Court of Chancery Appoints Receiver To Remedy Breach of Duty
Kevin McGovern, et. al. v. General Holding, Inc., et. al., C.A. No. 1296-N (Del. Ch. June 2, 2006).
In this action to recover for the diversion of partnership property, the Court of Chancery fashioned a unique remedy by ordering that the partnership be sold by a receiver so as to realize the special value of its technology.
Evan Koslow was the genius behind KX Industries, L.P. For years he had worked with his brothers and then, in the words of the court, he got greedy. He transferred valuable technology to an entity that he controlled to the exclusion of his partners. When they found out, they sued and the Court of Chancery concluded that Evan breached his fiduciary duty in several ways and tried to cover it up.
As a remedy, the Court reversed the technology transfer back to KX and then ordered the appointment of a receiver to sell KX and barred Evan from bidding. Even worse for Evan, the Court held he had to give back the attorney fees he had been advanced during the litigation and KX had to pay his opponents their fees.
This result means that unlike many fiduciaries who simply are ordered to give back what they wrongfully acquired, Evan lost more than he benefitted by his breach of duty.