### COURT OF CHANCERY OF THE STATE OF DELAWARE K ATHALEEN S T

. J UDE M C C ORMICK

C HANCELLOR L EONARD L. W ILLIAMS J USTICE C ENTER 500 N. K ING S TREET , S UITE 11400 W ILMINGTON , D ELAWARE 19801

- 3734
April 7 , 202 2
Neal J. Levitsky , Esquire Kasey H. DeSantis , Esquire Fox Rothschild LLP 919 North Market Street, Suite 300 Wilmin gton, DE 198 01
Gary F. Seitz, Esquire Gellert Scali Busenkell & Brown, LLC 1201 N. Orange Street, 3rd Floor Wilmington, DE 19801 Michael L. Vild , Esquire Cross & Simon, LLC 1105 N. Market Street, Suite 901 Wilmington, DE 19801

Re: Grassi Fund Administration Services, Inc. v. Crederian, LLC, C.A. No. 20 20

- 0748

- KSJM

Dear Counsel:

This letter decision resolves the objection of p etitioner Grassi Fund Administration
Services, Inc. (“Petitioner”) to the Liquidating Trustee’s Report and Recommendation for

Relief ( the “Report”)

. 1
Petitioner and Crederian, LLC (“Respondent”) together formed Crederian Fund
Services, LLC (the “Company”) “to pro vide accounting and compliance services to

investment fund accounts.” 2 Due to irreconcilable differences, Petitioner sought
dissolution of the Company and entered arbitration as provided for in the Company’s

1 See C.A. No. 2020

- 0748

- KSJM, Docket (“Dkt.”) 49, Report of Liquidating Trustee & Recommendation for Relief (Report); Dkt. 53
, Pet ’ r’s Obj

. to the Report of Liquidating Trustee & Recommendation for Relief (“Objection”).

2 Objection ¶ 1.C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 2 of 11
Operating Agreement. 3 The arbitration tribun al issued a decision on liability ( the “Liability

Decision” ) and a decision and final award ( the “ Final Award ”)
, 4 which Petitioner sought

to enforce in this court. 5 On December 4, 2020, the court confirmed the results of the
arbitration proceeding and ordered that the Company be wound up and dis solved. 6 On
February 9, 2021
, the court appointed Gary Seitz as Liquidating Trustee. 7
The Liquidating Trustee recovered $6 8,136.47 and submitted the Report on

December 20, 2021. 8

The Report recommended that the court order the Liquidating Trustee to pay the

recovered sum as follows : $26,702 .00 in fees and $262.29 for expenses to the Liquidating

Trustee ; $ 3 5,514.37 in unpaid salary to Eugene Grace ; and the remaining balance of
$5,657.85 to the Company’s landlord, Rosetree KPG III, LLC (the “Landlord”)

. 9 The
Liquidating Trustee further concluded that although he may be able to obtain additional
recovery, “the meager sums obtained through the liquidation and the lack of interest of any
contingent fee firms known to the Trustee prevent the ability to mount any liquidation

3 Id. ¶ 2.

4 Dkt. 1, Ex. A . Ex hibit A to the Verified Petition to Confirm Arbitration Award includes both the Liability Decision (pages 2 through 33) and Final Award ( pages 34 through 96)

. T h is decision cites to the internal pagination of the individual decisions and not the pagination of the exhibit.

5 Objection ¶¶ 2

– 3.

6 Dkt. 33 ¶ 1.

7 Dkt. 41 ¶ 2.

8 Report at 3.

9 Id. at 8.C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 3 of 11
litigation in this case.” 10 The Liquida ting Trustee concluded that “[d]ue to the lack of
resources, [he] is unable to further investigate or pursue any liquidation litigation suggested
by the parties.” 11

Petitioner initially asserted three objections to the Report , but Petitioner collapsed

two of its objections into one during oral argument. 12 Petitioner first argues that t he
Liquidating Trustee failed to provide documents supporting the claims of Eugene Grace
(the “Salary Claim”)

. 13 Petitioner next argues that the Liquidating Trustee improper ly

subordinated Petitioner’s claim s in favor of the L andlord’s claim under the lease agreement
(the “Lease Claim”)
, and that t he Liquidating Trustee failed to consider Respondent’s joint
and several liability under the lease agreement for the Lease Claim

. 14 Petitioner’s first
objection concerns $ 3 5,514.37 . Petitioner’s second object ion concerns $5,657.85

. The parties dispute what standard of review applies to Petitioner’s o bjections

. 15

Petitioner argues tha t de novo review is appropriate. Respondent argues that a more

deferential standard is appropriate

.

