Scalable Labs, Inc. vs Suhail Sehgal

On June 9, 2026, Defendant Sehgal filed a reply brief including a supplemental declaration of John D. Pernick seeking an updated amount of $45,984.14 based on $33,209.14 in fees and costs incurred in enforcing Defendant’s indemnification and advancement priors prior to this motion and $13,425.00 for drafting of the motion, reply brief, appearance on the hearing, and filing fees. (Defendant’s Reply brief, at p. 8). The Court notes that the sum of those amounts to $46,634.14. Subsequently, Defendant filed a Declaration in Errata attesting that the paralegal’s hourly fee initially stated as $450.00 was in error and that the paralegal’s hourly rate is $420.00, and that the total sum sought for advancement is $45,894.14. (Errata Declaration of John D. Pernick, at p. 2).

The Court carefully reviewed the following: Defendant’s s notice motion and memorandum of points and authorities in support of the motion (totaling 18 pages); Declaration of Suhail Sehgal and attached Exhibits A-C in support of the moving papers (totaling 48 pages); Declaration of John D. Pernick and attached Exhibits A-K2 in support of the motion (totaling 66 pages); Plaintiff ’s Opposition (totaling 10 pages); Defendant’s Reply brief (totaling 9 pages); Supplement Declaration of John D. Pernick (totaling 2 pages); Errata Declaration of John D. Pernick (totaling 3 pages); proofs of services; and the pleadings.

II. LEGAL STANDARD Pursuant to Code of Civil Procedure section 317 (b):

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 proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person’s conduct was unlawful.

Section 317 (c) provides: 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 by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders. No indemnification shall be made under this subdivision for any of the following: (1) In respect of any claim, issue or matter as to which the person shall have been adjudged to be liable to the corporation in the performance of that person’s duty to the corporation and its shareholders, unless and only to the extent that the court in which the proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine. (2) Of amounts paid in settling or otherwise disposing of a pending action without court approval. (3) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval.

Section 317 (d) provides:

To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in subdivision (b) or (c) or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith.

Section 317(g) provides: The indemnification authorized by this section shall not be deemed exclusive of any additional rights to indemnification for breach of duty to the corporation and its shareholders while acting in the capacity of a director or officer of the corporation to the extent the additional rights to indemnification are authorized in an article provision adopted pursuant to paragraph (11) of subdivision (a) of Section 204. The indemnification provided by this section for acts, omissions, or transactions while acting in the capacity of, or while serving as, a director or officer of the corporation but not involving breach of duty to the corporation and its shareholders shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, to the extent the additional rights to indemnification are authorized in the articles of the corporation.

An article provision authorizing indemnification “in excess of that otherwise permitted by Section 317” or “to the fullest extent permissible under California law” or the substantial equivalent thereof shall be construed to be both a provision for additional indemnification for breach of duty to the corporation and its shareholders as referred to in, and with the limitations required by, paragraph (11) of subdivision (a) of Section 204 and a provision for additional indemnification as referred to in the second sentence of this subdivision.

The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. Nothing contained in this section shall affect any right to indemnification to which persons other than the directors and officers may be entitled by contract or otherwise.

III. ANALYSIS Defendant Sehgal avers that upon learning of the Complaint, defense counsel advised Plaintiff’s counsel of factual and legal deficiencies and advised that the defense would procced with a motion under Code of Civil Procedure section 128.7 if the complaint was not withdrawn by December 9, 2024. (Declaration of Pernick, at p. 2; Exhibit B). 3). Plaintiff Scalable responded it would dismiss the second cause of action an amended complaint. (Id.; Exhibits C-D). Defendant Sehgal asserted that the dismissal of the second cause of action did not address the deficient of the complaint, including that the plaintiff was insolvent in November 2020, and thus estopped form making claims against the defendant. (Id., at p. 3).

Parties stipulated to a first amended complaint that did not allege any purported wrongdoing by Defendant Sehgal as CFO, and does not seek recovery of any payments to the defendant made prior to April 2021, four months after he was terminated as CFO. (Id.).

Defendant Sehgal also demanded indemnification against the alleged original Complaint based on his actions as Scalable’ s Chief Financial Officer (“CFO”) and for advancement of defense expense. (Id.; Exhibit E-F). Plaintiff Scalable repudiated the requests for indemnification and advancement of expenses. (Id.; Exhibit G). The defense sought another indemnification demand in obtaining favorable results, pursuant to section 1(c) of the Indemnification Agreement after Plaintiff Scalable dismissed its uniform voidable transfers act. (Id.; Exhibit H).

Defendant avers that the under section 7(d) of the Indemnity Agreement, the plaintiff has an obligation to advance fees and expenses, “regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses, or insurance recovery.” (Exhibit B; Declaration of Sehgal; and Defendant’s Motion, p. 16). Defendant asserts to have incurred $52,704.00 in attorney’s fees and cost to obtain the dismissal of claims relating to Defendant Sehgal’s role as CFO. (Declaration of Pernick, at 4).

