Jagodzinski v. Silicon Valley Innovation
Company LLC, C.A. No. 6203-VCP (Del. Ch. Feb. 14, 2012).
Issue Addressed
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.
Background
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.
Analysis
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 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.
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