Weighing the Carbon Footprint of Cryptocurrency

Cryptocurrency (“Crypto”) is a virtual form of currency that functions through a decentralized system to record transactions and uses encryption, rather than an entity such as a bank, to verify transactions.[1] Crypto’s first mark on the digital world was in 2009 through Bitcoin, which remains the best-known form of Crypto today.[2] Crypto is created through a process known as mining, which involves downloading a unique software that contains all transactions that have taken place through that specific network.[3]

Crypto has had a profound effect on the global economy and has altered our world’s view of currency and financial transactions in general. Any investor with access to the internet can purchase cryptocurrency.[4] Additionally, over 15,000 businesses worldwide now accept Crypto as a form of payment, which has altered the availability of transactions to interested purchasers.[5] A study conducted by Forester Consulting on Crypto using the Total Economic Impact methodology demonstrated that 40% of customers that used Crypto as their form of currency were new customers to the merchant, evidencing intriguing information that Crypto is affording access to new transactions to new demographic groups.[6]

Despite the numerous advantages that Crypto has offered globally, Crypto’s high demand comes at the cost of an impact on our environment, which is currently being addressed at a federal executive level. The process of mining all Crypto was initially designed to be capped at 21 million units; however, the number of units available to mine has caused an increase in computation power exerted in order to mint new units of Crypto.[7] The estimated carbon footprint stemming from a single crypto transaction is estimated to burn 2,292.5 kilowatt hours of electricity, which equates to the amount of power the average U.S. household uses over the course of 78 days.[8] No payment system is foolproof in completely abolishing its carbon footprint and CO2 emissions. However, compared   to VISA, which is another payment system, the average Crypto transaction requires 200,000 times more energy consumption.[9]

The substantial footprint of Crypto is acknowledged by the current administration, which has prioritized climate change mitigation. [10] In an Executive Order on “Ensuring Responsible Development of Digital Assets” which took place on March 9, 2022, United States President Joe Biden addresses the resulting environmental pollution from Crypto and Crypto mining and implements a plan alongside many federal agencies such as the Environmental Protection Agency.[11] The Executive Order recognizes the benefits of Crypto financial markets for consumers, investors, and businesses, however addresses the responsibility the United States has to mitigate contributions to climate change and pollution.[12]

To reach these goals and assure that Crypto’s harms to not outweigh its benefits, and to learn more about how to stray away from harms, the Executive Order calls on the Director of the Office of Science and Technology Policy to prepare a report to the President within 180 days, specifically addressing “the connections between distributed ledger technology and short-, medium-, and long-term economic and energy transitions; the potential for these technologies to impede or advance efforts to tackle climate change at home and abroad; and the impacts these technologies have on the environment…The report should also address the effect of cryptocurrencies’ consensus mechanisms on energy usage, including research into potential mitigating measures and alternative mechanisms of consensus and the design tradeoffs those may entail.[13]

The damages Crypto could potentially have large effects on climate change and the state of our environmental crisis. However, mitigating Crypto pollution is not an impossible feat. Government encouragement in developing sustainable technologies can have social and economic benefits to the Crypto market and remove the serious threat that Crypto can pose to the emission of greenhouse gases and its carbon footprint.[14]

[1]What is Cryptocurrency and How Does it Work?, Kaspersky, “https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency”>https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency (Last visited March 17, 2022)


[3] Jake Frankenfield, Cryptocurrency, Investopedia (Jan. 11, 2022) https://www.investopedia.com/terms/c/cryptocurrency.asp#:~:text=Cryptocurrencies%20are%20generated%20by%20mining,have%20occurred%20in%20its%20network.

[4] Jim Probasco, What to Know About Investing in Crypto Exchanges, Investopedia (Nov. 30, 2021) https://www.investopedia.com/buying-and-selling-4689764

[5]Who Accepts Bitcoin and Ether Cryptocurrencies, Currency Exchange International (May 12, 2021) https://www.ceifx.com/news/who-accepts-bitcoin-and-ether-cryptocurrencies#:~:text=More%20than%2015%2C000%20businesses%20worldwide,Microsoft%2C%20AT%26T%2C%20and%20Wikipedia.

[6]Forrester Study Shows Accepting Crypto Attracts New Customers and Boosts AOV, Forrester (Aug. 6, 2020) https://bitpay.com/resources/forrester-report-says-bitpay-adds-new-sales-and-2x-aov/

[7] John Bogna, What is the Environmental Impact of Cryptocurrency? PCMag (Jan. 8, 2022) https://www.pcmag.com/how-to/what-is-the-environmental-impact-of-cryptocurrency#:~:text=The%20environmental%20concern%20comes%20from,household%20for%20over%2078%20days.


[9]Bitcoin Energy Consumption Index, Digiconomist (2022) https://digiconomist.net/bitcoin-energy-consumption

[10] Executive Order on Ensuring Responsible Development of Digital Assets (Mar. 9, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.

[11] Executive Order, § 5(b)(vi)

[12] Executive Order, § 1

[13] Executive Order, § 5(b)(vii)

[14] Jon Truby, Decarbonizing Bitcoin: Law and Policy Choices for Reducing the Energy Consumption of Blockchain Technologies and Digital Currencies, 44 Energy Rsch. Soc. Sci. 399 (2018) (Discussing the benefits of Crypto and how the harms can be avoided through commitment to positive government intervention choices).

International, Alternative Methods of Service in a Modern, Mid-Pandemic Society

The Federal Rules of Civil Procedure (the “FRCP”) provide the common process in which an individual may serve another party. The FRCP provides means to achieve proper service of process of an individual located outside of the United States, which differs from serving a national defendant. The FRCP allows a party, in serving an international party, to take measures such as “any internationally agreed means of service that is reasonably calculated to give notice,” “as prescribed by the foreign country’s law for service in that country in an action in its courts of general jurisdiction,” “as the foreign authority directs in response to a letter rogatory or letter of request,” and more.[1] Rule 4(h) provides further for service of process of an international corporation.[2] The Hague Convention has been widely regarded as the as a primary organization to utilize to serve an international party.[3]

While the FRCP rule dictating service of process appears to list a wide range of methods to serve an international party, serving an individual in a different country can raise difficulty in practice, and challenges in doing so have increased. Delays in services of process are common as a result of the COVID-19 pandemic, fashioning conditions where serving a party in another country is nearly impossible. It can be ambiguous on how to conduct international service where the methods listed in FRCP Rule 4 have been exhausted.

