Court Opinion

ID: 4585428
Source: CourtListenerOpinion
Date Created: 2020-11-12 15:03:00.357885+00
Date Added: 2024-06-11T13:46:50.698066
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

    MICHAEL FERRIS,                               )
                                                  )
         Plaintiff,                               )
                                                  )
         v.                                       ) C.A. No. 2018-0112-MTZ
                                                  )
    FERRIS PROPERTIES, INC.,                      )
    LEXELL, LLC, EMERLEX, LLC,                    )
    and LIGHTHOUSE                                )
    MANAGEMENT GROUP, LLC,                        )
                                                  )
         Defendants.                              )

                      ORDER GRANTING PLAINTIFF’S
              MOTION FOR SUMMARY JUDGMENT AND DENYING
              DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT

        AND NOW, this 12th day of November 2020, upon consideration of the cross-

motions for summary judgment filed by Plaintiff and Defendants, as briefed, it is

hereby ORDERED that:

        1.     Plaintiff’s Motion is GRANTED, and Defendants’ Motion is

DENIED.

        2.     Defendants have agreed to provide Plaintiff with access to the requested

books and records and have therefore waived any argument that the records Plaintiff

seeks are not necessary and essential to his proper purposes.1                 Accordingly,

1
  See Docket Item (“D.I.”) 47 at 1 (“[T]he parties have narrowed the issues such that the
only issue to be resolved between them is the manner in which Defendants’ books and
records are made available to the Plaintiff for inspection, which the parties agree is a legal

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Defendants are compelled to produce the specific documents Plaintiff requested in

his demand letter sent pursuant to 8 Del. C. § 220 and 6 Del. C. § 18-305.

         3.      The sole issue remaining for decision on the parties’ cross-motions is

“the manner in which documents shall be produced.”2 With respect to Defendants’

paper files, the parties agree that the Court has “latitude” to determine the proper

process for inspection.3 They dispute which party must bear the burden of locating

the specific documents Plaintiff has requested. Defendants wish to avoid the burden

of locating the specific records Plaintiff seeks within their paper files. Defendants

believe Plaintiff should inspect all of their paper files, in the form of 65 bankers’

boxes, at Defendants’ attorneys’ offices, and copy the responsive documents at his

expense. Plaintiff asks the Court to compel Defendants to produce the specific

documents sought.

issue.”); D.I. 50 at 1–2 (“[T]he parties have agreed that there are no material issues of fact
remaining and so requested that the remaining controversy concerning the manner in which
documents shall be produced . . . .”); D.I. 53 at 18 (“Here, Plaintiff seeks documents from
the Defendants that are not related to his stated purposes in this action, yet Defendants are
still willing to allow such documents to be reviewed by Plaintiff.”). And to the extent
Defendants argue that Plaintiff seeks documents that are not “relevant,” I do not address
that contention, as Defendants have waived such a claim by conceding “to allow Plaintiff
to see and copy any corporate documents he wishes.” See D.I. 53 at 16.
2
  D.I. 50 at 1–2; see also D.I. 53 at 11 (“What remains in dispute is whether Defendants
are obligated to search their own files for the remaining documents requested by the
Plaintiff or whether Defendants may, as the plain language of both statutes state, make their
business records available for inspection as same are maintained by Defendants, and allow
Plaintiff to copy those records he seeks.”).
3
    D.I. 53 at 19.

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         4.     Defendant Ferris Properties, Inc. is a corporation subject to 8 Del. C.

§ 220. Where a stockholder has met the governing requirements, Section 220(b)

enshrines the stockholder’s “right during the usual hours for business to inspect for

any proper purpose, and to make copies and extracts from” the corporation’s books

and records.4 This statutory right originated from stockholders’ common law right

to examine the corporation’s books and records and make extracts from them. The

stockholder’s right is consistently phrased as a right of “inspection,” not a right of

“production.”

         5.     The remaining Defendants are limited liability companies, and so

Plaintiff seeks inspection of their books and records under 6 Del. C. § 18-305. That

statute empowers Plaintiff, as a member of those Defendants, “to obtain from the

limited liability company from time to time upon reasonable demand” certain

information, and permits Defendants or their managers to “set forth in a limited

liability company agreement” or “otherwise establish[]” “standards governing what

information and documents are to be furnished at what time and location and at

whose expense.”

