IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

GREG de VRIES, an individual, and )

RAYMOND MURRAY, )

an individual, )

)

Plaintiffs, ) C.A. No. 9782-ML

)

v. )

)

)

DIAMANTÉ DEL MAR, L.L.C. )

)

Defendant. )

MASTER‟S REPORT

(Plaintiffs‟ Motion to Compel)

Date Submitted: March 11, 2015

Final Report: June 3, 2015

Stamatios Stamoulis, Esquire and Richard C. Weinblatt, Esquire of STAMOULIS

& WEINBLATT, L.L.C., Wilmington, Delaware; Steven R. Main, Esquire and 

Christopher T. Hill, Esquire of HILL, RUGH, KELLER & MAIN, P.L., Orlando, 

Florida; Attorneys for Plaintiffs.

Joanna J. Cline, Esquire and James G. McMillan, III, Esquire of PEPPER 

HAMILTON, L.L.P, Wilmington, Delaware; OF COUNSEL: Thomas McC. 

Souther, Esquire of PEPPER HAMILTON, L.L.P., New York, New York;

Attorneys for Defendant.

LEGROW, Master 
The operating agreement of a limited liability company requires the 

managing member to prepare and provide to the other members certain quarterly 

and annual reports. In the last five years, the managing member has ignored that 

obligation. During that same period, the managing member caused the company to 

surrender its only asset to satisfy a debt with a balance approximately onetwentieth the value for which the asset previously appraised. The managing 

member had personally guaranteed that debt and the property transfer extinguished 

that personal guarantee.

Shortly after the transfer, two members of the limited liability company 

demanded to inspect the company‟s books and records to value their investment 

and investigate possible mismanagement. At the time, the members were unaware 

the asset had been surrendered. The company granted the inspection, but withheld 

privileged documents. It is undisputed that the company‟s non-privileged 

documents do not provide any information about the events or decision-making 

process that ultimately led to the surrender of the company‟s only asset. The 

plaintiffs therefore moved to compel the production of privileged documents under 

the fiduciary exception to the attorney-client privilege. Because they have shown 

good cause to inspect some of the documents on the privilege log, I recommend 

that the Court grant in part the motion to compel. This is my final report.
2

BACKGROUND 

Diamanté Del Mar, LLC (“DDM”) is a limited liability company organized 

under the laws of Delaware with its principal place of business in Danbury, 

Connecticut.1 DDM was formed in September 2002 along with its wholly-owned 

Mexican subsidiary for the purpose of acquiring the rights to approximately 10,000 

acres of undeveloped land, including three miles of Pacific coastline in El Rosario, 

Baja California, Mexico (the “Property”).

2 DDM‟s managing member is Baja 

Management, LLC (“Baja”).3 Kenneth A. Jowdy (“Jowdy”) serves as Baja‟s 

President and sole managing member and, as such, has control over the day to day 

operations of DDM.4 Baja owns a 93% interest in DDM.

DDM expected to develop the Property in three phases. The initial phase 

would include construction of a hotel and residential properties, as well as roads, a 

golf course, and a club house, and was estimated to cost $65 million.

5 A report 

prepared by KPMG in 2005 indicated DDM was seeking a $20 million loan to 

fund this phase of the development.

6

 Phases two and three would produce 

 

1

Pls.‟ Verified Compl. ¶ 3.

2

Id. at ¶¶ 4, 9.

3

Id. at ¶ 5.

4

Id. 

5

Id., Ex. B (“KPMG Report”) at 4-6.

6

Id.
3

additional recreational facilities such as a spa, tennis complex, fitness centers, a 

winery and vineyards, and an equestrian center.

7

 

The plaintiffs, Greg deVries and Raymond Murray, each invested $500,000

in DDM pursuant to subscription agreements dated April 14, 2004 and March 29, 

2005 respectively, and each received a 0.5% class A membership interest in the 

company.

8 At the time, the plaintiffs were professional ice-hockey players in the 

National Hockey League.9In all, 14 individuals invested $500,000 each in DDM. 

