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Category: Fees & Corp. Bylaws

Former CEO Sues Over Legal Fee Advancement

January 19, 2024

A recent Law 360 story by Jeff Montgomery, “Joonko Ex-CEO Sues in Del. for Legal Fees Related to Probe”, reports that the former CEO of AI-powered employee recruitment venture Joonko Diversity Inc. has sued the company for legal fee advancement in Delaware's Court of Chancery, alleging corporate failure to cover attorney expenses that total more than $300,000 and are still rising, related to still-under-wraps investigations.  The suit from former CEO and company founder Ilit Raz accuses the company of refusing to advance the money despite obligations established in its bylaws, an indemnification agreement and Delaware law.

Joonko has been in the news amid reports of alleged misconduct by Raz. A June statement by Joonko's board reported the discovery of "misstatements in financial reporting" and asserted that Raz was "was found to have engaged in egregious, unethical and fraudulent conduct, which caused harm to the company and its shareholders," according to media reports in 2023.

Government documents on the existence, targets or purpose of any investigations are not currently available, and parts of the suit are redacted. But an attorney letter sent Jan. 12 to Chancellor Kathaleen St. J. McCormick, seeking expedited handling of the advancement suit, said Raz continues "to incur attorneys' fees and costs by reason of her position as former chief executive officer of the company in connection with ongoing and active government investigations and proceedings."

An Aug. 31 email from Ilon Band, Joonko's chief operating officer, to Raz's counsel with Norton Rose Fulbright said, "Given the circumstances, we do not believe that under the terms of the indemnification agreement the company is obligated to pay the invoices you forwarded.  Attached for your reference is the company's D&O Insurance (recently expired)."  The email was addressed to Kevin J. Harnisch, head of Norton Rose white-collar practice and co-head of its regulation, investigations, securities and compliance practice.

"You explained that the company is (refusing to pay) because of Ms. Raz's alleged misconduct despite the fact that you are unaware of any precedent supporting the company's position," Harnisch wrote in reply Oct. 20.  "The company's posture leaves us little choice but to file suit to vindicate Ms. Raz's right to advancement."

Joonko, with offices in New York and Tel Aviv, markets itself as the developer of a "transparent diversity recruiting layer" used on top of cloud-based human resources and recruiting software.  The company's website said its system and services enabled recruiters "to passively source top diversity candidates who've been qualified by a two-steps validation process to make sure you receive the best fits for the roles you are looking for."

The company incorporated in Delaware in July 2016 and completed a $17 million equity offering in early 2022, according to SEC records.  A $25 million series B issue was reported the same year, led by Insight Partners.  Target Global, Kapor Capital and Vertex Ventures Israel also were described as supporting.

In the Jan. 12 letter to Chancellor McCormick, M. Paige Valeski of Young Conaway Stargatt & Taylor LLP wrote, "As a result of the company's unjustified delay" on the advancement demand, "Ms. Raz faces imminent, irreparable, and non-monetary injury. In her motion to expedite, Ms. Raz is seeking a final hearing on the merits in February 2024, subject to the court's availability."

Former Twitter Executive’s Fee Bid Called ‘Egregious’

September 15, 2023

A recent Law 360 story by Lauren Berg, “Musk’s X Corp. Slams Ex-Twitter Exec’s ‘Egregious’ Fee Bid”, reports that Elon Musk's social media company X Corp. urged the Delaware Chancery Court to reject three former top Twitter executives' bid seeking reimbursement for more than $1 million in legal fees, arguing that former Chief Legal Officer Vijaya Gadde's demand, in particular, is "egregious and unreasonable."

X Corp. claims it has already paid Gadde's counsel more than $106,000 for fees related to her appearance before the House Committee on Oversight and Reform during its investigation into the influence of social media on U.S. elections, which was in line with fees paid to counsel for other testifying Twitter executives, according to the company's brief unsealed opposing the summary judgment bid brought by Gadde, former Twitter CEO Parag Agrawal and former Chief Financial Officer Ned Segal.

But Gadde is demanding an "egregious and unreasonable" $1.15 million in fees without establishing what the facts are for determining reasonableness, such as the nature of her attorneys' work and the time spent on it, according to the opposition.  "Gadde's submission hides those facts from the court's review through invoices that aggregate vague time descriptions in undifferentiated, block-billed time entries," X Corp. said. 

"The court is thus obstructed from assessing, for example only, whether the time spent 'evaluating public materials' (even the partner-in-charge could not explain what it meant) was reasonable, given there is no way of knowing how much of the time-keeper's 150-plus hours was devoted to it."  X Corp. said it doesn't dispute that Gadde is entitled to advancement of fees related to the inquiry, only that it disputes the reasonableness of her asserted fees.

