IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SHAUN ANDRIKOPOULOS and                )
MICHAEL A. SANTER,                     )
                                       )
                 Plaintiffs,           )
                                       )
     v.                                )        C.A. No. 9899-VCP
                                       )
SILICON VALLEY INNOVATION              )
COMPANY, LLC,                          )
                                       )
                 Defendant.            )


                                   OPINION

                          Date Submitted: April 9, 2015
                           Date Decided: July 30, 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.


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, 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


1
      Jagodzinski v. Silicon Valley Innovation Co., LLC, C.A. No. 7378-VCP, D.I. 28
      (Del. Ch. Jan. 21, 2013) (ORDER) [hereinafter “Receivership Order”] ¶ 1.

                                            1
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


                                             2
management—and as such are administrative expenses to be paid on par with the

Receiver’s compensation.

       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 will be shown, however, the Court

still is left with minimal statutory guidance on the question before me.



2
       11 U.S.C. § 503(b).
3
       Receivership Order ¶ 2(d).
4
       6 Del. C. § 18-805; see also 8 Del. C. §§ 291-303.
5
       Ct. Ch. Rs. 148-168.
6
       6 Del. C. § 18-805; see also 8 Del. C. § 291 (analogous statutory framework in
       corporate context).

                                             3
       The only DGCL provision relevant to priority of claims in a receivership reads, in

pertinent part:

              The Court of Chancery, before making distribution of the
              assets of a corporation among the creditors or stockholders
              thereof, shall allow a reasonable compensation to the receiver
              . . . for such receiver’s . . . services, and the costs and
              expenses incurred in and about the execution of such
              receiver’s . . . trust, and the costs of the proceedings in the
              Court, to be first paid out of the assets.7

This language makes clear that the receiver’s fees and the “the costs and expenses

incurred in and about the execution” of administering the receivership estate deserve

priority treatment. Plaintiffs ask me to conclude that their advancement claims constitute

a cost of administering the estate. This line of reasoning posits that, were SVIC not in

receivership, then SVIC would be required to pay for both the prosecution and defense of

any claims against Plaintiffs brought by SVIC, meaning that Plaintiffs’ advancement

rights are a cost of such a lawsuit. For the reasons that follow, I reject this argument for

higher priority. One of the problems with Plaintiffs’ argument is that it ignores the

difference between a corporate entity in the ordinary course and one in receivership.

       In terms of case law, I am not aware of any relevant cases in this jurisdiction. One

recent decision from another jurisdiction, relied upon heavily by Plaintiffs, does examine

the precise issue before me. That case is S.E.C. v. Illarramendi,8 a 2014 decision by the

U.S. District Court for the District of Connecticut. The court in Illarramendi, applying



7
       8 Del. C. § 298.
8
       2014 WL 545720 (D. Conn. Feb. 10, 2014).

                                             4
Delaware law, rejected the bankruptcy analogy as unpersuasive.9 Relying on three other

cases from various courts around the country that afforded administrative priority to

mandatory indemnification claims in the receivership context, the Illarramendi court

concluded that, like indemnification, advancement also should receive administrative

priority.10 In making its determination, the court relied on Delaware’s strong policy in

favor of advancement and indemnification as incentives to attract qualified individuals to

serve as corporate officers and directors.11 An older case from the Third Circuit Court of

Appeals, also applying Delaware law and relying on this State’s policy in favor of