Under DDM‟s operating agreement (the “Operating Agreement”), Baja was 

required to prepare annual and quarterly reports and transmit to DDM‟s nonmanaging members unaudited financial statements and quarterly business reports.10

 

The quarterly business reports never were prepared and the plaintiffs have not 

received any reports or statements since at least 2010.

11

DDM obtained clear title to the Property and permits to complete the 

aforementioned renovations, but the Property remains largely undeveloped.12 An

appraisal performed by KPMG in April 2005 valued the Property at $68.9 million

and reported that DDM had:

 

7

Id. 

8

Id. ¶ 3.

9

Id. at ¶¶ 1-2.

10 Motion to Compel Production of Documents and Challenging Def.‟s Privilege Log 

(Pls.‟ Br.), Ex. C, § 502.

11 Pls.‟ Br. at 3. See also Pls.‟ Br., Ex. D (e-mail from DDM counsel dated November 4, 

2014 confirming that the quarterly business reports do not appear to exist).

12 Id. at ¶ 7.
4

[G]ood, clear, marketable, insurable title to three parcels of land that 

comprised 8,065 of the 9,727 total acres ... [and DDM] expects to 

obtain fee simple title on the three parcels that comprise 1,218 acres 

three to six months after the date of value. This transfer would bring 

the total acreage held in fee simple estate to approximately 9,283 

acres.”13

The report also stated that as of June 2005, the Property had no encumbrances.14

On February 21, 2006, DDM secured – with Jowdy‟s personal guarantee – a 

loan for $3 million from KSI Capital Corp. (“KSI”), a “hard money lender.”

15

 The 

plaintiffs were not aware of the loan or its terms at the time the Property was 

encumbered.

16

 DDM paid its required interest-only payments on a monthly basis

up to and including July 2009.

17

 DDM did not, however, obtain any of the 

additional funds necessary to develop the Property.

18

On June 18, 2009, the plaintiffs, along with DDM‟s twelve other individual 

members, filed suit against Jowdy in the Superior Court of California, alleging 

claims for breach of fiduciary duty and fraud (the “California Action”).19 The 

California Action included allegations that the KSI loan constituted 

 

13 KPMG Report at 4-6.

14 Id. 

15 Def.‟s Opposition to Pls.‟ Mot. to Compel (“Def.‟s Br.”) at 4. Hard money loans carry 

high interest rates and typically are secured by real estate.

16 Pls.‟ Br. at 9.

17 The total amount DDM paid is approximately $1.5 million. 

18 Id. DDM attributes its inability to secure any other financing for the project to the 

global financial crisis. Def.‟s Br. at 4.

19 Def.‟s Br., Ex. A. 
5

mismanagement by Baja and Jowdy. The suit voluntarily was dismissed in 

February 2010.20

In January 2010, KSI sued DDM, the Mexican subsidiaries, and Jowdy in 

the United States District Court for the District of New Jersey, alleging claims for 

breach of contract stemming from the default on the $3 million loan (the “KSI 

Action”).

21 The parties settled the KSI Action on November 15, 2010. The 

plaintiffs were not aware of the KSI Action or its settlement and dismissal. 

Under the settlement agreement, Jowdy and DDM executed confessions of 

judgment for the full amount of the loan and interest.

22 KSI agreed to hold the 

judgments in escrow until April 2011 to allow DDM time to obtain financing to 

satisfy the KSI loan. When DDM did not obtain financing, Baja and Jowdy 

reached a new agreement with KSI. Under that agreement, DDM executed 

documents transferring the Property to KSI in lieu of KSI recording the judgments 

against DDM and Jowdy.23 Those transfer documents were held in escrow for a 

brief time, to allow DDM a final opportunity to satisfy the loan, but DDM 

ultimately surrendered the Property to KSI in September 2013.24 

 