In Group One Ltd. V. GTE GmbH et al.[4],a recent decision in the Second Circuit, the court weighed in on the issue of international service and reaffirmed prior decisions that the Hague Convention is not the only means one can pursue to successfully serve a foreign party.[5] The court agrees that FRCP Rule 4 controls service of process, however it does not create a hierarchy on the best or most preferable means to serve a foreign defendant.[6] Additionally, it is established that means listed in Rule 4(f) need not be exhausted prior to seeking permission allowing alternative service from the court.[7]

This decision also deliberates E-mail as an alternate means for service under FRCP Rule 4, and the court authorizes this method to serve foreign defendants. [8] It is required that the service is likely to reach the defendant in order to comport with due process, and E-mail service is valid in order to satisfy this requirement. [9] More surprisingly, the court decides that E-mail service may be the most reliable and efficient method to accomplish service, as “[a]lthough emails may get lost in a defendant’s spam folder, compared to postal mail, emails are more reliable.[10]

The pandemic and its global effect has contributed to widespread delays in service of process. While ordinary and anticipated delays will arise while serving a foreign party even in the absence of a global pandemic, the courts do not aim to make serving a foreign party impossible by restricting alternative means to precedent or the plain language of FRCP Rule 4. Today, we are observing courts strive to put plaintiffs serving foreign parties at ease by interpreting service of process rules in a way that takes into account the current state of the world today.

During a time where the pandemic is triggering delays in all realms of everyday life, and the growing age of technology and communication via E-mail, the courts in many jurisdictions have encouraged plaintiffs to use E-mail as an alternative method of service.

[1]Fed. R. Civ. P. 4(f)

[2]Fed. R. Civ. P. 4(h)

[3]Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, art. 1, Nov. 15 1965, 20 U.S.T. 361, The Hauge Convention

[4]523 F.Supp 3d 323 (E.D.N.Y., 2021)

[5]Id. at 341


[7]Id. at 341


[9]Id. at 344

[10]Id. at 345

Tokenized Assets: What are They and how are They Regulated?

As the decentralized world of blockchain continues to grow, tokenized assets have caught the eye of investors and regulators alike. Tokenized assets may be fungible or non-fungible. Fungible tokenized assets are interchangeable and indistinguishable such as Bitcoin and other cryptocurrencies (“Crypto”). Non-fungible tokens (“NFTs”) are unique tokens that are non-divisible and cannot be replaced because each token has a unique value.[1] Tokenized assets result from taking a tangible asset (such as real estate, paintings, and precious metals) or an intangible asset (such as a digital picture or a YouTube video) and converting the asset ownership into a digital token on a blockchain.[2] This process is known as tokenization.[3] By taking a real-world asset and making a digital representation, it creates a broader investor base, geographic reach, and a reduction in transaction times.[4] Moreover, placing the digital token on a blockchain ensures no single authority can erase your ownership in the tokenized asset.[5]

While tokenized assets can allow for a broader base of investors, like the Crypto market, the NFT market lacks clear regulations from the regulatory agencies such as the U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”).[6] Moreover, state regulatory bodies have yet to issue guidance on the tokenized asset market.[7]

The current legal framework was not designed to regulate and guide the creation and trade of digital assets.[8] Moreover, the question of what category an NFT falls into depends on the particular asset that was tokenized.[9] For example, the CFTC has stated that renewable energy credits and emission allowances are commodities as defined by the Commodity Exchange Act.[10] However, the SEC has stated that depending on the facts and circumstances of a given NFT, it might be considered an investment contract under the Howey test, which would cause the NFT to be regulated under the Securities Act of 1933 and Securities Exchange Act of 1934.[11] The legal uncertainty within the NFT market led SEC Commissioner Hester Peirce to recently state that guidelines would help provide the public with an understanding of how the SEC is approaching these issues.[12] The lack of a clear regulatory framework has made investors susceptible to fraud, and it allows for bad actors to avoid domestic and international anti-money laundering laws.[13]

Additionally, there is no standardized set of rights that accompanies an NFT since the seller determines what rights follow the NFT.[14] Therefore, sellers and buyers alike should understand the limitations that a transfer, assignment, or license may have on the NFT.

While tokenized assets allow for quick cross-border investment and increased liquidity of real-world assets, investors are left without a clear regulatory framework and, at times, not knowing what rights follow the purchase of an NFT. As the decentralized world of blockchain continues to grow, it is imperative that investors and businesses use common sense, sound legal advice, and diligence to navigate this market. Given the lack of legal certainty, attorney legal opinions on these assets will likely immunize any reasonable use.

[1] Tokenization: Opening Illiquid Assets to Investors, BNY Mellon (June 2019), https://www.bnymellon.com/us/en/insights/all-insights/tokenization-opening-illiquid-assets-to-investors.html.




[5] What is asset tokenization?, Hedera, https://hedera.com/learning/what-is-asset-tokenization#:~:text=Asset%20tokenization%20is%20the%20process,either%20digital%20or%20physical%20assets.&text=Asset%20tokenization%20could%20convert%20ownership,0.0002%25)%20of%20the%20property (last visited Feb. 3, 2022).

[6] William de Sierra-Pambley, Tokenization: Opportunity and Regulation, Finding a Balance, Sheppard Mullin (Oct. 18, 2021), https://www.jdsupra.com/legalnews/tokenization-opportunity-and-regulation-5158893/.


[8]NFTs: Key U.S. Legal Considerations for an Emerging Asset Class, Jones Day (April 2021), https://www.jonesday.com/en/insights/2021/04/nfts-key-us-legal-considerations-for-an-emerging-asset-class.




[12] Sarah Wynn, SEC’s Peirce says agency guidance on nonfungible tokens needed, Roll Call (Jan. 25, 2022), https://rollcall.com/2022/01/25/secs-peirce-says-agency-guidance-on-nonfungible-tokens-needed/.

