COURT OF CHANCERY OF THE STATE OF DELAWARE Paul A. Fioravanti, Jr. Leonard L. Williams Justice Center Vice Chancellor 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734
Date Submitted: November 2, 2020 Date Decided: January 28, 2021
John G. Harris, Esquire Jason C. Powell, Esquire Berger Harris LLP The Powell Firm, LLC 1105 N. Market Street, Suite 1100 1201 N. Orange Street, Suite 500 Wilmington, DE 19801 P.O. Box 289 Wilmington, DE 19899 S. Michael Sirkin, Esquire Ross Aronstam & Moritz LLP 100 S. West Street, Suite 400 Wilmington, DE 19801
RE: In re Dissolution of Jeffco Mgmt., LLC, C.A. No. 2018-0027-PAF
Dear Counsel:
The court has reviewed the submissions that the court had requested
concerning Jeffrey Tabak’s position on seeking arbitration and the standard of
review governing the exceptions to the receiver’s determinations in winding up
Jeffco Management, LLC (“Jeffco”). Having carefully considered the submissions
of the members and the receiver, the court has determined to conduct a hearing to
give the receiver and the members of Jeffco an opportunity to address the specific
exceptions by way of argument, presentation of evidence that is already in the record,
and limited witness testimony. In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 2 of 15
This letter discusses the appropriate standard of review for Tabak’s various
exceptions, identifies certain issues that the parties should be prepared to address at
the hearing, and explains the scope of the proceeding.
I. Background
This dispute involves the receivership and winding up of Jeffco, a Delaware
LLC formed for the purpose of operating a broker/dealer business. Jeffco has two
equal managing members, Jeffrey Miller and Jeffrey Tabak (together, the
“Members”). In recent years, the relationship between Miller and Tabak has
deteriorated, and they have been unable to carry on as business partners. Due to
disagreement and deadlock between the two equal members, on March 26, 2018, the
court granted a decree of judicial dissolution of Jeffco. On March 12, 2019, the court
then entered an order appointing Jason Powell, Esquire (the “Receiver”) as an
independent receiver to wind up the affairs of Jeffco (the “Receivership Order”).
The Receiver was given “full authority over the business and affairs of
Jeffco.” Receivership Order ¶ 1. The Receivership Order directed the Receiver to
confer with the Members and to submit a proposed plan of dissolution that would
“provide for the prompt distribution of Jeffco’s assets and the winding up of its
affairs.” Receivership Order ¶ 2. The Receiver’s plan of dissolution would be
“subject to Court approval.” Receivership Order ¶ 3. The Receivership Order did In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 3 of 15
not otherwise provide any detailed instructions or establish a standard of review for
the Receiver’s decisions.
The Receiver spent the next several months gathering and analyzing Jeffco’s
financial information, formulating a proposed plan of distribution, and
corresponding with the Members about any issues regarding distribution. On
November 1, 2019, the Receiver filed a Motion to Approve Plan of Distribution and
Dissolution for Jeffco Management, LLC and for Related Relief (the “Motion”).
The Receiver determined that “Jeffco is unsaleable/illiquid and any distribution of
its assets to the Member(s) would involve an in-kind distribution.” Motion ¶ 4(g).
The Receiver concluded that there are no outstanding liabilities or claims against
Jeffco. Id. ¶ 9. The Receiver also found that “[t]he Capital Accounts, per the
documents and information reviewed by the Receiver, indicate that Jeffrey Miller’s
Capital Account is positive, while Jeffrey Tabak’s Capital Account is negative.” Id.
¶ 11. In conclusion, the Receiver proposed to distribute all of Jeffco’s assets in kind
to Miller. Id.