10 Id. at 4

11 Id. at 5.

12 Dkt. 62 (“Oral Arg. Tr.”) 14: 10

– 15 (“ THE COURT: So this is really about, assuming we can find support or I find at that poi nt Mr. Grace ’ s claim is supported, it ’ s really about the remaining 5,000

- plus dollars. ATTORNEY DESANTIS: Yes, that ’ s correct .”).

13 Objection ¶¶ 21

– 25.

14 Id. ¶¶ 26

– 37.

15 Id. ¶ 12; Dkt. 56
, Resp ’ t’s Response to the Pet ’ r’s Obj

. to the Report of Liquidating Tr

. & Recommendation for Relief (“Response”) ¶ 3.C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 4 of 11

Vice Chancellor Fioravanti addressed this issue in In re Dissolution of Jeffco

M ana g e m en t LLC , observing that while a receiver’s decision to disallow a c reditor’s claim

is reviewed de novo , a receiver’s business decisions are subject to a more deferential

standard. 16 This decision does not repeat the Vice Chancellor’s scholarly analysis.
Applying the holding of Jeffco here and giving Petitioner the benefit of a close call, I review

the Liquidating Trustee ’s determinations de novo because the priority assigned to the
Salary Claim and the Lease Claim had the effect of depriving Petitioner of any recovery
through the liqu idation

.
Under a de novo standard of review, the court “ma[kes] a careful and independent
review of both the factual findings and the conclusions of law.” 17 “Although de novo

rev iew generally means a new trial or hearing on questions of fact, it is equ ally possible to

conduct a review de novo on the record.” 18

In this case, the parties did not submit to an evidentiary hearing. 19 Given the
extremely narrow scope of Petitioner’s o bjections and the limited amount in controversy
,

16 See In re Dissolution of Jeffco M gmt. , LLC , 2021 WL 282634, at *2

– 4 (Del. Ch. Jan. 28, 2021) (discussing B.E. Cap

. Mgmt. Fun d LP v. Fund.com Inc. , 171 A.3d 140 (Del. Ch. 2017 ) and other cases).

17 In re Reardon , 759 A.2d 568, 575 (Del. 2000).

18 B.E. Cap

. Mgmt. Fun d LP , 171 A.3d at 144 ( internal quotation marks and citation omitted).

19 Neither party requested an evidentiary hearing. Petitioner asked the court to reject the Liquidating Trustee’s Report and “adopt a plan consistent with the findings of the Final Award

. ” Objection ¶ 8; see also i d. ¶ 12

. Respondent asked the court to accept the Report. Response ¶ 23 ( stating that “ the Respondent respectfully and reluctantly r equests that the Court accept the Trustee’s Report and overrule the Objections”).C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 5 of 11

this was a reasonable decision. The parties rely significantly on the arbitration tribunal’s
factual findings, which resulted in the Liability Decision and the Final Award confirmed
by this court. 20 The parties dispute whether the Liquidating Trustee act ed appropriately in
implementing aspects of the arbitration tribunal ’ s findings, and this court will review th e
challenged decisions de novo

. T he court , however, does not review the factual findings of

the arbitration tribunal de novo ; t hose findings have been confirmed by this court and are
binding.
As to the Salary Claim, Petitioner does not object to the Liquidating Trustee ’s

recommendation to pay Grace ’s unpaid salary. 21 R ather
, Petitioner questions whether the
amount Grace seeks is unpaid salary fo r work performed, as opposed to payment from
some other arrangement with Respondent. 22 Petitioner phrases its request strangely by

ask ing Respondent to prove a negative

— that no document exists proving Grace is not
entitled to his unpaid salary. 23 T he a rbitration t ribunal already resolved th e issue of Grace’s

20 Dkt. 33 ¶ 1 (ordering that “[a]ll aspects of the Arbitration Proceeding between the parties are hereby CONFIRMED”).

21 Objection ¶ 21.

22 Id. ( objecting to the Report “ to the extent the Liquidating Trustee recommends payment to Eugene Grace for unpaid salary in the amount of $35,514.37 with out any supporting evidence for the claim ” (emphasis added))

. 23 Oral Arg. Tr. 9:2

– 5.C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 6 of 11

entitlement

. 24 As discussed above, th at finding is binding. Petitioner’s objection to the
Salary Claim is therefore o verruled

.
As to the Lease Claim , Petitioner first argues that Respondent should be liable for

the Lease Claim instead of the Company “because Respondent is jointly and severally
liable under the terms of the lease agreement
, ” 25 and Petitioner next argues that the
Liquidating Trustee improperly subordinated its claim s to the Lease Claim.
Petitioner’s first argument is unpersuasive. The L andlord is owed $ 347,713.96 by
the Company, far more than the Liquidating Trustee recommends paying the L andlord; 26

Petitioner does not dispute this fact. 27 Instead, Petitioner argues that the L andlord should
have to chase Respondents for amounts owed jointly and severally by the Company.

