Invictus Special Situations Master I, L.P., a private fund containing ERISA assets, sued its former fiduciaries Invictus Global Management LLC, Invictus Special Situations I GP LLC, Amit Patel, and Cindy Chen Delano in October 2023 for breach of contract. The fund sought injunctive and declaratory relief, alleging defendants withheld approximately $10 million in fund assets and information after being removed from their positions. The defendants counterclaimed for advancement of legal expenses under the fund's partnership and management agreements.
Writing for the court en banc, Justice Valihura ruled 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 fund's governing documents required advancement 'upon the receipt of a written undertaking by or on behalf of such Indemnified Person to repay such amounts to the extent that it is ultimately determined that such Indemnified Person is not entitled to be indemnified hereunder.'
The court emphasized a crucial distinction, noting that 'the requested advancement does not implicate ERISA fiduciary responsibility or liability because it is sought for expenses incurred in defending state-law fiduciary duty claims in state court.' Justice Valihura wrote that the advancement does not 'relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part' of ERISA because it applies only to state-law claims.
The case reached the Delaware Supreme Court after the Court of Chancery initially ruled that defendants were entitled to advancement under Delaware law but later granted the fund's motion for partial summary judgment on its ERISA defense. Chancellor Zurn had determined that ERISA section 1110 'renders void any contractual provision that purports to allow an ERISA-regulated plan to indemnify and advance funds to an ERISA fiduciary using plan assets,' relying on Third Circuit precedent and DOL guidance. The trial court also noted that defendants had 'not shown any ability to repay advanced sums.'
The Supreme Court rejected the fund's argument that advancement necessarily violates ERISA's prohibition on relieving fiduciaries of responsibility. Justice Valihura explained that 'advancement 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,' but crucially, 'the ultimate right to keep payments characterized as an 'advancement' depends upon whether the former corporate official is entitled to indemnification.'
The court distinguished the Third Circuit's decision in Secretary United States Department of Labor v. Koresko, which the fund had relied upon. Justice Valihura noted that 'Koresko is distinguishable and does not control the outcome here' because 'the claims for which Defendants seek advancement are not ERISA claims, as the Fund has repeatedly acknowledged.' The court also observed that unlike in Koresko, the advancement here 'is expressly contingent on an undertaking' to repay if the defendants are ultimately found not entitled to indemnification.
The decision balances Delaware's strong policy favoring advancement with federal ERISA protections for plan assets. As Justice Valihura noted, 'this result reflects the distinction between the separate rights of advancement and indemnification' and '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 Supreme Court remanded the case to the Court of Chancery for further proceedings. The ruling provides important guidance for ERISA fiduciaries seeking advancement for state-law claims and clarifies that such advancement does not automatically violate federal law when properly structured with repayment obligations.