On March 12, 2020, the court entered an Agreed Order to Approve Receiver’s
Motion (the “Agreed Order”), which established procedures for submitting
objections to the Receiver’s plan of distribution. On April 24, 2020, Tabak In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 4 of 15
submitted several objections to the plan (the “Objections Letter”). 1 As required by
the Agreed Order, the Receiver filed his report in response to Tabak’s objections
(the “Receiver’s Response”). Tabak and Miller each submitted a reply, and the
Court conducted a telephonic hearing on September 15, 2020 (the “September 15
Hearing”). At the hearing, the court requested supplemental briefing to address,
among other things, the appropriate standard of review and Tabak’s argument that
the entire dispute is subject to mandatory arbitration under the terms of the Jeffco
LLC Agreement.2
II. Arbitration
As an initial matter, none of the disputes relating to the proposed plan of
distribution are subject to arbitration. To be sure, in supplemental briefing, Tabak
clarified that he is withdrawing his assertion that this matter is subject to arbitration.
See Tabak’s Reply to the Receiver’s Supp. Mem., at 1 (“Tabak’s supplemental
memorandum states without reservation that he was withdrawing any previously
1 The Agreed Order required objections to be filed within 25 days of the proposed plan being served upon the Members. Agreed Order ¶ 5. The Receiver served the Members on March 16, 2020, which would have placed the deadline for objections at April 10, 2020. See D.I. 40, Ex. A. 2 See Objections Letter, at 2; Jeffco LLC Agreement § 14.12. In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 5 of 15
made claim for arbitration concerning the Court’s treatment of the Receiver’s
proposed Plan.”). 3
III. The Standard of Review
Frequently, the applicable standard of review for a receiver’s decisions is
reflected in the order appointing the receiver. See e.g., In re TransPerfect Global,
Inc., 2018 WL 904160, at *1, *6–7, *14 (Del. Ch. Feb. 15, 2018) (observing that the
court’s order governing a custodian’s authority to conduct a sale of the company
specified that the custodian’s decisions were governed by an abuse of discretion
standard); In re 14 Realty Corp., 2009 WL 2490902, at *4 (Del. Ch. Aug. 4, 2009)
(observing that the court’s order governing a trustee’s authority to wind up several
entities specified that the trustee’s decisions would be reviewed de novo); In re
Supreme Oil Co., Inc., 2015 WL 2455952, at *6 (Del. Ch. May 22, 2015) (order
appointing custodian and providing that interim actions of the custodian “shall be
subject to review and reversal by the Court only on a showing that the Custodian
abused his discretion”); Jagodzinski v. Silicon Valley Innovation Co., LLC, 2012 WL
3 In light of Tabak’s concession, the court need not decide whether Tabak waived any right to seek arbitration by having participated in these proceedings. See Parfi Holding AB v. Mirror Image Internet, Inc., 842 A.2d 1245, 1260 n.39 (Del. Ch. 2004) (“[A] party may waive its right to arbitration by expressly waiving that right, actively participating in litigation as to an arbitrable claim, or otherwise taking action inconsistent with the right to arbitration.”). In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 6 of 15
593605, at *2 (Del. Ch. Feb. 14, 2012) (order appointing receiver and providing that
as “to matters in which the interests of all members are implicated, the decisions of
the Receiver shall be subject to review and reversal by the Court only on a showing
that the Receiver acted in bad faith, in violation of his fiduciary duties, or clearly
outside the scope of his authority”). In this case, the three-paragraph Receivership
Order does not establish a standard of review for the Receiver’s decisions.
