A Bitter Pill for Ex-Rite Aid GC: Delaware Court Finds His 2015 Suit for Indemnification Untimely

| Andrew N. Goldfarb

Remember 2002? That year, A Beautiful Mind won best picture, and the University of Maryland won the NCAA basketball tournament. It is also the year that Rite Aid and its former General Counsel, Franklin Brown, began litigating over Brown’s indemnification rights. They are still fighting, which brings us to Brown v. Rite Aid Corp., CA No. 11596-VCL, the latest chapter in the 14-year-long dispute.

The Delaware Chancery Court is generally a forgiving forum for an director or officer seeking to vindicate indemnification or advancement rights conferred by a Delaware company. But there are limits, and a recent decision by the Chancery Court in the Brown case concerned one such limit: a claim for indemnification must be brought within three years of final disposition of the proceeding that triggered the indemnification demand.

Brown wants Rite Aid to indemnify him for legal fees and expenses he incurred in proceedings arising out of a large fraud and accounting scandal.

In October 2003, Brown was convicted on 10 of 36 criminal charges arising from that scandal. In December 2003, after his conviction, and after a co-defendant successfully sued to secure his right to continued advancement post-conviction, Brown sued Rite Aid in Delaware for indemnification and advancement of his legal expenses. That case was stayed in favor of a suit initiated by Rite Aid against Brown in Pennsylvania in 2002, in which Rite Aid sought a declaratory judgment that it was not responsible for Brown’s legal costs. The Pennsylvania suit languished.

Brown served over five years of a seven and a half year sentence. In 2011, the Supreme Court declined to hear the appeal of his conviction. Brown then collaterally attacked his conviction. That second round of appeals reached a dead end in 2014, when the Supreme Court denied Brown’s petition for certiorari.

In October 2015, Brown again sued Rite Aid for indemnification in Delaware, alleging he had spent over $6 million investigating and defending the charges against him.

Rite Aid countered that he waited too long to sue. Rite Aid argued Brown’s claims were governed by a 3-year limitations period, and that the limitations period began running in 2011 after the Supreme Court denied cert on his appeals arising directly from his conviction. (The Chancery Court actually applies the equitable doctrine of laches—whether a plaintiff waited unreasonably long to sue—instead of the statute of limitations, but applies the analogous statute of limitations absent unusual circumstances.)

Brown responded that his claims were not time-barred because: (i) Rite Aid couldn’t prove the elements of a laches defense; (ii) unusual circumstances existed to justify an exception to the 3-year period; (iii) even if the 3-year period applied, it wasn’t triggered until the Supreme Court’s denial of cert in 2014; and (iv) a 2014 amendment to the relevant statute of limitations set a 20-year limitations period in certain situations.

As to the last, the statute, 10 Del. C. 8106(c), provides that “an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of the cause of such action.”

Brown cited a summary of the bill stating that an “indefinite period” could be a “specified period” under § 8106(c), and argued that the Rite Aid charter specified such an indefinite time: if a demand for indemnification “is not paid in full by the corporation within thirty days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim” (emphasis added).

Rite Aid replied that this language in the charter did not “specify” an indefinite period of time, and that the provision was intended to give the company time to respond to an indemnification demand, not to create an unbounded right to sue.

Vice Chancellor Laster agreed with Rite Aid.

In an oral ruling, he found that claims for indemnification and advancement must be brought within the 3-year limitations period in Delaware. He then found that “in terms of the right to indemnification, finality for purposes of final disposition is achieved when the original, underlying criminal proceeding ends.” Because Brown’s collateral attack on his conviction was a separate proceeding from the original, underlying criminal proceeding, Brown had 3 years from the Supreme Court’s 2011 decision, not from its 2014 action on his collateral review.

Brown has noticed an appeal of the Chancery Court’s decision, so the Delaware Supreme Court may get a chance to write the next chapter in this long-running saga.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.