Thomas J. Scaramellino v. Arencibia Holdco, LLC

• Court: Court of Chancery of Delaware
• Decided: March 31, 2025
• Docket: C.A. No. 2024-1174-BWD
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE BONNIE W. DAVID COURT OF CHANCERY COURTHOUSE VICE CHANCELLOR 34 THE CIRCLE GEORGETOWN, DE 19947

Date Submitted: March 7, 2025 Date Decided: March 31, 2025

Joseph L. Christensen, Esquire Nicholas J. Rohrer, Esquire Christensen Law LLC Lakshmi A. Muthu, Esquire 1201 North Market Street Jason W. Rigby, Esquire Suite 1404 Young Conaway Stargatt & Taylor, LLP Wilmington, DE 19801 1000 North King Street Wilmington, DE 19801

RE: Thomas J. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD

Dear Counsel:

In this books and records action, Thomas J. Scaramellino (“Plaintiff”) seeks

an order compelling Arencibia Holdco, LLC (“Arencibia” or the “Company”) to

produce formal and informal materials under the Company’s unitholders’ agreement

and Section 18-305 of the Delaware Limited Liability Company Act (“LLC Act”).

This letter opinion concludes, post-trial, that the informal materials sought are not

“reasonably appropriate to monitor and manage [Plaintiff’s] ownership interests in

the Company” or otherwise “reasonably request[ed].” It further concludes that,

having failed to satisfy statutory form-and-manner requirements by attaching a

power of attorney to a demand served by counsel, Plaintiff is not entitled to books

and records under Section 18-305 of the LLC Act. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 2 of 13 I. BACKGROUND1

Arencibia is a Delaware limited liability company that “finances, builds,

installs and operates large bulk gas recycling systems that are usually designed to

recycle industrial gas.”2 Plaintiff owns 831 “Class B” units of the Company, which,

at the time this action was filed, comprised five percent of the Company’s units.3

Beginning in 2020, Plaintiff served as a member of Arencibia’s board of directors

(the “Board”) and as the Company’s Senior Vice President of Sales and Business

Development, overseeing commercial functions including sales, marketing, and

information technology.4

The Operating Agreement of Arencibia Holdco, LLC dated February 11, 2022

provides that, “[o]ther than reports and information set forth in Section 21 of the

Unitholders’ Agreement, Class B and Class C Members shall not be entitled to

inspect or copy any Company documents . . . .”5 Section 21 of the Unitholders’

1 The facts herein are drawn from the parties’ pre-trial order (cited as “PTS ¶ __”), joint trial exhibits (cited as “JX __”), and argument presented at a one-day paper trial held on March 7, 2025. The trial transcript is cited as “Tr. __.” 2 PTS ¶¶ 5–6; JX 53 § 2.3. 3 PTS ¶¶ 3–4. 4 Id. ¶ 7. 5 JX 53 § 7.3. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 3 of 13 Agreement of Arencibia Holdco, LLC dated as of February 11, 2022 (the

“Unitholders’ Agreement”) states that:

For so long as any Unitholder owns at least five percent (5%) of the then-outstanding Units, such Unitholder shall be entitled to receive regular and suitable business (e.g. sales, marketing and technology), financial and other information reasonably appropriate to monitor and manage its ownership interests in the Company and such other information as it may reasonably request from time to time. The Company shall provide such information to each such Unitholder as promptly as practicable upon it becoming known and available to the Company, but in any event within ten (10) days after it is known and available to the Company. Such information will include the following:

(i) notification in writing of any litigation or governmental proceeding in which the Company is involved and which might, if determined adversely, materially and adversely affect the Company;

(ii) notification in writing of the existence of any default under any material agreement or instrument to which the Company is a party or by which any of their assets are bound;

(iii) copies of all reports prepared for or delivered to the management of the Company by its or their accountants; and

(iv) upon request, any other routinely collected financial or other information available to management of the Company.6

Arencibia invoices its customers using a complex framework that calculates

(among other things) the amount of industrial gas recycled through the Company’s

6 JX 54 § 21. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 4 of 13 systems.7 Arencibia contracts with its customers to recycle gas at an efficiency

threshold that, if not met, entitles customers to a discount.8 Beginning in early 2023,