[13]NFTs: Key U.S. Legal Considerations for an Emerging Asset Class, supra note 11.


Stablecoins: What are They?

A little-known area of the growing cryptocurrency market is stablecoins. Stablecoins, a type of cryptocurrency, are not mined through an open network like Bitcoin and Ethereum.[1] Instead, stablecoins derive their value from another asset.[2] Most stablecoins are pegged to a national currency.[3] For example, the USD Coin is a stablecoin that is pegged to the U.S. dollar.[4] Therefore, one USD Coin is always worth one U.S. dollar.[5] By deriving their value from a national currency, stablecoins avoid the volatility that is usually associated with cryptocurrencies.[6] Like other cryptocurrencies, stablecoins are stored in digital wallets.[7]

While Treasury Secretary Janet Yellen has recognized the potential benefits of stablecoins such as “supporting beneficial payment options,” there are no regulations in place to monitor stablecoin reserves. [8] Government regulators are concerned about the implications of a relatively stable cryptocurrency that allows investors to avoid anti-money laundering (“AML”) regulations. [9] Recently, the President’s Working Group on Financial Markets (“PWG”), consisting of Treasury Secretary Janet Yellen, the chairpersons of the Board of Governors of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission, issued a report recommending Congress to pass legislation to regulate the stablecoin market.[10]

The legislation recommended by the PWG report would limit the issuance of stablecoins to insured depository institutions and establish a federal framework to regulate other parties in stablecoin arrangements, such as the party that facilitates the transfer of stablecoins between individuals and the entity that stores the stablecoins.[11] While the PWG believes the proposed legislation should be passed urgently, it recommends in the meantime that agencies use their current authority to address the risks posed by the unregulated stablecoin market.[12] Moreover, the PWG recommends that international AML standards should be implemented to prevent the use of stablecoins by illicit actors.[13]

While stablecoins are still operating in an unregulated environment, one thing is clear: the market is only continuing to grow, and the SEC and other government agencies are taking notice of the unregulated area. Common sense, sound legal advice, and diligence will help any business or investor navigate this market despite the uncertainty surrounding stablecoins.

[1] Julian Dossett, Stablecoins: What they are, how they work and how to buy them, CNET (Dec. 6, 2021), https://www.cnet.com/personal-finance/crypto/stablecoins-what-they-are-how-they-work-and-how-to-buy-them/.


[3] Kathryn G. Wellman; Neil T. Bloomfield, President’s working group report calls for stablecoin regulation, Reuters (Dec. 2, 2021), https://www.reuters.com/legal/transactional/presidents-working-group-report-calls-stablecoin-regulation-2021-12-02/.

[4] What is USD Coin? Coinbase, https://www.coinbase.com/usdc (last visited Dec. 28, 2021).


[6] Wellman; Bloomfield, note 3.

[7] Dossett, note 1.

[8] Felicia Hou, Stablecoins are taking over the crypto world hot topic for Congress—here’s what they are and the fastest-rising ones to keep an eye on, Fortune (Dec. 8, 2021), https://fortune.com/2021/12/08/stablecoins-cryptocurrency-congress/ (quoting Janet Yellen.

[9] Wellman & Bloomfield, note 3.

[10] Id.

[11] President’s Working Grp. on Fin. Mkts., the Fed. Deposit Ins. Corp., & the Off. of the Comptroller of the Currency, Report on Stablecoins (Nov. 2021).

[12] Id.

[13] Id.

Application of Business Interruption Insurance to Losses from COVID-19

In the continued legal battle over whether business interruption insurance policies cover business losses due to the COVID-19 pandemic, a recent case in the United States District Court for the District of Connecticut (the “Connecticut District Court”) adds to the debate. Generally, business interruption insurance covers losses resulting from the closure of the property due to some physical damage or loss to the business premises. In terms of losses incurred from the COVID-19 pandemic, policyholders have argued that the revenue lost from the closure of their businesses is covered by the business interruption insurance. However, insurers have argued that exclusions such as a Virus Exclusion provision prevent any claims resulting from the COVID-19 pandemic. The recent case in the Connecticut District Court provides a great illustration of this ongoing fight for coverage between the insurance industry and business.

In the case One40 Beauty Lounge LLC v. Sentinel Ins. Co., No. 3:20-cv-00643 (KAD), 2021 U.S. Dist. LEXIS 216320 (D. Conn. Nov. 9, 2021), One40 Beauty Lounge, LLC (“One40”) filed a class action against Sentinel Insurance Company (“Sentinel”), claiming the losses it sustained from closing its business due to the COVID-19 pandemic were covered by its insurance policy (the “Policy”) with Sentinel.[1] Sentinel moved for judgment on the pleadings on the ground the Virus Exclusion provision of the Policy unambiguously excluded coverage of any losses resulting from the COVID-19 pandemic.[2] Judge Kari Dooley acknowledged that she was not examining the issue of whether the Virus Exclusion provision prevented One40 from making a claim under the Policy in a vacuum because other courts had previously examined identical provisions and found it to be unambiguous.[3]

One40 argued that even if the Virus Exclusion provision prevented coverage, a subsection of the Virus Exclusion provision allowed limited coverage for 30 days of losses.[4] However, Judge Dooley stated that the subsections of the Virus Exclusion provision must be read together.[5] When viewed as a whole, the subsection One40 relied upon did not provide One40 with limited coverage for 30 days.[6] Since the Virus Exclusion provision unambiguously applied to prevent coverage for losses resulting from the COVID-19 pandemic, Judge Dooley granted Sentinel’s motion for judgment on the pleadings.

While the Connecticut District Court ruled that Virus Exclusion provisions prevent coverage for losses from the COVID-19 pandemic, coverage of business losses from the pandemic is still an open issue. As the COVID-19 pandemic continues to ebb and flow and impacts daily business procedures, policyholders will most likely continue to seek coverage for lost revenue resulting from the closure of their businesses.

[1]One40 Beauty Lounge LLC v. Sentinel Ins. Co., No. 3:20-cv-00643 (KAD), 2021 U.S. Dist. LEXIS 216320 (D. Conn. Nov. 9, 2021).

[2]Id. at *1.

[3]Id. at *7.

