Chancery Court Defines De Novo Standard of Review for Appeals of Receiver’s Decisions Disallowing Claims

By: Jessica Pearlman and Will Smith

In B.E. Capital Management Fund LP v. Fund.Com Inc., C.A. No. 12843-VCL (Del. Ch. October 4, 2017), the Delaware Court of Chancery denied an appeal from a receiver’s decision disallowing a claim for breach of contract against a company in receivership. The Court held that the appropriate standard of review for an appeal of a receiver’s decision was de novo as to both law and facts, and in particular, that the Court had discretion to consider additional evidence not presented on record to the receiver. Applying this standard, the Court upheld the receiver’s decision, but on different grounds. The Court ruled that the breach of contract claim was time-barred by the doctrine of laches, not the contract’s choice-of-law provision, as choice-of-law provisions must expressly reference statutes of limitations to apply to statutes of limitations.

In October 2016, B.E. Capital Management Fund LP petitioned for the appointment of a receiver for Inc. (the “Company”), claiming the Company had abandoned its business. In November 2016, the Court entered a default judgment against the Company and appointed a receiver (the “Receiver”) to wind up its affairs and pay creditors. In February 2017, nonparty Philip Gentile submitted a claim to the Receiver for $497,739. Gentile asserted a breach of his employment agreement (the “Agreement”) while he served as the Company’s CEO from March 1, 2008 until his resignation in June 18, 2010. Gentile claimed the Company stopped making payments in February 2009.

The Receiver rejected Gentile’s claim as time-barred. The Receiver applied the New York statute of limitations to the contract claim because the Agreement was governed by New York law pursuant to its choice-of-law provision. The Receiver denied Gentile’s claim because New York law provided a six year statute of limitations for breach of contract claims; under this standard, Gentile’s breach of contract claim would have run on June 18, 2016, six years after the date he resigned as CEO. Gentile timely appealed the Receiver’s decision. The Receiver moved to have the determination confirmed.

The Court found that the appropriate standard of review for an appeal of a receiver’s determination was not defined in the available Delaware authority. After a survey of Delaware jurisprudence, the Court held that the standard of review is de novo for an appeal from a receiver’s disallowance of a claim pursuant to Section 296(b) of the Delaware General Corporation Law. More specifically, the Court held that de novo review of such an appeal entailed judicial discretion as to whether to go beyond the record presented to the receiver by conducting the Court’s own evidentiary hearing. The Court limited this holding only to an appeal from a receiver’s decision disallowing a claim, leaving open the standard of review that would apply in a different context.

Applying this de novo standard, the Court found on review that the Receiver’s decision erred in reasoning but not in the final outcome. Although the Receiver correctly determined that Gentile’s claim was time-barred by the statute of limitations, the Court ruled that the Receiver incorrectly relied on the Agreement’s choice-of-law provision. The Court held, instead, that the law of the forum applies to the Agreement. Statutes of limitations are procedural, and therefore, choice-of-law provisions do not dictate the applicable jurisdiction for statutes of limitations unless the choice-of-law provision expressly includes statutes of limitations. The Agreement did not expressly include statutes of limitations in its choice-of-law provision.[1]

The Court explained that the Receiver’s result should have been reached by applying the doctrine of laches under Delaware law. Under that doctrine, statutory limitations periods are presumptive, not dispositive, for the Court of Chancery, as a court of equity. The Court’s laches analysis showed that New York’s limitations period would have been most generous to Gentile. But even under that standard, the New York statutory period ran before Gentile filed his claim.

The Court also rejected Gentile’s arguments for tolling the statutory period because Gentile voluntarily sought to sue the Company in New York in a separate action and later abandoned the litigation around August 2011. Gentile otherwise failed to timely file his breach of contract claim.

The Court therefore granted the Receiver’s motion to confirm the determination below, holding that Gentile’s was claim time-barred after a de novo review of the record developed before the Receiver.

[1] The Agreement stated: “This Agreement shall be governed and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws thereunder.”

B.E. Capital Management Fund LP v. memorandum opinion 171004

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