Plaintiff undertook an approximately eighteen-month investigation into alleged

customer invoicing anomalies and billing fraud, purportedly committed at the

direction of Arencibia’s Chief Executive Officer, Brent Frissora.9 Plaintiff contends

that, through his investigation, he learned that Frissora had directed manual

adjustments to invoices in order to “falsify the recovery efficiency . . . to ensure the

Company always appeared to meet [its] [e]fficiency [g]uarantee[.]”10 Plaintiff

further contends that his investigation revealed at least seven other “overbilling

tactic[s]” and “manual loopholes” that enabled Arencibia to improperly manipulate

data in a way that “maximizes billing while minimizing risk.”11

According to Plaintiff, after he attempted to disclose anomalies and was

prevented from interacting with the Company’s auditor,12 Plaintiff “continued to dig

deeper” and “ramped up his investigation in earnest[,]” “reviewing the code base

7 See Pl.’s Opening Pre-Trial Br. [hereinafter POB] 6–18, Dkt. 55; id. 53–55. 8 Id. 6, 48. 9 Id. 53–55. 10 Id. 49, 54. 11 See id. 19–42 (describing in detail the purported “tactics” and “loopholes” Plaintiff uncovered through his investigation). 12 Id. 2, 20–21. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 5 of 13 with a more fine-toothed comb . . . .”13 Plaintiff contends that when he “raised

the[se] issue[s] with Frissora, made clear to Frissora that his billing fraud was a

violation of law, and further that [Plaintiff] would not participate in it,” Plaintiff was

terminated from his positions at the Company.14 Within days of his termination,

Plaintiff had prepared a ninety-two-page derivative complaint laying out the findings

of his investigation.15

On September 30, 2024, Plaintiff, through counsel, sent Frissora a copy of a

demand to inspect Arencibia’s books and records.16 On October 7, Arencibia

responded by letter, notifying Plaintiff that the Board had formed a special

committee to oversee an internal investigation into Plaintiff’s allegations.17

One week later, on October 14, Plaintiff, through counsel, served a fifty-nine-

page Demand to Inspect Books and Records of the Company (the “Demand”), for

the stated purposes of investigating “(i) fraudulent and unlawful conduct on the part

of management; (ii) potential breaches of fiduciary duty by members of the . . .

13 Id. 53–54. 14 Id. 55. Arencibia denies this, asserting that Plaintiff was terminated due to “unprofessional” and “inappropriate” conduct. See Def.’s Corrected Pre-Trial Answering Br. [hereinafter DAB] 16, Dkt. 58. 15 See JX 144. 16 See JX 147. 17 See JX 148. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 6 of 13 [Board] and (iii) whether to bring a lawsuit or take other appropriate action.”18 The

Demand was not accompanied by a power of attorney. The Demand seeks the

following nine categories of documents:

1. All Board-level materials concerning the audit function and financial oversight of the Company;

2. All documents and communications (including without limitation e-mail, and messaging platforms including text, Slack, Signal) concerning the calculation of invoices;

3. All documents and communications (including without limitation e-mail, and messaging platforms including text, Slack, Signal) concerning customer invoices, including all final and draft correspondence or materials transmitted to the Company’s customers;

4. All documents and communications (including without limitation e-mail, and messaging platforms including text, Slack, Signal) concerning the Company’s annual financial audit, including all final and draft correspondence or materials transmitted to the Company’s Auditor;

5. All documents and communications (including without limitation e-mail, and messaging platforms including text, Slack, Signal) concerning the Company’s Creditor or Prospective Creditors, including all final and draft correspondence or materials transmitted to the Company’s Creditor or Prospective Creditors;

6. All contracts with customers;

7. All software code, repositories, change records and supporting files and documentation concerning the calculation of customer invoices;

18 JX 147 at 2. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 7 of 13

8. All compliance, financial controls, accounting procedures, policy documents and records concerning the calculation of customer invoices;

9. Any materials created, modified, or provided to the Board or any committee thereof concerning the independence or non- independence of any director, including any disclosure questionnaires and any books and records relating to the appointment of directors to serve on any committee of the Board.19

Arencibia agreed to produce formal Board-level materials only, subject to a

confidentiality agreement. On November 15, Plaintiff initiated this action through

the filing of a Verified Complaint for Inspection of Books and Records.20 The Court

held a one-day paper trial on March 7, 2025.

II. ANALYSIS

Plaintiff seeks books and records under Section 21 of the Unitholders’

Agreement and Section 18-305 of the LLC Act.