In the absence of a standard of review in the order appointing the receiver,
this court has looked to the relevant statutes, rules, and case law for guidance. See,
e.g., B.E. Capital Mgmt. Fund LP v. Fund.com Inc., 171 A.3d 140 (Del. Ch. 2017);
In re GR Burgr, LLC, 2020 WL 6041970, at *1 n.1 (Del. Ch. Oct. 13, 2020)
(assuming without deciding that the standard is de novo, but acknowledging one
party’s argument that the standard should be abuse of discretion). The statute
authorizing the appointment of a receiver for an LLC does not provide a standard of
review. 6 Del. C. § 18-805. The applicable Court of Chancery Rules also do not
specifically identify a standard of review. Ct. Ch. R. 148–168.4 The Rules indicate,
4 These are default rules that may be waived in the court’s order appointing a receiver. Ct. Ch. R. 148; see Dunnco Viii, LLC v. Auviso, Inc., 2020 WL 532716, at *3 (Del. Ch. Jan. 31, 2020) (“The provisions of Court of Chancery Rules 149–168, pertaining to the duties of a receiver and/or trustee, are hereby waived.”). The Receivership Order in this case did not mention the Rules, and thus Rules 149 through 168 are applicable. In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 7 of 15
however, that this court should hold a hearing on exceptions to a receiver’s
determinations as to claims and accounts. See Ct. Ch. R. 156 (“Exceptions to [a
creditor’s] claims . . . will be heard by the Court upon such notice to the receiver,
creditor and exceptant as may be ordered by the Court.”); Ct. Ch. R. 157 (“At the
hearing of exceptions to claims and to accounts, the testimony of witnesses shall be
taken in the same manner as is provided for in other causes pending in this Court.”).
These references to a “hearing” “‘suggest that de novo hearings are permissible.’”
B.E. Capital, 171 A.3d at 144 (quoting Jack B. Jacobs, Delaware Receivers and
Trustees: Unsung Ministers of Corporate Last Rites, 7 Del. J. Corp. L. 251, 265
(1982)).
In B.E. Capital, the court explored the standard of review of a receiver’s
decisions, as well as the manner of review. B.E. Capital, 171 A.3d at 143–47. In
that case, the court held that a receiver’s decision to disallow a creditor’s claim
against a corporation pursuant to 8 Del. C. § 296 was subject to de novo review. In
addition to considering the applicable Court of Chancery Rules, the court supported
its decision by relying on the reference to a “hearing” in § 296, by citing previous
cases where the court conducted a de novo review of a receiver’s disallowance of a
claim, and by recognizing that de novo review was inherent in historical receivership
actions at common law. B.E. Capital, 171 A.3d at 144–46. The court also In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 8 of 15
analogized the receiver’s denial of the claim to a master’s ruling, which would be
subject to de novo review. Id. at 146 (“When a receiver by order of court hears
testimony and proof and rejects or allows a claim his action is closely analogous to
that of a master.” (internal quotation omitted)).
In reaching its conclusion that de novo is the applicable standard of review for
a receiver’s disallowance of a creditor’s claim, however, the court acknowledged
that a receiver may perform many other tasks.
This decision has no cause to determine whether the de novo standard of review would apply in other contexts. To the contrary, in a situation where a receiver or custodian has exercised judgment regarding the business and affairs of a corporation, such as when selling assets or settling a claim, a more deferential standard of review would seem warranted. Indeed, where the receiver or custodian has exercised the powers that otherwise would rest with the board of directors, a strong argument could be made that the standard of review should be at least as deferential as the standard that would apply to the board’s decision in the same context.
B.E. Capital, 171 A.3d at 146.
Applying a deferential standard of review to a receiver’s business decisions
also finds support in other decisions of this court. See In re First Woburn Bancorp.,
Inc., 1999 WL 33318823, at *1 (Del. Ch. Oct. 5, 1999) (receiver’s decision to seek
agreement with I.R.S. was “entitled to the protective presumption of the business
judgment rule in the absence of any persuasive evidence of bad faith, self-dealing, In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 9 of 15
gross negligence, or any other reason justifying removal of that protection”); 14
Realty Corp., 2009 WL 2490902, at *4 n.3 (“[D]e novo review of the determinations
of a skilled and experienced trustee is duplicative and wasteful of judicial resources
and parties’ time and money. Were the standard of review closer to a business
judgment standard—as it should have been—this motion could have been decided
far more expeditiously and efficiently on the basis of the Trustee’s well-reasoned
determinations.”); Acela Investments LLC v. DiFalco, 2020 WL 1987093, at *7 (Del.