Gadde, Agrawal and Segal sued the social media giant in April, saying they incurred significant expenses after becoming involved in several legal proceedings because of their former roles as Twitter executives.  They contend that per company bylaws and indemnification agreements, X Corp., as Twitter's successor, is obligated to advance their legal expenses.  Musk fired the three when he took ownership and control of the business in October 2022. Indemnification agreements covering them, however, remain in effect for proceedings related to their former position as officers, the complaint said.

In a motion for immediate payment in July, the trio argued: "Put simply, the world's richest person does not pay his bills."  And in their motion for summary judgment earlier this summer, the former executives accused the company of "perpetually making excuses" for not meeting its obligations and that it is "gaining a well-earned reputation for shirking its commitments."

They said the social media giant had advanced them roughly $575,000 for their legal costs, but is still "wrongfully" withholding about $1.1 million owed, along with roughly $270,000 in interest and "fees-on-fees" for having to litigate the Chancery suit.  But in its own motion for summary judgment, X Corp. called into question the reasonableness of fees related to Gadde's appearance in the Congressional inquiry, asking the court to reduce any advancement award to her from $1.15 million to $106,203.

In its opposition brief, the company reiterated those arguments, saying Gadde is asking the court to "rubberstamp her facially unreasonable Congressional inquiry fees simply because her counsel filed affidavits stating that, in their opinion, their fees are reasonable."  X Corp. said Gadde is seeking fees amounting to 1,100% of those incurred by two other Twitter executives who testified at the hearing.  There are issues of fact regarding the reasonableness of Gadde's fees that preclude summary judgment in her favor for advancement of fees that exceed $106,203, the opposition states.

Former Twitter Executives Seek Coverage of Legal Expenses

August 22, 2023

A recent Law 360 story by Rose Krebs, “X Corp. Accused of ‘Shirking’ Its Obligations in Legal Fee Row”, reports that three former top Twitter executives continue to urge the Delaware Chancery Court to order the Elon Musk-owned social media giant, now called X Corp., to reimburse them for at least $1.1 million in legal costs, accusing the company of "perpetually making excuses" for not meeting its obligations.  In a brief, former Twitter CEO Parag Agrawal, former Chief Legal Officer Vijaya Gadde and former Chief Financial Officer Ned Segal told the court that the company is "gaining a well-earned reputation for shirking its commitments."

They took aim at a cross-motion for summary judgment and accompanying brief X Corp. filed last month, after Agrawal, Gadde and Segal had already sought to have Chancellor Kathaleen St. J. McCormick summarily order the company to pay legal fees they have incurred in connection with Twitter-focused lawsuits and regulatory inquiries.

The three assert that, in their summary judgment bid, they established "beyond any doubt that Twitter has breached its advancement obligations."  "From the beginning of this dispute, plaintiffs have operated by the book — making timely demands for advancement, providing undertakings, and submitting good faith certifications from counsel attesting to the reasonableness of plaintiffs' attorneys' fees," their brief said.  "Plaintiffs have done everything prescribed by Delaware law to obtain advancement from Twitter."

They accuse the company of causing months of delays and "perpetually making excuses for its failure to meet its advancement obligations."  "Although Twitter would like to pretend it is a party that dutifully pays its contractual obligations as they come due, it is in fact perpetually delinquent and is gaining a well-earned reputation for shirking its commitments," they contend.

In a filing last month, they said the social media giant had advanced them roughly $575,000 for their legal costs, but is still "wrongfully" withholding about $1.1 million owed, along with roughly $270,000 in interest and "fees-on-fees" for having to litigate the Chancery suit.  The three sued the social media giant in Chancery Court in April, saying they incurred significant expenses after becoming involved in several legal proceedings because of their former roles as Twitter executives.

They contend that per company bylaws and indemnification agreements, X Corp., as Twitter's successor, is obligated to advance their legal expenses.  Musk fired the three when he took ownership and control of the business in October 2022.  Indemnification agreements covering them, however, remain in effect for proceedings related to their former position as officers, the complaint said.  In a filing last month, the three argued: "Put simply, the world's richest person does not pay his bills."

But, its own filing, X Corp. has called into question the reasonableness of fees related to Gadde's appearance before the House Committee on Oversight and Reform during the committee's investigation into the influence of social media on U.S. elections.  In its own summary judgment filing last month, X Corp. called Gadde's request for fees excessive.

