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Andrikopoulos v. Silicon Valley Innovation Co., LLC

Court of Chancery of Delaware, Wilmington

July 30, 2015

SHAUN ANDRIKOPOULOS and MICHAEL A. SANTER, Plaintiffs,
v.
SILICON VALLEY INNOVATION COMPANY, LLC, Defendant

Submitted April 9, 2015.

S. Mark Hurd, Esq., Ryan D. Stottmann, Esq., MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Plaintiffs.

Brian M. Rostocki, Esq., John C. Cordrey, Esq., REED SMITH LLP, Wilmington, Delaware; Attorneys for Defendant.

OPINION

PARSONS, Vice Chancellor.

This is an advancement case, albeit in the unusual context of a receivership. In a related case, on January 21, 2013, I appointed Bram Portnoy to be the Receiver of Silicon Valley Innovation Company,

Page 20

LLC (" SVIC" or the " Company" ).[1] SVIC's only assets are contingent claims against the Company's former officers and directors. Among the many cases filed by the Receiver were two in California in late 2013 and early 2014 that later were consolidated in the Superior Court for Los Angeles County. Two of the defendants in that action are the plaintiffs in this case: Shaun Andrikopoulos and Michael A. Santer. Those individuals requested from SVIC advancement for their legal expenses by virtue of their previous employment agreements with SVIC, but that request was denied. On July 18, 2014, Andrikopoulos and Santer (together, " Plaintiffs" ) commenced this advancement action.

SVIC moved to dismiss the advancement claims and Plaintiffs sought summary judgment on those claims. In opposing summary judgment, SVIC took the position that Plaintiffs had no advancement rights because, among other things, their employment agreements were the product of fraud. SVIC also contended that this case belongs in Los Angeles. The parties presented argument on those motions on November 21, 2014. By order entered January 20, 2015, I denied both Plaintiffs' motion for summary judgment and SVIC's motion to dismiss and set this case for trial on April 9, 2015, to resolve the issue of whether the employment agreements were fraudulent. Ultimately, however, SVIC abandoned its fraud defense and the parties stipulated, on April 8, 2015, to Plaintiffs' entitlement to advancement and the validity of the employment agreements. One issue remains for decision: to what extent, if any, Plaintiffs' advancement claims are entitled to priority as against the other claims asserted against SVIC in the receivership. The parties effectively agreed to submit that issue for decision on a stipulated record. For the reasons that follow, I conclude that Plaintiffs' advancement claims should be treated on par with the claims of other unsecured creditors and paid pro rata.

I. Priority of Advancement in the Receivership Context

The main dispute between the parties is the narrow, but previously unanswered legal question of whether, in the context of a receivership estate under Delaware law, advancement claims are administrative expenses or unsecured creditor claims. If Plaintiffs' claims are entitled to some sort of priority, there is an even narrower sub-issue of whether the Receiver's salary and expenses still have priority over those claims.

SVIC asserts that advancement is a pre-petition claim, because it is based on conduct that occurred before the receivership was instituted and, further, that advancement essentially is a form of compensation for services that Plaintiffs rendered before the receivership began. Thus, similar to the bankruptcy context, SVIC maintains that Plaintiffs' claims should be paid pro rata with those of the other unsecured creditors. Plaintiffs disagree, arguing: that advancement is a cost of bringing a lawsuit against a former officer with advancement rights; that there is a strong public policy in favor of advancement; and that a receivership is different from bankruptcy. Basically, Plaintiffs contend that the expenses for which they seek advancement arose as part of the administration of the estate and the pursuit of SVIC's assets-- i.e., claims against former management--and as such are administrative expenses to be paid on par with the Receiver's compensation.

Page 21

SVIC relies heavily on an analogy to federal bankruptcy law. One problem with this analogy is that bankruptcy proceedings are governed by a lengthy and complex statutory framework mandating a particular and well-defined schedule of priorities, including what qualifies as an administrative expense,[2] which essentially is the status that Plaintiffs contend I should accord to their advancement claims. Indeed, one indication that receivership and bankruptcy are not virtually identical is that the Receivership Order here allows the Receiver to take SVIC into bankruptcy.[3]

Delaware receiverships, by contrast to bankruptcy estates, are governed by a few short statutory provisions,[4] the Court of Chancery Rules,[5] and the discretion of this Court. Furthermore, SVIC is a limited liability company (" LLC" ), not a corporation. The statutory pronouncements for receiverships in the LLC context are even fewer in number.[6] Regardless, I find the provisions of the Delaware General Corporation Law (the " DGCL" ) on receiverships useful by analogy. As ...


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