Receivership

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In the recent decision of Jagodzinksi v. Silicon Valley Innovation Company, LLC, C.A. No. 7378-VCP (Del. Ch. Aug. 7, 2015), the Court of Chancery ruled on plaintiff’s motion to terminate the receiver, or in the alternative to lower the receiver’s compensation.  This opinion is significant in that it addresses the standard considered by the Court to terminate a receiver appointed to an LLC (case law is sparse on this topic).

By way of background, the receiver at the time of his appointment in 2013, Bram Portnoy (“Receiver” or “Portnoy”), was an employee of plaintiff, Jagodzinski.  Plaintiff and Portnoy had a “falling out”, and Jagodzinski brought the present petition before the Court to terminate the Receiver, or alternatively to lower Receiver’s compensation (this latter issue will be addressed in a subsequent post).

Portnoy was initially appointed by the Court after defendant Silicon Valley Innovation Company, LLC (“SVIC”) failed to obey Court orders relating to a books and records action commenced by Jagodzinski, and was held in contempt.  Once appointed, the Receiver uncovered significant destruction of records prior to the Court’s order allowing investigation, which were ultimately reconstructed to show massive amounts of self-dealing.  Plaintiff then moved this Court to have Portnoy appointed as a “full-blown” receiver to investigate all wrongdoing by former management, and to prosecute actions against the same.  In this regard, Receiver brought approximately thirty lawsuits against former management, which remain pending.

The falling out between Jagodzinski and Portnoy led to the present petition.  Vice Chancellor Parsons first provided the standard for appointing a receivership over an LLC, stating: “[t]his Court has the inherent equitable power to appoint a receiver for a Delaware limited liability company even where this remedy is not expressly available by statute or under the operative company agreement.” VTB Bank v. Navitron Projects Corp., 2014 WL 1691250, at *5 (Del. Ch. Apr. 28, 2014).

The Court then noted that there is little guidance in case law or statute regarding the applicable standard for terminating a receivership.  Based on black letter law, the Court concluded that, “once established, a receivership should continue in the discretion of the Court until its purpose has been fulfilled, at which time the Court ought to discharge the receiver.” Vice Chancellor Parsons also found that “this Court has expressed an understandable reluctance to allow interested parties to attempt to terminate a receivership, especially where they might be pursuing ulterior motives.”

Also of note is footnote 72.  There the Court addressed whether the receivership should stay in effect because of plaintiff’s contention that the LLC was no longer insolvent, as it was making capital calls.  Although questioning whether the LLC was in fact solvent, the Court found that because the receivership was appointed under equitable powers, and not due to insolvency, it did not place much emphasis on whether SVIC was presently solvent.

Applying this standard, the Court found that the receivership should not be terminated.  The Court provided four reasons.  First, Portnoy initially commenced the lawsuits, and will likely be needed to continue to prosecute the same.  Second, it was not lost on the Court that it was in fact plaintiff who first asked that Portnoy be appointed.  Third, the Court found that plaintiff showed little respect for the fact that the receivers are “officers of the court”, and answer to the Court—not to plaintiff.  Fourth and finally, the Vice Chancellor was concerned that ending the receivership would deprive SVIC the benefits of the receivership.

This Jagodzinski decision is a “must read” for any litigant seeking the termination/replacement of a Delaware receiver – especially in the LLC context.

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.

Very recently, we wrote on the Andrikopoulos decision of Vice Chancellor Parsons (Andrikopolous v. Silicon Valley Innovation Company, LLC, C.A. No. 9899-VCP (Del. Ch. July 30, 2015), which held that, in a matter of first impression under Delaware law, claims for advancement by directors or officers against a company in receivership should be treated as non-priority unsecured claims against the receivership estate.

In a letter opinion dated August 4, 2015 in Henson, et al. v. Sousa, C.A. No. 8057-VCG (Del. Ch. Aug. 4, 2015), Vice Chancellor Glasscock similarly denied a claim for advancement against an entity in receivership based upon, among other things, the ruling of Andrikopoulos.  Adopting the recent ruling of Andrikopoulos, the Court found that advancement claims against an entity in receivership should not be afforded priority status over claims of other 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.

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.

We have previously discussed the standard for the appointment of a custodian to a deadlocked corporation under Section 226 of the Delaware General Corporation Law (“DGCL”).  What standard is applied by the Court to consider whether to appoint a custodian on an interim basis to a corporation before a trial on the merits?

The recent case of In re TransPerfect Global, Inc., C.A.No. 9700-CB (Del.Ch. Dec. 3, 2014) addresses this question.  In TransPerfect, the Court of Chancery denied a request for the interim appointment of a custodian under Section 226 of the DGCL.  The decision was granted despite the fact that the corporation was deadlocked as a result of dissension among a board consisting of two directors.

In the opinion, the Court found that the moving party must demonstrate that the “appointment [of an interim custodian] is urgently needed for the immediate protection of the company.”  Slip op. at 2 (citing Moore v. C.H.M. Enters., Inc., 1983 WL 102620, at *2 (Del. Ch. Nov. 9, 1983)).  Absent such a showing, the Court will be disinclined to appoint an interim custodian prior to a trial on the merits, even in the face of corporate deadlock.

Carl D. Neff is a lawyer 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.