In the recent decision of Andrikopolous v. Silicon Valley Innovation Company, LLC, C.A. No. 9899-VCP (Del. Ch. July 30, 2015), Vice Chancellor Parsons addressed the novel issue under Delaware law as to what priority level advancement claims are afforded in a receivership action.

This case is an important read for any director or officer seeking advancement of their fees and costs from an entity that is in a receivership proceeding before the Delaware Court of Chancery.  The Court ruled that claims for advancement are not entitled to administrative priority, and instead are considered to be pre-petition, non-priority unsecured claims.

Background

The case had an unusual procedural posture.  In January 2013, the Court appointed a receiver over Defendant Silicon Valley Innovation Company, LLC (“SVIC”).  The only assets of SVIC are contingent claims against its former directors and officers.  The Receiver filed several cases in California, which were consolidated before the Superior Court for Los Angeles County.  The plaintiffs in this case, Shaun Andrikopolous and Michael Santer, are named defendants in the case commenced by the Receiver in California.  The parties to this advancement action stipulated to Plaintiffs’ entitlement to advancement, subject to the Court determining whether Plaintiffs’ advancement claims are entitled to priority.

Analysis

The Court found that a) there is no controlling Delaware authority, b) the Delaware statutes of receivership provide minimal guidance, c) Delaware has a strong public policy in favor of advancement, but d) the strong analogy between receiverships and bankruptcy weigh in favor of non-priority status of the advancement claim.

The Court found that Plaintiffs’ advancement claims should not be afforded priority status.  This was because (i) the successful winding up of a Delaware corporation has significance, (ii) a pre-receivership and post-receivership entities are “meaningfully different”, (iii) balancing the existence of advancement rights against the realities of insolvent entities lends to a non-priority determination, and (iv) “the reality of practical administration weighs in favor of treating advancement claims the same as the claims of other unsecured creditors.”

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.