[4]Id. at *8.

[5]Id. at *11.


[7]Id. at *12.

Commercial Mortgage-Backed Securities, COVID-19, and the New Potential Systematic Risk

A commercial mortgage-backed security (“CMBS”) is a group of bonds comprised of commercial real estate loans commonly contained in trusts which are then sold to investors.[1] As of 2020, the largest loan contributors to the CMBS market include large banks, such as Citibank, Goldman Sachs, Morgan Stanley, Deutsche Bank, JPMorgan Chase, Wells Fargo, and Bank of America.[2] The commercial property loans securitized by CMBS are generally compromised of commercial properties such as apartment buildings, hotels, factories, office buildings and parks, or shopping malls.[3] These bundles of bonds are also referred to as tranches.[4] CMBS loans are ranked – those with the highest rating have the lowest risk, and those with the lowest rating have the highest risk.[5] Lower risked bonds are known as senior issue, and higher risk bonds are known as junior issue.[6] After the bonds are sold, the bank receives the money from the sale.[7] The bank then lends these proceeds to a subsequent borrower to collect additional fees.[8]

Investing in CMBS poses a lower risk to borrowers than a residential mortgage-backed security (“RMBS”) loan because commercial mortgages typically have a fixed term.[9]  CMBS loans are also compromised of fewer loans than RMBS loans.[10] Many investors seek out this loan because they are interested in obtaining property for an extended period of time and CBMS loans provide lower interest rates.[11] Other incentives of CMBS loans include a higher leverage financing, and CMBS loans are nonrecourse loans, and thus have a wider range of accessibility, because investors with lower credit are more readily able to obtain these loans. [12]

Although there are numerous advantages of CMBS loans, there are several disadvantages tied to a CMBS loan investment. First, these loans have prepayment penalties, which penalize a borrower for paying back a loan outside of the fixed term, even in the circumstance where the borrower pays the loan back earlier than the predetermined date.[13] Second, CMBS loans go through a defeasance profess before prepayment, which can be a painstaking process involving the borrower consulting with a financial advisor in order to set up alternative securities to replace any collateral and interest that the lender no longer is obligated to.[14] Lastly, the terms of CMBS loans are more difficult to negotiate, and a borrower has little or no say in the terms of the loans.[15]

The CMBS market has been greatly impacted by the COVID-19 pandemic. A shift towards working from home has created a failure of roughly $5.5 billion commercial mortgage loans since the summer of 2020.[16] The delinquency rate of CMBS loans in June 2020 was reported to be 10.32%. [17] The delinquency rate continued to increase during October of 2020, during the second wave of the pandemic.[18] The trends of CMBS loans due to the financial crisis that the pandemic has caused are almost identical to the trends of CMBS loans during the 2012 financial crisis, which poses an alarming issue when considering the impact the 2012 crisis had on the CMBS market.[19] The rise of delinquency rates is directly correlated to the effects that COVID-19 has had on commercial real estate: apartment owners, retail owners, restaurants, and hotels are bringing in substantially less income, and are left unable to pay mortgage and other commercial property-related debts.[20]

The last financial crisis in 2012 led to grave delinquencies in the CMBS market, which may signal that the CMBS market will undergo similar disruption in the future, indicative of a similar systemic risk.[21] However, much has been learned from former financial crises and the risks they pose on all types of mortgage backed-security loans, to avoid unnecessary risk in the CMBS market. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act after the 2007-2008 financial crisis, which affects CMBS by “including risk-retention requirements for asset-backed security sponsors, increased disclosure requirements, the Volcker Rule and enhanced capitalization requirements for banks.”[22]

These protective measures are an attempt to make the CMBS market a safer space for investors by decreasing the systematic risk that the CMBS market decline may have on the overall economy.[23] An unforeseen consequence has been an increase in the price of entry into the CMBS market which affects retail investors, and aspects such as the Volcker Rule, which decreases market liquidity and restricts proprietary trading by preventing a bank from holding inventories of secondary market securities and disallowing a banks from investing in real estate.[24]

While the effects from the COVID-19 pandemic may affect the CMBS market and make these loans less accessible to borrowers, overall, the Dodd-Frank reforms have likely mitigated a majority of the risk to the CMBS market directly tied to COVID-19 and will provide a lasting benefit by decreasing this systematic risk impacting the overall economy.

[1] Owen Haney, The Virus, Risk, and Commercial Mortgage-Backed Securities: Examining Dodd-Frank’s Impact in the Midst of a Pandemic, 26 Fordham J. Corp. & Fin. L. 391, 394 (2021)


[3]Carol M. Kopp, Commercial Mortgage-Backed Securities (CMBS), Investopedia, (October 25, 2020), https://www.investopedia.com/terms/c/cmbs.asp

[4]Thomas Kenny, What are Commercial Mortgage-Backed Securities?, The Balance, (October 7, 2021), https://www.thebalance.com/what-are-commercial-mortgage-backed-securities-cmbs-416910





[9]Carol M. Kopp, Commercial Mortgage-Backed Securities (CMBS), Investopedia, (October 25, 2020), https://www.investopedia.com/terms/c/cmbs.asp

[10]Maegan E. O’Rourke, The New Normal: How the Dodd-Frank Risk Retention Rules Affect the Future of CMBS, 51 Suffolk Univ. L. Rev. 77, 81-82 (2018).