20 Id., Ex. B.

21 Pls.‟ Br., Ex. G; Def.‟s Br. at 6.

22 Pls.‟ Br., Ex. K, L.

23 Id., Ex. M.

24 Id., Ex. E.
6

The plaintiffs were not aware of these agreements or the transfer of the 

Property until they made a demand on May 30, 2014 to inspect DDM‟s books and 

records (the “Demand”). In the Demand, the plaintiffs stated the purpose of their 

inspection was to “conduct a current valuation regarding their respective 

ownership interests in DDM, and to further investigate whether there has been any 

mismanagement of DDM, especially as it relates to the $3,000,000 loan received 

from [KSI] in or around February of 2006.”25 When DDM did not provide the 

requested books and records for inspection, the plaintiffs filed this action on June 

18, 2014, to enforce their inspection rights under the Operating Agreement and 6 

Del. C. § 18-305.

After this action was filed, the parties reached a settlement and DDM 

produced non-privileged books and records responsive to the Demand. When they 

obtained the records, the plaintiffs learned for the first time about the terms of the 

settlement with KSI and the later transfer of the Property. The plaintiffs also 

discovered that on June 27, 2014, DDM canceled its status as an active limited 

liability company.26 According to the plaintiffs, the books and records produced in 

response to the Demand do not answer several key questions, including why the 

litigation was settled, why Jowdy entered into revised agreements with KSI in 

 

25 Pls.‟ Verified Compl., Ex. I, at 3.

26 Pls.‟ Br. at 4-5.
7

2012, or why the Property, which once appraised for more than $60 million in its 

undeveloped state, was transferred to KSI to satisfy a $3 million debt. 

In addition to producing non-privileged books and records, DDM also 

provided the plaintiffs a privilege log listing the documents DDM had withheld or 

redacted on the basis of privilege. The log included 95 documents, 41 of which 

were withheld in their entirety and 54 of which were redacted.27 The documents 

on the privilege log all were created between 2010 and 2012, aside from seven 

redacted documents relating to this litigation. The privileged documents involved 

communications between Jowdy, William Najam (“Najam”), Jowdy‟s brother-inlaw and the former Vice President and General Counsel of DDM, and several 

outside counsel representing DDM and Jowdy on a variety of matters. The 

plaintiffs do not dispute that the documents on the log are privileged. They argue, 

however, that they should be entitled to inspect all those documents under the 

Garner doctrine.

The plaintiffs filed this motion to compel asserting they should be allowed to 

inspect all the documents on the privilege log. The plaintiffs argue that the specter 

of mismanagement and self-dealing hangs over Jowdy‟s agreements with KSI 

because of Jowdy‟s personal guarantee of the loan, the surrender of the Property to 

 

27 Ltr. to the Court from J. Cline, Esq. dated Mar. 11, 2015, Ex. A (hereinafter “Privilege 

Log”). Although there are other versions of the privilege log in the record, this version is 

the most recent and reflects updated descriptions for some of the redacted documents. 

This is the version of the privilege log that I will refer to in this report.
8

satisfy a loan representing less than 5% of the appraised value of the Property, and 

the failure to provide any information to DDM‟s non-managing members since at 

least 2010. The books and records DDM previously produced in response to the 

Demand do not answer those questions, and the plaintiffs contend that the 

documents on the privilege log represent the best – and possibly only – way they 

may investigate possible mismanagement. 

DDM vigorously disputes the plaintiffs‟ right to inspect the privileged 

documents, contending that the plaintiffs have failed to demonstrate both that the 

records are essential to their stated purpose and that there is good cause to apply 

the fiduciary exception to the attorney-client privilege. DDM argues there is no 

evidence of any possible mismanagement of the company, and that the surrender of 

the Property is nothing more than a reflection of the fact that the initial estimates of

the value of the Property and its potential for development did not pan out, due at 

least in part to the financial crisis that began in 2008 and its affect on the 

availability of real estate financing.

