Securities Regulation Daily Wrap Up, FIDUCIARY DUTIES—Del. Ch.: In-house lawyer’s claim for advancement barred by unclean hands, (Sep 28, 2026)

By Anne Sherry, J.D.

The lawyer tried to enforce a right that his company had asked him to eliminate.

The former general counsel of an LLC couldn’t seek advancement of expenses due to his own unclean hands. Years prior, the attorney had been asked to eliminate the right of advancement for everyone except the LLC’s manager, but he only eliminated advancement going forward so as not to wipe out his own vested right. The Delaware Court of Chancery found that his knowing failure to carry out his client’s instructions triggered the unclean hands defense to his own claim for advancement (In re Care One, LLC Advancement Litigation, No. 2025-1286-NAC (Del. Ch. Sept. 24, 2026)).

Operating agreement amended. In 2009, following an investigation, the manager-managed LLC terminated and sued one of its senior executives for financial impropriety. The executive filed a counterclaim for indemnification and advancement under the LLC operating agreement. The manager was livid and asked the LLC’s general counsel, Androsky Lugo, to eliminate advancement and indemnification for everybody but the manager.

Lugo knew that waiver agreements were the way to eliminate vested advancement rights. But he instead focused on amending the operating agreement, which he knew would only affect advancement rights going forward, leaving in place vested rights such as his own. He also did not tell the manager that the amendment wouldn’t fully accomplish the manager’s goal.

General counsel sued. In 2021, Lugo was charged with several unrelated felonies. The LLC then discovered that Lugo had been in a long-term relationship with the LLC manager’s daughter, and it suspected that the couple had embezzled tens of millions of dollars from the company. The LLC terminated Lugo at the end of 2021.

In 2025, the LLC filed a RICO suit against Lugo and the manager’s daughter. Lugo demanded advancement of legal fees. A magistrate recommended summary judgment in Lugo’s favor, but the Court of Chancery overruled the magistrate as to the LLC’s equitable defenses. Chancery concluded that the available evidence could allow for a defense to the advancement claim under the doctrines of unclean hands or equitable estoppel.

Unclean hands. After a trial, the court concluded that Lugo’s right to advancement was barred by unclean hands. Under this standard, “the relevant inquiry is not whether the nonmovant’s hands are dirty, but whether the nonmovant dirtied them in acquiring the right that party now asserts” (internal quotation omitted).

Under Delaware law as well as that of New Jersey (where the LLC is headquartered and Lugo is licensed), an attorney is bound by fiduciary duty to his client, who in the case of a general counsel is his employer.

The court found that Lugo understood the instruction to eliminate advancement rights for everyone but the manager and that he knew that the way to do this was through waiver agreements. Despite this, he prepared an operating agreement amendment that he knew did nothing to address vested rights. He also did not tell the manager that this left the advancement rights of other officers—including himself—in place or that waivers could be used to eliminate vested rights.

In these circumstances, Lugo could not enforce an advancement right that he would not have but for his improper conduct as chief legal officer. Such a request “is inequitable and plainly bears an immediate and necessary relation to his claim; indeed, it proceeds hand-in-glove with making the advancement claim itself,” the court explained (internal quotations omitted). And precisely because of this alignment between the defense and the right itself, the cases Lugo cited were easily distinguished.

Lugo’s other arguments failed. First, the LLC manager’s failure to read the operating agreements was not a defense because critical facts were missing from the face of the amendment. Even if the manager had read the agreements, he would not have learned that the amendment did not eliminate vested rights or that waiver agreements were the correct mechanism.

Second, Lugo asserted that he had no obligation to “self-sacrifice” his vested advancement right. This was true, but he did have an obligation to inform his client. The LLC proved that the manager cared so much about eliminating the risk of future advancement that if he had been informed that a waiver was necessary to accomplish that goal, he would have required Lugo to either sign a waiver or be fired. Either way, Lugo would not be able to press an advancement claim.

The court emphasized that Delaware has a strong policy favoring advancement, but said that this was “a rare one-off” given the unusual facts.

The case is No. 2025-1286-NAC.

Judge: Cook, N.

Attorneys: Peter B. Ladig (Bayard, P.A.) for Plaintiff Androsky Lugo. Andrew S. Dupre (Akerman LLP) and Thomas A. Uebler (McCollom D’Emilio Smith Uebler LLC) for Plaintiff Elizabeth Straus. David E. Ross (Ross Aronstam & Moritz LLP) and Rita Glavin (Glavin PLLC) for Defendant Care One, LLC.

Companies: Care One, LLC

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