In the recent Court of Chancery decision of De Vries v. Del Mar, L.L.C., C.A. No. 9372-ML (June 3, 2015), Master LeGrow granted disclosure of privileged information under the Garner doctrine relating to the settlement of a $3 million loan to Del Mar, LLC (the “Company”), the transfer of the Company’s primary asset – a property located in Baja, Mexico valued at $68.9 million – to the lender in post-settlement negotiations, and potential mismanagement and self-dealing by the managing member of the Company, Baja Management, LLC.
This Final Report issued by Master LeGrow is significant in that the Court held that the plaintiffs demonstrated sufficient “good cause” to compel inspection of privileged books and records of the Company related to the post-settlement events under the Garner doctrine of the Fifth Circuit Court of Appeals, adopted by the Delaware Supreme Court in Wal-Mart Stores v. Indiana Electrical Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014).
The Court found that the plaintiffs adequately demonstrated that the privileged information was essential to their stated purpose, and good cause to support application of the fiduciary duty exception. In evaluating the “good cause” factors under the Garner doctrine, the Court concluded that the plaintiffs had presented a colorable claim of mismanagement (from which the Court could infer a credible basis of wrongdoing), a significant necessity of access and availability to the privileged information, and a narrow basis of inquiry.
The Court also found compelling the fact that the Company had failed to provide annual financial reports to its members over the years, as required by the Company’s operating agreement, which could have alerted the minority members to the status of their investment and the Property. As a result, the Court concluded plaintiffs’ had met the burden of showing sufficient “good cause” under Garner to invoke the fiduciary duty exception and compel inspection of the post-settlement privileged documents.