"Unlike many advancement actions, here, X Corp. does not challenge Gadde's entitlement to advancement of reasonable expenses — the company does not dispute that her testimony was required by reason of Gadde's role as former CLO of Twitter," the filing said. "Rather, the company here is challenging only the reasonableness of the fees for which Gadde seeks advancement with respect to the Congressional Inquiry."

X Corp. said Gadde is asking the company to advance "over $1.1 million" for fees incurred by her counsel, Sidley Austin LLP, "in connection with testifying for a single day."  That amount is "nearly 1,100%" what was incurred by two other former Twitter executives who also testified at the same hearing and were "similarly situated witnesses," X Corp. contended.

"The extreme delta between Gadde's legal fees and those of not one, but two separately represented, similarly situated, former Twitter executives who engaged similarly reputable law firms, is on its own sufficiently shocking to require that the reasonableness of Gadde's fees be thoroughly addressed now," the company argues.

X Corp. asked the court to "reduce any advancement award related to Gadde's representation in the congressional inquiry from $1,153,540.81 to $106,203.28 because Gadde failed to prove that all the fees and expenses were reasonably incurred."

But, ina filing, Gadde, Agrawal and Segal fired back.  "Twitter's challenge to these fees is particularly troubling given that Twitter's owner, Elon Musk, contributed to the exposure and complexity of the oversight inquiry when he publicly and repeatedly focused on Gadde and personally toured Capitol Hill to incite Republican lawmakers leading the oversight inquiry," their filing said.  They argued that "the record demonstrates that Gadde's fees incurred in the oversight inquiry are reasonable."

The three criticized the company for venting "invective at Gadde's counsel," including asserting that it engaged in "over-lawyering" and "extensive duplication of effort."  Gadde’s attorneys spent many hours prepping her for the committee’s questions, using five partners with hourly rates from $1,300 to $1,825, two associates charging more than $1,200 an hour and non-lawyer “policy adviser” Tracey LaTurner, who billed at $665 an hour.

"Aside from its invective, the only basis for Twitter's cross-motion is a false comparison between Gadde's attorneys' fees and the attorneys' fees of two other witnesses who testified in the same oversight inquiry," they said.

Insurer: Lehman Should Pay $58M in Fees/Costs After Trial Loss

July 5, 2023

A recent Law 360 story by Alexa Scherzinger, “Lehman Should Pay $58M For Trial Fees, Insurer Says”, reports that, in the aftermath of a trial with decade-old roots, Assured Guaranty Ltd. moved to recover $58 million in expenses it incurred during its battle with Lehman Brothers over credit default swaps, which the insurer won in a bench trial ruling this March.  In a memorandum of law filed in New York state court, an Assured unit said it's entitled to fees under the 1992 ISDA Master Agreement it holds with Lehman Brothers International Europe (LBIE), a now-bankrupt unit of the global investment firm.  The agreement, Assured told the court, said that LBIE would indemnify Assured for all costs incurred by reason of the enforcement and protection of the insurer's rights under the agreement.

Assured sought to recoup about $58 million in out-of-pocket expenses, including attorney fees, that piled up during the nearly 14-year-long dispute over 28 credit default swaps, which Assured terminated in 2009 in the wake of the global financial crisis. LBIE, a broker-dealer, bought credit protection in the forms of residential mortgage-backed securities and corporate loan securities from Assured unit AG Financial Products Inc. between 2005 and 2008, before the crisis began.

The dispute began in 2008 when LBIE filed for bankruptcy, and in 2009, Assured exercised its rights under the master agreement to terminate the credit default swaps due to LBIE's default.  LBIE originally sued in 2011 for $1.4 billion in damages, but after some of its claims were dismissed in 2013 and 2018, the number shrank to $485 million. Assured's estimate for the loss, however, was a mere $20 million.  "The amount of damages claimed by LBIE in this case was staggering," counsel for Assured wrote in the memorandum.

Justice Melissa A. Crane already ruled in Assured's favor in the case on both LBIE's claims and Assured's own counterclaim for recovery, deciding in March that LBIE failed to prove its calculations of loss based on market prices at the time was reasonable.  The judge found that Assured calculated the loss differently because it was unrelated to market prices — which, at the time, were too unstable to deem accurate.  According to the memorandum, Justice Crane "expressly permitted" Assured to move to recover its fees and costs from the dispute.  The remaining question, Assured posited, was whether the fees it sought were reasonable — and it argued they were.