advancement, similarly ordered the payment of advancement in the context of a


9
      Id. at *8 (“Although there are parallels between the goals of receiverships and
      bankruptcy courts to distribute limited assets, the goal of this Receivership is to
      wind up operations of the Estate and compensate the victims of Illarramendi’s
      fraud, not to promote the rehabilitation of a business.”).
10
      Id. at *7 (“In the context of the strong Delaware policy of indemnification and
      advancement of attorney’s fees, the reasoning of [those cases] is persuasive, even
      though the former directors there had already prevailed in the receivers’ actions
      against them, because the same policy considerations that favor indemnification
      after a director prevails on the merits also favor the advancement of legal fees to
      defend a claim.”) (citing Weingarten v. Gross, 563 S.E.2d 771 (Va. 2002),
      Fleischer v. Fed. Deposit Ins. Corp., 70 F. Supp. 2d 1283 (D. Kan. 1999), and
      Lawson v. Young, 486 N.E.2d 1177 (Ohio App. 1984)).
11
      See, e.g., Homestore, Inc. v. Tafeen, 888 A.2d 204, 211 (Del. 2005)
      (“Indemnification encourages corporate service by capable individuals by
      protecting their personal financial resources from depletion by the expenses they
      incur during an investigation or litigation that results by reason of that service. . . .
      Advancement is an especially important corollary to indemnification as an
      inducement for attracting capable individuals into corporate service.
      Advancement provides corporate officials with immediate interim relief from the
      personal out-of-pocket financial burden of paying the significant on-going
      expenses inevitably involved with investigations and legal proceedings.”); Hibbert
      v. Hollywood Park, Inc., 457 A.2d 339, 344 (Del. 1983).

                                              5
receivership.12   Interestingly, in neither case did the plaintiffs actually receive

advancement.13 Thus, despite the holdings of those cases, I know of no case that has

ordered advancement in the context of a receivership in which advancement in fact has

been paid.

                              II.    The Bankruptcy Analogy

       While acknowledging Delaware’s strong public policy in favor of advancement,

SVIC counters by arguing that advancement ultimately is a contract claim and that

Plaintiffs are merely two more individuals with unsecured claims against SVIC. In that

regard, Defendant relies heavily on bankruptcy law, which it contends is highly

analogous. If this case were a bankruptcy proceeding (which it is not) in which the

plaintiffs were requesting administrative priority status for their advancement claims—

which Plaintiffs essentially seek here—the relevant bankruptcy case law overwhelmingly

supports the denial of such a request.

       To qualify for administrative priority under 11 U.S.C. § 503(b)(1)(A), the relevant

bankruptcy provision, two elements are required: the bankrupt estate must incur (1) a




12
       Ridder v. CityFed Fin. Corp., 47 F.3d 85, 87-88 (3d Cir. 1995).
13
       In other related proceedings in Ridder, the Office of Thrift Supervision issued a
       cease-and-desist order preventing the bank, then in receivership, from paying the
       advancement. The Third Circuit eventually vacated the district court injunction
       ordering payment of the advancement. Ridder v. Office of Thrift Supervision, 146
       F.3d 1035, 1037-38 (D.C. Cir. 1998) (recounting this history). In Illarramendi,
       the district court later concluded that the defendants were not entitled to
       advancement because of unclean hands. S.E.C. v. Illarramendi, 2014 WL
       8019048, at *1 (D. Conn. Mar. 27, 2014).

                                            6
post-petition obligation (2) as a result of actions that benefitted the estate.14 Recast for

present purposes, SVIC asks this Court to conclude that priority should be accorded only

to expenses incurred (1) after the appointment of a receiver that (2) substantially

benefitted the estate. If such a test were to apply, I would conclude, guided by the

bankruptcy cases, that Plaintiffs could not meet either prerequisite.

       I begin with the second prong, which is more straightforward: SVIC has minimal

assets and any assets dissipated to finance the defense of those former officers and

directors that SVIC is suing almost certainly would harm the estate; it would make

prosecution of SVIC’s claims more difficult, if not practically impossible, given