During argument, one of the disagreements between the parties involved 

Jowdy‟s personal guarantee of the KSI loan, and whether – despite that guarantee –

Jowdy‟s interests were aligned with the other members of DDM. Specifically, the 

plaintiffs contend that Jowdy had a personal incentive to allow DDM to forfeit the 

property, so KSI would not collect its judgment against Jowdy. DDM argues that 
9

Baja owns 93% of DDM‟s membership interests and therefore was incentivized to 

maximize the value of the Property. The plaintiffs, however, contend the record is 

not clear regarding Baja‟s interest or what it stood to gain in the event of a sale of 

the Property and dissolution of the company. Under DDM‟s operating agreement, 

upon dissolution of DDM and payment of its third party obligations, DDM‟s net 

assets are to be distributed to “all of the Members in accordance with the positive 

balances in their respective Capital Accounts after giving effect to all 

Contributions, distributions and allocations for all periods.”28 According to the 

plaintiffs, the balance in each of the non-managing members‟ capital accounts is 

nearly $500,000 each, while Baja‟s is near zero.

29

 Therefore, if – as DDM argued 

– the Property was not worth anything close to its 2005 appraised value, Baja 

would not have received any of the proceeds from a sale of the property unless the 

net proceeds – after payment of DDM‟s obligations – exceeded $7 million. DDM, 

on the other hand, argues that the plaintiffs misunderstand the operating agreement, 

because upon a sale of the Property the net proceeds first would have gone to repay 

any “net losses” to Baja‟s capital account, after which the members of DDM would 

have received their percentage interest in the proceeds.30 Oddly, although DDM‟s 

 

28 Pls.‟ Br., Ex. C.

29 Ltr. to Court from S. Stamoulis, Esq. dated Mar. 10, 2015.

30 Ltr. to Court from J. Cline, Esq. dated Mar. 11, 2015.
10

argument assumes there were net losses to Baja‟s capital account, there is no 

documentation or explanation of those losses in the record.

The dispute between the parties is relatively narrow. DDM does not contend 

that the plaintiffs are not entitled to inspect books and records or that the plaintiffs 

have not stated a proper purpose for the inspection. The only issue before the 

Court is whether DDM may withhold as privileged the documents listed on the 

privilege log, or whether the “fiduciary exception” to the attorney-client privilege,

first articulated by the Fifth Circuit in Garner v. Wolfinbarger31 and expressly 

adopted by the Delaware Supreme Court, permits the plaintiffs to inspect DDM‟s 

privileged documents. 

I. ANALYSIS 

In Garner, the Fifth Circuit Court of Appeals confirmed that the attorneyclient privilege may be claimed by a corporation, even against its stockholders. 

The court recognized, however, that in suits between the corporation and its 

stockholders involving charges that corporate fiduciaries acted “inimically to 

stockholder interests, protection of those interests as well as those of the 

corporation and of the public require that the availability of the privilege be subject 

to the right of the stockholders to show cause why it should not be invoked in the 

 

31 430 F.2d 1093 (5th Cir. 1970).
11

particular instance.”32 This fiduciary exception attempts to strike a balance 

between the privilege‟s purpose of encouraging open communication between 

counsel and client, and the right of a stockholder to understand what advice was 

given to fiduciaries who are charged with breaching their duties.33 To balance 

those competing interests, the Fifth Circuit in Garner adopted a “good cause” test 

that stockholders must meet to avoid a corporate claim of privilege.34 In its recent 

decision in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Fund 

IBEW, the Delaware Supreme Court for the first time expressly held that the 

Garner exception may apply in both plenary actions and in books and records 

actions, although the exception continues to be one that “is narrow, exacting, and 

intended to be very difficult to satisfy.”35 In a books and records action, this Court 

must first consider whether the records at issue are necessary and essential to the 

stockholder‟s stated purpose for inspection. Only if the Court determines the 

records meet that standard should it consider the “good cause” factors articulated 

 

32 430 F.2d at 1103-04.

33 In re lululemon athletic, inc., 2015 WL 1957196, at *10 (Del. Ch. Apr. 30, 2015).

34 Garner, 430 F.2d at 1104.

35 Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 

A.3d 1264, 1278 (Del. 2014). On several previous occasions, this Court had applied the 

Garner doctrine, including in actions to inspect books and records. See, e.g. Saito v. 

