Court Opinion

ID: 4231740
Source: CourtListenerOpinion
Date Created: 2017-12-22 18:07:07.91024+00
Date Added: 2024-06-11T14:15:56.604663
License: Public Domain

COURT OF CHANCERY
                                                  OF THE
                                         STATE OF DELAWARE

TAMIKA R. MONTGOMERY-REEVES                                             New Castle County Courthouse
          VICE CHANCELLOR                                               500 N. King Street, Suite 11400
                                                                       Wilmington, Delaware 19801-3734

                                 Date Submitted: September 29, 2017
                                  Date Decided: December 22, 2017

          Joanne P. Pinckney, Esquire                 Jason C. Powell, Esquire
          Seton C. Mangine, Esquire                   The Powell Firm, LLC
          Pinckney, Weidinger, Urban                  1201 North Orange Street, Suite 500
                & Joyce LLC                           Wilmington, DE 19899
          3711 Kennett Pike, Suite 210
          Greenville, DE 19807

                RE:   Aloha Power Company, LLC v. Regenesis Power, LLC
                      Civil Action No. 12697-VCMR

      Dear Counsel:

                This post-trial Letter Opinion resolves the plaintiff’s action to compel

      inspection or production of certain books and records. For the reasons that follow,

      the plaintiff is entitled to some, but not all, of the books and records it demands.

      I.        BACKGROUND
                The facts stated herein reflect my findings based on the parties’ stipulations,

      forty-two documentary exhibits, and the testimony of one live witness during trial

      on August 3, 2017. I grant the evidence the weight and credibility that I find it

      deserves.1

      1
                Citations to testimony presented at trial are in the form “Tr. # (X)” with “X”
                representing the surname of the speaker, if not clear from the text. After being
                identified initially, individuals are referenced herein by their surnames without
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 2 of 14

     Plaintiff Aloha Power Company, LLC (“Aloha”) is a Delaware limited

liability company founded in May 2006 by Dennis Marini.2 Defendant Regenesis

Power, LLC (“Regenesis” or the “Company”) is a Delaware limited liability

company founded in May 2006.3 Aloha is a member of the Company.4

     Aloha seeks inspection of the Company’s books and records under the

Company’s operating agreement (the “Operating Agreement”)5 and 6 Del. C. § 18-

305 of the Delaware Limited Liability Company Act.6 On September 24, 2015 and

December 7, 2015, Aloha sent letters to Regenesis demanding inspection of the

     regard to formal titles such as “Dr.” I intend no disrespect. Exhibits are cited as
     “JX #,” and facts drawn from the parties’ Joint Pre-Trial Stipulation and Order are
     cited as “PTO ¶ #.” Unless otherwise indicated, citations to the parties’ briefs are
     to post-trial briefs.
2
     PTO ¶ 1.
3
     PTO ¶ 4.
4
     PTO ¶ 31.
5
     The Operating Agreement was executed on June 1, 2006, and amended on October
     1, 2006, and April 30, 2007. PTO ¶¶ 8, 10-11; JX 5, 5-A, 5-A.2.
6
     While I rely on the language of the Operating Agreement to determine Aloha’s
     demands for the Company’s books and records, the Operating Agreement closely
     tracks the language of 6 Del. C. § 18-305, and both parties cite to case law
     interpreting the statute; thus, I consider, at times, case law interpretations of 6 Del.
C. § 18-305.
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 3 of 14

Company’s books and records. On October 7, 2016, Aloha filed its Verified

Amended Complaint for Inspection of Books and Records (the “Complaint”).

II.   ANALYSIS
      Aloha seeks a host of books and records under the Operating Agreement.7

The Operating Agreement requires the Company to produce and send certain books

and records to members without the need for any demand, while other documents

under the Operating Agreement require members to show a proper purpose for

inspection. I address these two categories separately.