A. Plaintiff’s Requests For Informal Materials Under The Unitholders’ Agreement Are Not Reasonable.

Plaintiff first seeks books and records under Section 21 of the Unitholders’

Agreement. Section 21 entitles a unitholder “to receive regular and suitable business

(e.g. sales, marketing and technology), financial and other information reasonably

19 JX 153 at 1, 58–59. 20 Verified Compl. for Inspection of Books and Records, Dkt. 1. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 8 of 13 appropriate to monitor and manage its ownership interests in the Company and such

other information as it may reasonably request from time to time.”21 The parties

agree that the Unitholders’ Agreement does not impose form-and-manner

requirements or require a proper purpose for seeking records. The sole issue is

whether the Demand seeks “information reasonably appropriate to monitor and

manage [Plaintiff’s] ownership interests in the Company” or “other information . . .

reasonably request[ed,]” including “routinely collected financial or other

information available to management of the Company.”22

To satisfy the Demand, Arencibia has agreed to produce, subject to a

confidentiality order,23 all formal Board-level materials “concerning Arencibia’s

audit function and financial oversight of the Company” and “practices related to

customer invoices and its current written policy and procedure documents related to

21 JX 54 § 21. 22 Id. 23 Plaintiff does not “dispute . . . that a confidentiality agreement is appropriate” and “has no objection to entering into a customary confidentiality agreement.” Pl.’ Reply Pre-Trial Br. [hereinafter PRB] 33, Dkt. 66. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 9 of 13 finance, accounting, and customer invoice functions.”24 The parties are directed to

meet and confer on a form of confidentiality order to govern that production.25

The remaining categories of information requested in the Demand are not

“reasonably appropriate to monitor and manage [Plaintiff’s] ownership interests in

the Company” or otherwise “reasonably request[ed].” The reasonableness of

Plaintiff’s information requests “must be evaluated in the context of the unique

nature of the facts and circumstances” the parties face. NAMA Hldgs., LLC v. World

Mkt. Ctr. Venture, LLC, 948 A.2d 411, 420 (Del. Ch. 2007), aff’d, 945 A.2d 594

(Del. 2008). While a director and employee of Arencibia, Plaintiff personally

undertook a months-long investigation, compiling the results in a ninety-page draft

derivative complaint and fifty-nine-page Demand.26 Those documents, in

combination with Plaintiff’s pleadings, briefing, and presentation at trial, reflect

Plaintiff’s detailed knowledge of the wrongdoing alleged. Plaintiff has failed to

24 DAB 47–52; Tr. 51–52. Arencibia also represents that documents responsive to Request 9 do not exist. See Tr. 52; DAB 53 n. 12. 25 Arencibia separately argues that Plaintiff is not entitled to books and records under Section 21 of the Unitholders’ Agreement because in December 2024, Plaintiff’s membership interests were diluted to approximately 4.8%. See JX 181; JX 54 § 21(a) (conferring information rights “[f]or so long as any Unitholder owns at least five percent (5%) of the then-outstanding Units”); DAB 30. At trial, however, Arencibia confirmed its willingness to produce the formal Board-level materials identified herein notwithstanding that argument. See Tr. 46. This letter opinion therefore does not resolve that argument. 26 See JX 144; JX 147; see also, e.g., PAB 6–53; Tr. 4–19; id. 21–22. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 10 of 13 demonstrate that his requests for additional informal materials—including email,

text, Slack, and Signal communications, as well as contracts and software code—are

reasonable in light of the extensive information already in his possession. Instead,

without explaining what is missing, he offers only conclusory assertions that

informal materials are “necessary . . . to gain a complete picture into,” and “expose

the full scope of,” the purported wrongdoing.27 That rhetoric is insufficient to meet

Plaintiff’s burden. Nor has Plaintiff shown that the informal materials he seeks are

“routinely collected” or “available to management,” or otherwise fall within the

categories enumerated in Section 21.28 Plaintiff’s demand for those informal

materials is, therefore, denied.

