Receiver's Disallowance of Creditor's Claim Subject to De Novo Review

What should be the standard of review when the Delaware Court of Chancery considers an appeal from a receiver's disallowance of a claim pursuant to Section 296(b) of the Delaware General Corporation Law? In B.E. Capital Management Fund v. Fund.com, C.A. No. 12843-VCL (Del. Ch. Oct. 4, 2017), Vice Chancellor J. Travis Laster held that a receiver's determination is subject to de novo review and the court has discretion to go beyond the record presented to the receiver by conducting an evidentiary hearing.

Subchapter XI of the DGCL provides for the appointment of receivers for an insolvent corporation. Section 291 of the DGCL authorizes the Court of Chancery, on the application of any creditor or stockholder, to appoint one or more persons to be receivers for an insolvent corporation, to take charge of its assets, business and affairs; to collect outstanding debts, claims and property due the corporation; and to do all other acts which might be done by the corporation and which may be necessary or proper.

Section 295 provides for creditors' proofs of claims to be filed in the office of the Register in Chancery within the time fixed by the procedure established by the rules of the Court of Chancery. Any creditor or claimant who fails to file a timely proof of claim may be barred from participating in the distribution of the assets of the corporation. Section 296 provides for the adjudication of claims by the receiver, and gives the receiver power to examine, under oath, all witnesses “touching the claims” and to pass upon and allow or disallow the claims in whole or in part. Finally, Section 296(b) provides that any creditor or claimant whose claims have been disallowed in whole or in part may appeal to the Court of Chancery which, after a hearing, shall determine the rights of the parties. Court of Chancery Rule 157 states that at the hearing on exceptions to claims, the testimony of witnesses shall be taken in the same manner as provided for in other causes pending in the Court of Chancery.