      A.     Books and Records that Require No Demand for Inspection
      Aloha seeks to inspect certain books and records that require no demand for

inspection under four provisions of the Operating Agreement. First, Aloha seeks

copies of the Company’s balance sheet, income statement, and statement of changes

in financial position from 2011 to 2017. Section 8.3.1 of the Operating Agreement

provides:

             The Governing Members shall cause the Company to
             cause financial statements prepared in accordance with
             generally accepted accounting principles to be sent to each
             of the Members not later than ninety (90) days (or such
             other period as the Governing Members shall select) after
             the close of the Fiscal Year. The report shall contain a

7
      Capitalized terms not otherwise defined herein are defined under Article I of the
      Operating Agreement. JX 5 at 1.
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 4 of 14

             balance sheet as of the end of the Fiscal Year and an
             income statement and statement of changes in financial
             position for the Fiscal Year. Such financial statements
             shall be accompanied by the report thereon, of the
             independent accountants engaged by the Company.8

Section 8.3.1 requires production of these documents without the need for a demand.

Thus, Aloha is entitled to inspect the books and records listed in Section 8.3.1 of the

Operating Agreement from 2011 to 2017.

      Second, Aloha seeks the information that is necessary for Aloha to complete

its federal and state income tax or information returns and a copy of the Company’s

federal, state, and local income tax or information returns from 2011 to 2017.

Section 8.3.2 provides:

             The Governing Members shall cause the Company to
             cause to be prepared at least annually, at Company
             expense, information necessary for the preparation of the
             Member’s federal and state income tax returns. The
             Governing Members shall send or cause to be sent to each
             Member within ninety (90) days (or such other period as
             the Governing Members shall select) after the end of each
             taxable year such information as is necessary to complete
             federal and state income tax or information returns, and a
             copy of the Company’s federal, state, and local income tax
             or information returns for that year. On or before
             November 15 of each year, the Governing Members shall
             provide each Member with the following: (i) a statement
             showing each Member’s Capital Account as of the
             immediately preceding October 31; (ii) an estimate of each

8
      Id. at 35.
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 5 of 14

             Member’s taxable income for the current Fiscal Year; and
             (iii) each Member’s share of allocated non-recourse debt.9

Section 8.3.2 requires production of these documents without the need for a demand.

Thus, Aloha is entitled to inspect the books and records listed in Section 8.3.2 of the

Operating Agreement from 2011 to 2017 that have not already been provided. The

Company shall certify that such documents are complete and accurate.10

      Third, Aloha seeks minutes of all meetings of the members as described in

Section 5.3.11 The amendment to Section 5.3 of the Operating Agreement provides

that “[t]he Governing Members or their designee shall prepare and distribute to all

9
      Id. at 35-36.
10
      On May 3, 2017, Regenesis provided Aloha with copies of the K-1s for the years
      2010-2015, but Aloha questions whether the 2015 K-1 is complete “because it
      consists of only one page, whereas prior years contained multi-page K-1s.” PTO
      13.
11
      JX 5 at 14 (“At any time, and from time to time, the Governing Members may, but
      shall not be required to, call meetings of the Members. Written notice of any such
      meeting shall be given to all Members not less than five (5) days nor more than
      forty-five (45) days prior to the date of such meeting. Each meeting of the Members
      shall be conducted by the Governing Members or any designee(s) thereof. Each
      Member may authorize any other Person (whether or not such other Person is a
      Member) to act for it or on its behalf on all matters in which the Member is entitled
      to participate. Each proxy must be signed by the Member or such Member’s
      attorney-in-fact. All other provisions governing, or otherwise relating to, the
      holding of meetings of the Members, shall from time to time be established in the
      sole discretion of the Governing Members.”).
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 6 of 14

Members minutes of all meetings.”12 Section 5.3 requires production of such

minutes without the need for a demand. Thus, Aloha is entitled to inspect the

minutes of the meetings of the members called by governing members pursuant to

Section 5.3 from 2011 to 2017.

      Fourth and finally, Aloha seeks copies of any powers of attorney pursuant to

which the Operating Agreement or any amendments thereto have been executed.