New York courts typically use one of two approaches to evaluate whether fees are reasonable, according to the memorandum: considering the circumstances around the actual payment, and considering the factors identified in Matter of Freeman, dubbed the Freeman factors.  The Freeman factors include the time and labor required for the case, the difficulty of the questions involved, the skill required, the lawyers' experience levels, the certainty of compensation and customary fee, and the amount involved.  Assured asserted its fees were reasonable by all accounts.

The main reason for that assertion was that Assured already paid out the $58 million in full to its lawyers, experts and others.  "If a client has determined the reasonableness of the fees at issue by paying them without any certainty of recovery from the other side, the court does not have to engage in a line-by-line review of the attorneys' fees," Assured wrote in the memorandum.

Additionally, Assured wrote, the amount it requested already reflected several discounts, including a 10% discount on all invoices since 2013 from Cleary Gottlieb Steen & Hamilton LLP, Assured's representing law firm.  Assured also did not seek recovery for any fees from noncore attorneys, paralegals and nonlegal staff who each billed less than $10,000.  The reductions totaled just under $6 million, Assured said.

As for the Freeman factors, Assured argued that the time and labor factor was easily met because its attorneys reviewed tens of thousands of documents, the depositions of 19 fact witnesses, and the reports and depositions of nine experts for the case.  As for difficulty, skill and experience, the judge herself described the case as involving a "highly complex financial arrangement and valuation," so the attorneys handling it must have been highly skilled.

Assured said its lawyers were billed at their standard rates for the duration of the case — for the four main partners, that's about $1,761 per hour.  That fee was well within the range of market rates used by other large New York firms, Assured said, including the firm LBIE used, which billed one attorney at $1,770 per hour.

Ex-CEO to Bankruptcy Court: No Legal Fee Clawback in Chapter 11 Case

June 8, 2023

A recent Law 360 story by Vince Sullivan, “Ex-Insys CEO Says Legal Fee Clawback Unsupported in Ch. 11,” reports that the former CEO of drugmaker Insys Therapeutics told a Delaware bankruptcy judge that he shouldn't have to return $6 million in legal fees the company advanced to him for criminal defense costs because he was partially successful in his defense, despite a conviction that came with jail time.  During oral arguments over a motion for summary judgment in Wilmington, an attorney for John Kapoor said the attempt to claw back the legal fees by the liquidating trustee of Insys focuses on money spent on the successful defense of certain counts in a federal indictment.

"We've clearly shown that much of the work they're seeking to recoup on has nothing to do with his count of conviction," Brian T. Kelly of Nixon Peabody LLP told the court.  "Just because he got a significant sentence on the ultimate indictment doesn't mean he wasn't successful early on in defeating portions of the first [indictment]."

Kapoor was convicted in May 2019 on racketeering conspiracy and other counts, after a 51-day federal trial on his part in what prosecutors said was a massive, illegal campaign to boost sales of Insys opioid products through bribery, kickbacks and insurance fraud.  His sentence included a 66-month jail term and nearly $60 million of restitution.  Liquidating trustee William H. Henrich is seeking to claw back about $6 million in legal fees advanced to Kapoor under corporate indemnification agreements, saying his conviction dissolved the indemnification obligation.

But Kelly argued that since the Insys advancements covered a period between July 2016 and September 2018, Kapoor's success in defending against certain counts in an original indictment during that time should defeat the clawback effort.  After that window, Kapoor paid for his own defense, Kelly argued.  "Not all the work that was being done had anything to do with what he was ultimately convicted of," Kelly said.  Some of the advanced funds were also used in defense of civil actions against Kapoor, Kelly argued, and should not be subject to clawback.

Trustee attorney Morgan M. Menchaca of Reid Collins & Tsai LLP said the two firms retained by Kapoor for his criminal defense — Paul Weiss Rifkind Wharton & Garrison LLP and Ropes & Gray LLP — only made appearances in the criminal matters involving Kapoor and did no identifiable work on the civil matters, for which Kapoor retained separate counsel.  She also said the argument that the trimming of the indictment represented some kind of successful defense for Kapoor doesn't comport with the strategies used by federal authorities in criminal proceedings.

"Kapoor's argument ignores the practical realities of what federal prosecutors do when they indict a criminal defendant," Menchaca argued. "They threw everything at the defendant in the first indictment."  The ultimate superseding indictment that was presented before trial included much more specific and narrowly tailored charges against Kapoor, she said, and led to his conviction on the racketeering count.

U.S. Bankruptcy Judge John T. Dorsey said he would take the matter of partial summary judgment under advisement, and that he would review the counsel engagement agreements between Kapoor and his attorneys before issuing a decision.