
Under the terms of the LOC, Wisconsin law governs Ecolab’s contractual

obligation to defend the trusts.51 Under Wisconsin law, to initiate the indemnitor’s

duty to defend, the indemnitee is required to “effectuate[] a tender of defense.” 52 “A

tender of defense occurs once an [indemnitor] has been put on notice of a claim

against the [indemnitee].” 53

The Supreme Court of Wisconsin has held that after the indemnitor receives

the tender of defense, “[i]f there is any doubt about the [indemnitor’s] duty to defend,

[that doubt] must be resolved in favor of the [indemnitee].” 54 “[T]hese holdings

specifically apply to the question of whether coverage exists under a contract, [and]

50
Pls.’ Opening Br. 36-47.
51
Compl. Ex. G § 6.10.
52
Towne Realty, Inc. v. Zurich Ins. Co., 548 N.W.2d 64, 66 (Wis. 1996).
53
Towne Realty, 548 N.W.2d at 67.
54
Sch. Dist. of Shorewood v. Wausau Ins. Cos., 488 N.W.2d 82 (Wis. 1992); Elliott v.
Donahue, 485 N.W.2d 403, 407 (Wis. 1992).
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 13 of 28

underlying these decisions is the general realization that the [indemnitor] is in a

superior position to the [indemnitee] in relation to the formation and interpretation

of the . . . contract.”55

[I]f it is unclear or ambiguous whether the [indemnitee]
wishes the [indemnitor] to defend the suit, it becomes the
responsibility of the [indemnitor] to communicate with the
[indemnitee] before the [indemnitor] unilaterally forgoes
the defense. This places the “burden of ensuring clear
communication between the [indemnitor] and
[indemnitee] on the [indemnitor], who is better positioned,
in terms of expertise and resources, to manage such a
task.”56

If the indemnitor believes the claims are not covered by the agreement, then

the indemnitor may issue a reservation of rights letter.57 In addition to issuing the

reservation of rights letter, the indemnitor should provide an initial defense and then

commence a separate declaratory action to resolve whether the claims are covered.58

The Supreme Court of Wisconsin has held that the duty to defend is triggered

by a single covered claim. In Estate of Kriefall v. Sizzler USA Franchise, Inc., the

55
Towne Realty, 548 N.W.2d at 67.
56
Id. (footnote omitted) (quoting White Mountain Cable Constr. Co. v. Transamerica
Ins. Co., 631 A.2d 907, 910 (N.H. 1993)).
57
Newhouse v. Citizens Sec. Mut. Ins. Co., 501 N.W.2d 1, 6 (Wis. 1993).
58
MillerCoors LLC v. Millis Transfer Inc., 900 N.W.2d 343 (TABLE), 2017 WL
2131323, at *4 n.6 (Wis. Ct. App. May 16, 2017).
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 14 of 28

Supreme Court affirmed the trial court’s grant of summary judgment for the

indemnitee regarding whether the indemnitor breached its duty to defend:

When discussing an alleged breach of the duty to defend
under an indemnification agreement, we have noted that
an indemnitor’s duty to defend does not depend on the
merits of the claim asserted. Instead, the duty to defend
arises when potential liability is asserted against the
indemnitee. Indemnitors who deny their responsibility
after tender of a potential suit or liability “cannot
subsequently be allowed to turn around and evade the
consequences which their own conduct and negligence
have superinduced.”

[The indemnitor’s] conduct showed that it ignored its duty
to defend, as well as its duty to indemnify under the Hold
Harmless Agreement. The Hold Harmless Agreement
explicitly states that [the indemnitor] promised to defend
[the indemnitee] “from all actions, suits, claims and
proceedings.” Accordingly, regardless of [the
indemnitee’s] ultimate liability, [the indemnitor] was
obligated to honor its duty to defend upon [the
indemnitee’s] tender of a claim against it for acts or
omissions that were arguably within the purview of the
Hold Harmless Agreement.59

To establish whether an indemnitor has breached its duty to defend, the court

“compare[s] the allegations contained within the four corners of the complaint to the