24 Final Award at 17 ( ordering that “ [t] he LLC shall pay Mr. Grace any unpaid amounts of his regular base salary through the date of the termination of his employ e ments [si c] with the LLC (but no later than April 30, 2020), at the salary rate he was earning as of the last pay period in which he was paid, provided that the rate of pay shall not exceed his rate of pay for the 12 preceding months ”); Id. at 29 (awarding “[u] npaid salary of $35,514.37 to Eugene Grace, which shall be paid only in the final distribution of the assets of the LLC, but before any distribution to either Member, provided, however, that such salary shall be paid sooner to the extent required by law”). Petitioner’s objection to the Salary Claim is a repeat of the objection it made during the arbitration. Id. at 17 (“[Petitioner] opposes these applications on the basis that Crederian has failed to supply sufficient information regarding Mr. Grace’s sal ary and the employee flexible spending account.”). The arbitrat ion tribunal rejected Petitioner’s objections , finding that “there is sufficient information in the record to dispose of these matters.” Id.

25 Objection ¶ 27.

26 Report at 6

– 7 , 9

. 27 See Obje ction ¶ 27 ( arguing that “ [t] he Company should not be liable for the Landlord’s claims ” and that “ Respondent alone should be liable for the Landlord’s claims because Respondent is jointly and severally liable under the terms of the lease agreement ”).C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 7 of 11
Petitioner provides no support for this supposition. 28 Petitioner points to no factual or legal
basis for me to deny the Lease Claim outright, whic h would be the practical effect of the
court accepting Petitioner’s argument

. 29

Petitioner’s next argument also misses the mark

. Petitioner a sserts that the
Liquidating Trustee improperly subordinated its claims based upon an unsupported
assertion by R e spondent

. 30 Petitioner notes that the Final Award (i) found that Petitioner

was entitled to a credit of half of $297,000 for payments it made to subcontractors 31 and to
$275,000 in fees paid to the Company
, 32 and ( ii) awarded Petitioner $30,000, which was
the administrative fee stated in the operating agreement. 33

Petitioner selects too carefully from the Liability Decision and Final Award
, omitting adverse facts and findings that cut against Petitioner’s position

. For example, t he

arbi trat ion tribunal stated in the Liability Decision that the parties are to “make best efforts
to minimize fees and expenses resulting from the wind

- down of the LLC” including with

28 See id.

29 See Report at 6

– 7 ( stating that the L andlord is seeking $347,713.96 in the lease claim against the Company)

. 30 Oral Arg. Tr. 13:4

– 7.

31 Final Award at 10.

32 Id. at 29.

33 Id. at 8 ( finding Petitioner is “ entitled to the administrative fees provided in Schedule B to the LLC Agreement for each month from the inception of the LLC through April 30, 2020, including any such administrative fees that were unpaid as of the December 2018 drawdown”).C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 8 of 11
respect to the lease. 34 After the Liability Decision , however, the parties f ai led to use best

efforts to minimize fees in connection with the Lease.

After the Liability Decision
, the parties corresponded on how to terminate the lease,
arriving at a draft email to send to the L andlord. 35 The next day, Petitioner’s counsel
scuttled the negotiations, stating that after “consult[ing] with [his] client, [they] do not
believe that any communication with the landlord is appropriate, at this time” and that
Respondent should “recall that neither Member is autho rized to speak to the landlord about
the lease independently.” 36 Respondent raised the dispute with the arbitrat ion tribunal . In

response, Petitioner explained that “Members of the Joint Venture have no liability for the
Joint Venture” and that “[t]he L a ndlord would also have an obligation to mitigate any
damages for lost rent if the lease were terminated immediately, which may result in no
claim against the Joint Venture for lost rent.” 37

The arbitrat ion tribunal held a conference call to address the p arties’ dispute
concerning the lease and other issues

. 38 After that call, Respondent drafted a new email to

34 Liability Decision at 58

– 59 ; see also i d. at 57 ( directing that, “ [i] f any contract or other commitment cannot be terminated effective April 30, 2020, the Members shall make commercially reasonable efforts to effectuate a termination at the earliest possible date”).

35 Dkt. 56, Ex. F at 6

. 36 Id.

