Cezary Pietrasik v. Kraus Hamdani Aerospace, Inc.

• Court: Court of Chancery of Delaware
• Decided: February 23, 2024
• Docket: C.A. No. 2022-1069-LM
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CEZARY PIETRASIK, ) ) Plaintiff, ) ) v. ) C.A. No. 2022-1069-LM ) KRAUS HAMDANI AEROSPACE, ) INC., ) ) Defendant. )

FINAL REPORT ADDRESSING REMANDED EXCEPTIONS

WHEREAS:

A. Plaintiff Cezary Pietrasik is a stockholder and former employee of

Kraus Hamdani Aerospace, Inc. (the “Company”). 1 Pietrasik served a demand to

inspect books and records pursuant to 8 Del. C. § 220 on the Company on October

17, 2022.

B. On August 4, 2023, I presided over a one-day trial via Zoom and

subsequently delivered a final report (the “Final Report”) recommending denial of

inspection beyond the books and records that the Company had already provided

finding Plaintiff’s primary purpose was pretexual to his stated purpose of

investigating wrongdoing.2 Rather, my findings concluded that Plaintiff’s primary

1 Dkt. 30 (“PTO”) ¶ 1. 2 D. I. 49 (“Final Report”). purpose of inspection was to prepare for his “personal lawsuit” against Fatema

Hamdani.3

C. On August 9, 2023, Pietrasik filed a notice of exceptions from the Final

Report (the “Exceptions”). 4 The Plaintiff challenged two of my findings on

exceptions.5 First, my finding that plaintiff’s purpose was pretextual to an improper

purpose of suing Ms. Hamdani personally; and second, my determination that

pursing personal litigation against Ms. Hamdani was improper under Section 220.6

D. Chancellor McCormick reassigned this action to Vice Chancellor

Fioravanti for the limited purpose of resolving the Plaintiff’s exceptions to the Final

Report.7 Vice Chancellor Fioravanti concluded that he could proceed without

further hearings because the entire trial was conducted via Zoom and was recorded.8

E. When a litigant takes exceptions to a Magistrate’s report, “the Court of

Chancery reviews the [Magistrate’s] findings—both factual and legal—de novo.”9

3 Id. at 11. 4 D. I. 44. 5 Id. 6 Id. 7 D.I. 45. 8 D. I. 58 (“Order Addressing Exceptions”). 9 Hauppauge Digital, Inc. v. Rivest, 300 A.3d 1270 (Del. 2023) (ORDER). 2 F. After having considered the exceptions and having conducted a de novo

review of the record, the Vice Chancellor found that Plaintiff’s primary purpose in

seeking to inspect the Company’s books and records was not an improper purpose.10

The Vice Chancellor granted the Plaintiff’s Exceptions and declined to adopt the

Final Report. He also remanded this case back to me to determine the scope of

Plaintiff’s permitted inspection and the application for attorneys’ fees under the bad

faith exception to the American Rule.11

G. This is my final report limited to determining those issues.

H. Because the Vice Chancellor has determined the Plaintiff has satisfied

the test for proper purpose, the next step is for this Court to determine the scope.

“The scope of [] inspection is a separate issue on which plaintiff bears the burden of

specific justification.” 12 “The Court may, in its discretion, prescribe any limitations

or conditions with reference to the inspection.” 13 When tailoring the production

order, the court must balance the interests of the stockholder and the corporation.14

10 D.I. 58. 11 Id. 12 Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 569 (Del. 1997). 13 Del. Code Ann. tit. 8, § 220 (West). 14 Lebanon Cnty. Employees' Ret. Fund v. Amerisourcebergen Corp., 2020 WL 132752, at *24 (Del. Ch. Jan. 13, 2020), aff'd, 243 A.3d 417 (Del. 2020) (citing Sec. First, 687 A.2d at 569). 3 “The production of records in response to a Section 220 demand is not the equivalent

of discovery in a plenary action.”15

I. “[W]here a § 220 claim is based on alleged corporate wrongdoing. . .

the stockholder should be given enough information to effectively address the

problem. . .”16 “[T]he court must give the petitioner everything that is ‘essential,’

but stop at what is ‘sufficient.’ ”17

J. “The scope of inspection is a fact-specific inquiry, and the court has

broad discretion when conducting it.”18 Furthermore, the plaintiff “bears the burden

of proving that each category of records is essential to accomplishment of the

stockholder’s articulated purpose for the inspection.”19 “Books and records satisfy

