Delaware Chancery Court orders inspection and copying of general ledger but denies counsel fees

Steven D. Goldberg, Esq. Wilmington, DE
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In a decision dated July 28, 2009, VC Parsons addressed a claim by the plaintiff, a member of two Delaware LLC’s, for the right to inspect and copy  each company’s general ledger. He also addressed whether she was entitled to a award of counsel fees. Mickman v. AIP, LLC

The company agreement of each company provided:

“Upon request, the Members and their designated representatives shall have access to all books and records of the Company at all reasonable times, provided that written notice is given to the Company at least (1) one day prior to requesting such access.”

The Delaware Act, §18-305, titled “Access to and confidentiality of information; records,” sets out rules for permitting a member or manager access to company records upon a “reasonable demand for any purpose reasonably related to the member’s interest as a member of the limited liability company”. The Court commences its analysis by noting that “the basic approach of the [LLC] Act is to provide members with broad discretion in drafting the agreement and to furnish default provisions when the members’ agreement is silent”. The Court determined that the language quoted form the LLC agreement was intended by the parties to substitute for the default provisions of §18-305.

In determining whether the right to “access to all books and records” includes the right to make copies of the general register, the Vice Chancellor noted that the phrase from the agreement “commonly denotes a grant of broad inspection rights”. In his analysis he looked to the DGCL (§220) and its case law in concluding that the language in the agreement includes the general ledger and the right to make copies. ([T]he right to access and inspect books and records typically includes the right to copies of those books and records… even though the agreement did not expressly provide a right to make copies.]

The defendant resisted the application in part because the plaintiff did not include the general ledger in her demand.  The Court held:

“The demand requirement, however, exists under the relevant statute, 6 Del. C.  §18-305, not the operating agreements. The only requirement under the operating agreements is that members give at least one day written notice of a request to access documents.”

As the Court determined that the plaintiff had the right to inspect and copy the general ledger under agreement “I need not address her additional arguments for inspection rights under §18-305 or Defendants’ opposition to those arguments”.  Certainly the inspection rights under §18-305 was determined by the Court to be a “default” provision which the parties had replaces with the language in the agreement.

After affirming that Delaware follows the “American Rule” “under which a prevailing party generally is expected to pay its own attorneys’ fees and costs” the Vice Chancellor stated that there are exceptions to that rule and that the Plaintiff was relying on an exception that the court could award fees to a “prevailing claimant if the loosing party acted in bad faith in opposing relief being sought in the lawsuit.” That is “if defendant’s conduct forces the plaintiff to file suit to ‘secure a clearly defined and established right'”.

In this case the defendant initially opposed the plaintiff’s claim that she was a member, even though she was listed as a member on the K-1. For the purpose of the motion the defendant stipulated that she was a member. The Court found that there was a reasonable dispute which militated against the award. Given that the defendant listed the plaintiff as a member on the K-1 it is difficult on the record presented in the decision to understand the Court’s holding.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

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