[11]Understanding CMBS and CLO Markets, Signet Investments, “https://signetinvestments.com/understanding-cmbs-and-clo-markets/” https://signetinvestments.com/understanding-cmbs-and-clo-markets/ (Last visited November 6 2021)

[12]Commercial Mortgage-Backed Securities (CMBS): A guide, Quicken Loans (January 27, 2021), https://www.quickenloans.com/learn/cmbs




[16]Dorothy Neufield, Commercial Mortgage Delinquencies Near Record Levels, Visual Capitalist (July 16, 2020), https://www.visualcapitalist.com/mortgage-delinquencies/

[17]U.S. CMBS Delinquencies Resume Increase in October, Fitch Ratings (November 6, 2020), “https://www.fitchratings.com/research/structured-finance/us-cmbs-delinquencies-resume-increase-in-october-06-11-2020” https://www.fitchratings.com/research/structured-finance/us-cmbs-delinquencies-resume-increase-in-october-06-11-2020


[19]Owen Haney, The Virus, Risk, and Commercial Mortgage-Backed Securities: Examining Dodd-Frank’s Impact in the Midst of a Pandemic, 26 Fordham J. Corp. & Fin. L. 391, 394 (2021)

[20] Peter J. Irwin et al., CMBS Loan Workouts During COVID-19: A Borrower’s Perspective, Debevoise & Plimpton (May 14, 2020), https://www.debevoise.com/-/media/files/insights/publications/2020/05/20200514-cmbs-loan-workouts-during-covid-19.pdf https://www.debevoise.com/-/media/files/insights/publications/2020/05/20200514-cmbs-loan-workouts-during-covid-19.pdf

[21]Steven L. Schwarcz, Systematic Regulation of Systematic Risk, 2019 Wis. L. Rev. 1, 1 (2019).

[22]Owen Haney, The Virus, Risk, And Commercial Mortgage-Backed Securities: Examining Dodd-Frank’s Impact in the Midst of a Pandemic, 26 Fordham J. Corp. & Fin. L. 391, 401 (2021)

[23]Craig Furfine, The Impact of Risk Retention Regulation on the Underwriting of Securitized Mortgages, 58 J. FIN. SERVS. RSCH. 91, 93 (2020).

[24]Volcker Rule, The Real Estate Round Table https://www.rer.org/policy-issues/capital-credit/volcker-rule https://www.rer.org/policy-issues/capital-credit/volcker-rule (Last visited November 6, 2021)

Federal Jury Rules Four Cryptocurrency products are not Securities

A recent decision in the United States District Court for the District of Connecticut appears to be the first of its kind in the nation. In the case Audet et al v. Garza et al, a federal jury recently weighed in on whether cryptocurrency products were considered securities.[1] The jury held that four digital-asset products linked to cryptocurrency were not securities.[2]

In the case, a class of customers brought an action against GAW Miners LLC (“GAW Miners”) and ZenMiner LLC (“ZenMiner”) for running a cryptocurrency Ponzi scheme.[3] When GAW Miners and ZenMiner were faced with demands from customers for the physical cryptocurrency mining equipment which they could not meet, GAW Miners and ZenMiner turned to Hashlets, Hashpoints, Paycoin and HashStakers (collectively the “Digital Assets”). [4]  These Digital Assets provided customers with a portion of the computing power without owning the physical hardware.[5] Moreover, the Digital Assets served as virtual wallets for the promissory notes and virtual currency of GAW Miners and ZenMiner.[6] The plaintiffs argued that these Digital Assets were investment contracts and therefore were unregulated securities.[7]

The plaintiffs asked Judge Michael Shea to rule as a matter of law that the Digital Assets were securities under the Howey test. [8] The Supreme Court in Howey stated an investment contract exists when “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” [9] However, in an unusual decision, Judge Shea declined to rule as a matter of law that the Digital Assets were securities.[10] Instead, the judge left the issue of how to classify the Digital Assets for the jury.[11] Despite the SEC previously referring to one of the Digital Assets, Hashlets, as a security in a case against one of the former defendants in this case,[12] the jury ruled that the Digital Assets were not investment contracts, and therefore, they were not securities.[13]

The issue of how to define cryptocurrencies is an ongoing debate, and the federal jury’s ruling in this case does not settle it.

[1] Elise Hansen, Crypto Mining-Linked Products Weren’t Securities, Jury Finds, Law360 (Nov. 2, 2021), https://www.law360.com/articles/1436790/crypto-mining-linked-products-weren-t-securities-jury-finds.

[2] Id.

[3] HHR Wins Groundbreaking Jury Verdict in Crypto Fraud Trial, HHR (Nov. 3, 2021), https://www.hugheshubbard.com/news/hhr-wins-groundbreaking-jury-verdict-in-crypto-fraud-trial.

[4] Id.

[5] Hansen, supra note 1.

[6] Id.

[7] Id.

[8] Alison Frankel, In apparent first, Conn. class action jury finds crypto products are not securities, Reuters (Nov. 3, 2021), https://www.reuters.com/legal/transactional/apparent-first-conn-class-action-jury-finds-crypto-products-are-not-securities-2021-11-03/.

[9] SEC v. W. J. Howey Co., 328 U.S. 293, 298­–99 (1946).

[10] Id.

[11] Id.

[12] HRR, supra note 3.

[13] Hansen, supra note 1.

Cryptocurrencies: Security, Currency, or None of the Above?

As interest in cryptocurrencies (“crypto”) continues to rise, businesses and investors are left wondering what regulations they must follow. While crypto may contain the word “currency” in its name, it is unclear whether it truly is a currency. There has been a lot of debate over which category it belongs to for regulatory purposes.1 Is it a currency or a security? The SEC has yet to provide guidance on this rapidly developing market.

Simply put, a currency is a store of value, unit of account, and medium of exchange, while a security is a tradable financial asset that has monetary value.2 The Securities Act of 1933 (“the ‘33 Act”) provides a list of what qualifies as a security, and crypto is not included. However, the list contains investment contracts, which is the category the SEC has openly debated whether cryptocurrencies belong.3 The Supreme Court in Howey stated an investment contract exists when “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”4

The determination of which category crypto belongs in is essential for investors as it implicates which governing body has the authority to regulate the market. If crypto is categorized as a currency, the SEC lacks jurisdiction. If it is considered a security, it falls squarely in the SEC’s jurisdiction and becomes subject to the agency’s strict reporting and trading regulations.

The SEC is not the only government agency that has failed to provide clear guidance on what category crypto belongs in. The IRS still refers businesses to its 2014 Notice where it opined on the topic.5 The 2014 Notice stated it is “aware that ‘virtual currency’” exists and referred to “Bitcoin” as a convertible virtual currency because it has an equivalent value in real currency. However, in the same notice, it stated that virtual currency could be held as a capital asset like stocks and bonds.