Ch. Apr. 27, 2020) (“[The Trustee] is indisputably independent and has no personal
financial interest in the outcome of the sale process. He also possesses invaluable
knowledge and insight gained over the past ten months of his tenure as Liquidating
Trustee concerning, among other things, the Company’s operations and finances as
well as the capabilities of its stakeholders. It is for such reasons that this court
routinely applies a deferential standard of review when the action of an agent of the
court is challenged . . . .”).
The Delaware LLC Act also lends support to the view that a receiver’s
business decisions are entitled to a deferential standard of review. For example,
Section 18-805 authorizes a receiver “to take charge of the limited liability
company's property . . . and to do all other acts which might be done by the limited
liability company, if in being, that may be necessary for the final settlement of the In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 10 of 15
unfinished business of the limited liability company.” Section 18-406 provides that
“[a] member, manager, or liquidating trustee . . . shall be fully protected in relying
in good faith” upon reasonably reliable records and other sources of information
when making business decisions.
The Members and the Receiver generally agree that B.E. Capital provides an
appropriate framework for determining the standard of review for a receiver’s
determination in the absence of a court-ordered standard. They disagree, however,
as to its application to the Receiver’s decisions that are the subject of Tabak’s
objections. Tabak contends that all of the challenged decisions are subject to de
novo review. On the other hand, Miller and the Receiver urge the court to apply a
deferential standard to the decisions.
In my view, each of the Receiver’s challenged determinations should be
analyzed independently. See, e.g., 14 Realty Corp., 2009 WL 2490902, at *7–13
(considering separately three discrete determinations made by a Trustee). Even in
the absence of a court order establishing the standard of review, certain
determinations may be subject to de novo review and other determinations may
receive a deferential review, depending on the nature of the determination. See Badii
ex rel. Badii v. Metro. Hospice, Inc., 2012 WL 764961, at *11 (Del. Ch. Mar. 12,
2012) (appointing a receiver and directing the receiver to exercise independent In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 11 of 15
business judgment to settle a federal tax liability but to make recommendations to
the court to resolve creditor and shareholder claims).
At this stage, I am persuaded that the Receiver’s decision to deny Tabak’s
claim for $60,000 in advanced expenses and the Receiver’s conclusion that Tabak
has a negative capital account balance are subject to de novo review. 5 The
Receiver’s other decisions that are the subject of Tabak’s objections, such as not to
conduct a valuation of Jeffco’s assets and to distribute the assets in kind, appear to
fall into the category of discretionary business decisions permitted under the Jeffco
LLC Agreement. The Members and the Receiver will have an opportunity to present
their respective arguments as to the appropriate standard(s) of review on the
objections to these other decisions at the upcoming hearing.
IV. Hearing and Evidence
Even as to decisions that are subject to de novo review, the court is not
required to hold an evidentiary hearing. As the B.E. Capital court explained, “when
5 At the September 15 hearing, Tabak’s counsel asserted that Tabak has a claim for $300,000 from a subordinated loan that Tabak made in 2013. Oral Arg. at 28. However, Tabak did not raise this issue in his Objections Letter, and this claim is time-barred. Agreed Order ¶ 8 (“Any Public Claims, Member Objections or any other opposition to the dissolution of Jeffco and the Distribution Plan, or any claim in tort or contract which any person or party may have against Jeffco which is not timely served or filed, as applicable, in accordance with the procedures set forth herein shall be forever barred.”). This letter expresses no opinion as to Tabak’s alternative argument that the $300,000 was a capital contribution. In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 12 of 15
a court considers an appeal from a receiver’s disallowance of a claim . . . , the
standard of review is de novo, and the court has discretion as to whether to go beyond
the record presented to the receiver by conducting an evidentiary hearing.” B.E.
Capital, 171 A.3d at 144.
In conducting a de novo review on the record, the court has discretion to “hear
the evidence anew, either as to all the issues or as to designated issues only.” In re
Collins’ Will, 251 A.2d 345, 346–47 (Del. 1969) (affirming Orphans’ Court’s review
of a decision by the Register of Wills). When this court conducts de novo review of
a master’s report, “[o]nly where exceptions raise a bona fide issue as to dispositive
credibility determinations will a new hearing be inevitable. In those cases the new
hearing can be limited to the witness or witnesses whose credibility is at issue.”