McKesson HBOC, Inc., 2002 WL 31657622 (Del. Ch. Nov. 13, 2002); Grimes v. DSC 

Communications Corp., 724 A.2d 561 (Del. Ch. 1998); Sealy v. Sealy Inc., 1987 WL 

12500 (Del. Ch. Jun. 19, 1987).
12

in Garner.

36

 DDM argues that the books and records listed on the privilege log are 

not necessary and essential to the plaintiffs‟ purpose, and, alternatively, that the 

plaintiffs have not met the burden of showing “good cause” to invade DDM‟s 

privilege. I will address each argument in turn.

A. Certain of the records are necessary and essential to the plaintiffs’ 

purpose.

Determining whether the documents listed on the privilege log are 

“essential” to the plaintiffs‟ stated purpose is a threshold question that must 

precede any inquiry into the application of the Garner good cause analysis.

37 A 

document is “„essential‟ ... if, at a minimum, it addresses the crux of the 

shareholder‟s purpose, and if the essential information the document contains is 

unavailable from any other source.”38 This inquiry depends on the context of a 

particular case.39 It is the plaintiffs‟ burden to demonstrate that a document is 

“essential” to the inspection. 

DDM argues that the plaintiffs have not met that burden because they only 

contend that the privileged documents would provide “additional insight” into the 

events that led to the surrender of the Property. DDM also asserts that the 

plaintiffs‟ stated purpose is to investigate the KSI loan and the encumbrance of the 

 

36 Wal-Mart Stores, Inc., 95 A.3d at 1278; Espinoza v. Hewlett-Packard Co., 32 A.3d 

365, 374 (Del. 2011).

37 Wal-Mart Stores, Inc., 95 A.3d at 1278.

38 Espinoza, 32 A.3d at 371-72.

39 Id. at 372.
13

Property, which occurred in 2006, while the privileged documents were created 

between 2010 and 2014. The plaintiffs, on the other hand, argue that the nonprivileged books and records produced by DDM do not address in any way the 

events that transpired after the settlement of the KSI Action, including the critical 

decisions that led to the loss of the Property and the associated loss of the 

plaintiffs‟ investment. The plaintiffs therefore argue that, unless they are permitted 

to inspect the privileged documents, they will have no way to assess whether 

Jowdy surrendered the Property (a) to advance his personal interests in satisfying 

the KSI debt, (b) because of mismanagement, or (c) as DDM contends, because 

outside factors associated with the economy generally and the real estate market 

particularly left DDM no alternative.

The documents on the privilege log – all of which the plaintiffs contend are 

necessary and essential to their stated purpose – fall within three general 

categories: (1) the documents relating to the KSI Action and its settlement, (2) the 

documents relating to post-settlement events, including the post-settlement 

negotiations and the transfer of the Property, and (3) the documents relating to this 

litigation. In my view, the plaintiffs only have demonstrated that the documents in 

the second category are essential to their stated purpose.

As to the first category, the plaintiffs‟ argument in their briefs exclusively 

focused on the necessity of inspecting documents regarding the events “following 
14

[Jowdy‟s] settlement of the KSI [Action].”40 Although the plaintiffs retreated from 

that position during oral argument, and contended the documents relating to the 

KSI Action also are essential to their purpose, it is not apparent how those records 

address the crux of the plaintiffs‟ purpose, which is to investigate whether Jowdy‟s 

actions were self-interested or otherwise constituted mismanagement. The 

plaintiffs concede that issues regarding the initial KSI loan in 2006 are not the 

focus of their investigation, and have not articulated a single reason why the 

settlement of the KSI Action constituted self-dealing or mismanagement. Put 

another way, the plaintiffs do not contend that the KSI debt was not genuine or that 

Jowdy engaged in misconduct by settling the KSI Action. Jowdy personally 

executed a confession of judgment in connection with the settlement, so there can 

be no contention he used the settlement to remove his personal liability for the KSI 

loan. Plaintiffs have access to the settlement agreement to understand its terms. 

