By Chris Bankler

In Energy Founders Fund, LP v. Daskevich, the Texas Business Court addressed when a company must pay a director’s legal fees during litigation.

The dispute arose out of a drag-along sale at Gage Western LLC. After the board approved the transaction, a director who voted against it allegedly failed to take the steps necessary to transfer his membership units. The investor plaintiff sued, arguing that the units had already been transferred.

What makes the case significant is what happened next. On the very day the lawsuit was filed, the company adopted a new governing agreement that eliminated both its board of directors and any rights to advancement or indemnification. The director nevertheless sought advancement under the prior agreement, presenting the Business Court with a set of issues it addressed in careful sequence.

The Court’s Rulings

1. Advancement is a contractual, interim right—and the analysis is intentionally limited

The opinion begins with one of the more detailed discussions of advancement in Texas case law. As the Court explained, advancement is a contractual mechanism by which a company agrees to pay a director’s legal fees as they are incurred—not after the case is resolved, but while the litigation is ongoing. It “provides funding during the litigation itself,” ensuring that directors “are not required to finance their own defense while a case is pending.” The Court emphasized that this interim character is what sets advancement apart: “Courts therefore treat advancement as a separate contractual right and enforce it according to its terms, without regard to the merits of the underlying claims.”

Importantly, the question of advancement is meant to be resolved quickly. As Judge Stagner explained, “Advancement proceedings are summary in nature,” and “[t]he inquiry is therefore intentionally limited.” That “intentionally limited” framework is the engine of the Court’s analysis. It confines the inquiry to the governing agreement and the live pleadings—not to extrinsic disputes about what the parties may have contemplated before suit was filed.

2. The governing agreement is fixed at the time of the conduct

With that limited review framework in place, the Court turned to the threshold issue: which agreement governs. The Company had taken quick and overt action to attempt to avoid advancement.  The Court observed that, “The record shows that on the day this litigation was filed, Gage Western adopted the Fourth Agreement and eliminated its board of directors.” The company argued that this later agreement controlled and eliminated any right to advancement. The Court framed the issue more precisely: “The dispute, in essence, is about timing—whether advancement is determined by the agreement in effect when the underlying conduct occurred, or by a later amendment in place when suit is filed.”

The answer, in the Court’s view, follows directly from basic contract principles. “Applying a later-adopted amendment to eliminate that right would alter the parties’ bargain after the fact.” Advancement is part of what the company offers in exchange for service as a director. Once that service is performed, the associated rights cannot be stripped away retroactively. The Court distilled the rule:

“advancement rights cannot be retroactively eliminated after the conduct giving rise to those rights has occurred.”

The policy considerations reinforce that conclusion. Advancement provisions exist to encourage capable individuals to serve as fiduciaries, “assuring them that they will not have to fund their own defense.” That protection would be largely illusory if it could be withdrawn after a dispute arises. As the Court put it, “that assurance would mean little if a company could eliminate those protections after the service was performed.”  Put another way, a company cannot rely on a condition it made impossible to satisfy

The company’s next argument—that the director failed to satisfy a condition precedent—fared no better. The governing agreement required a board determination that the director could repay advanced fees. But by the time the request was made, the board no longer existed; the company itself had eliminated it. The Court dispatched the argument in short order: by abolishing the board, the company “removed the only mechanism by which the required determination could be made.” Under settled Texas law, a party cannot benefit from the non-occurrence of a condition it has itself rendered impossible. The condition was therefore excused.

3. The claims were not brought “by reason of” director service

That left the dispositive question: whether the claims were brought “by reason of” the defendant’s service as a director. Here, the Court’s “intentionally limited” framework did the decisive work. “The Court therefore confines its analysis to the claims as pleaded.” And looking only at the live petition, the Court concluded that the claims did not arise from director-level conduct at all. They arose, instead, from the defendant’s conduct as an equity holder—specifically, his “alleged refusal, in his capacity as a member, to transfer … his ownership units.”

The distinction the Court drew was a clean one. Whatever pre-suit correspondence may have characterized the defendant’s conduct as inconsistent with his duties as a director, those were not the claims actually brought. As the opinion noted, the claims threatened are not the claims asserted. And under the framework the Court adopted, that distinction is decisive. Because the claims were based in ownership rights rather than fiduciary duty, they fell outside the scope of the advancement provision.

Conclusions and Takeaways

First, advancement rights are enforceable in Texas. They are contractual in nature, and they vest when the underlying conduct occurs—not when litigation is filed or when the company might prefer them to lapse. As this opinion makes clear, “advancement rights cannot be retroactively eliminated” by later amendments, particularly ones adopted on the eve of litigation.

Second, courts will not permit a party to engineer the failure of a condition and then invoke that failure as a defense. If the company dismantles the mechanism required to satisfy a condition—as happened here, when Gage Western eliminated its own board—the condition will be excused.

Third—and ultimately dispositive here—the “by reason of” requirement does real analytical work. Advancement applies only when the claims bear a meaningful nexus to the defendant’s service in a covered capacity. Where the lawsuit targets conduct as an owner rather than as a officer or director (fiduciary), the advancement provision does not apply.

The practical lesson is straightforward: advancement often turns less on the underlying facts than on how the case is pleaded. The same dispute can look very different depending on whether the claims are framed as fiduciary misconduct or as an ownership fight. That framing may well determine, at the threshold, who bears the cost of litigation. In many cases, the question of who is paying the lawyers is where the real leverage lies.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For more information, please contact Chris Bankler or a member of the Trial & Appellate Litigation practice.

Meet Chris

Chris Bankler focuses on the resolution of disputes for businesses and financial institutions. He counsels clients through the process of complex business litigation, including general business disputes, fraud claims, breach of fiduciary duty cases, and complex business bankruptcy litigation. He has served as litigation counsel in more than 100 cases in state and federal courts, as well as FINRA and AAA arbitrations.