COURT OF CHANCERY SHEDS LIGHT ON THE APPROPRIATE AMOUNT OF RESERVES FOR CORPORATIONS IN DISSOLUTION
By Scott E. Waxman and Caitlin M. Velasco
In In re Swisher Hygiene, Inc., 2020 WL 3125415 (Del. Ch. June 12, 2020), the Delaware Court of Chancery granted Swisher Hygiene, Inc.’s (“Swisher”) Motion for Interim Distribution and rejected Honeycrest Holdings, Ltd.’s (“Honeycrest”) opposition, holding that the proposed amount of funds to be held in a reserve for a pending lawsuit between the two parties (the “Honeycrest Litigation”) was sufficient security pursuant to Section §280(c)(1) of the Delaware General Corporation Law (the “DGCL”).
After selling its operating assets, Swisher filed a certification of dissolution in May 2016 and notified its potential creditors of the dissolution. Through the dissolution process Swisher resolved the major claims and pending litigation against it except for five remaining creditor claims and the Honeycrest Litigation. In June 2019, once the statutory claims period expired, Swisher filed a petition with the Court of Chancery and subsequent motions under Section 280 seeking a determination on, among other things, the amount that would be sufficient security to cover wind-down costs, pending litigation, prospective claims, as well as any unknown or unripe claims. In particular, Swisher sought approval of a process to resolve or set a reserve for the remaining five creditor claims and the Honeycrest Litigation.
At the time of filing, Swisher had net assets in liquidation of approximately $16.279 million. Swisher sought to distribute $10 million to its stockholders, leaving a reserve of $6.279 million in addition to $1.667 million Swisher had already set aside specifically for the Honeycrest Litigation.
Under Section 280(c)(1) of the DGCL, a corporation that has provided notice to potential claimants “shall petition the Court of Chancery to determine the amount and form of security that will be reasonably likely to be sufficient to provide compensation for any claim against the corporation which is the subject of a pending action, suit or proceeding to which the corporation is a party.” Once a reserve is determined to be adequate, an interim distribution to the corporation’s stockholders is permissible.
The Court of Chancery first addressed the five creditors’ motions to substantiate their claims. The Court held that four of the claims were unsubstantiated: one without prejudice, one based on lack of evidence, and two were barred because the plaintiffs failed to appear in court. However, one claim was appropriately reserved for under Swisher’s Motion for Distribution.
The Court of Chancery then addressed Honeycrest’s opposition to the Motion for Distribution. Honeycrest is a plaintiff in three lawsuits in New York against Swisher, which were filed in 1998, 2001, and 2017 respectively. In 2003, Honeycrest and Swisher entered a tentative settlement agreement for $1.8 million; however, the settlement was never finalized. In its opposition claim, Honeycrest valued the settlement between $6.9 million and $9.2 million. Swisher valued the settlement at $1.8 million.
The Court of Chancery noted that, though the Honeycrest Litigation has some merit, it is two decades old, its resolution remains unclear, trial has not been set, and Honeycrest’s assigned value is a best-case scenario. Based on these factors, the Court determined that Swisher followed proper procedures for judicial dissolution and its reserve was adequate to justify an interim distribution.
The Court of Chancery emphasized that it was not required to guarantee the full amount of any judgment a creditor could potentially achieve against Swisher; rather, the court was only required to determine an amount that was “reasonably likely to be sufficient to provide compensation for any claim against the corporation which is subject of a pending action, suit or proceeding.” As such, the Court of Chancery held the total reserve of $6.9 million would reasonably and amply satisfy any judgment obtained by Honeycrest in future litigation with Swisher.