this standard ‘if they address the crux of the shareholder's purpose and if that

information ‘is unavailable from another source.’ ”20

15 Sec. First, 687 A.2d at 569. 16 Amerisourcebergen Corp., 2020 WL 132752, at *24 (citing Sec. First, 687 A.2d at 569). 17 Id. 18 Hightower v. SharpSpring, Inc., 2022 WL 3970155, at *8 (Del. Ch. Aug. 31, 2022) (citing NVIDIA Corp. v. City of Westland Police & Fire Ret. Sys., 282 A.3d 1, 26–27 (Del. 2022), as revised (July 25, 2022)). 19 KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 751 (Del. 2019) (internal quotation mark omitted). 20 Id (quoting Wal–Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264, 1271 (Del. 2014)) (internal quotation marks omitted). 4 K. In Amalgamated Bank, Vice Chancellor Laster found that the

stockholders demonstrated a credible basis to suspect breach of fiduciary duty,

ordered inspection of related documents, and conditioned that inspection on the

stockholder “agreeing that the entirety of the company’s production in response to

the Demand is incorporated by reference in any derivative action complaint it files

relating to the subject matter of the demand…” 21 The Vice Chancellor reasoned that

“[i]mposing the condition helps balance [the company’s] rights against those of the

plaintiff by recognizing that the production as a whole should provide the basis for

any follow-on complaint, not just a handful of isolated documents or emails[;]”22

IT IS HEREBY ORDERED, this 23rd day of February 2024, as follows:

1. Vice Chancellor Fioravanti found that Plaintiff’s requested documents

“target[] information which could prove that Hamdani mismanaged the

Company by exposing it to liability as a government contractor and by

misappropriating corporate assets.”23 Thus where there remains a dispute

regarding the scope of production, I am inclined to resolve that dispute by

ordering production of those documents which remain outstanding from

the original demand.

21 Amalgamated Bank, 132 A.3d at 796, abrogated in other part by Tiger v. Boast Apparel, Inc., 214 A.3d 933, 935 (Del. 2019). 22 Id. at 798. 23 VCF Order ⁋10. 5 2. Post-Trial, the following documents remained outstanding to the Demand:

a. The Company’s defenses contracts, including subcontracts, entered

or modified from December 2020 to present;

b. Pitch decks and related materials made or distributed in connection

with any defenses contracts, including subcontracts, entered or

modified from December 2020 to present;

c. Investors decks, presentations, or updates made or distributed from

December 2020 to present;

d. Field performance reports and data on K1000ULE test flights run

from December 2020 to present;

e. Communications logs or similar information related to K1000ULE

test flights run from December 2020 to present;

f. Contracts, purchase orders, and payment records related to any

manufacturer based in or operating from the Czech Republic from

January 2021;

g. Any security clearance applications or related forms, including but

not limited to any Standard Form 328, submitted by the Company

h. Records or all payments made to Ms. Hamdani by the Company

6 i. Records of compensation agreements entered by Ms. Hamdani and

this Company from December 2020 to present;

j. Any subsidiary-level documents responsive to the above;

k. Electronic communications sent or received by Ms. Hamdani from

December 2020 to present concerning any of the above-listed

matters. 24

3. “[T]he 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.” 25 To determine which documents are

necessary and essential to accomplish a proper purpose, recent decisions

from this Court have grouped requests for books and records into three

categories:

a. “Formal Board Materials,” or “board-level documents that formally

evidence the directors’ deliberations and decisions and comprise the

materials that the directors formally received and considered;”

b. “Informal Board Materials,” which “generally will include

communications between directors and the corporation’s officers

24 Pl. PTB at 20-21. KT4 Partners LLC, 203 A.3d at 751–52 (quoting Thomas & Betts Corp. v. Leviton Mfg. 25

Co., 681 A.2d 1026, 1035 (Del. 1996)).

7 and senior employees, such as information distributed to the

directors outside of formal channels, in between formal meetings, or

in connection with other types of board gatherings,” and sometimes

including “emails and other types of communication sent among the

directors themselves;” and

c. “Officer-Level Materials,” which are “communications and

materials that were only shared among or reviewed by officers and

employees.”26

4. Much of this demand, seeks Board Level Materials to which in many

organizations, the corporate secretary maintains a central file for each

board meeting in either paper or electronic form. The demand also

includes requested documents which exceed Board Level Materials, which

request communications and documents limited to the relevant proper

purpose of investigating wrongdoing. Therefore, I recommend the

production of the following requested document categories: 27 a (excluding

26 Hightower, 2022 WL 3970155, at *9 (quoting Lebanon Cnty. Emps.’ Ret. Fund, 2020 WL 132752, at *25). 27 Although Plaintiff’s Demand is numbered and contains subcategories identified by letters, with only certain demands remaining outstanding, I am only referring to the categories of documents identified in Plaintiff’s Post-Trial Brief. Although the Post-Trial Brief identified the documents by bullet points and not numbers or letters, for purposes of clarity, I have identified them by letters in this report.

8 classified documents), b, c, d, e, f (excluding classified documents), g (to

the extent unclassified documents in this category are available), i, and j.

