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Category: Coverage of Fees

Chancery Court: Railroad Operator’s Attorney Fees Must Be Covered

November 27, 2020

A recent Law 360 story by Rose Krebs, “Railroad Operator’s Fees Must Be Covered Chancery Says,” reports that a Delaware vice chancellor ruled that American Rail Partners LLC must cover legal expenses incurred by a railroad ownership company that it sued over unjust enrichment claims, saying an agreement in place "unambiguously" provides that expenses be covered.  In a 24-page memorandum opinion, Vice Chancellor Paul A. Fioravanti Jr. said fee advancement provisions of American Rail Partners' limited liability agreement are "quite broad" and unambiguous.

"For purposes of this action, there is no dispute that the plaintiffs are covered persons under the broad advancement and indemnification provisions of the company's limited liability company agreement," the opinion said.  International Rail Partners LLC, its manager Gary O. Marino and Boca Equity Partners LP sued American Rail for the advancement of fees earlier this year, asserting that their LLC agreement entitles them to "mandatory advancement and indemnification" related to a suit filed in the First State's Superior Court in February.

Boca Equity is the sole owner and only member of International Rail, according to court filings. International Rail is one of two members of American Rail, the opinion said.  Despite the "broad scope" of the advancement provisions, American Rail had argued it should not be required to advance legal fees because the LLC agreement "does not provide indemnification for claims between the company and any covered person — what it calls 'first-party claims,'" the suit said.

American Rail argued that "an indemnification or advancement provision may only cover first-party claims if it expressly says so," the opinion said.  The vice chancellor, however, said that argument was "not based upon a plain reading" of the agreement, and there is a "strong public policy in favor of indemnification and advancement" in Delaware.  That policy aims to assure key corporate officers that they will not have to shoulder the risk of paying legal expenses for claims related to the performance of their duties, the opinion said.

In April, Vice Chancellor Fioravanti refused to toss the suit, saying questions remained about fee advancement provisions agreed to by the parties. The vice chancellor said he couldn't conclude as a "matter of law" that American Rail offered the only "reasonable" interpretation of the applicable limited liability agreement.  Although Vice Chancellor Fioravanti identified certain shortcomings with how the complaint was pled, including a failure to invoke certain advancement provisions that were later referenced in briefings, he said there was not enough cause to toss the Chancery Court suit.

Judge Tosses Suit Seeking Coverage of Defense Fees

November 23, 2020

A recent Law 360 story by Rachel O’Brien, “Judge Nixes Suit For Crypto Co. Investor’s $728K Atty Fees,” reports that a New York federal judge tossed a lawsuit by an alleged pump-and-dump scheme mastermind asking for his attorney fees to be paid by a cryptocurrency company involved in the alleged scheme, ordering the man to pay the company's fees instead.  While Barry Honig and his business GRQ Consultants Inc. point to indemnification clauses in agreements with Riot Blockchain as proof that his legal fees should be paid, U.S. District Judge Naomi Reice Buchwald said the clauses say the opposite.

Honig, at one time the largest shareholder in Riot Blockchain, spearheaded a $27 million pump-and-dump scheme involving 10 individuals and 10 associated corporate entities, the U.S. Securities and Exchange Commission alleged in September 2018.  Honig and others, including former Teva Pharmaceutical Industries Ltd. chairman Phillip Frost and Riot Blockchain CEO John O'Rourke, manipulated stock prices in three microcap companies and left investors holding "virtually worthless shares," the SEC said.

In July 2019, Honig settled the SEC claims without admitted any wrongdoing, submitting to an injunction barring him from future violations of federal securities laws, a penny stock ban and further restrictions.  Honig was named in several other suits, including in five shareholder derivative actions which alleged Riot, its directors and officers and Honig violated securities laws, and that Honig bought stock from Riot to gain "control" over the company so he could violate the securities laws.

A February 2018 class action from shareholder Creighton Takata in New Jersey federal court alleged that Honig's purchase of securities was part of a "fraudulent scheme consisting of misrepresentations, omissions, and actions that deceived the investing public in violation of securities laws."  He called those allegations "a house of cards" in his October 2019 motion to dismiss, which was granted in April because the shareholders didn't show how the defendants violated anti-fraud provisions of federal securities law, the judge said then.

In the case tossed, Honig had argued that the security purchase agreements he entered into with Riot in 2017 to buy convertible promissory notes and common stock purchase warrants guaranteed that if Honig was a defendant in a lawsuit, Riot would pay his legal fees.  The indemnification clauses in the agreements, Honig argued in the April suit, meant Riot must pay the $728,000 attorney fees he incurred fighting securities fraud allegations by the SEC and in class actions.