         6.     No limited liability company agreement has been furnished to the

Court;5 no such standards are evident. “Nor is there any evidence that [Defendants’]

4
    8 Del. C. § 220(b).
5
 See D.I. 53, Ex. 1; D.I. 54, Exs. A–E; D.I. 55, Ex. 1; D.I. 57, Ex. F. The only agreement
appearing in the record is a “Business Separation Agreement” dated November 20, 2012.

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managers have established any standards to govern a member’s exercise of

inspection rights.”6 “Therefore, the scope of [Plaintiff’s] inspection rights is co-

extensive with Section 18-305 of the LLC Act.”7            In the absence of an LLC

Agreement circumscribing a member’s inspection rights, “Delaware courts have

interpreted Section 18-305 by looking to cases interpreting similar Delaware statutes

concerning corporations.”8 And so here, where “[t]he parties have not drawn any

distinction between the rights [Plaintiff] may enjoy as a stockholder of [Ferris

Properties, Inc.] and the rights he may enjoy as a member of [the other Defendants],”

the Court “will not draw any distinction . . . between [Plaintiff’s] inspection rights

as a stockholder as opposed to his rights as a member.”9 Accordingly, Plaintiff

See D.I. 54, Ex. A. That document does not reference any governing limited liability
company agreements for the non-corporate entity Defendants. See id. And although
Plaintiff requested “[c]opies of the filed-stamped Certificates of Formation/Incorporation
(including any amendments thereto), and bylaws/LLC Agreements (including any
amendments thereto), as applicable,” D.I. 54, Ex. B at Ferris 000111, Defendants did not
submit any such agreements on summary judgment.
6
    Sanders v. Ohmite Hldgs., LLC, 17 A.3d 1186, 1193 (Del. Ch. 2011).
7
Id.
8
 Id. (quoting Somerville S Tr. v. USV P’rs, LLC, 2002 WL 1832830, at *5 n.4 (Del. Ch.
Aug. 2, 2002) (citing cases applying 8 Del. C. § 220, the corporate-law counterpart to
6 Del. C. § 18-305, to interpret Section 18-305)); accord Bizzari v. Suburban Waste Servs.,
Inc., 2016 WL 4540292, at *5 (Del. Ch. Aug. 30, 2016) (“[T]his Court treats Section 220,
and the cases interpreting it, as the corporate analogue to inspection rights under Section
18-305 of the LLC Act.”).
9
    Bizzari, 2016 WL 4540292, at *5.

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enjoys a right of inspection, rather than a right of production, with respect to the

alternative entity Defendants’ books and records.

      7.     The conclusion that Plaintiff enjoys an inspection right does not end the

inquiry. Other principles of law inform the appropriate manner of inspection. First,

the scope of the inspection should be circumscribed with precision and limited to

those documents that are necessary, essential, and sufficient to the stockholder’s

purpose. As the Delaware Supreme Court stated in KT4 Partners LLC v. Palantir

Technologies Inc.,

      Keeping in mind that § 220 inspections are not tantamount to
      comprehensive discovery, the Court of Chancery must tailor its order
      for inspection to cover only those books and records that are essential
      and sufficient to the stockholder’s stated purpose. In other words, the
      court must give the petitioner everything that is essential, but stop at
      what is sufficient. In other decisions, we have referred to the set of
      books and records that are essential and sufficient as those that are
      “necessary.” To wit, in Saito v. McKesson HBOC, Inc., we wrote that
      a stockholder with a proper purpose “should be given access to all of
      the documents in the corporation’s possession, custody or control, that
      are necessary to satisfy that proper purpose.”10

10
  203 A.3d 738, 751–52 (Del. 2019) (emphasis added) (footnotes and internal quotation
marks omitted) (quoting Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563,
570 (Del. 1997), and then quoting Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d
1026, 1035 (Del. 1996), and Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 775 (Del.
Ch. 2016), abrogated on other grounds by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del.
2019), and also quoting Saito v. McKesson HBOC, Inc., 806 A.2d 113, 114–15 (Del.
2002)).