These documents relate to Plaintiff’s purpose to prove that Hamdani

mismanaged the Company by exposing it to liability as a government

contractor and by misappropriating corporate assets.

5. With respect to subcategory “a” as noted above, Plaintiff has credibly

shown that the defense contract itself isn’t typically confidential.28 To the

extent that it is, the Company should produce evidence thereof in

accordance with this order.

6. With respect to subcategory “h”, which corresponds with Plaintiff’s

Demand No. 8, Plaintiff seeks the records of all payments made to Ms.

Hamdani by the Company from December 2020 to present. Given the

Company’s assertion in its Post-Trial briefing that it has “agreed to make

available for inspection its financial statements for fiscal years 2020, 2021,

and 2022,” 29 I am in agreement that the financial statements should

provide Plaintiff with sufficient information on payments made to Ms.

Hamdani from the Company.

28 Pl. PTB at 25. 29 Def. PTB at 34-35. 9 7. With respect to subcategory “k”, Plaintiff’s Demand seeks electronic

communications sent or received by Ms. Hamdani concerning the matters

outlined in the Demand. Plaintiff argues he is entitled to emails because

the board-level materials would be insufficient, and key communications

took place informally. 30 “[T]he court must give the petitioner everything

that is “essential,” but stop at what is “sufficient.”31

Plaintiff’s Pre-Trial Brief explains that key communications took place

informally in “Musketeers 32 meetings,”33 however at trial, Plaintiff failed

to prove that key communications, related to his Demand, took place

during these “Musketeer meetings” and were subsequently discussed over

email. 34 Additionally, Plaintiff fails to meet his burden that the

information in Ms. Hamdani’s emails from December 2020 to the present,

concerning the Demand, is the only method to obtain this information.35

30 Pl. PTB at 12-13. 31 KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 752 (Del. 2019) (quoting Amalgamated Bank,132 A.3d at 775 (“The order should permit access to books and records that are ‘essential’ for the plaintiff to achieve its purpose, but should stop at the quantum of information that the court deems ‘sufficient.’ ” (internal quotation marks omitted)). 32 At trial, Plaintiff testified that the “Musketeers” referred to the Plaintiff, Ms. Hamdani, and Stefan Kraus; Tr. 52:22-24. 33 Pl. PTB at 12-13. 34 Tr. 29:13-32:3. 35 KT4 Partners LLC v. Palantir Techs., Inc., 203 A.3d 738, 753 (Del. 2019). 10 Instead, it appears from the wording in the Post-Trial Brief, that the emails

serve to merely supplement the categories in the Demand and it’s not a

matter of the traditional board level-materials being insufficient.

8. Looking at the issue about potentially classified documents between the

Company and the United States, I find that Defendant has not established

by preponderance of the evidence that the requested information is subject

to any federal security clearance. Nevertheless, this Court lacks authority

to require the Defendant to produce classified documents. Should

Defendant uncover any such document, the Company should submit

supporting documentation thereof within seven (7) calendar days of this

order or immediately upon identification of such relevant document.

9. Neither party requests a limiting confidentiality order here, as such, I do

not impose one. Instead, I condition the entirety of the Company’s

production in response to the Demand as incorporated by reference in any

relative derivative action Plaintiff files relating to the subject matter of the

demand. Like the Vice Chancellor, I aim to “balance [the company’s]

rights against those of the plaintiff by recognizing that the production as a

whole should provide the basis for any follow-on complaint, not just a

handful of isolated documents…”

11 10.With respect to Plaintiff’s request to shift fees, I hereby DENY Plaintiff’s

request. “Delaware courts follow the American Rule that ‘each party is

generally expected to pay its own attorneys’ fees regardless of the outcome

of the litigation.’” 36 An exception exists in equity, however, when a party

litigates in bad faith.37 Given the nature of Plaintiff’s proper purpose, and

the Company’s need to investigate whether it was valid, I don’t find the

Company acted in bad faith in not producing the demanded books and

records, whereby the American Rule on attorneys’ fees would be

disregarded and fees shifted in Plaintiff’s favor. Having originally

disagreed with Plaintiff’s presentation of its suspicion of wrongdoing, I

cannot, in good faith, find the Company acted in bad faith by denying the

demand and proceeding to litigation on the matter.

IT IS SO ORDERED.

/s/ Loren Mitchell Magistrate in Chancery

36 Pettry v. Gilead Scis., Inc., 2020 WL 6870461, at *29 (Del. Ch. Nov. 24, 2020) (quoting Shawe v. Elting, 157 A.3d 142, 149 (Del. 2017)). 37 Rice v. Herrigan-Ferro, 2004 WL 1587563, at *1 (Del. Ch. July 12, 2004). 12