W. Jerome Frautschi v. Ecolab, Inc.

Opinion

COURT OF CHANCERY

OF THE

STATE OF DELAWARE

TAMIKA R. MONTGOMERY-REEVES Leonard Williams Justice Center VICE CHANCELLOR 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734

Date Submitted: July 12, 2018 Date Decided: October 31, 2018

Kurt M. Heyman, Esquire Eric Lopez Schnabel, Esquire Aaron M. Nelson, Esquire Robert W. Mallard, Esquire Heyman Enerio Gattuso & Hirzel LLP Alessandra Glorioso, Esquire 300 Delaware Avenue, Suite 200 Dorsey & Whitney LLP Wilmington, DE 19801 300 Delaware Avenue, Suite 1010 Wilmington, DE 19801

RE: W. Jerome Frautschi et al. v. Ecolab, Inc.

Civil Action No. 12951-VCMR

Dear Counsel:

This letter opinion addresses Plaintiffs’ Motion for Summary Judgment. For

the reasons stated below, the motion is denied as to W. Jerome Frautschi’s claims. 1

I. BACKGROUND The facts in this opinion derive from the pleadings, the parties’ submitted

affidavits, and exhibits cited therein. 2

1 I address the claims of the Pleasant T. Rowland Revocable Trust and the W. Jerome Frautschi Living Trust, plaintiffs in this action, in a separate letter opinion issued today.

2 Ct. Ch. R. 56(c).

C.A. No. 12951-VCMR October 31, 2018 Page 2 of 10

This action involves Frautschi’s request for indemnification from Ecolab, Inc.

(“Ecolab”), a Delaware corporation in the business of providing water, hygiene, and

energy technologies. 3 In February 2008, Ecolab acquired Ecovation, Inc.

(“Ecovation” or the “Company”) through a merger. 4 Ecovation was a Delaware

corporation in the business of providing sustainable wastewater treatment and

renewable energy solutions. 5 Diane C. Creel was the President, Chief Executive

Officer, and Chair of the Board of Directors of Ecovation. 6 Frautschi served

Ecovation as a director from May 2004 until November 2005. 7 Two trusts, the

Pleasant T. Rowland Revocable Trust and the W. Jerome Frautschi Living Trust

(together, the “Trusts”), invested significantly in the Company when it was

struggling financially. 8

Ecovation provided for indemnification of directors and officers in its

Amended and Restated Certificate of Incorporation (the “Charter”) and its Bylaws

3 Verified Am. and Supplemental Compl. for Indemnification ¶ 27 (“Compl.”).

4 Id. ¶ 4; id. Ex. C.

5 Nelson Aff. Ex. C ¶ 19.

6 Compl. ¶ 30.

7 Id.

8 See id. ¶ 3.

C.A. No. 12951-VCMR October 31, 2018 Page 3 of 10

(the “Bylaws”). 9 As part of the merger, Ecolab agreed to provide advancement and

indemnification to Ecovation’s current and former directors and officers, including

Frautschi, to the same extent as those current and former directors and officers were

entitled to advancement and indemnification under Ecovation’s Charter and

Bylaws. 10

This case involves Frautschi’s right to indemnification for fees and expenses

incurred in actions filed in the New York Supreme Court (the “Ahlers Action”) and

in the United States District Court for the Western District of New York (the “ITV

Action”). 11 Both underlying actions involved allegations that Creel provided

material nonpublic inside information to Frautschi and the Trusts regarding Ecolab’s

9 Nelson Aff. Ex. F art. V, § 1, at 9; id. Ex. G, at 16-17. Ecovation was formerly known as AnAerobics, Inc.; the Charter and Bylaws reflect the former name.

10 Id. Ex. H § 7.5(a) (“[Ecolab] and [Empire Acquisition, Inc.] jointly and severally agree that all rights to indemnification and advancement of expenses for acts or omissions occurring prior to the [merger] (including acts or omissions in connection with this Agreement and the consummation of the transactions contemplated hereby) now existing in favor of the Company’s current and former directors and officers (each a ‘D&O Indemnified Party’) as provided in the Company’s Governing Documents, and in any indemnification agreements with the D&O Indemnified Parties, will survive the Merger and will thereafter continue in full force and effect in accordance with their terms. [Ecolab] and [Empire Acquisition, Inc.] jointly and severally will advance expenses to and indemnify the D&O Indemnified Parties to the same extent as the Indemnified Parties currently are entitled to advancement of expenses and indemnification.”).