59
816 N.W.2d 853, 869-70 (Wis. 2012) (emphasis added) (citing Elliott v. Donahue,
485 N.W.2d 403, 407 (Wis. 1992); Barrons v. J.H. Findorff & Sons, Inc., 278
N.W.2d 827, 832 (Wis. 1979)) (quoting Deminsky v. Arlington Plastics Mach., 657
N.W.2d 411, 426 (Wis. 2003)).
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 15 of 28

terms of the parties’ contract. In addition, the allegations in the complaint are to be

liberally construed in favor of the indemnitee.” 60 If one claim is arguably within the

purview of the agreement, then the indemnitor must defend the entire case.61

Where an exception limits the duty to indemnify, that limitation

presumptively applies only to the duty to indemnify and not to the duty to defend.62

For example, in Estate of Kriefall, the Supreme Court of Wisconsin held that a

limitation referring to “[c]laims . . . caused by the negligent acts or omissions of

[indemnitee]” did not limit the indemnitor’s duty to defend the claims based on

alleged negligence; the limitation applied only to the duty to indemnify. 63 To limit

the duty to defend, the limitation must unambiguously refer to allegations.64 The

court “will not read words into the contract that the parties opted not to include.”65

60
MillerCoors, 2017 WL 2131323, at *3 (citing Water Well Sols. Serv. Grp. Inc. v.
Consol. Ins. Co., 881 N.W.2d 285, 291 (Wis. 2016)).
61
Id. at *6; see Fabco Equip., Inc. v. Kreilkamp Trucking, Inc., 841 N.W.2d 542, 548-
49 (Wis. Ct. App 2013).
62
See MillerCoors, 2017 WL 2131323, at *5.
63
816 N.W.2d at 865, 869.
64
MillerCoors, 2017 WL 2131323, at *5 (comparing “negligence” and “alleged
negligence”).
65
Id. (quoting Ash Park, LLC v. Alexander & Bishop, Ltd., 866 N.W.2d 679, 689 (Wis.
2015)).
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 16 of 28

“When an insurer breaches a duty to defend its insured, the insurer is on the

hook for all damages that result from that breach of its duty.” 66 The Supreme Court

of Wisconsin explained,

[A] party aggrieved by an [indemnitor’s] breach of its duty
to defend is entitled to recover all damages naturally
flowing from the breach . . . . Damages which naturally
flow from an [indemnitor’s] breach of its duty to defend
include: (1) the amount of the judgment or settlement
against the insured plus interest; (2) costs and attorney fees
incurred by the insured in defending the suit; and (3) any
additional costs that the insured can show naturally
resulted from the breach.67

2. Ecolab’s Duty to Defend
The Trusts sent letters a few months after the start of each of the Actions.

These letters informed Ecolab that the Trusts “claim indemnification under the

[LOC] for all obligations and expenses incurred by them in connection with the . . .

lawsuit . . . , to the full extent such indemnification is available.” 68 The letters

informed Ecolab that litigation was pending against the Trusts and identified the

basis of their right to indemnification.69 These letters were sufficient to put Ecolab

66
Maxwell v. Hartford Union High Sch. Dist., 814 N.W.2d 484, 496 (Wis. 2012).
67
Id. (omission in original) (quoting Newhouse, 501 N.W.2d at 6).
68
Nelson Aff. Ex. Q, at 2; id. Ex. R, at 2.
69
See id. Exs. Q, R.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 17 of 28

on notice of the claims against the Trusts, and the Trusts therefore effectuated

tenders of defense.

Regarding the ITV Action, Ecolab responded to the tender of defense by

issuing a reservation of rights letter. 70 After issuing this letter, Ecolab took no further

action—it failed to provide a defense for the Trusts in the ITV Action, and it failed

to seek a declaratory judgment to determine whether it must provide a defense.71

Regarding the Ahlers Action, Ecolab took no action. It did not provide a defense for

the Trusts, nor did it issue a reservation of rights letter.

Ecolab argues that the Trusts elected to retain their own counsel and that this

election provides evidence that the Trusts did not demand a defense from Ecolab.72

Ecolab, however, fails to point to any authority to support this conclusion. 73 The

Trusts’ self-help measure of retaining its own counsel does not absolve Ecolab of its

duty to defend. 74 Further, if it was unclear or ambiguous whether the Trusts wished

70
See id. Ex. S.
71
Compl. ¶ 62.
72
Def.’s Opp’n Br. 49.
73
See id. at 49-50.
74
See Deminsky, 657 N.W.2d at 425-26 (citing Ill. Cent. R.R. v. Blaha, 89 N.W.2d
197, 200 (Wis. 1958); Newhouse, 501 N.W.2d at 6).
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 18 of 28

