## Facts

- Energy Maintenance Services Group I, LLC (EM), a Delaware limited-liability company, operated under an LLC agreement governed by Delaware law.
- The LLC agreement stated EM “shall indemnify” its officers and directors if the board determined the person acted in good faith. The agreement also stated an adverse judgment would not, by itself, create a presumption of bad faith and declared a company policy of indemnifying officers to the fullest extent permitted by law.
- Jim Sandt, a shareholder and former officer, sued EM, its CEO Timothy Nesler, and two other officers, alleging they wrongfully diluted Sandt’s ownership interest and committed fraud and breach of fiduciary duty.
- While Sandt’s suit was pending (2007), EM’s board adopted a resolution finding Nesler acted in good faith and agreeing to indemnify him for liabilities and expenses connected to that litigation.
- About two years later, a jury awarded Sandt $780,000 against EM and all three officers, plus $300,000 in punitive damages against EM and Nesler individually.
- While the appeal of that judgment remained pending, EM’s primary creditor took control of EM, Nesler was fired, and a newly constituted board voted to revoke Nesler’s indemnification retroactively.
- EM and the two other officers later settled with Sandt, resolving all liability except the $300,000 punitive-damages award against Nesler individually. The settlement stated Sandt would not attempt to recover that $300,000 from EM “directly or indirectly.”
- After appellate review ended and the punitive-damages judgment against Nesler remained in place, Nesler demanded indemnification from EM for the $300,000 judgment and for defense costs exceeding $700,000.
- EM filed a Texas declaratory-judgment action against Nesler and Sandt seeking declarations that EM owed no indemnity and that Sandt could not collect the $300,000 from Nesler. EM also asserted fraud and breach-of-fiduciary-duty claims tied to the earlier dispute and indemnification events.
- Nesler counterclaimed for contractual indemnification. A jury found EM owed indemnification and awarded Nesler attorney’s fees of more than $700,000, and the trial court declared Sandt could not collect the $300,000 from Nesler because doing so would be an indirect recovery from EM. EM and Sandt appealed.

## Issues

1. Whether, under Delaware law and EM’s LLC agreement, the 2007 board resolution created an enforceable obligation requiring EM to indemnify Nesler for the punitive-damages judgment and defense costs, despite the later adverse verdict and the new board’s attempted retroactive revocation.
2. Whether EM’s fraud and breach-of-fiduciary-duty claims were barred by Texas statutes of limitation.
3. Whether the settlement agreement’s “directly or indirectly” recovery bar prevented Sandt from collecting the remaining $300,000 punitive-damages judgment from Nesler, given EM’s indemnity obligation.

## Decision

- The court affirmed that EM was obligated to indemnify Nesler under the LLC agreement and the 2007 board resolution, including the $300,000 punitive-damages judgment and Nesler’s defense costs.
- The court affirmed that EM’s fraud and breach-of-fiduciary-duty claims were time-barred under Texas law.
- The court affirmed the declaration that Sandt could not pursue collection of the $300,000 punitive-damages judgment against Nesler because collection would trigger EM’s indemnity and therefore amount to indirect recovery from EM, which the settlement prohibited.
- The trial court’s judgment was affirmed.

## Legal Principles

- Delaware law gives LLCs broad contractual freedom to define indemnification obligations in an LLC agreement, including mandatory indemnification conditioned on a board’s good-faith determination.
- When an LLC agreement states that an adverse judgment does not create a presumption of bad faith, a later verdict against the officer does not automatically negate the board’s earlier good-faith determination for indemnification purposes.
- A valid board resolution adopted under authority granted by the LLC agreement can create a binding contractual indemnification obligation; a later board generally cannot revoke that obligation retroactively for conduct and proceedings already covered.
- If the agreement and indemnification decision contain no exclusion for punitive damages and Delaware law allows the coverage, indemnification may extend to punitive-damages liability as well as defense fees and expenses.
- Under Texas law, fraud and breach-of-fiduciary-duty claims are subject to limitations periods that begin when the claimant knew or should have known of facts that would cause a reasonable party to investigate; the filing of related litigation may supply notice sufficient to start limitations.
- A settlement term barring recovery “directly or indirectly” from a party can block collection from another person when payment would be shifted back to the protected party through a legally enforceable indemnification duty.

## Conclusion

The Texas court enforced EM’s Delaware-governed LLC indemnification framework and held that EM’s 2007 board resolution obligated EM to indemnify former CEO Nesler for both the punitive-damages judgment and substantial defense fees, rejected EM’s later fraud and fiduciary-duty claims as untimely, and construed the settlement with Sandt to bar collection of the remaining $300,000 against Nesler because any payment would be reimbursed by EM and thus constitute an indirect recovery from EM.


Sandt v. Energy Maintenance Services Group I, LLC, 534 S.W.3d 626 (2017)