The Delaware Supreme Court on April 13 reversed the Court of Chancery and held that ERISA section 1110 does not bar an investment fund from advancing defense costs to former fiduciaries facing state-law claims, where the advancement is conditioned on a written undertaking to repay if liability is ultimately found.
Justice Valihura, writing for an en banc court that included Chief Justice Seitz and Justices Traynor, LeGrow and Griffiths, concluded that the requested advancement "does not relieve ERISA fiduciary responsibility or liability by abrogating the Fund's right to recover from Defendants for ERISA breaches because the requested advancement is expressly contingent on a written undertaking."
The dispute arose from Invictus Special Situations Master I, L.P., a privately held fund that holds ERISA assets. In September 2023, the Fund's controlling limited partners removed Invictus Global Management, LLC and Invictus Special Situations I GP, LLC as the Fund's management company and general partner. The Fund then sued the entities and individuals Cindy Chen Delano and Amit Patel, alleging they withheld information and approximately $10 million in Fund assets after their removal.
The defendants counterclaimed for advancement of legal expenses under the partnership and management agreements. The Fund argued advancement from Fund assets was barred by ERISA section 1110, which provides that "any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy."
The Court of Chancery agreed with the Fund, ruling in May 2025 that Third Circuit case law and Department of Labor guidance render void "any contractual provision that purports to allow an ERISA-regulated plan to indemnify and advance funds to an ERISA fiduciary using plan assets." The lower court found the advancement provisions "were invalid at the time they were entered into."
The Supreme Court rejected that reading. Justice Valihura emphasized the distinction between indemnification and advancement, writing that "[w]hile the rights to indemnification and advancement are correlative, they are still discrete and independent rights, with the latter having a much narrower scope." Advancement, she wrote, "provides corporate officials with immediate interim relief from the personal out-of-pocket financial burden of paying the significant on-going expenses inevitably involved with investigations and legal proceedings."
The court noted that the partnership agreement permits advancement only "upon the receipt of a written undertaking" to repay if the recipient is ultimately found not entitled to indemnification, and that indemnification is precluded for "Disabling Conduct," which the agreement defines to include any material breach of fiduciary duty. "Therefore, any breach of fiduciary duties under ERISA, including breaches of the prudent person standard and per se violations, would constitute non-indemnifiable Disabling Conduct," Justice Valihura wrote.
The court distinguished the Third Circuit's non-precedential decision in Secretary United States Department of Labor v. Koresko, on which the Court of Chancery had relied. "The claims for which Defendants seek advancement are not ERISA claims, as the Fund has repeatedly acknowledged," the opinion states, noting that "[t]he parties have not cited any decision of any court that has applied the relevant provisions of ERISA to bar advancement for expenses incurred in defending claims arising under state law."
The court also distinguished the Ninth Circuit's decision in Johnson v. Couturier, which involved litigation expenses incurred defending against ERISA fiduciary duty claims and was decided in the preliminary injunction context. "Here, we are not considering the advancement issue through the lens of a preliminary injunction. Nor are we considering claims brought under federal ERISA law," Justice Valihura wrote.
The court rejected the Fund's argument that advancement should be barred because the defendants had not shown an ability to repay. "The relevant agreements do not require a showing of ability to repay because these provisions conditioned advancement only on an undertaking requirement," the opinion states, citing Reddy v. Electronic Data Systems Corp.
The result, Justice Valihura wrote, "balances the policy in Delaware favoring advancement rights under our well-established state law against the important federal interest in protecting ERISA plan assets." The court declined to address the Fund's alternative argument that advancement is barred by ERISA section 1106 as an impermissible extension of credit, noting the Court of Chancery had not addressed it.
The case is remanded to the Court of Chancery.
The defendants were represented by Rudolf Koch, Robert L. Burns, Susan Hannigan Cohen and Nicole M. Henry of Richards, Layton & Finger, P.A., and Lars C. Golumbic of Groom Law Group; and by Todd C. Schiltz, Oderah C. Nwaeze, Renèe M. Dudek and Stephanie L. Gutwein of Faegre Drinker Biddle & Reath LLP. The Fund was represented by Ronald N. Brown, III and Aaron S. Applebaum of DLA Piper LLP (US).