Tuesday, August 11, 2015

Court Calls Foul on Attempt to Bench Receiver

By Anne Sherry, J.D.

The receiver winding down an LLC will stay in that role, but the Delaware Court of Chancery determined that his 10-percent contingency fee should be determined on a net, rather than gross, basis. Although the LLC was no longer susceptible to the self-dealing and corporate looting that precipitated the receivership, the court was not convinced that the plaintiff’s motion seeking to terminate the receivership was supported by the interests of the LLC rather than animus towards the receiver (Jagodzinski v. Silicon Valley Innovation Co., August 7, 2015, Parsons, D.).

Background. Silicon Valley Innovation Company, LLC (SVIC) was placed into receivership at the request of a unitholder, Jagodzinski, who also successfully requested the appointment of one of his employees, Portnoy, as receiver. Portnoy ceased to be employed by Jagodzinski, but carried on as receiver. The Chancery Court changed his compensation arrangement from an hourly rate to a flat monthly rate with a contingent bonus of 10 percent of all funds collected by the receivership estate going forward. (SVIC’s main assets are lawsuits against the company’s former management and advisors.) The fee was worded as a gross recovery, but Jagodzinski assumed that it would be a net fee, similar to Portnoy’s compensation structure as an employee of Jagodzinski’s investment management company. After it was revealed that one of the lawsuits could secure a $100 million recovery for the estate, Jagodzinski moved to terminate the receivership, remove Portnoy as receiver, or reduce his pay.

Factors in terminating receivership. In view of the scant case law on the circumstances in which a receivership should be terminated, the court concluded that a receivership should continue until its purpose has been fulfilled. The Chancery Court has expressed a reluctance to allow interested parties to attempt to terminate a receivership, especially where they may have ulterior motives. In this case, while it was true that SVIC is no longer being looted, there is no dispute that the company is unlikely to return to operations again, and so the task of gathering and disposing of its assets through litigation continues. Four factors led the court to conclude that the receivership should continue and that Portnoy should remain as receiver:

  • Portnoy began the investigation of SVIC, did the initial diligence, and launched the lawsuits, which will likely require his participation due to his unique knowledge of the situation;
  • Jagodzinski originally asked the court to appoint Portnoy and indicated that he favored Portnoy’s compensation arrangement;
  • Jagodzinski’s suggestions that the receivership belongs to him “are not only wrong, but also a brazen affront to the Court”; and
  • Ending the receivership would likely place SVIC at serious risk of being placed into bankruptcy.
Compensation structure. However, the court did find it appropriate to revise the contingent portion of Portnoy’s fee. Receivers are entitled only to reasonable compensation, and shifting to a net recovery while retaining the 10-percent contingency was most appropriate, in the court’s view. Accordingly, the contingent fee arrangement was modified to 10 percent of the monies collected, net of fees paid to Portnoy and any out-of-pocket expenses of administering SVIC’s estate (other than contingent attorney fees).

The case is No. 7378-VCP.

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