DiGiacobbe, 743 A.2d at 184.
Although the record is unclear, it appears that the Receiver’s decisions
regarding 1) Tabak’s $60,000 claim and 2) Tabak’s capital account balance may
have involved credibility determinations. As to the capital accounts, the Receiver
credited the tax returns and other contemporaneous financial records over the revised
calculations provided by Tabak. The revised calculations included a cover sheet
addressed to the Receiver from Constantine Sophos of Citrin Cooperman, Jeffco’s
accountant, along with supporting financial records. Sophos stated that he prepared In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 13 of 15
the revision of the capital accounts “based on documents provided to me by Jeffrey
Tabak.” Receiver’s Exhibits, Ex. H. The Receiver dismissed Sophos’s revised
report as unreliable, equating it with a litigation-driven expert report. Receiver’s
Response ¶ 27 (“Courts have rejected expert analysis done contemporaneously with
litigation as an unreliable source.” (citing Owen v. Cannon, 2015 WL 3819204, at
*22 (Del. Ch. June 17, 2015)). Tabak’s evidence, however, is not an expert’s
estimation of future financial projections. Cf. Owen, 2015 WL 3819204, at *21–22
(discussing cases where the courts discounted experts’ forecasts that were
inconsistent with contemporaneous management projections). Rather, Tabak’s
evidence is a recitation of facts that conflicts with the story that is told through the
tax returns and the contemporaneous financial documents.
The record before the court does not clearly reflect that the Receiver’s
decision rested upon a dispositive credibility determination, which would require
witness testimony. See DiGiacobbe, 743 A.2d at 184 (holding that a new hearing
only becomes necessary if the credibility determination is dispositive). I also note
that a credibility determination is not dispositive if there are “objective facts in the
record that support the Master’s findings.” In re Real Estate of Jamies’s L.L.C.,
2006 WL 644473 at *6 (Del. Ch. Mar. 1, 2006). In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 14 of 15
At the September 15 Hearing, it became evident that the parties had
anticipated making detailed, fact-intensive arguments based on the financial records
that could not be fully explored in the 90 minutes allotted for argument, and that
issues over the standard of review needed further exploration. The Members and the
Receiver should be afforded a full opportunity to present their arguments as to the
objections, as contemplated by the Agreed Order.
Having reviewed the objections and the submissions of the Members and the
Receiver, the only issues that might turn on a credibility determination are Tabak’s
objections as to the Receiver’s treatment of his claim for $60,000 and of his capital
account balance. Accordingly, the court will permit Tabak to testify at the hearing
in support of those objections and to present testimony from Sophos. Those
witnesses will be subject to cross-examination. See Ct. Ch. R. 157.
The documentary evidence will be limited to the current record. The parties
have had ample opportunity to submit evidence. Tabak did not serve any discovery
requests. For six months, the Receiver repeatedly extended deadlines for submitting
evidence and for responding to the other party’s submissions, including at the
request of both Tabak and Tabak’s counsel. Even after the Receiver filed his
Motion, the parties had multiple opportunities to present additional information to In re Dissolution of Jeffco Mgmt., LLC C.A. No. 2018-0027-PAF January 28, 2021 Page 15 of 15
the court. Tabak and Miller have already submitted numerous records that shed light
on Tabak’s objections, and I am not persuaded to reopen the documentary record.
Pursuant to the foregoing, the Members and the Receiver will have the
opportunity to argue the objections to the Receiver’s Motion, including as to the
standard of review, and Tabak will be afforded the opportunity to present his
testimony as outlined above. The Members and the Receiver should also address
whether any of the arguments presented in the objections have been waived or are
barred as untimely. The parties shall confer and contact chambers to schedule a
hearing as soon as reasonably practicable.
IT IS SO ORDERED.
Very truly yours,
/s/ Paul A. Fioravanti, Jr.
Vice Chancellor