Riot argued that Honig's claim fails because Riot isn't obligated to pay when the litigation is connected with actions "based upon ... any violations by [Honig] of securities laws or any conduct by [Honig] which constitutes fraud, gross negligence, willful misconduct or malfeasance by [Honig]."  But Honig said the carveout in the indemnification clause only applies to actual securities violations, and since some of the lawsuits are ongoing, he's entitled to advancement of legal costs.

Judge Reice Buchwald agreed with Riot that "the allegations of the underlying action — not the merits of the action — govern Riot's obligations."  Since it's the nature of the allegations that trigger the obligation to indemnify, the clauses clearly side with Riot, Judge Reice Buchwald said.  "If there were any ambiguity, which there is not, about when the obligation to indemnify is determined (and thus whether allegations or merits control), the next sentence of Section 4.8 confirms the court's conclusion," she said.  She pointed to the section that states if an action is brought wherein the indemnity clause might be implemented, Honig must notify Riot in writing and Riot "shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to [Honig]."

"The logic of Section 4.8's structure is apparent," the judge said.  "The first sentence informs the parties as to whether indemnification is required.  If and when those conditions are satisfied, Honig would notify Riot, which then has the option to assume the defense.  The provision presupposes that the parties can determine, prior to that notice, whether an obligation to indemnify exists."

Judge Reice Buchwald also granted Riot's motion that Honig pay its reasonable attorney fees for this action.  Scott Carlton of Paul Hastings LLP, counsel for Riot Blockchain, told Law360 in a statement, "We are pleased with the court's careful consideration in this matter, including the awarding of attorneys' fees for Riot Blockchain as the prevailing party."

Insurers Refuse to Pay $18M in Defense Fees in Experian Class Actions

November 19, 2020

A recent Law 360 story by Joanne Faulkner, “Insurers Deny Liability in Experian’s $18M Legal Fees Suit,” reports that two insurers have told a London judge they are entitled to refuse to pay Experian's $18 million claim for coverage of its U.S. legal fees in a pair of class actions over errant credit reporting because the litigation stems from deliberate data erasure by staff at the company.  Zurich Insurance PLC and a subsidiary of SCOR said Experian's policy excludes "deliberate acts" such as those that allegedly form the basis of two major class action suits in the U.S., a newly public Nov. 13 defense said, after the company sued to claw back litigation fees.

The claims made against Experian — which said it has racked up millions of dollars in liabilities and legal costs defending the suits — were for statutory damages according to the U.S. Fair Credit Reporting Act.  If Experian is liable, it is the result of a "wilful (or reckless) failure on the part of an employee or employees … to comply with the FCRA," the defense said. 

Experian says in its October High Court suit that it paid a class of more than 100,000 payday loan customers $24 million to settle a lawsuit in January brought by lead plaintiff Demeta Reyes.  A $5 million deal was reached with consumers in the so-called Smith action.  The customers said they were harmed by inaccurate reporting of their credit history.  The insurers said that Experian's alleged liability in the Reyes action arises out of the deleting of loan records —  particularly those held by an entity called Delbert Services Corp.  In the Smith action, it is connected to the re-reporting of records relating to loans held by CashCall Inc.  Experian directors were involved in the decision-making in both incidents, the insurers said.

From April 2015 through April 2016, Experian held a complex multitiered insurance "tower" consisting of a primary policy from XL Specialty Insurance Co. and several layers of excess coverage, Experian says.  Zurich and SCOR unit General Security Indemnity Co. of Arizona are each liable for half of a $20 million excess policy, which kicked in once the underlying coverage was depleted, Experian says.  So far the insurers have only paid out a slice of the $20 million excess that Experian says it is entitled to, the company alleges.

Experian is also seeking a declaration from the court that the insurers will cover financial penalties that Experian may have to pay as a result of investigations into a 2015 cyberattack.  The two insurers said that coverage is provided for regulatory fines and penalties, but Experian must prove that any sanction is "lawfully insurable."

Experian says it has run up costs of more than $32 million defending two major related class suits.  Thousands of consumers successfully argued that Experian's failure to delete certain negative information in their consumer credit reports caused them harm.

Experian says it should be able to recover $18 million in legal costs from the insurers under its third-party liability and first-party insurance policies.  The suit also name-checks an action brought by Carolyn Clark alleging the company violated the FCRA, which ended up costing Experian more than $21 million. The company says it could be entitled to an indemnity of $14.3 million from the insurers to cover the costs from that case.

