Advanced Payments Denied Priority

The case deals with Silicon Valley Innovation Co., for which Parsons appointed a receiver in January 2013. Parsons said the company's only assets are contingent claims against its former officers and directors. Two of those people, Shaun Andrikopoulos and Michael A. Santer, were named as defendants in a case that has been consolidated in the Superior Court for Los Angeles County. Andrikopoulos and Santer in July 2014 filed an action in Delaware court seeking to invoke their advancement rights.

The receiver of Silicon Valley Innovation, Bram Portnoy, and the two former executives stipulated to the validity of the employment agreements that included the right to advancement, and the litigation boiled down to the question of whether Andrikopoulos and Santer enjoyed any priority as to their advancement rights.

The decision turned, Parsons said, on whether under Delaware law advancement claims are administrative expenses or unsecured creditor claims. Administrative expenses are generally given second priority when a company in receivership is paying out obligations. Secured creditors get top priority and unsecured creditors are paid after the first two.

Silicon Valley argued the advancement claims were based on a commitment of the company that predates receivership and is furthermore a form of compensation for the executives' service. Andrikopoulos and Santer disagreed, arguing advancement rights were triggered by the company's decision to bring a lawsuit against its ex-officials. They also asserted a “strong public policy in favor of advancement.” Parsons said the ex-officials' arguments “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.”

Parsons said Silicon Valley relied heavily on an analogy to federal bankruptcy law. But he said the federal statutory framework in bankruptcy law was much longer and more complex than the statute and Court of Chancery rules ' along with the court's discretion ' governing Delaware receiverships.

Although Delaware policy strongly favors advancement, Parsons said, a strong analogy between receivership and bankruptcy indicates that advancement rights are a creature of a contract that was entered into before the “petition” was filed by Silicon Valley. Therefore, the bankruptcy analogy augurs against any enhanced priority for advancement rights.

While not explicitly applying Silicon Valley's bankruptcy analogy, Parsons said there is a meaningful difference between the pre-receivership entity and the nature of the entity under receivership. Advancement obligations, he reasoned, are contractual and arise from pre-receivership transactions.

“In that respect, they are no different from other creditors' claims,” Parsons wrote.

Michael A. Riccardi is Managing Editor of The Legal Intelligencer, an ALM sister publication of this newsletter. This article also appeared in ALM's Delaware Business Court Insider.

Advancement claims of executives are not entitled to priority over other claims against an entity in receivership, the Delaware Court of Chancery has ruled in a case of first impression.

Writing in Andrikopoulos v. Silicon Valley Innovation, C.A. No. 9899-VCP (July 30, 2015) Vice Chancellor Donald F. Parsons Jr. said advancement claims should be treated on par with the claims of other unsecured creditors. Along with those of unsecured creditors, Parsons said further, advancement rights claims are to be satisfied on a pro rata basis.

While the Court of Chancery is frequently asked to sort out the advancement rights of executives, this case came “in the unusual context of a receivership,” Parsons observed.

The case deals with Silicon Valley Innovation Co., for which Parsons appointed a receiver in January 2013. Parsons said the company's only assets are contingent claims against its former officers and directors. Two of those people, Shaun Andrikopoulos and Michael A. Santer, were named as defendants in a case that has been consolidated in the Superior Court for Los Angeles County. Andrikopoulos and Santer in July 2014 filed an action in Delaware court seeking to invoke their advancement rights.

The receiver of Silicon Valley Innovation, Bram Portnoy, and the two former executives stipulated to the validity of the employment agreements that included the right to advancement, and the litigation boiled down to the question of whether Andrikopoulos and Santer enjoyed any priority as to their advancement rights.

The decision turned, Parsons said, on whether under Delaware law advancement claims are administrative expenses or unsecured creditor claims. Administrative expenses are generally given second priority when a company in receivership is paying out obligations. Secured creditors get top priority and unsecured creditors are paid after the first two.

Silicon Valley argued the advancement claims were based on a commitment of the company that predates receivership and is furthermore a form of compensation for the executives' service. Andrikopoulos and Santer disagreed, arguing advancement rights were triggered by the company's decision to bring a lawsuit against its ex-officials. They also asserted a “strong public policy in favor of advancement.” Parsons said the ex-officials' arguments “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.”

Parsons said Silicon Valley relied heavily on an analogy to federal bankruptcy law. But he said the federal statutory framework in bankruptcy law was much longer and more complex than the statute and Court of Chancery rules ' along with the court's discretion ' governing Delaware receiverships.

Although Delaware policy strongly favors advancement, Parsons said, a strong analogy between receivership and bankruptcy indicates that advancement rights are a creature of a contract that was entered into before the “petition” was filed by Silicon Valley. Therefore, the bankruptcy analogy augurs against any enhanced priority for advancement rights.

While not explicitly applying Silicon Valley's bankruptcy analogy, Parsons said there is a meaningful difference between the pre-receivership entity and the nature of the entity under receivership. Advancement obligations, he reasoned, are contractual and arise from pre-receivership transactions.

“In that respect, they are no different from other creditors' claims,” Parsons wrote.

Michael A. Riccardi is Managing Editor of The Legal Intelligencer, an ALM sister publication of this newsletter. This article also appeared in ALM's Delaware Business Court Insider.