Ecolab to defend the Trusts in the Actions, it was the responsibility of Ecolab to

communicate with the Trusts. Wisconsin law places the burden of ensuring clear

communication on Ecolab.75

Ecolab also argues that the duty to defend extends only to “covered” claims. 76

This argument misstates Wisconsin law, which states that a single covered claim

triggers the duty to defend the entire case.77 If the allegations within the four corners

of the ITV or Ahlers Complaints, construed liberally in favor of the Trusts, arguably

raise a reasonable inference that the claims arose “out of the financing provided

under the [LOC],” 78 then the Actions trigger Ecolab’s duty to defend under the

LOC’s indemnification provision. 79 In both the ITV and the Ahlers Actions, the

plaintiffs’ relevant claims stem from the allegation that the Trusts exercised control

over Ecovation because the Trusts could threaten to foreclose on the LOC.80

Because the alleged control arises from the terms of the LOC, I conclude that the

75
Towne Realty, 548 N.W.2d at 67.
76
Def.’s Opp’n Br. 33-35.
77
Estate of Kriefall, 816 N.W.2d at 869-70.
78
Compl. Ex. G § 6.6.
79
See Estate of Kriefall, 816 N.W.2d at 869.
80
Compl. Ex. A ¶¶ 141, 150, 159, 182; id. Ex. B ¶¶ 402, 411, 415, 440.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 19 of 28

alleged control arises “out of the financing provided under the [LOC].” 81 This

alleged control plays a role in multiple claims against the Trusts in the ITV Action.82

The same is true for the Ahlers Action.83 The Trusts’ ability to foreclose on the LOC

arose out of the financing provided under the LOC. 84 Construing the allegations

liberally in favor of the Trusts in accordance with Wisconsin law, I conclude that the

claims arguably arose “out of the financing provided under the Loan Documents.”85

The indemnification provision has an exception “for harm arising from the

[Trusts’] willful misconduct or wanton or malicious disregard of [Ecovation’s]

rights.”86 Ecolab focuses its argument on whether the underlying actions “[arose]

out of the financing provided under the Loan Documents” and makes no argument

that this exception to the indemnification provision applies.87 The court in the Ahlers

81
Id. Ex. G § 6.6.
82
See id. Ex. A ¶¶ 141, 150, 159, 182.
83
See id. Ex. B ¶¶ 402, 411, 415, 440.
84
See id. Ex. A ¶ 141.
85
Id. Ex. G § 6.6.
86
Id.
87
Id.; Def.’s Opp’n Br. 32-35, 38-39.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 20 of 28

action granted summary judgment in the Trusts’ favor, 88 and thus, the court made no

finding of any harm, excepted or not. In the ITV Action, where the litigation ended

in a settlement,89 there also was no finding that any excepted harm occurred.

Because the limitation to the indemnification provision does not unambiguously

refer to allegations of harm—as opposed to actual harm—it does not limit the duty

to defend. Therefore, the exception in the indemnification provision does not apply

here.

Because the allegations in the complaints fall within the indemnification

provision and because the excepted harm is not present, the indemnification

provision applies. Ecolab had a duty to defend the Trusts in the ITV and Ahlers

Actions. It failed to do so and, therefore, breached its duty.

Under Wisconsin law, when an indemnitor breaches its duty to defend, the

indemnitee is entitled to recover “(1) the amount of the judgment or settlement

against the [indemnitor] plus interest; (2) costs and attorney fees incurred by the

[indemnitee] in defending the [underlying] suit; and (3) any additional costs that the

88
Nelson Aff. Ex. E.
89
See id. Ex. V.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 21 of 28

[indemnitee] can show naturally resulted from the breach.” 90 These amounts must

be reasonable. 91

Here, Ecolab makes no arguments regarding the reasonableness of the Trusts’

defense costs.92 Ecolab also fails to assert a genuine dispute of material fact related

to its duty to defend. Because there are no genuine disputes of material fact

regarding Ecolab’s duty to defend the Trusts in the ITV and Ahlers Actions and

because the defense costs are reasonable, the Trusts are entitled to judgment as a

matter of Wisconsin law.

