A recent Delaware Court of Chancery decision addressed issues with the receivership of a defunct corporation and the report of a Special Magistrate appointed to investigate claims against the court-appointed Receiver. In B.E. Capital Management Fund LP v. Fund.com Inc., C.A. No. 12843-VCL (Del. Ch. July 18, 2024), the court reviewed the report de novo of a Special Magistrate who chronicled the misdeeds of a Receiver appointed by the court for a defunct corporation.
Highlights
- The court noted that DGCL Section 226(a)(3) limits the appointment of receivers for a defunct corporation in a manner that is an analogous to Chapter 7 in bankruptcy–not a Chapter 11 bankruptcy. See footnote 1. The court also observed that DGCL Section 226(a)(3) does not authorize a receiver to revive the defunct corporation, but rather a receiver can be appointed when the corporation “has abandoned its business and had failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.” See DGCL Section 226(a)(3). The court also doubted that it would make the same appointment of a receiver today in this case if it knew then what it knows now about the undisclosed details.
- A notable aspect of this decision, due to the paucity of case law addressing the standard of review of a Special Magistrate’s report regarding the determination of damages, is the court’s use of the summary judgment standard for reviewing the damages determination by the Special Magistrate. See Slip op. at 39-40.
- More specifically, the court applied the Third Restatement of Restitution and Unjust Enrichment to analyze the damages recommended by the Special Magistrate, for example, in connection with deposits and withdrawals over a period of time, and profits received from embezzled funds. See Slip op. at 41-47 and footnotes 11 and 13.
- The court also explained the limits to the right to invoke the Fifth Amendment in a civil proceeding. See Slip op. 35-36.