Jagodzinski v. Silicon Valley Innovation Company LLC, C.A. No. 6203-VCP (Del. Ch. Feb. 14, 2012).
The issue addressed in this case was whether the Court of Chancery should grant a Motion for Contempt and for the Appointment of a Receiver in connection with a failure to comply with a prior order entered by the Court granting access to books and records pursuant to Section 18-305 of the Delaware Limited Liability Company Act (Title 6 of the Delaware Code), and the limited liability company agreement of the defendant company.
The Court entered an order in August 2011 that the defendant company must produce books and records. Again, in October 2011, the Court granted in part and denied in part a prior motion to contempt for failure of the company to comply with the August order. In November 2011, the plaintiff filed the most recent pending motion for contempt and for a receiver. After the most recent motion was filed, also in late November 2011, the Court ordered the company to file an opposition to the most recent motion for contempt, and for the third time also directed the company to make the production required in the August order.
The company did not file any reply brief or memorandum in opposition to the most recent motion for contempt. The record also indicates that the defendant has not produced all of the documents required in the August, October or November orders.
The defendant purported to move for an extension of time to respond to the second motion for contempt although the motion to extend was not properly filed with the Court and therefore the Court did not consider it. The Court explained that even if it did consider the motion to extend time, the motion would not be granted. The Court reasoned that under Court of Chancery Rule 6(b) that the Court may extend time only when “the failure to act was the result of excusable neglect.” That is, “neglect which might have been the act of a reasonably prudent person under the circumstances.” The company could not meet this standard.
The Court explained that under Court of Chancery Rule 70(b), the Court “may find a party in contempt when it fails to obey or to perform any order of which it has knowledge.” It is clear that the company violated essential terms of the prior orders in several ways, such as failing to deliver or make available all the documents the Court ordered it to produce in the August, October and November orders. The company still has not fully complied with those orders, nor has it complied with an order of several months ago requiring it to obtain new Delaware counsel. Thus, the Court found the company in contempt.
Appropriate Remedy for Contempt
The Court explained that it has broad discretion in formulating a remedy for contempt of its orders. See cases cited at footnote 4 for authority, based on the history of this case and the multiple failures to comply by the defendant. The Court also awarded attorneys’ fees and costs. In addition to contempt penalties, or as an additional penalty, the plaintiff also sought the appointment of a receiver.
Criteria for Appointment of Receiver
The Court explained that except where the certificate of formation has been cancelled, Delaware law is silent on the appointment of a receiver for an LLC. See footnotes 6 and 7. The LLC Agreement in this case did not address the issue and the relevant statutory provision of the LLC Act, at Section 18-1104, provides that “in any case not provided for in this chapter, the rules of law and equity shall govern.”
The Court also observed that it has the inherent equitable power to appoint a receiver. See footnote 9. The Court also acknowledged that the appointment of a receiver is a “extraordinary remedy” (citing Roth v. Laurus U.S. Fund, L.P., 2011 WL 808953, at *5 (Del. Ch. Feb. 25, 2011)). One of the factors in determining whether a receiver should be appointed is when it is necessitated by the exigencies of a case, and whether “some real beneficial purpose will be served thereby.” See footnotes 11 through 13.
The Court reasoned that based on the evidence which demonstrated that the company only had one employee, who cannot be relied on to produce the documents required under the order, that it was appropriate to appoint a receiver. The Court added that a receiver was appropriate because the company appeared to have limited or no resources, and may not be able to pay a receiver out of current funds. With that in mind, the Court accepted the recommendation of the plaintiff that the Court appoint an agent of the plaintiff, who appears to have the necessary skills, and that would also minimize the financial strain on the company.
The Court limited the power and the appointment of the receiver “only to the extent necessary to cure the contempt by effecting the production ordered under 6 Del. C. Section 18-305.” Thus, the powers of the receiver were limited to retrieving and producing the documents ordered by the Court in the underlying books and records litigation and actions reasonably related to that purpose. The receiver may attempt to obtain documents at issue from third parties where the company can claim to have control over those documents, but once the receiver completed his efforts to collect and produce the books and records, he will be discharged.
[In an unrelated and separate opinion, also issued this month, involving the dissolution of a company, the Court of Chancery appointed a receiver in the Calypso case highlighted here.]
In closing, however, the Court underscored that its restriction on the scope of the receiver is without prejudice to the ability of the plaintiff to petition the Court to expand those powers in a later proceeding on the merits.