The Trusts also seek prejudgment interest on defense costs expended since

2008. 93 Under Wisconsin law, prejudgment interest should be awarded when

(1) demand has been made and (2) the amount is determinable.94 “[A]ttorney

90
Maxwell, 814 N.W.2d at 496.
91
See Kriefall, 816 N.W.2d at 870.
92
The Trusts assert that their defense costs (“attorneys’ fees and expenses”) were
reasonable. Pl.’s Opening Br. 50.
93
Id.
94
Chi. Title Ins. Co. v. Runkel Abstract & Title Co., 654 F. Supp. 2d 926, 928 (W.D.
Wis. 2009); U.S. Fire Ins. Co. v. Good Humor Corp., 496 N.W.2d 730, 740-41 (Wis.
Ct. App. 1993) (citing Olguin v. Allstate Ins. Co., 237 N.W.2d 694, 698 (Wis.
1976)).
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 22 of 28

fees . . . [become] determinable as soon as they [are] incurred.”95 “[T]he burden of

making the determination of the amount owed is on the party withholding

payment.” 96 Wisconsin has an equitable policy supporting prejudgment interest

because the “plaintiff should be compensated for the time value of the money he

would have had if the payment had been made when due.” 97

Here, the Trusts made demand for their attorneys’ fees when they put Ecolab

on notice of the claims against the Trusts. In those letters, the Trusts “claim[ed]

indemnification under the [LOC] for all obligations and expenses incurred by them

in connection with [the ITV and Ahlers Actions].” 98 The letters are dated September

3, 2008 (for the Ahlers Action), and January 30, 2009 (for the ITV Action). 99 Under

Wisconsin law, the burden was on Ecolab to inquire as to any amounts it may have

owed.100 It is, therefore, irrelevant that the Trusts did not make a second demand for

95
Good Humor, 496 N.W.2d at 741.
96
Id. (citing Klug & Smith Co. v. Sommer, 265 N.W.2d 269, 272 (Wis. 1978)).
97
See Chi. Title Ins. Co., 654 F. Supp. 2d at 928-29 (quoting Medcom Hldg. Co. v.
Baxter Travenol Labs, Inc., 200 F.3d 518, 519 (7th Cir. 1999)).
98
Nelson Aff. Ex. Q, at 2; id. Ex. R, at 2.
99
Id. Ex. Q, at 1; id. Ex. R, at 1.
100
Good Humor, 496 N.W.2d at 741.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 23 of 28

its attorneys’ fees until June 2016. 101 For these reasons, I award prejudgment interest

at Wisconsin’s statutory rate 102 from either the later of (1) the date of the demand103

or (2) when the Trusts made payment. 104

For the foregoing reasons, I grant the Frautschi Parties’ Motion for Summary

Judgment as to the Trusts’ defense costs in the ITV and Ahlers Actions.

B. Indemnification for the Trusts’ Portions of the Settlement
Under Wisconsin law, when an indemnitor breaches its duty to defend, the

indemnitee is entitled to recover “the amount of the judgment or settlement against

the [indemnitor].” 105 Generally, the indemnitor who fails in its duty to defend cannot

contest the reasonableness of the judgment or settlement. 106 But when the

indemnitor is denied the opportunity to participate in the settlement process, it is not

“equitable to bind [the indemnitor] to the settlement agreement.” 107 In Deminsky v.

101
See Def.’s Opp’n Br. 57-58 (asserting that demand was made in June 2016).
102
See Wis. Stat. § 138.04.
103
See Nelson Aff. Ex. Q, at 1; id. Ex. R, at 1.
104
See Solheim Aff. Ex. 1; Kearney Aff. Att’ys’ Fees and Expenses Exs. 1-3.
105
Maxwell, 814 N.W.2d at 496.
106
See Deminsky, 657 N.W.2d at 427-28.
107
Id. at 427.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 24 of 28

Arlington Plastics Machinery, the Supreme Court of Wisconsin held that a

settlement was unreasonable because the indemnitor did not know that settlement

negotiations were in progress and had no “opportunity to challenge the

reasonableness and validity of the settlement agreement.”108 The court remanded

“for a limited trial . . . regarding the reasonableness of the settlement.” 109

The Frautschi Parties assert that Ecolab had multiple opportunities to

participate in the settlement process but declined to do so. 110 The Frautschi Parties

provide supporting evidence through an affidavit. The affidavit states that “Ecolab

was kept advised on the status of settlement discussions, and given every opportunity

to participate in that process.”111 Additionally, Ecolab’s counsel participated in the

mediation of the ITV Action.112 The affidavit also refers to communications in April