Accordingly, the plaintiffs have not made the threshold showing that the privileged 

 

40 Pls.‟ Reply Br. in Supp. of Mot. to Compel (“Reply Br.” at 4). See also id. at 4 

(privileged documents are the most essential to evaluating whether Jowdy breached his 

duties “following the settlement of the KSI [Action] in November of 2010.”); id. at 5 

(“Plaintiffs are still completely in the dark as to why Jowdy ultimately chose to surrender 

DDM‟s sole asset over a debt that represented less than 5% of its previously appraised 

value.”); id. at 6 (“Frankly, in the absence of any actual evidence to support the 

conclusory assertion in DDM‟s Opposition, there are myriad of other possible reasons 

and explanations regarding why Jowdy ultimately surrendered the [P]roperty.”); id. at 6 

(explaining the plaintiffs do not know what efforts were made to refinance the $3 million 

loan or the pursue alternative options to protect the investments of DDM‟s members).
15

records created before the KSI Action was settled in November 2010 are essential 

to their purpose of investigating mismanagement.

Similarly, the privileged documents relating to this books and records action 

are not essential to the plaintiffs‟ purpose. There is no suggestion on the privilege 

log that those records relate to the issue of what happened after the settlement of 

the KSI Action or why the Property ultimately was surrendered to satisfy the KSI 

loan. Because how DDM chose to defend this action is unrelated to the plaintiffs‟ 

purpose, those records are not essential to the inspection.

In contrast, the plaintiffs have shown that the privileged documents created 

after the settlement of the KSI Action, other than those specifically related to this 

litigation, are essential to the inspection and in fact may be the only records that 

address the issue of what occurred after the settlement and why the Property was 

surrendered. Tellingly, DDM does not argue that the plaintiffs have access to this 

information from non-privileged documents. Notwithstanding the obligation to 

create and disseminate to DDM‟s members quarterly business reports, which likely 

would have kept the plaintiffs apprised in near-real time of the KSI Action and the 

issues regarding the KSI loan, DDM concedes that those reports were not provided 

or even prepared. The plaintiffs therefore have no other way to determine what 

efforts Baja or Jowdy undertook to save the members‟ investment, or whether 

Jowdy‟s interest in extinguishing his personal guarantee may have factored into the 
16

decision to surrender the Property, which extinguished the value of the plaintiffs‟ 

interest in DDM.

DDM argues, however, that the plaintiffs have no legitimate complaint 

regarding Jowdy‟s potential conflict of interest, because Jowdy‟s interest in 

preserving Baja‟s stake in DDM would have substantially outweighed his interest 

in avoiding his obligations under the guarantee. This argument assumes too much 

based on the record before me. DDM argues without a sufficient record that a sale 

of the Property and dissolution of the company would result in a substantial 

payment to Baja based on its percentage ownership and losses to its capital 

account. DDM‟s argument, however, depends on its contention that there were net 

losses to Baja‟s capital account, a “fact” for which DDM provided no support. 

Given the posture of this case and the limited showing the plaintiffs must make to 

permit inspection, it is at least possible that Jowdy‟s interest in extinguishing his 

personal liability would outweigh the value of preserving Baja‟s interests in DDM. 

In so concluding, it also is significant that Jowdy took these actions without 

apprising DDM‟s members about them. This prolonged secrecy over a period of 

years lends credence to the plaintiffs‟ concerns about mismanagement. As 

explained below in connection with the “colorable claim” factor of the good cause 

analysis, I do not believe it is proper in an inspection action to weigh the strength 

of the plaintiffs‟ claims of mismanagement against other possible explanations for 
17

the conduct, particularly because of the informational divide that separates the 

parties at this procedural stage. 

Finally, DDM also argues that investigation of the post-settlement events 

and the ultimate surrender of the Property exceeds the scope of the purpose 

plaintiffs stated in the Demand. This game of “gotcha” comes with ill grace. 

