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.

Defendant s. )

) ) ) ) ) ) ) ) ) ) ) ) ) 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, De fendants 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 Defendant s 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 S eptember 28, 2021, the Court held oral argument on

Defendants’ Moti ons to D ismiss 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 21 st day of

December , 2021, as follows:

1. T he parties dispute whether Palazzo caused the spoliation and

destruct ion of evidence to occur , both as a matter of fact and as a matter of law

. 2

Plaintiff ask s the Court to make adverse factual inference s 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. P alazzo 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 M undo 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 reason ably anticipated this litigation

. . . .”).

3 Sears, Roebuck & Co. v. Midcap , 893 A.2d 542, 550 (Del. 2006) ; see also i d. 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.” ).4

determination in dispute, granting an adverse in ference at this stage would be

premature.

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

argues that if the evidence show s Defendant(s) spoliated evidence, the Court should
apply the adverse inference against Defendant s now a s 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, 6 and rarely

4 Spoliation Mot. at 3 (“[I]n light of SPay’s recent discovery of the intentional spoliation of evidence that would further su pport 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 S ee In re Gen

. Motors (Hughes) S’hold er 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 ge nerally 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. Hewlett

Packard Co. , 840 A.2d 606, 611 (Del. 2003) (“An allegation, though vague or lacking in detail, is neverthe less ‘well

- pleaded’ if it puts the opposing party on notice of the claim being brought against it.”).5

can claim (factually) that he was denied access to spoliated evidence that might have
been useful to him when he prepared his c omplaint.

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 whe n 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 , w het her 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. 11 6) ¶¶ 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.”).6 b. In Count Two , brought i n 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 , w hether Plaintiff has well

- pled a claim for declarator y judgment;

e. In Count Five , w hether Plaintiff has well

- pled a claim for breach of contract against Palazzo relating to the Employment Agreement ;

f. In Count Six
, brought i n 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 agree ment ;

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 Y ork; and

k. In Count Eleven , whether Plaintiff has well

- pled a breach of the APA’s claim notice provisions against Defendants , including7 the effect of Plaintiff’s Demand Letter and Defendants’ responses to Plaintiff’s allegations of damages

.
5. The se claims ar e 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 th e 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 spol iated evidence

. At that point, the

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

the M otions to D ismiss . Once this determination is made, the Court will resume its

consideration of the Motions to Dismiss.

7. The partie s 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