2016 from counsel for the Frautschi Parties to Ecolab’s counsel regarding settlement

developments.113

108
Id. at 428.
109
Id.
110
Pl.’s Opening Br. 40.
111
Kearney Aff. Mot. for Summ. J. ¶ 22.
112
Id. ¶ 25.
113
Id. ¶ 30, 32.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 25 of 28

Ecolab, on the other hand, asserts that counsel for Creel and counsel for the

Frautschi Parties prevented Ecolab from participating in the settlement process.114

Ecolab also presents supporting evidence through an affidavit. In that affidavit,

counsel for Ecolab states that he suggested to counsel for the Frautschi Parties they

jointly negotiate settlement with ITV and that the Frautschi Parties rejected his

suggestions.115 Additionally, Ecolab provides supporting evidence that the

information Creel and the Frautschi Parties provided to Ecolab shortly before

settlement negotiations concluded did not accurately reflect the terms of the

Settlement.116

Here, the parties dispute whether Ecolab had the opportunity to participate in

the settlement process and, if Ecolab had that opportunity, whether Ecolab declined

to participate. I cannot decide this issue without weighing the evidence and

114
Def.’s Opp’n Br. 9.
115
Trevor Aff. ¶ 5.
116
Id. ¶¶ 7-8.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 26 of 28

assessing credibility, which is improper at this stage. 117 Thus, this issue constitutes

a genuine dispute of material fact. 118

C. Fees-on-Fees
The Trusts seek reimbursement of their legal fees in this case. “The American

Rule provides that parties to litigation typically are responsible for their own attorney

fees.”119 Under Wisconsin law, if parties contract for the award of attorneys’ fees,

then the court may deviate from the American rule. 120 Courts “construe the contract

language according to its plain or ordinary meaning. ‘If the contract is unambiguous,

[the] attempt to determine the parties’ intent ends with the four corners of the

contract . . . .’” 121

117
Cerberus Int’l , Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1150 (Del. 2002).
118
I do not address Ecolab’s reasonableness argument as it is contingent on a showing
that Frautschi or the Trusts prevented Ecolab from participating in the settlement
process.
119
Estate of Kriefall, 816 N.W.2d at 872.
120
Id.; Colleran v. Wildes, 886 N.W.2d 592 (TABLE), 2016 WL 4195354, at *6 (Wis.
Ct. App. Aug. 9, 2016) (“We conclude that [fees-on-fees] are the legal consequence
of the original wrongful act by M.D. Transportation in refusing to accept defense
when tendered without obtaining a prior ruling on its obligation to defend.”).
121
Town Bank v. City Real Estate Dev., LLC, 793 N.W.2d 476, 484 (Wis. 2010)
(quoting Huml v. Vlazny, 716 N.W.2d 807, 820 (Wis. 2006)).
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 27 of 28

Here, Section 6.5 of the LOC states, “[Ecovation] will reimburse the [Trusts]

for all reasonable attorneys’ fees and all other reasonable costs, fees and out-of-

pocket disbursements (including fees and disbursements of counsel) incurred by a

[Trust] . . . in connection with the administration, defense and enforcement, of this

[LOC] Agreement.” 122 The plain language of the contract is unambiguous.

The Trusts are entitled to fees-on-fees in this case.123 Therefore, I grant the

Frautschi Parties’ Motion for Summary Judgment as to the Trusts’ claim for fees-

on-fees.

III. CONCLUSION
For the foregoing reasons, I GRANT the Frautschi Parties’ Motion for

Summary Judgment as to the Trusts’ claims for its defense costs in the underlying

Actions and for fees-on-fees, and I DENY the motion as to the claim for

indemnification for the Trusts’ portions of the Settlement. Trial shall focus on the

122
Compl. Ex. G § 6.5 (emphases added).
123
Ecolab argues that (1) an award of fees-on-fees is premature when the Frautschi
Parties have not yet succeeded on their underlying claims and (2) the Trusts are not
entitled to fees-on-fees for fees incurred from November 2016 through April 2017,
when the Plaintiffs’ original complaint asserted a different theory. Def.’s Opp’n Br.
56-57. Under the plain language of the LOC, these arguments fail.
Frautschi et al. v. Ecolab, Inc.
C.A. No. 12951-VCMR
October 31, 2018
Page 28 of 28

following issue: whether the Trusts prevented Ecolab from participating in the

settlement process in the ITV Action.

IT IS SO ORDERED.

Sincerely,

/s/Tamika Montgomery-Reeves

Vice Chancellor

TMR/jp