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Further, contrary to Defendants’ position,11 “[Section 220 proceedings and Rule 34

discovery] are not the same and should not be confused. A Section 220 proceeding

should result in an order circumscribed with rifled precision. Rule 34 production

orders may often be broader in keeping with the scope of discovery under Court of

Chancery Rule 26(b).”12

         8.      Accordingly, inspection orders must deploy “rifled precision.”13 The

Court’s order must grant Plaintiff “access to all of the documents in the corporation’s

possession, custody or control, that are necessary to satisfy [the plaintiff’s] proper

purpose,”14 “but should stop at the quantum of information that the court deems

sufficient[:]” “the production order must be carefully tailored.”15 And so this Court

has ordered that the defendant “shall produce [books and records] falling within the

categories for which inspection is permitted” “that the Demand requested.”16

11
     See D.I. 53 at 19.
12
  Sec. First Corp., 687 A.2d at 570 (reversing and remanding Court of Chancery’s scope
determination in a books and records case where “[t]he scope of the production which the
Court of Chancery ordered . . . [wa]s more akin to a comprehensive discovery order under
Court of Chancery Rule 34 than a Section 220 order”).
13
  Espinoza v. Hewlett-Packard Co., 32 A.3d 365, 372 (Del. 2011) (“In making that ‘scope
of relief’ determination, our courts must circumscribe orders granting inspection with rifled
precision.” (internal quotation marks omitted) (emphasis in original)).
14
  Lebanon Cty. Empls.’ Ret. Fund v. Amerisourcebergen Corp., 2020 WL 132752, at *24
(Del. Ch. Jan. 13, 2020).
15
  Amalgamated Bank, 132 A.3d at 775 (internal quotation marks omitted) (quoting
Thomas & Betts Corp., 681 A.2d at 1035, and then quoting Sec. First Corp., 687 A.2d at
565).
16
     Amerisourcebergen Corp., 2020 WL 132752, at *24.

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         9.     The second governing principle is found in Section 220(c): “[t]he Court

may, in its discretion, prescribe any limitations or conditions with reference to the

inspection, or award such other or further relief as the Court may deem just and

proper.”17

         10.    Here, Defendants’ proposal to allow Plaintiff to review all of their

records in search of the ones he seeks obviates the requirement that Plaintiff’s

inspection be circumscribed with precision and limited to those documents that are

necessary, essential and sufficient to his purpose.18 Ordering Defendants’ proposed

overproduction would go far beyond the “the quantum of information that the court

deems sufficient”19 and be “more akin to a comprehensive discovery order under

Court of Chancery Rule 34 than a Section 220 order.”20 At bottom, ordering Plaintiff

to sift through dozens of boxes in search of those documents that are necessary and

essential to his stated purpose would make the exercise of his statutory right unduly

burdensome.

17
     8 Del. C. § 220(c).
 See KT4 P’rs LLC, 203 A.3d at 751–52; Amalgamated Bank, 132 A.3d at 775; Sec. First
18

Corp., 687 A.2d at 570; Thomas & Betts Corp., 681 A.2d at 1035.
19
  Amalgamated Bank, 132 A.3d at 775 (internal quotation marks omitted) (quoting
Thomas & Betts Corp., 681 A.2d at 1035).
20
     Sec. First Corp., 687 A.2d at 570.

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         11.     Applying the requirement that my order be tailored with “rifled

precision” to Plaintiff’s right of inspection,21 I conclude that Defendants must

identify those documents responsive to Plaintiff’s requests, but may make those

documents available for Plaintiff’s inspection and copying at Defendants’ counsel’s

office.        In addition to the paper documents, Defendants shall produce the

QuickBooks file they agreed to produce within five (5) business days.22

         IT IS SO ORDERED.

                                                     /s/ Morgan T. Zurn
                                               Vice Chancellor Morgan T. Zurn

21
     Espinoza, 32 A.3d at 372.
22
     See D.I. 53 at 11.

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