Defendant’s financial constraints, and could create additional credit risk, even if SVIC

succeeds. At best, to the extent advancement is only an extension of credit and therefore

a financial wash15—a proposition that appears unrealistic in the context of this

receivership—the receivership estate still does not receive a “benefit” from paying

advancement.16




14
       See generally In re Hackney, 351 B.R. 179, 185-95 (Bankr. N.D. Ala. 2006)
       (collecting an impressive 115 cases, across numerous circuits, district courts, and
       bankruptcy courts over the course of more than two decades supporting this
       proposition).
15
       See Danenberg v. Fitracks, Inc., 58 A.3d 991, 997-98 (Del. Ch. 2012) (describing
       advancement as an extension of credit giving rise to no net liability on the part of
       the corporation) (quoting Advanced Mining Sys., Inc. v. Fricke, 623 A.2d 82, 84
       (Del. Ch. 1992)).
16
       One recognized purpose of advancement is to attract qualified individuals to serve
       as directors and officers. Plaintiffs arguably served as officers of SVIC in part
       because of the promise of advancement. In that sense, therefore, SVIC did receive

                                             7
       Although the question is closer, Plaintiffs would not satisfy the first prong of the

administrative priority test either.   Undeniably, the obligation by SVIC to advance

Plaintiffs’ current attorneys’ fees did not arise until the Receiver, on behalf of SVIC, filed

a lawsuit against them. The bankruptcy courts, however, repeatedly have addressed this

same question17 in the administrative expense context and concluded that the post-

petition requirement was not satisfied. In 1984, the U.S. District Court for the Southern

District of Ohio addressed the issue, which apparently was one of first impression in light

of the recently amended bankruptcy code,18 of whether the bankruptcy court “has the

discretion to permit a Chapter 11 debtor to advance its present and former non-

management directors’ funds from the estate with which to pay for their defense, as

individual defendants, in securities actions alleging misconduct during their terms as

directors.”19   The board of the debtor corporation had authorized payment of the



       a benefit, long ago, in the form of those services, for which it only now is paying
       the full price. But, even if true, this line of reasoning ignores that any benefit
       received by SVIC accrued pre-receivership; the focus here, however, is on
       whether the receivership estate would receive a benefit. It would not.
17
       My review of the bankruptcy case law indicates that the bankruptcy courts often
       conflate the concepts of advancement and indemnification. Not infrequently,
       those courts speak instead of “reimbursement” for attorneys’ fees. See, e.g., In re
       RNI Wind Down Corp., 369 B.R. 174, 182 (Bankr. D. Del. 2007) (recognizing
       distinction between the two concepts, but noting that “[t]he distinction is irrelevant
       for present purposes, however, because, regardless of whether the claim is for
       advancement or indemnification, the claimant is seeking reimbursement”).
18
       See generally Charles Jordan Tabb, The History of the Bankruptcy Laws in the
       United States, 3 AM. BANKR. INST. L. REV. 5, 32-37 (1995) (describing the
       Bankruptcy Reform Act of 1978).
19
       In re Baldwin-United Corp., 43 B.R. 443, 445 (S.D. Ohio. 1984).

                                              8
advancement. The court nevertheless refused to afford administrative priority to claims

for advancement of fees to former officers.

       In so holding, the court made several pertinent comments. First, with respect to

when the transaction occurred, the court noted: “Because a determination that a debt

which matured pre-petition but did not come due until post-petition is, we think, wholly

outside the statute, we see no basis for the assertion that the court enjoys the discretion to

authorize such expenditures as administrative expenses.”20 Applying the same reasoning

here would support the conclusion that the relevant advancement obligation is a pre-

receivership obligation, even though the actual payment did not come due until after the

appointment of the Receiver. Numerous bankruptcy court decisions have declined to

give administrative expense priority to claims of a similar “pre-petition agreement, post-

petition payment obligation” nature, even when the bankrupt estate receives the benefits

of the transaction post-petition.21

       Second, the Baldwin-United court emphasized the distinction between the pre- and

post-petition entities, stating: “While the distinction between the pre- and post-petition

entities appears at first to be a fiction, it is not so ethereal as that. Rather the debtor-in-

possession holds the position of trustee, and as such controls the estate for the benefit of

the creditors instead of for its own benefit.”22 Similarly, in a receivership, the board of




20
       Id. at 454.
21
       See In re Hackney, 351 B.R. at 197-200 (collecting 27 such cases).
22
       In re Baldwin-United Corp., 43 B.R. at 454.