Having effectively eliminated the informational rights of DDM‟s non-controlling 

members by failing to provide the regular updates required under the Operating 

Agreement, DDM now attempts to take advantage of that informational gap by 

criticizing the plaintiffs for failing to be more specific in their stated purpose. The 

plaintiffs were unaware when they made their Demand that the Property had been 

surrendered to satisfy the KSI loan. In my view, they should not be required to 

make a second demand to more specifically state an intent to investigate those 

actions, when their stated purpose of investigating possible mismanagement 

relating to the KSI loan and the encumbrance of the Property fairly may be read to 

include an investigation into how the loan and encumbrance ultimately caused

DDM to surrender its only asset. 

B. The plaintiffs have shown good cause to inspect the post-settlement 

privileged books and records.

When the Delaware Supreme Court expressly adopted the Garner doctrine, 

it also adopted the factors identified in Garner as contributing to the analysis of 
18

whether a stockholder has shown “good cause” to examine privileged documents. 

The factors identified in Garner include:

the number of shareholders and the percentage of stock they represent; 

the bona fides of the shareholders; the nature of the shareholders' 

claim and whether it is obviously colorable; the apparent necessity or 

desirability of the shareholders having the information and the 

availability of it from other sources; whether, if the shareholders' 

claim is of wrongful action by the corporation, it is of action criminal, 

or illegal but not criminal, or of doubtful legality; whether the 

communication is of advice concerning the litigation itself; the extent 

to which the communication is identified versus the extent to which 

the shareholders are blindly fishing; the risk of revelation of trade 

secrets or other information in whose confidentiality the corporation 

has an interest for independent reasons.41

Of those factors, this Court historically has given the least weight to the percentage 

of a stockholder‟s ownership, reasoning that the “ownership factor” only will come 

into play when no other factor supports good cause.42 In contrast, the most 

important factors in the analysis often are the nature of the claim and whether it is 

obviously colorable, the apparent necessity or desirability of the stockholder 

having the information and the availability of it from other sources, and the extent 

to which the communication is identified as opposed to whether the stockholders 

are fishing blindly.

43

 

41 Wal-Mart Stores, Inc., 95 A.3d at 1276 n.32 (quoting Garner v. Wolfingarger, 430 

F.2d 1093, 1104 (5th Cir. 1970)).

42 Saito v. McKesson HBOC, Inc., 2002 WL 31657622, at *13 (Del. Ch. Nov. 13, 2002). 

43 Sealy Mattress Co. of New Jersey, Inc. v. Sealy Inc., 1987 WL 12500 (Del. Ch. Jun. 19, 

1987). See also In re lululemon athletic, inc., 2015 WL 1957196 (Del. Ch. Apr. 30, 

2015); Grimes v. DSC Communications Corp., 724 A.2d 561, 570 (Del. Ch. 1998).
19

Of the eight factors identified in Garner as relevant to the good cause 

analysis, I view the first two factors (percentage of ownership and the “bona fides” 

of the stockholders) and the eighth factor (risk of revelation of trade secrets or 

other independently confidential information) as irrelevant to the analysis in this 

case. With respect to the remaining five factors, I believe all the factors are neutral 

or favor application of the fiduciary exception for the post-settlement privileged 

documents, other than those documents related to this litigation.

First, in an inspection action, the “colorable claim” factor considers whether 

the stockholder has stated an “obviously colorable” claim that justifies inspection. 

In Wal-Mart, the Supreme Court concluded the stockholder had stated an 

“obviously colorable” claim for bribery; in lululemon this Court considered 

whether the stockholder had stated an obviously colorable Brophy claim or claim 

for mismanagement. In my view, the consideration of whether the claim is 

obviously colorable must take into account the procedural posture and the 

relatively low showing necessary in an inspection action, which only requires a 

stockholder to state a “credible basis” from which the Court may infer possible 

mismanagement or wrongdoing.44 Here, the plaintiffs have shown that DDM and 

 