Ex-Uber Official Seeks Coverage of Fees Under Corporate By-Laws

October 13, 2020

A recent Law 360 story by Rose Krebs, “Uber’s Ex-Security Chief Seeks Legal Fees For Breach Suit,” reports that Uber's ex-head of security filed suit in Delaware Chancery Court seeking to have the company pay his legal fees in connection with charges he faces for allegedly trying to cover up a cyberattack that exposed the data of 57 million riders and drivers.  Joseph Sullivan, who is also a former cybercrime prosecutor at the U.S. Department of Justice, says Uber Technologies Inc. should cover his legal fees per a "mandatory indemnification and advancement" provision of the ride-hailing company's bylaws.

"Uber granted its 'officers' mandatory advancement rights and yet is resisting those rights for its former chief security officer, Mr. Sullivan, who has been sued by the federal government by reason of the fact of his service to the company as an officer," the suit asserted.  In August, Sullivan was charged in California federal court with obstructing justice and concealing a felony for allegedly misleading the Federal Trade Commission about the 2016 incident, which included a $100,000 payoff he allegedly arranged from Uber to two hackers in exchange for keeping the episode quiet.

Uber initially referred to the payout internally as part of its "bug bounty" program, which incentivizes cybersecurity experts to report security flaws to the company.  But the $100,000 sum was 10 times the program's award cap at the time, and an Uber executive later admitted to Congress that the payoff was akin to extortion.  The payment and cover-up came at the same time as Uber was negotiating a settlement with the FTC over a similar 2014 incident in which hackers pilfered user data from one of Uber's Amazon cloud storage sites, according to another criminal complaint.

Sullivan, who was "visibly shaken" after hearing of the new breach, concealed the episode from both the FTC and Uber's attorneys who were negotiating with federal regulators, the DOJ asserts.  Sullivan told a co-worker at the time "that he could not believe they had let another breach happen and that the team had to make sure word of the breach did not get out," a witness told investigators, according to the California suit.

Sullivan is also accused of misleading Uber's new management team that took over in 2017, editing a summary of the incident prepared by his team to remove key details including that the hackers had stolen user data, court filings said.  The company's CEO, Dara Khosrowshahi, announced the data breach in November 2017, saying that Sullivan had been fired for not disclosing the incident sooner.  Since allegations in the California suit relate to his alleged conduct in connection with the 2016 breach and during his time as an Uber officer, Sullivan contends he is entitled to have the company advance his legal fees.

OPM Plans to Limit Attorney Fees for Federal Workers

October 9, 2020

A recent Law 360 story by Jon Steingart, “OPM Plans to Limit Back Pay, Attorney Fees for Federal Workers,” reports that the U.S. Office of Personnel Management unveiled a proposal that would narrow the circumstances when federal employees can recover back pay and attorney fees after management makes a mistake that causes them to be underpaid.

The notice of proposed rulemaking from the U.S. government's central human resources agency would retool Back Pay Act regulations that allow federal employees to be made whole if they are underpaid because their employer didn't comply with a legal requirement or a collective bargaining agreement.  The OPM said current regulations exceed Congress' intent for the law to have a narrow scope that covers only alleged underpayment connected to an action such as a suspension, termination or a demotion.  "By extending the Back Pay Act's coverage beyond personnel actions they encourage and subsidize expensive litigation over any matter that affects employee pay," the OPM wrote in the notice.

As an example of a scenario that is not covered by the Back Pay Act, the OPM identified a situation where the U.S. Department of Defense clawed back too much when it recouped a housing allowance that it overpaid to a teacher working on an overseas military base.  The employee couldn't get a refund under the Back Pay Act because a miscalculated recoupment isn't a personnel action, the OPM noted.

In another example of a situation that Congress didn't intend the Back Pay Act to cover, the OPM identified a case where an arbitrator found that a Veterans Affairs hospital didn't give a performance award to an employee who earned it.  The arbitrator ordered the hospital to pay the employee $1,000 for the award and $30,387 in attorney fees under the act, the notice said. 

"Requiring agencies to pay tens of thousands of dollars in attorney fees in litigation over much smaller performance awards wastes agency resources," the OPM said.  "It also encourages agencies to broadly distribute performance awards, to avoid litigation.  This undermines the purpose of performance awards, which is to recognize, reward, and incentivize high performance."

The proposed rule would also specify that a union cannot collect attorney fees under a Back Pay Act regulation that permits them for an "employee or an employee's personal representative."  The OPM explained that courts have interpreted this regulation to include labor organizations, but that wasn't what the OPM meant when it wrote the rule in 1981.