                                              9
directors no longer controls the corporation; instead, the receiver is to “to take charge of

[the company’s] assets, estate, effects, business and affairs, and to collect the outstanding

debts, claims, and property due and belonging to the corporation,”23 and then distribute

those assets pro rata by order of priority to the company’s claimants.24

       Finally, the Baldwin-United court acknowledged that its holding “has potentially

disastrous implications for [former officers and directors].”25 Throughout its opinion,

that court contrasted the potentially competing policy goals of advancement and

bankruptcy, but concluded that the federal bankruptcy code dictated the outcome.

       Since Baldwin-United, with quite limited exceptions,26 the bankruptcy courts

generally have held that, at least with respect to former officers and directors, claims for

advancement do not qualify for administrative priority.27 Claims for advancement by



23
       8 Del. C. § 291.
24
       Id. § 281. Presumably, the costs of the receivership are paid under 8 Del. C. § 298
       before assets are distributed to the other claimants. See Ferry v. Kehnast, 2008
       WL 2154861, at *6 (Del. Ch. May 6, 2008) (noting potential tension between
       Sections 298 and 281, but still ordering that the receiver be paid first).
25
       In re Baldwin-United Corp., 43 B.R. at 457.
26
       See In re RNI Wind Down Corp., 369 B.R. 174 (Bankr. D. Del. 2007) (refusing to
       disallow former officer’s advancement claims when the company had advanced
       those fees before the bankruptcy, the fees were capped at a certain amount, and the
       reorganization was accomplished in the context of a sale under Section 363 of the
       bankruptcy code, providing the debtor with sufficient funds to cover the
       expenses). The reason for the different outcome in the RNI Wind Down case is not
       entirely clear, but the advancement issue was not argued in the context of
       administrative priority.
27
       See Wojick v. Hudson Funding LLC, 2013 WL 2085959, at *4 (N.D. Ohio May
       13, 2013) (“Defendants cannot claim that the contractual obligation to advance

                                             10
current directors or officers, especially in relation to post-petition conduct and services,

appear to be treated differently,28 but that factual situation is not before me.

                           III.    The Appropriate Outcome Here

       To summarize the foregoing review: (1) there is no controlling Delaware

authority; (2) the Delaware statutes on receivership provide minimal guidance; (3) the

Illarramendi decision and Delaware’s strong policy in favor of advancement point in one

direction; and (4) a strong analogy between receiverships and bankruptcy points in the

other direction. In attempting to reconcile these somewhat dissonant findings, I am

mindful that this Court has broad discretion in the receivership context.29




       fees and indemnify arose from a transaction with the bankruptcy estate nor did
       these obligations provide a benefit to the bankruptcy estate.”); see also In re
       Heck’s Props., Inc., 151 B.R. 739, 767 (S.D. W. Va. 1992) (“Numerous courts
       have denied administrative expense priority . . . to corporate officials seeking
       indemnification under the provisions of corporate by-laws when it is determined
       that the acts or services which gave rise to the claims occurred before rather than
       after the filing of the petition for relief in bankruptcy.”).
28
       See In re Adelphia Commc’ns Corp., 323 B.R. 345 (Bankr. S.D.N.Y. 2005)
       (ordering advancement, which was authorized by the board, to the current
       directors, but only to the extent advancement was mandatory under the relevant
       entities’ operational documents and governing instruments); In re Heck’s Props.,
       Inc., 151 B.R at 768 (“Inasmuch as the claim against the officers and directors of
       [the company] related solely to post-petition conduct and services, the bankruptcy
       judge properly concluded that the officers and directors were entitled to
       indemnification under [the company’s] Articles of Incorporation and could be
       afforded administrative cost priority . . . .”).
29
       E.g., Ct. Ch. R. 148 (“Rules 149 to 168 shall apply to all cases in which receivers
       are appointed . . . provided, however, that the Court may relieve the receivers or
       trustees from complying with all or any of the duties and procedures set forth in
       Rules 149 through 168 and may impose such other duties or prescribe such other
       procedures as the Court may deem appropriate.”).

