Chancery Explains Standards of Review for Receiver Determinations and Shifts Fees and Expenses in Dissolution

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

When the Court of Chancery appoints a receiver to effectuate a company’s dissolution, certain determinations are subject to de novo review and others are given a more deferential review depending on the nature of each determination. Here, the Court appointed a receiver to effectuate the relevant LLC’s dissolution based on a deadlock between the two members. Upon review of the record, 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 with the negative account balance challenged that decision based on various objections. 

Upon judicial review, the Court of Chancery explained that a receiver’s determinations “as to claims and to accounts” will be subject to de novo review under court 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 deferential” as the standard that would apply to the manager’s decision in the same context. Applying those rules here, the Court affirmed the receiver’s determinations and dismissed the objecting member’s challenge. In addition, the Court held that the cost of the receiver’s fees and expenses and some of the other member’s attorneys’ fees and expenses should be shifted to the objecting member under the bad faith exception to the American Rule and the Court’s discretionary authority over receivership costs. Among the objecting member’s misconduct was improperly redirecting profit distributions, manufacturing a false narrative regarding his account balance, and taking other wasteful and dilatory actions during the proceeding.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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