Danielle Blount, an associate in our Wilmington office, provided the following review of the case.
A “scant two years” after the Court of Chancery’s prior decision in this case seemingly resolved the parties’ disputes, Chancellor Chandler described this latest iteration of the parties’ imbroglio as “déjà vu all over again.” The Plaintiffs, Hausmann-Alain Banet, (“Banet”) and, Lion Capital Management, LLC (“LLM”), (collectively “Plaintiffs”) moved for judgment on the pleadings or in the alternative, for summary judgment as to Count I of their amended complaint involving the request for appointment of a receiver. The Court denied the Plaintiffs’ motion for summary judgment because Plaintiffs failed to prove that defendant company New York Chocolate and Confections Company, Inc., (“NYCCC”) was insolvent. In the alternative, Plaintiff also failed to prove that NYCCC faced an “imminent threat of great loss.”
The Court noted that the “material facts” were “vigorously disputed.” Leaving a “murky picture of the factual situation” that involved much “conjecture and finger-pointing.” Although Plaintiffs faced an uphill battle in their attempt to prove insolvency because “insolvency is a jurisdictional fact, proof of which must be clear, convincing, and free from doubt” and would have had to prevail on the following criteria:
In determining insolvency under Section 291 of the Delaware General Corporation Law (1) liabilities must exceed assets or (2) there must be an inability to pay current obligations in the ordinary course of business. Plaintiffs failed to establish that NYCCC’s liabilities exceeded its assets because NYCCC’s assets totaled $5,195,102.04, which far exceeded their stated liabilities of $1,980,040.99. The Court determined that NYCCC maintained a “positive asset to liabilities ratio.” Additionally, Plaintiffs failed to prove that NYCCC could not pay its current obligations in the ordinary course of business. NYCCC provided evidence of its “new found financial stability”. Therefore, Plaintiffs were unable to prove that NYCCC was insolvent.
In its role as a court of equity, the Court of Chancery may exercise its equity power to appoint a receiver upon a clear showing of “fraud, mismanagement or extreme circumstance causing imminent danger of great loss.” However, the Court of Chancery has an obligation to exercise the power with great restraint. Plaintiffs failed to meet this high standard.