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 firstname.lastname@example.org.