This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently imposed additional sanctions on the controller of a chain of troubled senior care facilities who had repeatedly flouted orders to give a court-appointed receiver and investors access to the finances of his labyrinth of companies, and who might place vital revenue out of reach in GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, memorandum opinion issued, (Del. Ch. May 18, 2020).

In a May 18 opinion, Vice Chancellor Sam Glasscock held that 6 Del. C. § 18-703 of the Delaware Limited Liability Company Act justifies a temporary restraining order and an interim charging order to force defendant controller Andrew White to pay a receiver the court brought in to stabilize his firm.

That section specifically addresses the rights and responsibilities of limited liability company members and the court’s power to use charging orders to satisfy judgment creditors without encroaching on a defendant member’s property rights.

The vice chancellor said that section allows him to effectively impose a lien against the entities through which White receives revenue from his 100% ownership of two limited liability companies that generate income through leases of the senior care facilities properties of East Lake Capital Management LLC.

It was the third ruling within a year in which the Court sought to provide interim relief for a group of investor plaintiffs led by GMF ELCM Fund L.P. who claimed White’s alleged continuing neglect and mismanagement of his senior care facilities hurt the value of their investments and the residents’ quality of life.

Their November 2018 suit claimed White’s multi-state nursing home chain and its residents were in serious trouble, facing litigation and state actions in Vermont, North Carolina and elsewhere and that delivery of food to residents and pay to employees had often been interrupted or delayed.

After a March 29, 2019 rule-to-show cause hearing, the vice chancellor found White did not cooperate with the receiver he had appointed over ELCM HCRE GP LLC, the lead entity through which White controlled the chain and said White repeatedly failed to show for hearings or gave confusing testimony.

The April 4 opinion

In an April 4 memorandum opinion, the Court stated that it had learned that White had repeatedly failed to comply with orders to turn over financial records and other documents to the receiver, ex-Chancellor William Chandler, and that both he and White’s defense counsel petitioned to withdraw from the case. GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, letter opinion issued, (Del. Ch. Apr. 4, 2019).

According to the Court, White’s “intransigence” and “obstruction” made it impossible for them to do their jobs.

In that opinion, he found that White had engaged in bad faith litigation, which justified a departure from the normal “American Rule” where each side pays its own legal costs. He said at that point, White had failed to pay more than $350,000 in receiver costs and imposed civil contempt, which he said is remedial, rather than the criminal variety, which is punitive.

The August 7 opinion

That was not enough to effect the change the vice chancellor wanted, and in an August 7 opinion, he granted the plaintiffs’ motion to dissolve and liquidate HCRE because it was not fulfilling the purpose for which it was created. GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, memorandum opinion issued, (Del. Ch. Aug. 7, 2019).

The purpose of HCRE was to operate the nursing home chain and invest in new facilities but it has not been able to do either because of White’s “obstruction,” including intercepting and redirecting revenues needed to operate the facilities – most of which are already under state receivership, the Court said.

“The business, therefore, must be liquidated to preserve what value remains,” Vice Chancellor Glasscock said in the August opinion. “In other words, the operation of the business is stymied, and absent liquidation, its remaining value is at risk.”

The May 18 opinion

But that too was not enough, the Court said in its May 18 opinion, because the plaintiffs found through discovery that White was using two limited liability companies, EL FW Leasing LLC and EL FW Intermediary I LLC, to collect sublease payments from senior care facilities in Connecticut, but he did not use the funds to pay any portion of the judgments against him, the vice chancellor said.

The plaintiffs sought a charging order as a lien against the distribution of those funds to the sole member of those FW entities, Andrew White.

Under 6 Del. C. § 18-703, a charging order acts as a lien against White’s membership interest in the FW entities and gives judgment creditors “the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled,” the Court said. But it does not grant “any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.”

The vice chancellor found the plaintiffs stated a colorable claim because:

(1) They have outstanding judgments in the Court, arising as sanctions for White’s misconduct, which he claimed to be unable to satisfy;

(2) Plaintiffs faced irreparable harm because, based on this litigation’s history, there was a likelihood that in the absence of injunctive relief, White will act to make the assets unavailable to the plaintiffs;

(3) A balancing of the equities favored the plaintiffs because a charging order on White’s membership interests would not cause a default of the master lease, harming the FW Entities as White claimed.

He ordered a TRO and charging order to remain in effect until a summary judgment decision could permanently resolve the matter.