Thus, Defendant Sehgal sought advancement of attorney’s fees and costs. Defense counsel John D. Pernick attests that his hourly

rate is $1,150.00; attorney Lauren Thomas rates are $800.00 per hour; and paralegal are $420.00.21 Defense counsel asserts that $33,209.14 in fees and costs were incurred in enforcing Defendant’s indemnification and advancement priors prior to this motion. Defense also estimates $13,425.00 for drafting a reply brief, appearance for the motion, and filing fees. (Defendant’s Reply brief, at p. 8). In total, defense seeks $45,894.14. Defense argues this amount is reasonable as it successfully defended the defense against Plaintiff Scalable’ s original compliant that sought recoverin excess of $3.7 million dollars from the defendant. (Defendant’s motion, p. 17).

Defense work resulted in the plaintiff dismissing the original complaint that implicated the defendant’s services as Scalable’ s COF and resulted in a reduction that the plaintiff now seeks to recover to under $800,000.00. (Id.). Plaintiff asserts that there has been no duplication of time billed by attorneys. (Id.).

Plaintiff Scalable avers that the request to advance expenses is barred by California Corporations Code section 317; defendant was not sued as Scalable’ s Chief Financial Officer; public policy precludes advancement for Defendant’s intentional wrongdoing; an advancement of expenses violates the safe harbor rule as the original cross- complaint was voluntarily dismissed; and that prior to a final adjudication of the claims, advancement of fees and expenses is premature. (Plaintiff’s Opposition, at p. 2).

Plaintiff asserts that the defendant is not entitled to advancement of expenses because he was not a party to this proceeding as CFO of Scalable, but rather because he received distributions from Scalable at the time the corporation was insolvent. (Id., at p. 6). Thus, the plaintiff challenges whether Defendant meets the prerequisite that the person is or an agent of the corporation. (Id.). Plaintiff also asserts that indemnification may violate public policy in cases involving wrongful conduct or conduct involving bad faith. (Id., at p. 7).

Plaintiff Scalable argues to the extent the defendant maintains he was sued for intentional misconduct, his claim is barred. (Id.). Plaintiff also argues that the request for indemnification is premature as section 7(f) of the Indemnification Agreement states: “Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.” (Id., at p. 8). Plaintiff seeks to have the request denied on those grounds, or in the alternative, argues that the alleged costs are excessive and seek a reduction.

Defendant repudiates the plaintiff’s assertion of Corporate Code section 317(d) on the grounds that the defendant has successfully obtained the dismissal of claims alleged against him in the original Complaint relating to his work as Scalable’ s CFO. (Defendant’s motion, at p. 16-17). Defense also avers that the plaintiff’s other arguments attacking the merits of the case as irrelevant as to the present motion and underlying obligation that the plaintiff must advance fees under the plain language of section 7(d). (Id, at p. 16).

Plaintiff asserts that Defendant Sehgal’s improperly seeks to recover expenses related to his cross-complaint and is prohibited under section 9(c) of the Indemnification Agreement, which provides that “the Company shall not be obligated under this Agreement to make any indemnity ... in connection with any Proceeding or any part of any Proceeding) initiated by Indemnitee ...”. (Id., at p. 9). Plaintiff also avers that the hourly rates for the attorneys and paralegal are excessive and not reasonable or customary for the county.

Plaintiff asserts that the defendant has not provided a proper basis for how much time was expended on particular claims. (Id.). Further, Plaintiff argues that attorney Pernick’s work did the bulk drafting of the motion that could have been done by a more junior attorney. (Id.). Plaintiff asserts that the defense seeks to recover $24,704.00 in attorney’s fees and $120.14 costs that were denied in its initial advancement motion, and that there is no basis for awarding attorney’s fees and costs for successful motions. (Id.).

Upon the Court’s review of the Indemnity Agreement and the arguments asserted by the parties, the Court finds that the December 29, 2020 Indemnity Agreement, section 7(d) provides grounds for advancement of expenses actually and reasonably incurred by Defendant Sehgal in seeking judicial adjudication, regardless of whether

21 Paralegal Lara Brostko’s hourly rate is $420.00 and not $450.00 as initially alleged in moving papers. (Errata Declaration of John D. Pernick, at p. 2). 24

Indemnitee is ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery. This is consistent with the findings of the prior court order. Here, the court finds that defendant Sehgal has presented evidence of expenses incurred. The Court will award advancement of fees. However, the Court does not find the amount requested to be reasonable, but excessive given the straightforward nature of the second motion on the same grounds, excessive hourly rates of counsel and paralegal that is not in accordance with local rates, and overbilling from December 4, 2024 by Lauren Thomas and from February 18, 2025 by John Pernick.

The Court awards the following in expenses: a total of 8.2 hours for John D. Pernick’s preparation, drafting the motion, reviewing opposition papers, preparing a reply brief, and anticipating an appearance at the hearing at the hourly rate of $750.00 per hour; 5.7 hours for Lauren Thomas’s research and preparation of the motion at the hourly rate of $500.00 per hour; 2.9 hours at the hourly rate of $250.00 per hour for paralegal work; $29.94 in costs incurred on June 16, 2015 and a $60 filing fee for this present motion.

IV. CONCLUSION Based on the foregoing, the Court GRANTS advancement of fees and costs incurred by Defendant Sehgal. The Court DENIES the total amount requested, but grants advance fees and costs in the amount of $9,814.94.

The Court will prepare the formal Order.

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