                                    COURT OF CHANCERY
                                           OF THE
                                    STATE OF DELAWARE

D ONALD F. PARSONS, J .
                     R                                          New Castle County Courthouse
   VICE CHANCELLOR                                              500 N. King Street, Suite 11400
                                                               Wilmington, Delaware 19801-3734



                            Date Submitted: September 15, 2014
                              Date Decided: October 6, 2014




   Philip A. Rovner, Esq.                      Brian M. Rostocki, Esq.
   Jonathan A. Choa, Esq.                      Reed Smith LLP
   Potter Anderson & Corroon LLP               1201 N. Market St., Suite 1500
   1313 N. Market Street                       Wilmington, DE 19801
   Wilmington, DE 19801

           RE:    Harry Pontone v. Milso Industries Corporation, et al.
                  Civil Action No. 7615-VCP

   Dear Counsel:

           This is an advancement proceeding based on related litigation in

   Pennsylvania. On May 29, 2014, this Court issued a memorandum opinion (the

   “Exceptions Opinion”) addressing the exceptions of defendant Milso Industries

   Corporation (“Milso”) to the Second Report of the Special Master on a number of

   disputed advancement issues.1 The Court rejected most of Milso‟s arguments, but

   partially agreed with Milso that for fees and expenses relating to counterclaims to


   1
           Pontone v. Milso Indus. Corp., 2014 WL 2439973 (Del. Ch. May 29, 2014)
           (“Exceptions Op.”).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 2


be advanceable, the counterclaim must be compulsory. As a result, the Court held

that two of the counterclaims asserted by the plaintiff, Harry Pontone (“Pontone”),

in the Pennsylvania litigation and deemed advanceable by the Special Master, in

fact were not advanceable. Pontone timely sought reargument on the Exceptions

Opinion.    On September 3, 2014, the Court denied Pontone‟s motion for

reargument (the “Reargument Opinion”).2

      On September 15, each side moved for certification of an interlocutory

appeal.3 On September 25, both parties timely opposed the other side‟s motion.4

For the reasons set forth below, the Court grants both motions and certifies this

matter for an interlocutory appeal.

                        I.     Contentions of the Parties
      In resolving the issues presented in the Exceptions Opinion, this Court

analyzed the Delaware Supreme Court‟s decision in Citadel Holding Corp. v.



2
      Pontone v. Milso Indus. Corp., 2014 WL 4352341 (Del. Ch. Sept. 3, 2014)
      (“Rearg. Op.”).
3
      Mot. for Certification of Interlocutory Appeal (“Pl.‟s Mot.”); Def. Milso
      Indus. Corp.‟s Mot. for Certification of an Interlocutory Appeal (“Def.‟s
      Mot.”).
4
      These documents are cited as Defendant‟s Opposition (“Def.‟s Opp‟n”) and
      Plaintiff‟s Opposition (“Pl.‟s Opp‟n”), respectively.
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 3


Roven.5 The Exceptions Opinion found that Roven established a two-pronged test

for determining whether counterclaims asserted by a party seeking advancement

are “in defense” of the affirmative claims and thus advanceable: (1) the

counterclaims must be “necessarily part of the same dispute” as the affirmative

claims; and (2) the counterclaims must be “advanced to defeat, or offset” those

affirmative claims.6 Both sides contend that, in different ways, the Court erred in

interpreting Roven.    Pontone seeks certification as to the first prong of the

identified test; Milso seeks certification as to the second prong.

