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Advancement Claims Not Entitled to Priority in LLC Receivership

BY Barry M. Klayman
October 02, 2015

Do the advancement rights of directors and officers have priority over the rights of creditors to the assets of a limited liability company in receivership? In two recent Delaware Court of Chancery decisions ' Andrikopoulos v. Silicon Valley Innovation LLC, C.A. No. 9899-VCP (Del. Ch. July 30, 2015), and Henson v. Sousa, C.A. No. 8057-VCG (Del. Ch. Aug. 4, 2015) ' Vice Chancellors Donald F. Parsons Jr. and Sam Glasscock III both concluded that the claims for advancement were not entitled to priority treatment as administrative expenses of the receivership. The cases underscore the importance of obtaining directors and officers liability insurance regardless of the existence of advancement and indemnification provisions in the entity's organizational documents or the party's employment agreement.

Dispute over Advancement Claims

The main dispute between the parties in both cases was whether, in the context of a receivership under Delaware law, advancement claims are administrative expenses or unsecured creditor claims. Under federal bankruptcy law, the filing of a bankruptcy petition significantly affects the ability of a creditor to obtain payment of defense costs from a debtor corporation. Such payments are only permitted if they constitute administrative expenses under Section 503(b) of the Bankruptcy Code. To qualify as an administrative expense, the expense must have arisen from a post-petition transaction between the creditor and the trustee/debtor-in-possession and the transaction must have benefited the estate in the post-petition period. If claims are not administrative expenses, they are treated as ordinary pre-petition claims not subject to priority.

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