Background: A Drag-Along Dispute and Eliminated Advancement Rights

Phillip Daskevich served as both a member and director of Gage Western LLC, a Texas limited liability company governed by a series of amended company agreements. In September 2024, a majority of Gage Western's board approved a drag-along sale transaction under the company's Third Amended Company Agreement; Daskevich voted against it. Plaintiff Energy Founders Fund, LP (EFF) subsequently sued Daskevich and his wife, alleging they refused to transfer their membership units as required by the drag-along provisions. On the same day EFF filed suit, Gage Western adopted a Fourth Amended Company Agreement that eliminated both the board of directors and all advancement and indemnification provisions. When Daskevich later sought advancement of his defense costs under the Third Agreement, the company refused, setting up a three-part dispute over which agreement governs, whether conditions precedent were satisfied, and whether the claims fall within the scope of any advancement right.

The Court's Ruling: Conduct-Based Advancement Rights Cannot Be Retroactively Eliminated

Judge Stagner ruled for Daskevich on the threshold question of which agreement controls, holding that "Daskevich's right to advancement arises from an agreement that was in effect when he performed his services as a director." The court emphasized that advancement is a contractual mechanism distinct from indemnification, operating "before any determination of liability" to ensure "corporate officials are not required to finance their own defense while a case is pending." While Texas law treats advancement rights as primarily contractual—the Business Organizations Code permits but does not require LLCs to provide advancement—the court concluded that once such rights vest based on conduct performed under a particular agreement, they cannot be eliminated by subsequent amendment.

Conditions Precedent and Impossibility

The court also sided with Daskevich on the second issue, finding that Gage Western could not rely on an unsatisfied condition precedent that it had made impossible to perform. The Third Agreement required two conditions for advancement: a written undertaking to repay amounts if indemnification is ultimately denied, and a board determination that the director is financially able to repay. Daskevich provided the undertaking, but the board made no financial determination—because by that point, the Fourth Agreement had eliminated the board entirely. The court held that "Gage Western cannot rely on a condition precedent that it made impossible to satisfy," applying principles of contractual impossibility to excuse the unfulfilled condition.

The Fatal Flaw: Claims Not Brought 'By Reason Of' Director Service

Despite ruling for Daskevich on the first two issues, the court denied his motion on the third and dispositive question: whether the claims against him were brought "by reason of" his service as a director, as required by the Third Agreement's advancement provision. The court noted that while pre-suit correspondence from EFF's counsel "at times" characterized Daskevich's conduct as inconsistent with his director duties and warned of potential derivative claims, EFF's actual pleadings told a different story. The court observed that "EFF's most recent pleading" advanced a theory "seeking a declaration that the units were automatically transferred upon EFF's issuance of the drag-along notice"—a claim focused on Daskevich's obligations as a member under the drag-along provisions, not his conduct as a director. This distinction proved fatal to the advancement claim, as the court concluded "the claims against Daskevich, as currently pleaded, are not brought by reason of his service as a director."

Significance for Texas Commercial Practice

This decision provides important guidance on three fronts for practitioners advising LLC directors and drafting company agreements. First, it confirms that advancement rights vest based on the agreement in effect when the relevant conduct occurred, providing directors with protection against retroactive elimination of contractual rights through subsequent amendments. Second, it establishes that companies cannot use conditions precedent as a shield when they have rendered those conditions impossible to satisfy—a principle with broad applicability beyond advancement disputes. Third, and most critically for litigation strategy, it underscores that advancement eligibility turns on careful pleading analysis: the "by reason of" causation requirement demands that claims actually implicate the director's corporate service, not merely the individual's status as a member or party to the company agreement. Counsel seeking advancement must scrutinize the operative petition to ensure claims are framed as arising from directorial conduct, while opposing counsel can defeat advancement by carefully pleading claims to target the individual's non-director capacities.