IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

SPAY, INC.,

 Plaintiff,

 v.

STACK MEDIA INC. k/n/a JLC2011, 

INC., NICK PALAZZO, P. JEFFREY 

LUCIER TRUST, PETER JOHNSON, 

CHAD ZIMMERMAN, CARL 

MEHLHOPE, JOSH STAPH, 

GRAVITAS SECURITIES, INC.

 Defendants.

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 C.A. No. 2020-0540-JRS

ORDER VACATING DISCOVERY STAY

FOR TARGETED SPOLIATION DISCOVERY

WHEREAS, on October 9, 2020, Defendants, Stack Media Inc. k/n/a 

JCL2011, Inc. and Nick Palazzo (the “Palazzo Defendants”), moved to stay 

discovery (“Motion to Stay Discovery”);

WHEREAS, on October 30, 2020, Plaintiff, SPay, Inc., opposed the Motion 

to Stay Discovery;

WHEREAS, on November 23, 2020, the Court granted the Motion to Stay 

Discovery and entered an order to that effect on December 1, 2020;

WHEREAS, on March 4, 2021, Plaintiff filed a Verified Second Amended 

Complaint (the “Complaint”);
2

WHEREAS, Defendants filed various motions to dismiss the Complaint

(the “Motions to Dismiss”);

WHEREAS, on July 30, 2021, Plaintiff brought a Motion for Finding 

Spoliation and Sanctions (the “Spoliation Motion”);

WHEREAS, on August 30, 2021, the Non-Palazzo Defendants

1

filed an 

Opposition to the Spoliation Motion;

WHEREAS, on August 31, 2021, the Palazzo Defendants filed an Opposition 

to the Spoliation Motion;

WHEREAS, on September 10, 2021, Plaintiff filed a Reply in Support of the 

Spoliation Motion; 

WHEREAS, on September 28, 2021, the Court held oral argument on 

Defendants’ Motions to Dismiss and Plaintiff’s Spoliation Motion; and

WHEREAS, on this date, the Court issued a Memorandum Opinion 

addressing certain issues raised in the Motions to Dismiss that were not dependent 

upon the Court’s disposition of the Spoliation Motion (the “Memorandum 

Opinion”);

1 The Non-Palazzo Defendants include, naturally, all of the Defendants besides the Palazzo 

Defendants—P. Jeffrey Lucier Trust, Peter Johnson, Chad Zimmerman, Carl Mehlhope, 

Josh Staph and Gravitas Securities, Inc. 
3

NOW, THEREFORE, IT IS HEREBY ORDERED this 21st day of 

December, 2021, as follows: 

1. The parties dispute whether Palazzo caused the spoliation and 

destruction of evidence to occur, both as a matter of fact and as a matter of law.

2

Plaintiff asks the Court to make adverse factual inferences against Defendants

because of the alleged spoliation, but Delaware law “require[s] a preliminary finding 

of intentional or reckless destruction of evidence as a predicate to an adverse 

inference [determination].”3 With the factual predicate necessary to make this 

2 See, e.g., SPay, Inc.’s Mot. for Finding of Spoliation and Sanctions (“Spoliation Mot.”) 

(D.I. 154) at 2 (“[O]n the very same day of Palazzo’s termination as SPay’s employee, 

Palazzo instructed a subordinate employee to completely wipe, delete, and destroy the 

entire contents of the stack.com email domain belonging to SPay . . . .”) (emphasis 

omitted); Defs. Stack Media Inc. k/n/a JLC2011, Inc.’s and Nick Palazzo’s Opp’n to Pl.’s 

Mot. for Finding of Spoliation and Sanctions (D.I. 164) at 2 (“Plaintiff cannot establish

spoliation because Mr. Palazzo did not instruct John Matthew Thompson to delete any 

emails . . . . Mr. Palazzo denies telling Mr. Thompson to delete anything, and provides 

corroborating records . . . .”); id. at 8–9 (“Mr. Palazzo had no duty to preserve the stack.com 

emails because he had no reason to believe or expect SPay’s litigation against him was 

imminent . . . . Nor did Mundo Media’s May 2019 demand alert Mr. Palazzo of a potential 

claim against him. Mundo Media never served a claim on Mr. Palazzo personally.”);

SPay, Inc.’s Reply in Supp. of its Mot. for Finding of Spoliation and Sanctions (D.I. 167) 

at 4–5 (“[A]lthough Palazzo’s carefully crafted affidavit states ‘Mundo Media has never 

asserted a claim against me,’ Palazzo ignores the fact that Mundo initially approached him 

directly and sent him a ‘formal demand letter’ and he then engaged in multiple written 

communications with the receiver outside of Plaintiff’s knowledge . . . Palazzo had a 

second independent duty to preserve because he reasonably anticipated this 

litigation . . . .”).

3 Sears, Roebuck & Co. v. Midcap, 893 A.2d 542, 550 (Del. 2006); see also id. at 552

(“An adverse inference [determination] is appropriate where a litigant intentionally or 

recklessly destroys evidence, when it knows that the item in question is relevant to a legal 

dispute or it was otherwise under a legal duty to preserve the item.”). 
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determination in dispute, granting an adverse inference at this stage would be 

premature. 

2. Since this litigation is currently at the motion to dismiss stage, Plaintiff 

argues that if the evidence shows Defendant(s) spoliated evidence, the Court should 

apply the adverse inference against Defendants now as it considers the sufficiency 

of the Complaint’s allegations under Chancery Rule 12(b)(6).

