Texas Business Court Clarifies Standards Regarding a Texas LLC Director’s Right to Advancement of Defense Costs

In its April 9, 2026, memorandum opinion ruling on a motion to compel advancement of legal fees in Energy Founders Fund, LP v. Daskevich, the Texas Business Court addressed three issues relevant to a Texas limited liability company director’s claim to advancement of legal defense costs. The opinion addresses (1) which version of a company agreement governs advancement rights; (2) when conditions precedent to advancement may be excused; and (3) what the court reviews and considers in determining whether a claim is brought “by reason of” a person’s status as a director.

Link to Background Background

The underlying dispute arose from the sale of Gage Western LLC and the related transfer of the company’s membership units under the drag-along provisions of Gage Western’s Third Amended Company Agreement (Third Agreement). The sale was approved by the Gage Western board of directors, but the plaintiff in this advancement action, Phillip Daskevich, who was then both a member and director of Gage Western, voted against the sale as a director. After approval of the sale, Daskevich refused to take the steps necessary to transfer his Gage Western membership units, as Gage Western asserted was required by drag-along provisions in the Third Agreement. Energy Founders Fund sent correspondence to Daskevich questioning his conduct as a director and subsequently sued Daskevich and his wife for their alleged refusal to transfer their membership units.

On the same day Energy Founders filed the lawsuit, Gage Western adopted a Fourth Amended Company Agreement (Fourth Agreement) eliminating the board of directors and removing advancement and indemnification provisions, which had been included in the Third Agreement. When Daskevich later requested advancement of his defense costs under the earlier Third Agreement, Gage Western declined, and no board determination was (or could be) made.

Link to The Court’s Analysis The Court’s Analysis

Link to Which Agreement Governs? Which Agreement Governs?

The court first addressed whether Daskevich’s advancement rights were governed by the Third Agreement (in effect when the underlying conduct occurred) or the Fourth Agreement (in place when the lawsuit was filed).

Adopting a “conduct-based” approach consistent with principles of Texas contract law, the court held that, absent clear contractual language to the contrary, advancement rights are determined by the agreement in place when the underlying conduct occurred. The court drew on Delaware jurisprudence related to Section 145 of the Delaware General Corporation Law, because Texas case law has not squarely addressed the issue. Consistent with Delaware law, the court concluded that advancement rights form part of the consideration for a director’s service — individuals accept the risks of the position with the understanding that, if litigation arises from their service, the company will fund their defense in the interim. Once the director performed his or her duties in reliance on those protections, the rights vested and could not be retroactively extinguished by amendment.

Link to Were Conditions Precedent Satisfied? Were Conditions Precedent Satisfied?

The Third Agreement required the satisfaction of two conditions precedent for director advancement: (1) a written undertaking to repay amounts advanced if indemnification is ultimately denied; and (2) a board determination that the director could financially repay such amounts. Although Daskevich provided the required undertaking, he could not obtain a board determination because the Fourth Agreement extinguished the board.

In light of these facts and applicable Texas law holding that a party is excused from satisfying a condition precedent if the opposing party’s actions made satisfaction impossible, the court held that the second condition precedent was excused as a matter of law because the company could not rely on the failure of the second condition precedent which it had unilaterally made impossible to satisfy.

Link to The “By Reason Of” Requirement The “By Reason Of” Requirement

The advancement provision in the Third Agreement required that Gage Western advance expenses only for defense costs that Daskevich incurred “by reason of” being a director. The court ultimately rejected Daskevich’s motion to compel advancement of fees because the claims against him were not brought “by reason of” his service as a Gage Western director.

In making this determination, the courtanalyzed whether the “by reason of” analysis should be based solely on the “eight corners” of the company agreement and the live pleading, or whether extrinsic evidence, such as the pre-litigation correspondence regarding his conduct as a director, should also be considered. Ultimately, after again taking guidance from Delaware courts, the court determined the “eight corners” approach should guide the analysis due to the summary nature of advancement proceedings. That said, the court clarified that departure from the “eight corners” framework may be warranted in limited circumstances, not met here, such as where an advancement clause itself suffers from an ambiguity.

The court explained that, to satisfy the “by reason of” requirement, there must be a meaningful nexus between the pleaded claims and the defendant’s service as a director. Here, the court concluded that, although pre-suit correspondence related to board-level conduct, the underlying lawsuit targeted Daskevich’s conduct as a member of the limited liability company — i.e., the failure to transfer his membership interests in Gage Western — rather than his service as a Gage Western director or the discharge of any director-level duties on Gage Western’s behalf.

Link to Key Takeaways for Texas Entities Key Takeaways for Texas Entities

Texas companies should consider the following lessons from Energy Founders:

1. Timing matters for advancement rights. Companies should be aware that amending a company agreement to eliminate indemnification or advancement may only apply to future conduct, not pre-amendment disputes. The court’s analysis and conclusion may also apply to a Texas corporation and its directors, officers, and other indemnified persons.
2. Self-created impossibility may not defeat advancement. If a company disables the mechanism for satisfying a condition precedent — such as eliminating a board responsible for making required determinations — courts may excuse non-compliance.
3. The “by reason of” inquiry is narrow. When seeking advancement in the Texas Business Court, the operative contract and live pleading control. If the plaintiff crafts its petition to focus on shareholder/contractual breaches rather than fiduciary duties, that may otherwise deprive a defendant-director from access to company-funded defense costs.
4. Advancement provisions will be interpreted carefully against indemnification provisions. Advancement provisions that include “threatened” claims or “demands” may create broader advancement obligations than those limited only to “asserted claims.” Here, the narrow focus on “claims” and omission of “threats” in advancement provisions of the Third Agreement, both of which terms appeared in adjacent indemnification provisions, prevented Daskevich from introducing pre-suit demand letters to satisfy the requirement that he was being sued “by reason of” being a director.

Link to Conclusion Conclusion

The Energy Founders opinion signals that the Texas Business Court will rely on established corporate principles — sometimes mirroring Delaware law — to bring some predictability to corporate disputes involving Texas entities. Texas companies and their counsel may wish to note that, per the Texas Business Court, advancement rights are determined at the time of service; conditions precedent cannot be circumvented after the fact through subsequent strategic restructuring; and the scope of coverage depends on the specific claims asserted and the specific language of the advancement provisions.