Hone Capital LLC (Hone) and CSC Upshot Ventures I, L.P. (Upshot) (together the Companies) are indirect subsidiaries of a private equity fund. Petitioner Gandhi served as Hone’s CFO. Gandhi was terminated and Hone subsequently filed a lawsuit against her in California Superior Court, alleging, among other things, that Gandhi breached her fiduciary duties by engaging in fraud. In that lawsuit, Hone seeks a declaratory judgment that Gandhi is not entitled to her profit interest.
In defending these claims and pursuing counterclaims, Gandhi incurred litigation expenses. Gandhi sent a written demand letter to the Companies asking for an advancement of her expenses and then filed a complaint in the Delaware Court of Chancery to enforce her advancement rights.
After initially stipulating that Gandhi was entitled to advancement, Hone moved to vacate the stipulated order. At the same time, Gandhi moved for summary judgment. The Court ruled in favor of Gandhi and found that Gandhi was entitled to advancement from both Hone and Upshot.
Gandhi subsequently submitted written demands for advancement to the Companies over the course of several months, but neither of the Companies objected to those demands or paid the amounts claimed by the applicable deadlines. Given the non-responsiveness of the Companies, Gandhi asked the court to hold the Companies in civil contempt for failing to comply with the Advancement Order. She also asked the court to (1) appoint a limited purpose receiver to compel compliance, (2) impose a fine of US$10,000 per day on each Company until they comply, and (3) award her the fees and expenses incurred in pursuing contempt.
Vice Chancellor Laster granted Gandhi’s request in part. The court found that the extreme nature of the Companies’ behavior met the elements of civil contempt: the Companies failed to comply with a court order of which (i) they had notice and (ii) by which they were bound.
The court then considered whether civil contempt was an appropriate remedy to enforce an advancement order. Under Delaware law, the general rule is that “a party that holds a money judgment must resort to [recognized] collection mechanisms,” such as wage garnishment or possession and sale of assets at a sheriff’s sale. The court then noted that there are certain situations in which alternative remedies may be appropriate.
For example, court’s often issue interim orders, such as fee-shifting, that “must be paid before the end of the action, otherwise they lose much of their effect. The court reasoned that “[c]ontempt sanctions provide the mechanism for mid-case enforcement of interim awards.” Applying that rationale here, the court reasoned that the Companies’ noncompliance with the Advancement Order, an interim award, warranted contempt sanctions.
The court also concluded that additional relief is appropriate when recognizing collection methods are inadequate, such as when a defendant intends to transfer money out of the court’s jurisdiction. Here, the court found that traditional collection methods would not be sufficient because a company’s failure to timely dispute or pay an advancement demand might irreparably harm the litigation position of the party seeking advancement. Thus, the Court held that the need for timely relief in an advancement proceeding also weighs in favor of allowing contempt sanctions.
Authored by Allison M. Wuertz, Maura Allen, and Christine Jiha.