                                              11
      After careful consideration, I conclude that Plaintiffs’ advancement claims should

be treated the same as the claims of other unsecured creditors. Several reasons, in no

particular order, favor this conclusion. First, while advancement is important, so is the

successful winding up of a corporation or other business entity. A corporate entity is

managed for the benefit of the entity and its stockholders. In the usual receivership

context, however—and especially in receiverships like this one—there is no long-term

horizon; the focus is on winding up the entity’s affairs. As such, the relevant importance

of the policy justification of advancement as an inducement to attract qualified

individuals to manage the company is diminished. Additionally, granting administrative

priority to advancement claims, such as Plaintiffs’ claims here, seriously could

undermine, if not entirely eliminate, the ability of companies in receivership to pursue

claims against former management.

      Second, even though I do not find the bankruptcy analogy as powerful as SVIC

suggests,30 there is substantial force to the idea that the pre-receivership entity and the

receivership entity are meaningfully different: they are managed by different individuals

for different purposes and are governed by different rules. Thus, while I am not bound by

the administrative priority case law that has developed in the bankruptcy context, I view

the essential distinction it recognizes as important in this case also.     Advancement


30
      As Plaintiffs point out, many of the holdings in the bankruptcy cases cited herein
      resulted from the requirements laid out in bankruptcy’s detailed statutory
      framework. The Delaware receivership statutes are much more barebones in
      comparison. Nevertheless, I find unpersuasive Plaintiffs’ argument that those
      statutory differences justify adopting a drastically different approach for handling
      advancement claims.

                                            12
obligations are contractual in nature and generally arise from pre-receivership

transactions. In that respect, they are no different from other creditors’ claims.

       Plaintiffs contend that this result frustrates the expectations of advancement

legitimately held by former corporate officers and directors, like themselves. This brings

me to my third point, which involves balancing the existence of advancement rights

against the realities of insolvent entities. Market-based solutions already may exist for

ameliorating the challenges that may arise in this area. Indeed, various articles by

practitioners have discussed potential solutions to the problem of obtaining advancement

from an insolvent entity. Those articles highlight insurance as the best solution.31

       Fourth, the reality of practical administration weighs in favor of treating

advancement claims the same as the claims of other unsecured creditors. The parties

disputed whether, if Plaintiffs’ advancement claims were entitled to administrative

priority, the Receiver’s fees should receive super-priority. There are policy reasons—

such as incentivizing talented individuals to serve as receivers of troubled entities—to

favor such an outcome. Yet, as the parties’ positions at the argument demonstrated, if the

Receiver’s own fees are so important, what of other “necessities,” such as a bookkeeper,

office space, a rental car, etc.? Once the line drawing among those items begins, courts

face the danger of becoming embroiled in time-consuming, line-item accounting disputes.




31
       See, e.g., William D. Johnston et al., Bankruptcy: The Game-Changer for
       Directors & Officers Who May Face Claims by Shareholders or Others, SEC.
       LITIG. REPORT, Dec.-Jan. 2010, at 3-4.

                                             13
                                       Conclusion

        For the foregoing reasons, I conclude that SVIC is entitled to entry of an order

declaring that: (1) Plaintiffs’ claims for advancement are not entitled to administrative

priority or otherwise to receive priority treatment as administrative expenses of the

receivership; and (2) Plaintiffs’ request for advancement of legal fees and expenses

should be treated as a pre-petition, unsecured claim without administrative priority. Each

party shall bear its own attorneys’ fees and expenses for this aspect of Plaintiffs’ case.

Counsel for the parties shall confer about an appropriate form of final order and judgment

in this action, and shall file a proposed final order and judgment, on notice, by August 10,

2015.




                                            14