44 In re lululemon athletic, inc., 2015 WL 1957196, at * 11 & n.75; Saito, 2002 WL 

31657622, at *13 (“plaintiff‟s purpose is to recoup any investment loss that may have 

been the result of breaches of fiduciary duty. Plaintiff seeks books and records to 

determine if there was wrongdoing involved with the merger, which is a colorable 

claim.”)
20

Jowdy ignored the obligation under the Operating Agreement to provide quarterly 

and annual reports to the members, effectively leaving the plaintiffs in the dark for 

years while the KSI loan went unpaid and the company‟s only asset ultimately was 

surrendered to satisfy the loan. The balance on the loan was less than 5% of the 

value for which the Property appraised several years before it was surrendered, and 

the transfer of the Property had the effect of extinguishing a personal guarantee

Jowdy made on the loan. Although DDM has articulated plausible alternative 

explanations for these events, the question of whether the plaintiffs have stated a 

“colorable” claim should not turn on whether the facts might ultimately 

demonstrate the absence of wrongdoing.45 Rather, the plaintiffs have stated a 

credible basis from which the Court may infer possible mismanagement or 

wrongdoing, the plaintiffs have inspected non-privileged documents and have not 

found anything addressing the issues of what occurred after settlement that 

prompted Jowdy to surrender the Property, and it would be unfair on that record to 

require a more detailed showing of colorability.

The fourth factor, regarding the necessity of the plaintiffs‟ access and the 

availability of this information from another source, is addressed at length in the 

previous section. Suffice to say it weighs in favor of granting the plaintiffs access 

to the privileged documents. The fifth and sixth factors neither favor nor disfavor 

 

45 See Khanna v. Covad Communications Group, Inc., 2004 WL 187274, at *6 (Del. Ch. 

Jan. 23, 2004).
21

granting the plaintiffs leave to invade DDM‟s privilege. Although the wrongful 

conduct alleged by the plaintiffs likely was not criminal, plaintiffs do contend that 

Jowdy acted in a manner inconsistent with his fiduciary obligations to DDM‟s 

members. Likewise, although the plaintiffs‟ motion to compel sought advice 

concerning this litigation, I already concluded those records are not necessary and 

essential to the stated purpose. 

Finally, I do not believe inspecting the limited subset of documents on the 

privilege log that I concluded are necessary and essential – i.e., those created after 

settlement of the KSI Action and not related to this litigation – would amount to a 

fishing expedition by the plaintiffs. Although the plaintiffs ideally would be able 

to further limit their inquiry to those communications specifically addressing the 

post-settlement negotiations and the surrender of the Property, the descriptions on 

DDM‟s privilege log do not allow the plaintiffs to more accurately pinpoint the 

documents they seek.46 Nothing in the record allows the plaintiffs to more

narrowly tailor their inquiry, but the records they seek fall within a limited number

of documents and production will not be overly burdensome or require additional

searches by the company.

 

46 The log obliquely describes the documents at issue as relating to the “transfer of 

ownership of property with attorney comments,” “legal advice re negotiations with KSI,” 

or similar descriptions. See Privilege Log, Entry Nos. 22-39 and redactions from Aug. 

2011 through 2012. Although these are not facially inadequate descriptions, they also do 

not lend themselves to a more targeted application of the Garner exception.
22

In sum, I conclude that the third, fourth, and seventh factors of the Garner

analysis support allowing the plaintiffs to inspect the privileged documents, while 

the other factors either are irrelevant to the inquiry or are neutral as between the 

parties‟ positions. I therefore conclude the plaintiffs have met their burden of 

showing good cause to invoke the fiduciary exception to DDM‟s attorney-client 

privilege for those particular documents.

CONCLUSION

For the foregoing reasons, I recommend that the Court grant in part the 

plaintiffs‟ motion to compel and order DDM to allow the plaintiffs to inspect the 

documents identified on the privilege log and created after the settlement of the 

KSI Action, excluding those documents created in connection with this litigation. 

This is my final report and exceptions may be taken in accordance with Court of 

Chancery Rule 144.

/s/ Abigail M. LeGrow

Master in Chancery