Chancery Explains Review Standards for Receiver Decisions and Change Fees and Expenses on Dissolution | Morris James LLP

In re Dissolution of Jeffco Management, LLC, CA No. 2018-0027-PAF (Del. Ch. August 16, 2021)

When the Court of Chancery appoints a receiver to dissolve a company, certain decisions are subject to de novo review and others are given a more respectful review depending on the nature of each determination. Here, the Court appointed a receiver to effect the dissolution of the LLC concerned on the basis of an impasse between the two members. After reviewing the file, the receiver found that one of the members had a negative capital account balance and decided to distribute the company’s assets in kind to the other member with a positive capital account balance. The member whose balance was negative challenged this decision on the basis of various objections.

During a judicial review, the Court of Chancery explained that the decisions of a receiver “with regard to debts and accounts” will be submitted to de novo review under a judicial rule, but where the receiver has exercised powers that would rest with the manager, the standard of review for that decision “should be at least as respectful” as the standard that would apply to the manager’s decision in the same context. Applying these rules here, the Court upheld the receiver’s decisions and dismissed the opposing member’s challenge. Further, the Court held that the cost of the receiver’s fees and expenses and some of the other member’s attorney fees and expenses should be passed on to the opposing member under the bad faith exception to the U.S. rule and the discretion of the Court over the costs of receivership. Among the faults committed by the opposing member were improper reorientation of profit distributions, fabricating a false account regarding his account balance and taking other unnecessary and dilatory actions during the proceedings.

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