      Both sides set forth similar arguments in support of certification. Each side

asserted that, for their client, the Exceptions Opinion decided a substantial issue,

determined a legal right, and satisfied the same two sub-criteria for certification

specified under Supreme Court Rule 42(b)(i)-(v). In opposition, Pontone contends

that Milso fails to meet any of the Rule 42 criteria. Milso, for its part, opposes

Pontone‟s request for certification, arguing that he has failed to meet any of the

sub-criteria under Rule 42(b)(i)-(v). Interestingly, each side alleges that it has

satisfied Rule 42(b)(i) via Rule 41(b)(ii): conflicting trial court decisions on the


5
      603 A.2d 818 (Del. 1992).
6
      Id. at 824.
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 4


issue. Both parties, however, deny the existence of a jurisprudential split as to the

Roven prong on which their opponent seeks certification.              At the risk of

oversimplification, Pontone contends that there are a series of errant Court of

Chancery decisions on prong one, but not on prong two, while Milso avers that the

cases conflict on prong two, but not on prong one.

                          II.        Rule 42 Requirements
      Supreme Court Rule 42 governs interlocutory appeals. Under Rule 42(b), to

meet the criteria for an interlocutory appeal the opinion of the trial court must: (a)

determine a substantial issue; (b) establish a legal right; and (c) meet at least one of

the five additional sub-criteria enumerated in Rule 42(b)(i)-(v). “Applications for

interlocutory review are addressed to the sound discretion of [the Supreme] Court

and are granted only in exceptional circumstances.”7 One factor the Supreme

Court may consider in exercising its discretion is the opinion of the trial court.8

                                A.     Substantial Issue
      An order satisfies the substantial issue requirement when it decides a main

question of law relating to the merits of the case, as opposed to some collateral


7
      State Farm Mut. Auto. Ins. Co. v. Patterson, 2008 WL 5008565, at *1 (Del.
      Nov. 26, 2008).
8
      Del. Supr. Ct. R. 42(d)(v).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
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Page 5


matter, such as a discovery dispute.9 Pontone spends approximately forty percent

of his opposition arguing that Milso has failed to establish the existence of a

“substantial issue.” In this regard, Pontone misinterprets the standard. The focus

is not on the merits of Milso‟s legal argument, but rather on whether the trial

court‟s order determined a substantial issue.10 This case involves advancement

issues.   The Exceptions Opinion made a determination about a disputed and

uncertain legal question pertaining to the propriety of Pontone‟s advancement

requests. I conclude, therefore, that the substantial issue criterion is met in the case

of both Pontone‟s and Milso‟s requests for certification.

                                B.      Legal Right
      “A legal right is established when a court determines an issue essential to the

positions of the parties regarding the merits of the case, i.e., „where one of the
9
      See, e.g., In re CNX Gas Corp. S’holders Litig., 2010 WL 2705147, at *13
      (Del. Ch. July 5, 2010) (“An interlocutory ruling determines a „substantial
      legal issue‟ for purposes of Rule 42(b) if it „relate[s] to the merits of the
      case,‟ not to collateral matters such as discovery.”) (quoting Castaldo v.
      Pittsburgh-Des Moines Steel Co., 301 A.2d 87, 87 (Del. 1983)); Sprint
      Nextel Corp. v. iPCS, Inc., 2008 WL 2861717, at *1 (Del. Ch. Sept. 26,
      2007) (“The „substantial issue‟ requirement is met when an interlocutory
      order decides a main question of law which relates to the merits of the case,
      and not to collateral matters.”).
10
      “No interlocutory appeals will be . . . accepted by this Court unless the order
      of the trial court determines a substantial issue . . . ” Del. Sup. Ct. R. 42(b)
      (emphasis added).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 6


parties‟ rights has been enhanced or diminished as a result of the order.‟” 11

Pontone argues that the Exceptions Opinion did not establish a legal right because

Milso‟s bylaws require Milso to advance Pontone‟s fees; thus, Pontone contends

that the legal obligation to advance Pontone‟s fees existed all along and the

Exceptions Opinion did not affect that obligation. The Court rejects this argument.

Increasing or decreasing the parties‟ obligations with respect to the contested

issue—advancement of fees—establishes a legal right. The parties disputed the

extent of Milso‟s advancement obligation. Depending on whether viewed through

the eyes of Milso or Pontone, the legal obligation to advance fees and the legal

right to receive advancement was either expanded or diminished by the Exceptions

Opinion. In either case, the legal right criterion is satisfied.