Section 8.2.4 states that the “Governing Members shall promptly furnish to a

Member a copy of any amendment to the . . . [Operating] Agreement executed by

the Governing Members pursuant to a power of attorney from the Member.” 13 On

May 3, 2017, Regenesis provided Aloha copies of the Operating Agreement and its

two amendments,14 but the Company provided no copies of any related powers of

attorney. Section 8.2.4 requires production of these documents without the need for

a demand. Thus, Aloha is entitled to copies of any related powers of attorney under

Section 8.2.4 of the Operating Agreement.

12
      JX 5A at 2 (“Section 5.3, Meetings, is amended by adding the following sentence
      to the end thereof, ‘The Governing Members or their designee shall prepare and
      distribute to all Members minutes of all meetings.’”).
13
      JX 5 at 35.
14
      PTO ¶ 29.
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 7 of 14

      B.     Books and Records that Require a Proper Purpose for Inspection
      Similar to 6 Del. C. § 18-305(a), Section 8.2 of the Operating Agreement

permits Aloha to access certain books and records “for purposes reasonably related

to the interest” of Aloha as a member of the Company.15                “Once a member

demonstrates that its primary purpose is proper, any secondary purpose, whether

proper or improper, is irrelevant.”16 “Any number of purposes may be proper,

depending on the context of a particular case, but a stockholder’s purpose must not

be adverse to the company, unrelated to a legitimate interest of the stockholder, or

intended to harass the corporation.”17 And a stockholder’s entitlement to inspection

“is not open-ended; it is restricted to inspection of the books and records needed to

15
      JX 5 at 35. See Somerville S Tr. v. USV P’rs, LLC, 2002 WL 1832830, at *5 (Del.
      Ch. Aug. 2, 2002) (“The case law interpreting Section 18-305 holds that for
      inspection relief to be granted, the plaintiff must first establish by a preponderance
      of the evidence the existence of a ‘proper purpose’ for inspection. A proper purpose
      is one that is ‘reasonably related to such person’s interest’ as a member, limited
      partner or stockholder.”) (citations omitted).
16
      Somerville, 2002 WL 1832830, at *5.
17
      Bizzari v. Suburban Waste Servs., Inc., 2016 WL 4540292, at *5 (Del. Ch. Aug. 30,
      2016) (citations omitted); see Somerville, 2002 WL 1832830, at *5 n.4 (“Because
      of a lack of reported decisions in the LLC context, the Court may look to cases
      interpreting similar Delaware statutes concerning corporations and partnerships.”)
      (citing Bond Purchase, L.L.C. v. Patriot Tax Credit Props., L.P., 746 A.2d 842, 851
      (Del. Ch. 1999)).
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 8 of 14

perform the task. Accordingly, inspection is limited to those documents that are

necessary, essential, and sufficient for the shareholders’ purpose.”18

      In order for Aloha to inspect the books and records that require a proper

purpose under Section 8 of the Operating Agreement, Aloha alleges a host of proper

purposes, which I divide into three categories: (1) to value its membership interest;

(2) to understand the dilution of its membership interest; and (3) to investigate

mismanagement.19

      Regenesis argues that Aloha is barred from inspecting any books and records.

Regenesis insists that none of Aloha’s purported proper purposes reflect its actual

purpose, which Regenesis claims is to harass the Company.20 Regenesis’s primary

evidence in support of its argument is a 2009 lawsuit between the parties in

California, in which Regenesis prevailed. While it is apparent that the parties have

mutual hostility between them, the evidence at trial did not show that Aloha’s sole

purpose is to harass the Company. Therefore, Aloha is not barred from inspecting

books and records upon a showing of a proper purpose.

18
      BBC Acq. Corp. v. Durr-Fillauer Med., Inc., 623 A.2d 85, 88 (Del. Ch. 1992)
      (citations omitted).
19
      Compl. ¶¶ 15-17.
20
      Def.’s Opening Br. 9.
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 9 of 14

      To assess the value of Aloha’s membership interest in Regenesis, Aloha seeks

copies of the operating statements and general ledgers of the Company, if any, for

the six most recent fiscal years under Section 8.1(f) of the Operating Agreement.