Something that tends to complicate the classification of crypto even more is the fact that it seems a specific cryptocurrency’s classification may change over time. This happened in the case of the token ether, the primary token for Ethereum.8 The then SEC Chairman decided it no longer met the Howey test and declared it not a security. Then SEC Chairman Clayton also stated that Bitcoin was not a security due to its decentralized nature.10

Even though the SEC has stated Bitcoin and ether are not securities, the question remains on what the status is of the numerous other cryptos. A recent action brought by the SEC against Ripple Labs, Inc. (“Ripple”) in the U.S. District Court for the Southern District of New York could significantly impact how crypto is regulated and categorized. The SEC argues that XRP, Ripple’s cryptocurrency, is an investment contract under the Howey test, and therefore by not registering it, Ripple sold XRP as an unregistered security.11 While the parties have entered into settlement discussions, it is still a case to watch for potential regulatory impacts on cryptos.

While it is still unclear whether cryptos are securities or currency for regulatory purposes, one thing is clear: the market is only continuing to grow, and the SEC and other government agencies are taking notice of the unregulated area. Common sense, sound legal advice, and diligence will help any business or investor navigate this market despite the uncertainty surrounding crypto.

1. SEC Reckons With Crypto’s Currency And Security Conundrum, PYMNTS (Apr. 20, 2021).
2. Public Statement, Bill Hinman, Dir. Of Div. of Corp. Fin., SEC; Valerie Szczepanik, Senior Advisor for Digital Assets & Innovation, SEC, Statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets” (Apr. 13, 2019).
3. Public Statement, Chair Gary Gensler, SEC, Remarks Before the Aspen Security Forum (Aug. 3, 2021).
4. SEC v. W. J. Howey Co., 328 U.S. 293, 298­–99 (1946).
5. I.R.S. Notice 2014-21, 2014-16 I.R.B. 938 (Apr. 14, 2014).
6. Id.
7. Id.
8. David Borsack & Cole Schotz, Cryptocurrencies And The Security And Exchange Commission, JDSUPPRA (Aug. 4, 2021).
9. Aaron Hankin, SEC’s Jay Clayton says Ether isn’t a security, reiterating the regulator’s stance, MarketWatch (Mar. 12, 2019).
10. Is Crypto A Commodity or Security?, SoFi (Apr. 27, 2021).
11. Press Release, SEC, SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering (Dec. 22, 2020).

Infrastructure Bill May Broaden Definition of “Broker” to Include Cryptocurrency Miners and Developers

The United States Senate recently passed an infrastructure bill, H. R. 3684, which contains new regulations regarding the reporting of digital assets for cryptocurrency miners and software developers.

The regulations in the bill, entitled “Information Reporting for Brokers and Digital Assets” aims to extend cryptocurrency tax reporting requirements, which could raise money to help offset some infrastructure development. At issue is an addition to the definition of the term broker in Section 6045(c)(1) of the Internal Revenue Code of 1986. Currently, the bill would insert a new subparagraph which makes the definition include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” H. R. 3684, at 2434 (as of 8/11/2021). Such a literal addition would cause not only the intended effect of encouraging reporting from crypto exchanges, but also require that anyone who is involved with any service that involves cryptocurrency transfers be required to report their transactions, as a broker is required to do. This could include crypto miners, software developers, and others involved in crypto exchanges who cannot know who their “customers” are because of the anonymous nature of crypto mining, and are therefore incapable of reporting the necessary information that a broker is required to report by law.

The definition amendment was the source of public backlash and concern that the cryptocurrency sector could potentially be outsourced outside of the United States as a result of this legislation. A bipartisan compromise to the amendment was drafted in an attempt to correct the over-broad language of the bill. However, this amendment was blocked by the Senate on Monday, August 9th, 2021. The following day, the Senate and passed the bill in its original form without additional amendments. It is still possible for the bill to be changed in reconciliation, as it has yet to reach the floor of the House of Representatives for a vote. In addition, the IRS may further narrow the definition (should the bill be passed and signed into law) when adding the amendment to the definition of broker in the Internal Revenue Code.

Indemnification, Not as Simple as You Think

On the surface, indemnification seems like a fairly simple concept. If a company indemnifies a person, the person will be reimbursed for their expenses including legal fees. This at-a-glance view of indemnification, however, fails to answer some important questions that often get brought up when one party claims indemnity. These questions include when indemnification is due, if the outcome of a proceeding is essential to the determination of indemnification rights, whether the claim is ripe for adjudication, and the legitimacy or legality of the claim for indemnification itself. These questions can be tricky to navigate, evidenced by how often they crop up in litigation. This article provides a general overview of indemnification law and some of the intricate questions that arise when dealing with indemnification issues.

The Law of Indemnification

Delaware Indemnification Laws

As many corporations and limited liability companies (“LLC”) are incorporated and organized in Delaware, this article first examines Delaware indemnification law.

Under Delaware LLC law, indemnification is a broad concept. For these businesses, indemnification is governed by 6 Del. C. § 18-108, which states: “Subject to [restrictions and standards] in its [LLC operating] agreement, a [LLC] may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.” Indemnification may be offered by a Delaware LLC even if there is no obligation to indemnify. Symonds & O’Tolle on DE Limited Liability Cos. § 11.02 (2019). If there is no obligation to indemnify, Delaware courts apply the business judgement rule to determine if the company has made the decision to indemnify absent agreement which would otherwise create an obligation. See Lola Cars Int’s Ltd. v. Krohn Racing, LLC, No. 6520 -VCN.

Delaware corporations are governed by Del. Code Ann. tit. 8, § 145. This statute states in pertinent part that:

A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding . . . .

In other words, corporations incorporated in Delaware have the power to indemnify anyone working for the corporation. It is required, however, that “the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.” Del. Code Ann. tit. 8, § 145 (a).

Delaware Advancement Law

For LLCs, advancement of expenses is covered under the same statute (6 Del. C. § 18-108) as indemnification, with a similar broad scope  See Senior Tour Players 207 Mgmt. Co. v. Golftown 207 Holding Co., 2004 Del. Ch. LEXIS 22 (Del. Ch. Mar. 10, 2004) (the statute’s provisions are “broadly empowering and deferential to the contracting parties’ wishes regarding indemnification and advancement . . .”). A “right to advancement is not ordinarily dependent upon a determination that the party in question will ultimately be entitled to be indemnified . . .” Id. However, “advancement implies a general obligation to repay if the underlying conduct is ultimately judged to be not indemnifiable.” Id. In other words, a party’s right to advancement is not dependent on its right to indemnification, even if it may have to repay the funds in the future.