11 Compl. ¶ 1.

C.A. No. 12951-VCMR October 31, 2018 Page 4 of 10

desire to acquire Ecovation.12 Allegedly using that information, the Trusts

purchased stock from other investors who were not privy to the highly confidential

information.13 According to those investors, the Trusts made a large profit from the

inside information when Ecolab acquired Ecovation in February 2008.14

In the Ahlers Action, the plaintiffs asserted claims for breach of fiduciary duty,

interested director transactions, breach of the Charter, and unjust enrichment against

Creel, Frautschi, and the Trusts.15 The defendants prevailed on summary

judgment. 16 The New York Appellate Division, Fourth Department, affirmed the

trial court’s order on June 30, 2017. 17 The parties filed no further appeals.18

In the ITV Action, the plaintiff asserted claims against Creel, Frautschi, and

the Trusts.19 The claims against Frautschi included claims for breach of fiduciary

12 Nelson Aff. Ex. A ¶¶ 96-102; id. Ex. C ¶ 328.

13 Id. Ex. A ¶¶ 106-22; id. Ex. C ¶¶ 325-28.

14 Id. Ex. A ¶¶ 128; see id. Ex. C ¶¶ 375.

15 Id. Ex. C ¶¶ 391-442.

16 Id. Ex. E, at 29-30; see generally id. Exs. D, E.

17 Id. Ex. E.

18 Compl. ¶ 23.

19 See generally Nelson Aff. Ex. A.

C.A. No. 12951-VCMR October 31, 2018 Page 5 of 10

duty, aiding and abetting breach of fiduciary duty, securities fraud, common law

fraud, and civil conspiracy. 20

In April 2017, the parties to the ITV Action reached a settlement agreement.21

The total settlement amount was $4.65 million. 22 Frautschi paid $835,000 of the

settlement, 23 and the parties apportioned the remaining amounts to Creel and the

Trusts.24 Ecolab did not contribute any money to the settlement. 25

Throughout both actions, Ecolab provided advancement of defense costs to

Frautschi, first through its directors’ and officers’ liability policy and later, when that

policy was exhausted, from its own funds. 26

II. ANALYSIS In their Motion for Summary Judgment, Frautschi and the Trusts seek

summary judgment on all counts of their Verified Amended and Supplemental

20 Id. ¶¶ 134-39, 155-61, 186-215.

21 See generally Nelson Aff. Ex. V.

22 Id. § 2.

23 Id. § 3(c).

24 Id. § 3(a), (b), (d).

25 Compl. ¶ 92.

26 Id. ¶¶ 75, 77.

C.A. No. 12951-VCMR October 31, 2018 Page 6 of 10

Complaint, including full indemnification of Frautschi’s portion of the settlement,

indemnification for his attorneys’ fees in the Ahlers and ITV Actions at his counsel’s

standard hourly rates, and fees-on-fees for this action to enforce his indemnification

rights.27

A. Standard of Review Summary judgment will be “granted if the pleadings, depositions, answers to

interrogatories and admissions on file, together with the affidavits, show that there

is no genuine issue as to any material fact and that the moving party is entitled to a

judgment as a matter of law.”28 The movant bears the initial burden of demonstrating

that there is no question of material fact. 29 When the movant carries that burden, the

burden shifts to the nonmoving party “to present some specific, admissible evidence

that there is a genuine issue of fact for a trial.” 30 When considering a motion for

27 Pls.’ Opening Br. 2. Plaintiffs also seek full indemnification of the Trusts’ portions of the settlement, payment of the Trusts’ attorneys’ fees in the ITV and Ahlers Actions, and fees-on-fees for this action to enforce their indemnification rights. Id. I address those portions of their motion in a separate letter opinion.

28 Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14, 2007) (citing Ct. Ch. R. 56(c)).