                       C.      The Five Additional Criteria
      Not infrequently, a party‟s sole legitimate basis for proceeding on an

interlocutory appeal will be Rule 42(b)(i). In such a case, even if a party satisfies

factors (a) and (b) described above, it also must meet the requirements for

certification of a question of law under Supreme Court Rule 41. Rule 41(b)


11
      Sprint Nextel, 2008 WL 2861717, at *1 (quoting Donald J. Wolfe, Jr. &
      Michael A. Pittenger, CORPORATE AND COMMERCIAL PRACTICE IN THE
      DELAWARE COURT OF CHANCERY § 14-4(b) (2008)).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 7


requires a showing, with particularity, of the “important and urgent reasons for an

immediate determination” by the Delaware Supreme Court. Illustrative reasons are

set forth in Rule 41(b)(i)-(iii). Here, the parties rely on Rule 41(b)(ii), which

recognizes that one reason for certification is that: “The decisions of the trial courts

are conflicting upon the question of law.”

      The Exceptions Opinion addressed both prongs of the Roven test.12 As to

the first prong, the Exceptions Opinion stated that “Delaware courts repeatedly

have held that the baseline requirement for a counterclaim to be advanceable is that

it qualify as compulsory.”13 As to the second prong, the Exceptions Opinion

rejected Milso‟s argument favoring a more narrow understanding of the standard

for finding counterclaims advanceable.14        Both parties primarily dispute the

meaning of a decision by Chief Justice Strine, then writing as a Vice Chancellor, in

Zaman v. Amedeo Holdings, Inc.15 For his part, Pontone argues the Supreme

Court‟s decision in Roven never required that counterclaims be compulsory to be

advanceable. Instead, he asserts that Zaman “grafted onto the controlling standard
12
      Exceptions Op. at *3-7
13
      Id. at *4.
14
      Id. at *4-7.
15
      2008 WL 2168397 (Del. Ch. May 23, 2008).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
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Page 8


enunciated in Roven a new „compulsory counterclaim‟ requirement.”16 Zaman‟s

holding, according to Pontone, “appears to have been influenced by the Supreme

Court‟s cursory analysis of Roven‟s counterclaims.” 17 Milso, on the other hand,

interprets Zaman as applying a narrower standard for the advancement of

counterclaims.     Milso also characterizes Zaman as part of a larger chain of

purportedly conflicting Court of Chancery opinions18 that collectively provide only

muddled guidance on the proper standard for the advanceability of counterclaims.

      Despite the parties‟ apparent agreement that a conflict may exist between

Zaman and Roven, each side denies the existence of any material conflict when

opposing their adversary‟s motion for an interlocutory appeal. Milso, for instance,

argues that Roven and the later Court of Chancery decisions consistently hold that

counterclaims must be compulsory to be advanceable. The real conflict, according

16
      Pl.‟s Mot. 12.
17
      Id. at 13.
18
      Milso relies on the following cases in addition to Zaman: Paolino v. Mace
      Sec. Int’l, Inc., 985 A.2d 392 (Del. Ch. 2009); Sun-Times Media Gp., Inc. v.
      Black, 954 A.2d 380 (Del. Ch. 2008); and Reinhard & Kreinberg v. Dow
      Chem. Co., 2008 WL 868108 (Del. Ch. Mar. 28, 2008). Milso further
      argues that the Supreme Court adopted Zaman‟s narrower interpretation of
      Roven in Baker v. Impact Holding, Inc., 2011 WL 2118979 (Del. May 26,
      2011). This Court previously rejected the latter argument. Exceptions Op.
      at *6-7.
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 9


to Milso, is between “Pontone‟s own subjective interpretation of Roven” and the

rest of Delaware precedent.19 Conversely, Pontone stands by his argument that

Roven controls, and that, at least as Pontone understands it, Roven forecloses

Milso‟s position.    As a result, Pontone contends that “[w]hether subsequent

decisions misapply or reject such precedent does not create a conflict.”20

      Pontone and Milso each seek certification of an interlocutory appeal, but for

different parts of the Roven standard.      Taken together, the Court faces cross