Although “[v]aluing one’s ownership interest is a proper purpose for seeking books

and records,”21 “the burden of proof is always on the party seeking inspection to

establish that each category of the books and records requested is essential and

sufficient to [that party’s] stated purpose.”22 Here, Aloha makes no attempt to

explain why the books and records under Section 8.3.1—the Company’s financial

statements, including a balance sheet, income statement, and statement of changes

in financial position for the fiscal years 2011 to 2017—are insufficient to satisfy

Aloha’s stated purposes; nor does Aloha explain why the Company’s operating

statements and general ledgers are necessary for its purposes. Thus, I deny Aloha

access to the Company’s operating statements and general ledgers.

      Next, Aloha seeks under Section 8.1(a) “a current list of the full name and last

known business or residence address of each Member and Economic Interest Owner

21
      Sanders v. Ohmite Hldgs., LLC, 17 A.3d 1186, 1193 (Del. Ch. 2011) (citing
      Somerville, 2002 WL 1832830, at *8).
22
      Id. at 1194 (citing Thomas & Betts Corp. v. Leviton Mfg. Co., 681 A.2d 1026, 1035
      (Del. 1996)).
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 10 of 14

set forth in alphabetical order, together with the Capital Contributions, Capital

Account, Number of Units and Percentage Interest of each Member and Economic

Interest Owner”23 in order to understand the dilution of its membership interest in

Regenesis since 2011. Regenesis’s only response is that any purpose relating to

Aloha’s dilution is improper because it was the subject of a 2009 lawsuit between

the parties in California. But Regenesis makes no attempt to explain why the

California litigation—which ended in 2011—would bar inspection of documents

related to events that took place after the resolution of that litigation. As such, Aloha

is entitled to the books and records under Section 8.1(a) of the Operating Agreement

from 2011 to 2017 to understand the dilution of its membership interest after 2011.24

      Aloha demands copies of “the Company’s books and records as they relate to

the internal affairs of the Company for at least the current and past four Fiscal Years”

under Section 8.1(g) of the Operating Agreement.25 Although Aloha does not

specifically explain why books and records relating to the Company’s internal

affairs—which seems extremely broad and ambiguous—are necessary to fulfill any

23
      JX 5 at 34.
24
      See Sanders, 17 A.3d at 1193 (determining legitimacy of the dilution of member’s
      interest is a proper purpose).
25
      JX 5 at 35.
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 11 of 14

of Aloha’s proposed proper purposes,26 it appears that Aloha seeks these documents

to allege mismanagement or wrongdoing.

      The precise allegations of mismanagement or wrongdoing are unclear, but

Marini testified that he needs “to find out what’s going on with the company, [and]

the internal structure of the company”27 because there were decreases in the capital

account, new entities appeared on various K-1s, and the Company may have ceased

operations (which came to light after Aloha filed the Complaint).28 As this Court

has routinely held, “[a] mere statement of a purpose to investigate possible general

mismanagement, without more, will not entitle a shareholder to broad [books and

records] inspection relief.”29 Aloha “must present some credible basis from which

the court can infer that waste or mismanagement may have occurred.”30 “That

‘threshold may be satisfied by a credible showing, through documents, logic,

26
      Aloha’s demand for books and records under Section 8.1(g) could be denied on this
      basis alone.
27
      Tr. 21.
28
      Neither party provided any evidence that the Company has dissolved or filed for
      bankruptcy.
29
      Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 122 (Del. 2006) (citing
      Helmsman Mgmt. Servs., Inc. v. A & S Consultants, Inc., 525 A.2d 160, 166 (Del.
      Ch. 1987)).
30
      Thomas & Betts Corp., 681 A.2d at 1031.
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 12 of 14

testimony or otherwise, that there are legitimate issues of wrongdoing.’”31 Neither

the proposed documentary evidence nor Aloha’s testimony convinces me that Aloha

has presented some credible basis to infer mismanagement or wrongdoing. Thus, I

deny Aloha’s demand to inspect the books and records relating to the internal affairs

of the Company under Section 8.1(g) of the Operating Agreement.