27 Aff. of Thomas J. Scaramellino ¶ 9, Dkt. 55; see also POB 66 (asserting in conclusory fashion that it is “fair and proper” to order the production of informal materials); PRB 25 (conceding that “[i]n most circumstances,” the informal material sought in the Demand “would be far too granular[,]” but arguing that here, Plaintiff “has provided an extensive basis to suspect that Frissora is committing widespread misconduct”); Tr. 22 (acknowledging that Plaintiff “knows a lot more than maybe any other books and records demander I have seen” and is “as intimately familiar as anybody probably,” but asserting “he has not come close to uncovering what Mr. Frissora alluded to with the five or six different ways”). 28 Plaintiff asserts, without citation, that his own “affidavit and testimony establish that the information is available to management of the Company and routinely collected[,]” but they do not. PRB 18. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 11 of 13 B. The Demand Does Not Satisfy The Statutory Form-And-Manner Requirements.

Plaintiff separately seeks books and records under Section 18-305 of the LLC

Act. Even assuming Section 21 of the Unitholders’ Agreement did not modify

Plaintiff’s inspection rights,29 Plaintiff is not entitled to books and records under

Section 18-305 because the Demand does not satisfy the statutory form-and-manner

requirements.

Section 18-305’s “form-and-manner requirements are not onerous, but they

are strictly enforced.” Floreani v. FloSports, Inc., 2024 WL 4637689, at *2 (Del.

Ch. Oct. 31, 2024). The statute requires that, “[i]n every instance where an attorney

. . . shall be the person who seeks the right to obtain the information described in

subsection (a) of this section, the demand shall be accompanied by a power of

attorney or such other writing which authorizes the attorney . . . to so act on behalf

of the member.” 6 Del. C. § 18-305(e). A demand “sent by counsel but not

accompanied by a power of attorney” is “clearly deficient.” Floreani, 2024 WL

29 But see Apogee Invs., Inc. v. Summit Equities LLC, 2017 WL 4269013, at *2 n.12 (Del. Ch. Sept. 22, 2017) (“Section 18-305 governs books and records demand[s] unless an LLC agreement limits or otherwise modifies inspection rights.”); see also Leistner v. Red Mud Enters. LLC, C.A. No. 2023-0503-SEM, at 26–27 (Del. Ch. Sept. 7, 2023) (TRANSCRIPT) (explaining that the Court “must first look to the LLC Agreement to determine the inspection rights afforded to members of the Company; only if the LLC Agreement is silent or incorporates the LLC Act will [the Court] turn back to the LLC Act to determine the rights afforded to members”). Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 12 of 13 4637689, at *2; see also Mattes v. Checkers Drive-In Rests., Inc., 2000 WL 1800126,

at *1–2 (Del. Ch. Nov. 15, 2000) (dismissing a books and records action where a

demand sent by counsel was not accompanied by a power of attorney).

Plaintiff contends that, although counsel served the Demand, a power of

attorney was not required because Plaintiff, not counsel, “is the person who can

properly interpret and digest the information.”30 That argument fails under the plain

language of Section 18-305, which is not limited to instances where an attorney will

review the books and records sought in the demand. Section 18-305 requires a power

of attorney “[i]n every instance where an attorney . . . shall be the person who seeks

the right to obtain the information” in the demand. 6 Del. C. § 18-305 (emphasis

added). That makes sense. Like the requirement for a beneficial owner to attach

proof of stock ownership, requiring counsel sending a demand to attach a power of

attorney protects an entity from responding to unauthorized demands. See Cent.

Laborers Pension Fund v. News Corp., 45 A.3d 139, 144–46 (Del. 2012) (explaining

that the statutory form-and-manner requirements are intended to “protect[]

corporations from improper demands” (quoting Seinfeld v. Verizon Commc’ns Inc.,

873 A.2d 316, 317–18 (Del. Ch. 2005))).

30 POB 59. Scaramellino v. Arencibia Holdco, LLC, C.A. No. 2024-1174-BWD March 31, 2025 Page 13 of 13 Plaintiff also suggests that “[i]f the Court nevertheless finds a power of

attorney necessary, [Plaintiff] is willing to provide one . . . .”31 That argument also

fails because “a defective demand’s procedural deficiencies cannot be cured by later

submissions.” Martinez v. GPB Cap. Hldgs., LLC, 2020 WL 3054001, at *8 (Del.

Ch. June 9, 2020). Because the Demand did not comply with the statutory form-

and-manner requirements when it was served, Plaintiff’s request to inspect books

and records under Section 18-305 is denied.

III. CONCLUSION

Judgment will be entered as described above. The parties are directed to

submit a proposed form of order to implement this letter opinion.

Sincerely,

/s/ Bonnie W. David

Bonnie W. David Vice Chancellor

cc: All counsel of record (by File & ServeXpress)

31 Id.