For corporations, section (e) of Del. Code Ann. tit. 8, § 145 states that expenses may be paid in advance. The party who receives the funds, however, must show that it will repay the funds if it is later established that they would not be entitled to indemnification. Del. Code Ann. tit. 8, § 145 (e).

New York Indemnification Laws

Pastore regularly works with New York corporations and LLCs as a going concern. As such, we next turn to a discussion New York indemnification laws. Similar to Delaware law, New York LLC indemnification law is also broadly tailored to allow indemnification and advancement for managers, members or associated persons. N.Y. Ltd. Liab. Co. Law § 420 (pursuant to the LLC agreement, “a limited liability company may, and shall have the power to, indemnify and hold harmless, and advance expenses to, any member, manager or other person . . . from and against any and all claims and demands whatsoever”). This statute differs from the Delaware LLC statute by adding that:

no indemnification may be made [for a person] if a judgment . . . adverse to such [person] establishes (a) that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated or (b) that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.

In other words, an LLC may not indemnify a person, member, or manager if the person to be indemnified loses their case and the penultimate judgement establishes that their actions were made in bad faith, were the result of deliberate dishonesty, or that the person personally made some kind of gain that they were not legally entitled.

In New York, indemnification for corporations is governed by N.Y. Bus. Corp. Law § 722. While it is written similarly to the Delaware law, the New York law only allows for the indemnification of directors and officers. N.Y. Bus. Corp. Law § 722 (a) states:

A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by or in the right of the corporation to procure a judgment in its favor), whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful.

In summation, corporations can indemnify any director or officer, so long as they acted in good faith and pursuant to their fiduciary duty to the corporation. If the proceeding is a criminal one, then the director or officer needs to have had no reasonable cause to believe that their conduct was unlawful. Of course, the corporation can limit indemnification further than that, and indemnification under this statute is not required. See Donovan v. Rothman, 253 A.D.2d 627 (App. Div. 1st Dept. 1998) (where the Defendants were prevented from using corporate funds on the litigation because  there was no agreement to indemnify, there was no receipt of the corporation offering to indemnify, and the defendant may not have met the statutory requirements).

New York Advancement Laws

Similar to Delaware indemnification statutes, advancement for New York LLCs is governed by the same statute as indemnification. N.Y. Ltd. Liab. Co. Law § 420.  Rights to advancement are also based on the operating agreement of the LLC, similar to rights for indemnification under N.Y. Ltd. Liab. Co. Law § 420.

Advancement in regard to New York corporations, indemnification is governed by N.Y. Bus. Corp. Law § 723(c), and N.Y. Bus. Corp. Law § 725(a). Section 723(c) allows for indemnification, stating that “[e]xpenses incurred in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action” . . ., also adding that it must be done in accordance with § 725(a). Section 725(a) states that all advanced funds “shall be repaid in case the person receiving such advancement or allowance is ultimately found, under the procedure set forth in this article, not to be entitled to indemnification.”

Connecticut Indemnification Laws

In Connecticut, indemnification for LLCs is governed by Conn. Gen. Stat. § 34-255g(b), which allows for indemnification of current or former members, managers, or officers, so long as the liability does not arise from violations of §§ 34-255d (limitations on distributions), 34-255f (management of LLC), or 34-255h (standards of conduct for members and managers). Section 34-255g(c) further requires indemnification for people who are wholly successful in their defense, stating:

A limited liability company shall indemnify and hold harmless a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding with respect to any claim or demand against the person by reason of the person’s former or present capacity as a member, manager or officer of the company from and against reasonable expenses, including attorney’s fees and costs incurred by the person in connection with such claim or demand.

For corporations, the relevant statute is Conn. Gen. Stat. § 33-1122, which broadly allows indemnification and advancement so long as they do not violate public policy. Section 33-1122 (a) states:

A corporation may indemnify and advance expenses under sections 33-1116 to 33-1125, inclusive, to an officer, employee or agent of the corporation who is a party to a proceeding because he is an officer, employee or agent of the corporation (1) to the same extent as a director, and (2) if he is an officer, employee or agent but not a director, to such further extent, consistent with public policy, as may be provided by contract, the certificate of incorporation, the bylaws or a resolution of the board of directors. A corporation may delegate to its general counsel or other specified officer or officers the ability under this subsection to determine that indemnification or advance for expenses to such officer, employee or agent is permissible and the ability to authorize payment of such indemnification or advance for expenses. Nothing in this subdivision shall in any way limit either the ability or the obligation of a corporation to indemnify and advance expenses under other applicable law to any officer, employee or agent who is not a director.

Conn. Gen. Stat. § 33-112(b) allows for indemnification for directors of a company if said director is also an employee or officer and indemnification is only offered to them in connection with their role as an employee or officer of the company. Section 33-1122(b) (“The provisions of subdivision (2) of subsection (a) of this section shall apply to an officer, employee or agent who is also a director if the basis on which he is made a party to the proceeding is an act or omission solely as an officer, employee or agent”).

For directors seeking indemnification in their role as a member of the board of directors, the relevant statute is C.G.S. § 33-1117, which provides that “a corporation can only indemnify a director who acted in good faith, in the best interests of the corporation, and in the case of a criminal proceeding, had no reason to believe their conduct was unlawful.” Indemnification for directors defending against a lawsuit or criminal proceeding is mandatory in Connecticut, so long as they were successful, on the merits or otherwise as provided for under C.G.S. § 33-1118 (“Mandatory Indemnification”).

Connecticut Advancement Law

For LLCs, advancement is authorized pursuant to C.G.S. § 34-255g(d), so long as the money is repaid if the person being advanced funds is, in fact, not owed advancement under § 34-255g(b).

