If you are a director, officer, member, manager, or even an employee in a business, and you find yourself in a legal dispute (formal litigation or otherwise), the business may be required to pay (advance) your legal expenses as they are incurred. State laws, along with perhaps your organization’s governing documents (including any applicable Operating Agreement, Bylaws, or a Shareholder Agreement), often impose requirements upon businesses to pay (advance) legal expenses in all sorts of cases (to read more on this topic, please click here). While the business may be legally required (including ordered by a court) to advance legal expenses to you / your attorney as they are incurred (as opposed to at the very end of the case), the business will undoubtedly keep a close eye on those expenses and may seek to challenge the amounts being paid and/or the payment procedure itself.
A business’ challenge to the advancement of legal expenses can prove time consuming and costly for all involved. In March 2012, the Delaware Court of Chancery acknowledged that in certain cases a special master (typically a local attorney) is appointed to oversee challenges to advancement amounts and/or payment procedures; however, the court recognized, appointing a special master adds yet another layer of expense and time. Danenberg v. Fitracks, Inc., 6454-VCL, 15 (Del. Ch. Mar. 5, 2012) (stating: ”But appointing a special master comes at a cost. Seasoned Delaware lawyers are not cheap, and the additional layer of review lengthens the timeline to payment.”). The court then identified an alternative means of addressing challenges to advancement amounts and payment procedures.
After acknowledging the inherent drawbacks of appointing a special master, the Delaware court outlined a detailed, step-by-step procedure for how parties may resolve advancement disputes (such as challenges to the advancement amount and/or payment logistics) without a special master:
- Before the 10th calendar day of each month, Danenberg’s counsel will submit an advancement demand for fees and expenses incurred during the previous month. Any fees or expenses not included in the demand are deemed waived. The advancement demand will include the following:
- A detailed invoice identifying the fees and expenses for which advancement is requested. The invoice shall provide for each time entry the date, timekeeper, billing rate, task description, time incurred, and amount charged. The invoice shall identify with detail for each expense the date of the charge, its nature, and the amount incurred.
- A certification signed by the senior member of the Delaware bar representing Danenberg attesting that (i) he personally reviewed the invoice, (ii) each time entry and expense falls within the scope of Danenberg’s advancement rights, (iii) in his professional judgment, the fees and expenses charged are reasonable in light of the factors listed in Rule 1.5(a), and (iv) the services rendered were thought prudent and appropriate in his good faith professional judgment.
- Before the 20th calendar day of the month, Fitracks’ counsel will respond to the advancement demand in writing. The response shall identify each specific time entry or expense to which Fitracks objects and explain the nature of the objection. The senior member of the Delaware bar representing Fitracks shall certify that (i) he personally reviewed the advancement demand and (ii) in his professional judgment, the disputed fees and expenses are not reasonable or otherwise fall outside the scope of the advancement right. The response shall cite any legal authority on which Fitracks relies. Any objection not included in the response is deemed waived.
- Fitracks shall pay the undisputed amount contemporaneously with the response. If Fitracks disputes more than 50% of the amount sought in any advancement demand, Fitracks shall pay 50% of the amount sought and Danenberg’s counsel shall hold the amount exceeding the undisputed amount in its escrow account pending resolution of the dispute regarding such portion.
- Before the 25th calendar day of each month, Danenberg’s counsel will reply to the advancement response in writing and provide supporting information and authority.
- Before the last calendar day of the month, the senior members of the Delaware bar representing each side will meet, in person, and confer regarding any disputed amounts. Any additional advancement that results from the meet-and-confer session will be paid with the next month’s payment of undisputed amounts.
- Not more frequently than quarterly, Danenberg may file an application pursuant to Court of Chancery Rule 88 seeking a ruling on the disputed amounts. Briefing shall consist of a motion, an opposition filed within fifteen days of the motion, and a reply filed within ten days of the opposition. Danenberg and Fitracks shall not raise any new arguments not previously raised with the other side in the applicable demand, response, reply, or meet-and-confer. Danenberg and Fitracks only shall cite authorities identified in writing in the applicable demand, response, or reply. The Court will determine if a hearing is warranted.
- If the Court grants an application in whole or part, then pre-judgment interest is due on the adjudicated amount from the date of the applicable advancement demand. In addition, in parallel with the next advancement demand, Danenberg may demand indemnification for the fees and expenses incurred in connection with the granted application, proportionate to the extent of success achieved. The parties shall address the indemnification demand in the same manner as the advancement demand. Except in connection with a successful application, Danenberg shall not seek or receive advancement or indemnification for time spent preparing invoices and advancement demands, addressing responses, or conferring regarding advancement requests.
This step-by-step procedure provides excellent guidance and insight on how other courts may also seek to resolve challenges to advancement amounts without appointing a special master. For more information on advancement / reimbursement of legal expenses you should consider contacting a licensed attorney.
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