37 Id. at 13.

38 Final Award at 3; see Dkt. 56, Ex. F at 8 ( stating that “ [t] here is an urgent matter that we would like to bring to the Panel’s attention. The Joint Venture’s landlord has emailed Mr. Ciavardini about the unpaid June rent and asked him to respond”).C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 9 of 11

the L andlord for Petitioner’s review, and Petitioner responded through counsel stating that

a call with the Landlord would not be productive. 39

T he arbitrat ion tribunal later issued its Final Award
, requir ing the parties to “take
such steps as are necessary to terminate ongoing service s contracts and other commitments,
including . . . lease commitments, effect ive to the extent feas ible April 30, 2020, except as
may be required in the Members’ joint interest.” 40

During the time period when Petitioner failed to coopera te in communications
concerning terminating the lease, the Company remain ed a tenant but was unable to pay

rent. 41 Th e Company’s failure to pay rent caused the L andlord to levy interest and penalty
charges against the Company and file a breach of contract claim against the Company and
Respondent

. 42

39 Dkt. 56, Ex. F at 1 8

. 40 Final Award at 25; Liability Decision at 58

– 59 ( requiring the parties to “make best efforts to minimize fees and expenses resulting from the wind

- down of the LLC” including with respect to the lease).

41 Withdrawing funds from the LLC’s bank accounts required both Members ’ consent. See Final Award at 17 (“Except as specifically provided in this paragraph, no other funds shall be taken from the accounts of the LLC, except by agreement of the Members or order of a court, liquidating trustee, or other referee.”). Petitioner refused to pro vide its consent, instead asking Respondent to tell the L andlord “ that the company is in the midst of winding down and . . . will be evaluating all claims of potential creditors as part of that process.” Dkt. 56, Ex. F at 18 ; see also Final Award at 6 ( fi nding that Petitioner “may have violated orders of the Pennsylvania court providing for the deposit of collected client accounts receivable into the LLC’s bank account”).

42 See Dkt. 56, Ex. C at 2; Dkt. 56, Ex. D at 1 , 5

.C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 10 of 11
Summing it up, Petitioner was obligated to help terminate the existing lease

.
Petitioner’s failure to cooperate contributed to additional liability. These facts support a
finding that Petitioner is at least partially responsible for the Lease Claim.
Accordingly, it is appropriate to subordinate Petitioner’s claims under o ne of two
equitable doctrines

— equitable subordination 43 or unclean hands. 44 Petitioner’s act ions

contributed to additional rent, penalty, and interest payments owed to the L andlord.
Although the effect of Petitioner’s actions on the Lease Claim is not e asily
quantifiable, Petitioner’s act ions caused an increase in the amount of the claim of at least

more than half of the remaining balance of the recover ed sum, $5,657.85 , which is the most

that Petitioner would otherwise be entitled to

. 45

43 “Equitable subordination is a do ctrine that, based on a creditor’s inequitable conduct and its effect on other creditors, allows that creditor’s debt to be subordinated to other claims in bankruptcy or allows the creditor’s liens to be transferred to the bankruptcy estate.” Nelson v. Eme rson , 2008 WL 1961150, at *4 n.13 (Del. Ch. May 6, 2008) (citations omitted).

44 “The doctrine of unclean hands is [ e ] quity’s maxim that a suitor who engaged in his own reprehensible conduct in the course of [ a ] transaction at issue must be denied equitab le relief

. . . . ” RBC Cap. Mkts., LLC v. Jervis , 129 A.3d 816 , 875

– 76 (Del. 2015) ( internal quotation marks and citation omitted ). “Ultimately, the doctrine is about public policy, and the Court has the broad discretion to refuse relief if [a party] can establish that [the other party] does not meet a very basic though inexact standard: ‘where the litigant ’ s own acts offend the very sense of equity to which he appeals.’” Universal Enter

. Gp., L.P. v. Duncan Petro

. Corp. , 2014 WL 1760023, at *7 (Del. Ch. Apr. 29, 2014) (quoting Merck & Co., Inc. v. SmithKline Beecham Pharm. Co. , 1999 WL 669354, at *4 5 (Del. Ch. Aug. 5, 1999) ).

45 The L andlord stated in its Pennsylvania Court of Common Pleas Complaint that it is owed $30,937.33 in outstanding rent through August 2020, and $316,776.63 in accelerated rent. Dkt. 56, Ex. D ¶ 34

.C.A. No. 20 20

- 0 748

- KSJM

April 7 , 202 2 Page 11 of 11
Accordingly, Petitioner’s objections are overruled . T he court adopts the Report in

full

. Sincerely,

/s/ Kathaleen St. Jude McCormick

Kathaleen St. Jude McCormick Chancellor

cc: All counsel of record ( by File & ServeXpress )