motions for certification of an interlocutory appeal that collectively seek

clarification by the Supreme Court of the entire Roven test. When it serves their

interests, both parties to this dispute recognize the existence of tension in the case

law on this legal issue. Likewise, the Exceptions Opinion expressly acknowledged

at least part of the potential conflict,21 and the Reargument Opinion referenced the

same possibility.22 Based on these facts and circumstances, I conclude that the


19
      Def.‟s Opp‟n 3.
20
      Pl.‟s Opp‟n 11.
21
      Exceptions Op. at *6 (“At the outset, however, I acknowledge that Zaman
      can be read to suggest a standard for the advancement of counterclaims that
      appears somewhat more restrictive than the standard used in Roven.”).
22
      Rearg. Op. at *2 (“Subsequent cases from the Court of Chancery potentially
      added an interpretive gloss on the Supreme Court‟s [Roven] standard.”).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 10


requirements of Supreme Court Rule 42(b)(i) are satisfied here by way of Rule

41(b)(ii), and that the parties before me, as well as corporate defendants and their

directors and officers generally, would benefit from greater clarity on the issue of

when counterclaims are advanceable.

      This brings me to my final point. Both parties argue, as an alternative

ground for meeting one of the five sub-criteria of Rule 42(b)(i)-(v), that an

interlocutory appeal here would serve considerations of justice.23 As with the

previous issues, each party argues that certifying their own interlocutory appeal

would serve the interests of justice, but certifying the other party‟s interlocutory

appeal would not. Both parties highlight Delaware‟s public policy of promoting

prompt resolution of disputes about advancement issues. They also snipe at the

justifications proffered by their adversary and suggest that only their issues deserve

interlocutory consideration.

      In my view, the parties to this action have litigated to a conclusion a legal

dispute as to the proper standard for determining when a counterclaim is

advanceable, depending also, of course, on the language of the operative corporate

documents. One side or the other may have a slightly stronger argument that only


23
      Del. Sup. Ct. R. 42(b)(v).
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
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Page 11


their issue regarding one of the two prongs of the Roven standard merits an

interlocutory appeal. If the Roven standard is to be considered on such an appeal,

however, I am convinced that the interests of justice would be served best if both

parties‟ issues were considered at the same time. Thus, I find that certifying this

interlocutory appeal in fact would serve the interests of justice.

      Advancement cases can be quite contentious, time-consuming, and

expensive. A decision clarifying when counterclaims are advanceable would avoid

unnecessary litigation and resolve at least some potential advancement disputes

before they occur. As a practical matter, this problem seems capable of repetition,

but easily could evade review because parties frequently settle these types of cases

before completing a final and appealable accounting of the money owed in either

direction at the indemnification phase. Thus, an interlocutory appeal may be the

most effective method of ensuring resolution of the important questions the parties

have moved to certify.

                             III.     CONCLUSION
      For the reasons stated in this Letter Opinion, I conclude that both parties

have sustained their burdens of showing that the Exceptions Opinion and the

Reargument Opinion satisfy the requirements of Supreme Court Rule 42 for an

interlocutory appeal.     Accordingly, I grant Pontone‟s motion, and Milso‟s
Pontone v. Milso Industries Corporation, et al.
Civil Action No. 7615-VCP
October 6, 2014
Page 12

motion, for certification of an interlocutory appeal to the Supreme Court of

Delaware from this Court‟s Opinion and Order of May 29, 2014, and September

3, 2014, constituting the Excluded Counterclaim Advancement Decision.

      IT IS SO ORDERED.

                                      Sincerely,

                                      /s/ Donald F. Parsons, Jr.

                                      Donald F. Parsons, Jr.
                                      Vice Chancellor

DFP/ptp