For corporations, advancement is allowed for non-director employees. Conn. Gen. Stat. § 33-1122 (“A corporation may indemnify and advance expenses . . . .”). For directors, advancement is allowed under C.G.S. § 33-1119, which requires that the director provide the corporation a written affirmation of her good faith belief that the standard of conduct required by them has been met, and provide a written undertaking to repay all funds advanced if it is determined that the director is not entitled to mandatory indemnification under § 33-1118.

Indemnification vs. Advancement

Indemnification and advancement are often mistaken for one another. While indemnification is more common, most litigants prefer advancement of expenses.

A litigant’s right to indemnification cannot be established until the conclusion of the legal proceeding. Homestore, Inc. v. Tafeen, 888 A.2d 204, 212 (Del. 2005). This is because the litigant’s actual claim for indemnification cannot be brought until the underlying matter has been resolved with certainty. Scharf v. Edgcomb Corp., 864 A.2d 909,919-20 (Del. 2004). The matter can only be said to be resolved with certainty when the litigation or investigation has completely concluded. Id. at 919. The results of those proceedings can be determinative of whether or not the litigant has a right to indemnification, as it may not be authorized by either the terms of the agreement which gave the party the right, or the actual laws of the state.

In contrast, advancement differs from indemnification in that the party entitled to advancement receives their legal fees before the end of the underlying legal proceeding. While many states require that the party receiving the funds must repay them at the end of their lawsuit if they would not be entitled to indemnification at that time, it is still generally allowed in proceedings regardless of what kind of proceeding it is (legal or administrative, civil or criminal). See Senior Tour Players 207 Mgmt. Co. LLC v. Golftown 207 Holding Go. LLC, 853 A.2d 124, 29 (Del. Ch. 2004). Advancement has been allowed in a criminal prosecutions even after a guilty verdict, for the sake of paying for the appeal to the judgement. See Sun-Times Meia Group Inc. v. Black, 954 A2d 380 (Del. Ch. 2008). In Delaware, parties who are owed advancement may also initiate advancement actions, which are special summary proceedings to establish owed advancement. See Kaung v. Cole Nat. Corp., 884 A2d 500, 510 (Del. Sup. Ct. 2005). This type of action is not available for indemnification. Id.

Indemnification and Securities Violation Public Policy Rationale

One way a party loses their right to indemnification, even if a company is obligated to indemnify them by a violation of public policy

There is long standing public policy generally prohibiting indemnification arising from violations of federal and/or state securities laws, particularly in the case of intentional misconduct. For example, in Globus v. Law Research Service, Inc., the Second Circuit determined that it would be against public policy to permit someone who violated securities law to enforce their indemnification agreement. 418 F2d 1276, 1288 (1969). The court’s reasoning was that “one cannot insure himself against his own reckless, willful or criminal misconduct, and that allowing one to do so would run contrary to the purpose of the law that was violated.” Id. That being, to deter negligence and abuse. Id.

Indemnification may be upheld in cases when there is a determination that an indemnified party did not violate the securities laws. See, e.g., In re Residential Capital, LLC, 524 B.R. 563, 597 (Bankr. Ct. 2015) (“under New York law, Minnesota law does not preclude indemnification of fraud claims where there has not been a threshold ‘finding of illegal or even intentional misconduct’”); Credit Suisse First Boston, LLC v. Intershop Communs. AG, 407 F. Supp. 2d 541, 550-51 (S.D.N.Y. 2006) (“no court has extended Globus to preclude indemnification where, as in this case: (i) the claims against the party seeking indemnification have been dismissed with prejudice; and (ii) the ‘wrongful’ conduct that allegedly precludes indemnification was never alleged against the indemnitee in the underlying action”); Austro v. Niagara Mohwak Power Corp., 66 N.Y.2d 674 (1985) (“[i]ndemnification agreements are unenforceable as violative of public policy only to the extent that they purport to indemnify a party for damages flowing from the intentional causation of injury”).

In sum, public policy considerations can ultimately lead to a denial of indemnification despite an agreement that allows for indemnification otherwise. A party that has a contractual or legal right to indemnification may ultimately be denied that right if it is found that the party violated securities laws. Since such a determination cannot be made until after final resolution of the case, the party to be indemnified may not have a clear answer as to whether their fees will be reimbursed until after they have expensed fees to defend the action. Leaving litigants to seek to lock in their right to indemnification prior to final judgment by using tactics such as seeking a declaratory judgment that they are entitled to indemnification.

Indemnification and Declaratory Judgement

In another recent Pastore case, a former director of a Pastore client was attempting to obtain a declaratory judgement from the court declaring that they would be entitled to indemnification on a future claim for contribution. Pastore was successful in establishing that the declaratory judgment claim should be dismissed for being premature.

Indemnification is improper pending a final disposition of the underlying proceeding. Hermelin v. K-V Pharm. Co., 54 A3d 1093, 1107 n.51 (Del. Ch. 2012). Indemnification claims are premature, or not ripe, until after the merits of an action have been decided and everything has been resolved. Bamford v. Penfold, L.P., 2020 WL 967942, at *32 (Del. Ch. Fed. 28, 2020).

If there is no actual claim being made against a litigant, then they clearly cannot argue that they are owed indemnification, since the time to make that argument is after proceedings have ended. In In re Dow Chem. Co. Deriv. Litig., the Delaware Chancery Court described the plaintiff’s indemnification claim as “clearly not ripe,” because no litigation nor dispute existed nor was pending when they made their claim for indemnification. No. 4349-CC, 2010 Del. Ch. LEXIS 2, 55 (Ch. Jan. 11, 2010). As such, any claim for indemnification that arises before the existence of any litigation or dispute is obviously premature/unripe.

The Court ended up agreeing with Pastore’s argument on the count for declaratory judgement of the plaintiff’s indemnification claim. Holding, that the plaintiff was unable to get declaratory judgement for an indemnification claim based on a potential future claim that has not yet been filed. It was not the right time to establish a right to indemnification, and thus Pastore’s motion to dismiss was granted on that count.


In conclusion, indemnification is complicated and can cause complex questions when litigated. Indemnification is not simply something which allows for payment of fees involved in litigation whenever and however the indemnitee would like. It has its own rules and systems governing issues involving indemnification and advancement. The matters discussed here are a few of the many different issues which arise under the umbrella indemnification.