      C.     Attorney Fees Award
      Aloha seeks to recover attorney fees for this action.32 The parties’ briefings

with respect to this issue are unhelpful. Fortunately, however, Delaware case law

provides some guidance. Delaware courts generally apply the American Rule,33 but

“where the parties have determined the allocation of fees by private ordering,” like

in an LLC’s operating agreement,34 “departure from this general rule and deference

31
      In re Plains All Am. Pipeline, 2017 WL 6016570, at *2 (Del. Ch. Aug. 8, 2017)
      (quoting Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 568 (Del.
      1997)).
32
      Compl. ¶ 28.
33
      Under the American Rule, “each party is obligated to pay its own attorneys’ fees
      regardless of the outcome.” W. Willow-Bay Ct., LLC v. Robino-Bay Ct. Plaza, LLC,
      2009 WL 458779, at *8 (Del. Ch. Feb. 23, 2009).
34
      Limited liability company agreements are “creatures of contract, which should be
      construed like other contracts.” Mickman v. Am. Int’l Processing, L.L.C., 2009 WL
2244608, at *2 (Del. Ch. July 28, 2009); 6 Del. C. § 18-1101(b). “Such agreements
      operate to displace otherwise applicable default provisions in Delaware’s Limited
      Liability Company Act.” RED Capital Inv. L.P. v. RED Parent LLC, 2016 WL
612772, at *2 (Del. Ch. Feb. 11, 2016); 6 Del. C. § 18-305(a). The interpretation of
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 13 of 14

to their agreement are warranted. Absent any qualifying language that fees are to be

awarded claim-by-claim or on some other partial basis, a contractual provision

entitling the prevailing party to fees will usually be applied in an all-or-nothing

manner.”35

      Aloha seeks an award of attorneys’ fees under Section 11.18 of the Operating

Agreement. Section 11.18 states:

             In the event that any dispute between the Company and the
             Members or among the Members should result in litigation
             or arbitration, the prevailing party in such dispute shall be
             entitled to recover from the other party all reasonable
             actual fees, costs and expenses of enforcing any right of
             the prevailing party, including without limitation,
             reasonable actual attorneys’ fees and expenses.36

As shown above, Aloha is the prevailing party in this action. Section 11.18 contains

no “qualifying language that fees are to be awarded claim-by-claim or on some other

      an LLC agreement begins with the language of the agreement. Arbor Place, L.P. v.
      Encore Opportunity Fund, L.L.C., 2002 WL 205681, at *3 (Del. Ch. Jan. 29, 2002).
35
      W. Willow-Bay Ct., LLC, 2009 WL 458779, at *8; see also Mahani v. Edix Media
      Gp., Inc., 935 A.2d 242, 245 (Del. 2007); Choupak v. Rivkin, 2015 WL 1589610, at
      *20 (Del. Ch. Apr. 6, 2015), aff’d, 129 A.3d 232 (Del. 2015); Aveta Inc. v. Bengoa,
      2010 WL 3221823, at *6 (Del. Ch. Aug. 13, 2010); Comrie v. Enterasys Networks,
      Inc., 2004 WL 936505, at *2 (Del. Ch. Apr. 27, 2004).
36
      JX 5 at 44.
Aloha Power Co., LLC v. Regenesis Power, LLC
C.A. No. 12697-VCMR
December 22, 2017
Page 14 of 14

partial basis.”37 Thus, Aloha is entitled to all “reasonable actual attorneys’ fees and

expenses.”38

III.   CONCLUSION
       For the aforementioned reasons, Aloha is entitled to its reasonable attorneys’

fees under Section 11.18 and to books and records from 2011 to 2017 under Sections

5.3, 8.2.4, 8.3.1, 8.3.2, and 8.1(a) of the Operating Agreement. Counsel shall confer

and submit an implementing form of order consistent with this ruling.

       IT IS SO ORDERED.

                                              Sincerely,

                                              /s/Tamika Montgomery-Reeves

                                              Vice Chancellor

TMR/jp

37
       W. Willow-Bay Ct., LLC, 2009 WL 458779, at *8.
38
       JX 5 at 44.