4

 As the parties

acknowledge, whether an adverse inference is justified at the pleading stage presents 

a novel issue.5 That the issue has yet to be decided is not surprising given that a 

plaintiff is already entitled to favorable inferences at the pleading stage,6and rarely 

4 Spoliation Mot. at 3 (“[I]n light of SPay’s recent discovery of the intentional spoliation 

of evidence that would further support SPay’s claims, which was undertaken to the benefit 

of all Defendants, SPay . . . respectfully requests, at minimum, an adverse reference with 

respect to the Court’s consideration of the Motions to Dismiss, to the extent necessary.”) 

(emphasis omitted); id. at 13–14 (“[T]his Court should assess an adverse inference sanction 

against Defendants through the motion to dismiss stage and through trial.”). 

5

In re Xura, Inc., S’holder Litig., 2018 WL 6498677, at *9 n.92 (Del. Ch. Dec. 10, 2018) 

(“Delaware courts have yet to decide whether an adverse inference is available to the 

plaintiff at the pleading stage when responding to a motion to dismiss.”). 

6 See In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) 

(“In deciding a motion to dismiss under Rule 12(b)(6), a trial court must accept as true all 

of the well-pleaded allegations of fact and draw reasonable inferences in the plaintiff’s 

favor.”); id. (“The complaint generally defines the universe of facts that the trial court may 

consider in ruling on a Rule 12(b)(6) motion to dismiss.”); VLIW Tech., LLC v. HewlettPackard Co., 840 A.2d 606, 611 (Del. 2003) (“An allegation, though vague or lacking in 

detail, is nevertheless ‘well-pleaded’ if it puts the opposing party on notice of the claim 

being brought against it.”). 
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can claim (factually) that he was denied access to spoliated evidence that might have 

been useful to him when he prepared his complaint. 

3. This case, however, presents a unique factual circumstance. Plaintiff 

alleges that Defendant(s) destroyed emails that, at the time of the spoliation, 

belonged to Plaintiff and, but for the spoliation, would have been available to 

Plaintiff when it drafted the Complaint.

7

 Under these unique circumstances, I am 

satisfied that an adverse inference at the pleading stage could be justified should the 

facts corroborate Plaintiff’s accusations.8 To allow a defendant to spoliate evidence 

and profit thereby would foster bad policy and violate venerable legal maxims.9

4. Therefore, a decision on the viability of claims and arguments for and 

against dismissal of claims not specifically addressed in the Memorandum Opinion 

is reserved pending the completion of discovery regarding the Spoliation Motion. 

These include:

a. In Count One, whether Plaintiff has well-pled a fraud claim with 

the necessary particularity against Defendants;

7 Spoliation Mot. at 4–5 (“[I]t is undisputed that SPay purchased the rights to the stack.com 

email domain . . . .”); Verified Second Am. Compl. (D.I. 116) ¶¶ 104–05, 181–82, 188–89.

8 See Xura, 2018 WL 6498677, at *9 n.92 (“Some federal courts have held that an adverse 

inference may be drawn at the motion to dismiss stage.”) (collecting cases).

9 See Riggs v. Palmer, 22 N.E. 188, 190 (N.Y. 1889) (“No one shall be permitted to profit 

by his own fraud, or take advantage of his own wrong, or to found any claim upon his own 

iniquity, or to acquire property by his own crime.”).
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b. In Count Two, brought in the alternative to Count One, whether 

Plaintiff has well-pled that Defendants breached the Asset 

Purchase Agreement (“APA”);

c. In Count Three, also brought in the alternative to Count One,

whether Plaintiff has well-pled a breach of contract claim 

relating to the Restrictive Covenant Agreements against 

Defendants;

d. In Count Four, whether Plaintiff has well-pled a claim for 

declaratory judgment; 

e. In Count Five, whether Plaintiff has well-pled a claim for 

breach of contract against Palazzo relating to the Employment 

Agreement;

f. In Count Six, brought in the alternative to Count Five, whether 

Plaintiff has well-pled a breach of fiduciary duty claim against 

Palazzo;

g. In Count Seven, also brought in the alternative to Count Five, 

whether Plaintiff has well-pled an unjust enrichment claim 

against the Palazzo Defendants to the extent Palazzo’s conduct 

was not prohibited by an applicable agreement;

h. In Count Eight, whether Plaintiff has well-pled that Defendants 

breached Section 5.6 of the APA; 

i. In Count Nine, brought in the alternative to Count Eight, 

whether Plaintiff has well-pled conversion against the Palazzo 

Defendants for withholding emails and bank account 

information;

j. In Count Ten, whether Plaintiff has well-pled a breach of the 

APA’s forum selection clause against the Palazzo Defendants

for the Palazzo Defendants’ initiation of allegedly related 

litigation in New York; and

k. In Count Eleven, whether Plaintiff has well-pled a breach of the 

APA’s claim notice provisions against Defendants, including 
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the effect of Plaintiff’s Demand Letter and Defendants’ 

responses to Plaintiff’s allegations of damages.

5. These claims are potentially subject to an adverse inference, should the 

evidence show that Defendant(s) intentionally or recklessly spoliated evidence. 

6. The Order Granting Defendants’ Motion to Stay Discovery (D.I. 74) is 

hereby VACATED. The parties shall commence discovery on the spoliation issue, 

but only on this issue, effective immediately. Upon completion of spoliation 

discovery, the Court will conduct an evidentiary hearing to determine if any or all of 

the Defendants intentionally or recklessly spoliated evidence. At that point, the 

Court will also determine whether an adverse inference is justified in considering 

the Motions to Dismiss. Once this determination is made, the Court will resume its 

consideration of the Motions to Dismiss. 

7. The parties shall confer and submit, on or before January 7, 2022, a 

proposed scheduling order sequencing discovery relating to, and further submission 

of, the Spoliation Motion. 

 /s/ Joseph R. Slights III 

 Vice Chancellor