29 Deloitte LLP v. Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009).

30 Id. (citing Watson v. Taylor, 829 A.2d 936 (TABLE), 2003 WL 21810822, at *2 (Del. Aug. 4, 2003)).

C.A. No. 12951-VCMR October 31, 2018 Page 7 of 10

summary judgment, this Court must view the evidence and the inferences drawn

from the evidence in the light most favorable to the nonmoving party. 31 Even so, the

non-moving party may not rely on allegations or denials in the pleadings to create a

material factual dispute. 32

B. Indemnification for Frautschi’s Portion of the Settlement Frautschi claims that under 8 Del. C. § 145(a) and Ecovation’s Charter and

Bylaws, as a former director, he is entitled to indemnification from Ecolab for his

portion of the settlement. 33 Ecolab argues that (1) Frautschi’s entitlement to

indemnification is limited to claims against him by reason of his former director

status, (2) Frautschi has no right to indemnification as a trustee of one of the Trusts,

and (3) Frautschi is not entitled to indemnification because the settlement was not

“reasonable.”34

Some of the claims in the ITV Action are based on Frautschi’s role as a

director of Ecovation. For example, the ITV Complaint alleges that Frautschi

31 Judah v. Del. Tr. Co., 378 A.2d 624, 632 (Del. 1977); Fike v. Ruger, 754 A.2d 254, 260 (Del. Ch. 1999), aff’d, 752 A.2d 112 (Del. 2000).

32 Ct. Ch. R. 56(e).

33 Compl. ¶¶ 138-39, 148.

34 Def.’s Opp’n Br. 27-32, 36-38, 40-48.

C.A. No. 12951-VCMR October 31, 2018 Page 8 of 10

breached the fiduciary duty that he, as a director, owed to the stockholders of

Ecovation because he allegedly worked with Creel to induce Ecovation’s Board of

Directors to accept agreements that were unfavorable to Ecovation’s stockholders.35

Other claims, however, include allegations that occurred much later in time

than the period when Frautschi served as a director, May 2004 to November 2005.

For example, the ITV Complaint alleges that Frautschi intentionally omitted and

actively concealed that Ecovation was negotiating a merger with Ecolab.36 These

alleged negotiations did not start until January 2007, over a year after Frautschi was

no longer a director.37 If Frautschi had such information, it most likely was because

he was trustee or agent of the Trusts and in that role helped Ecovation obtain

financing from the Trusts.38

Frautschi is a trustee of the W. Jerome Frautschi Living Trust.39 Frautschi

argues that any actions he allegedly took after he resigned as director were as trustee

35 Nelson Aff. Ex. A. ¶¶ 135, 137-38.

36 Id. ¶¶ 188-90.

37 Id. ¶¶ 96-100.

38 See id. ¶ 102.

39 Compl. ¶ 155.

C.A. No. 12951-VCMR October 31, 2018 Page 9 of 10

of his Trust and that these actions are indemnifiable under the terms of the Trusts’

financing to Ecovation. 40 Frautschi, however, cites no law to support this claim. 41

Further, Frautschi is a trustee for only one of the two Trusts. 42 The parties do

not explain whether, and in what capacity, Frautschi acted for the second Trust, the

Pleasant T. Rowland Revocable Trust. He may have been acting as trustee or agent,

but again, the parties have not provided any documents or law to support or refute

Frautschi’s claim that he is entitled to indemnification for his actions related to the

second Trust.

The Trusts have their principle places of business in Wisconsin, 43 and I

presume that Wisconsin trust and agency law governs. However, neither party has

cited any relevant Wisconsin law or argued that another state’s law governs.

Because the parties address this issue in such a cursory fashion without

supporting documents and law, I am unable to determine whether there is a genuine

40 Pls.’ Opening Br. 26 n.16; see Compl. ¶ 157.

41 See Pls.’ Opening Br. 26, 29-30. Frautschi cites only to the Trusts’ source of indemnification. He fails to explain why that source of indemnification also applies to him. Id. 29-30.

42 Compl. ¶¶ 155-56.

43 Id. ¶¶ 25-26.

C.A. No. 12951-VCMR October 31, 2018 Page 10 of 10

dispute of material fact, nor can I decide whether one of the parties is entitled to

judgment as a matter of law. This issue directly controls Frautschi’s claim for

indemnification. Further, this issue affects Frautschi’s other two claims, his claim

for attorneys’ fees incurred in the Ahlers and ITV Actions and his claim for fees-on-

fees in this action.

III. CONCLUSION For the foregoing reasons, I DENY the Motion for Summary Judgment as to

Frautschi’s claims.

IT IS SO ORDERED.

Sincerely,

/s/Tamika Montgomery-Reeves

Vice Chancellor

TMR/jp