FLEISHER DEVELOPMENT v. Home Owners Warranty Corp.

• Decision Date: 08 July 1987
• Docket Number: Civ. A. No. 85-1766.
• Citation: 670 F. Supp. 27
• Parties: FLEISHER DEVELOPMENT CORPORATION, et al., Plaintiffs, v. HOME OWNERS WARRANTY CORPORATION, et al., Defendants.
• Court: U.S. District Court — District of Columbia

670 F. Supp. 27

FLEISHER DEVELOPMENT CORPORATION, et al., Plaintiffs, v. HOME OWNERS WARRANTY CORPORATION, et al., Defendants.

Civ. A. No. 85-1766.

United States District Court, District of Columbia.

July 8, 1987.

William E. Rollow, Arlington, Va., for plaintiffs.

William C. Casano, Washington, D.C., for defendants.

MEMORANDUM

GASCH, Senior District Judge.

I. INTRODUCTION

On October 29, 1986, the Court granted plaintiffs Fleisher Development Corporation, et al., the right to inspect the books and records of defendant Home Warranty Corporation and its subsidiaries, Home Owners Warranty Corporation and Home Owners Warranty Insurance Company.¹ See Fleisher Development Corp. v. Home Owners Warranty Corp., 647 F.Supp. 661, 668 (D.D.C.1986) ("Fleisher II"). Because Fleisher II was brought pursuant to the diversity statute, 28 U.S.C. § 1332, a threshold consideration in the case was a determination of the applicable law. The District of Columbia's choice of law rules required the Court to weigh the governmental policies underlying the law of the District of Columbia and of Delaware. See Williams v. Williams, 390 A.2d 4, 5 (D.C. 1978). Fleisher pressed for the application of the statutory law of the District of Columbia. HWC maintained that the statutory law of Delaware was most appropriate.

Upon consideration of both statutes, the Court found neither applicable to the instant case, since it involves the right of members of a nonstock profit-making mutual to inspect their corporation's books and records. Therefore, the Court held that "resort must be had to the common law." See Fleisher II, supra, 647 F.Supp. at 667. Finding that the courts of the District of Columbia had never passed on the question of a shareholder's or nonstock member's common law right to inspect a corporation's books and records, the Court found that the District of Columbia had little interest in applying its law to this controversy. To the contrary, the Court wrote that

Delaware courts have confronted this question on several occasions. On the basis of governmental interest analysis, Delaware would seem to have a greater interest in the application of its common law. As such, the Court will, wherever possible, rely on that state's rulings. Where the courts of Delaware are silent, the Court will rely on discernible trends in the common law as stated in other jurisdictions.

Id. Neither the plaintiffs nor the defendants questions the propriety of this ruling.

In defining the parameters of Delaware's common law right to inspect a corporation's books and records, the Court relied on a decision of the United States Supreme Court which appeared to state the position of the Delaware judiciary. See Guthrie v. Harkness, 199 U.S. 148, 26 S.Ct. 4, 50 L.Ed. 130 (1905).² In their motion to amend the judgment, the defendants challenge the vitality of this precedent in Delaware. They claim that the decisions of the Delaware courts have more recently established a common law right to inspect a corporation's books and records which is narrower than the one found by the Supreme Court in Guthrie. Furthermore, the defendants maintain that the plaintiffs' request to inspect HWC's books and records failed to satisfy the requirements of the prevailing Delaware common law rule. A review of the cases proffered by the defendants persuades the Court that the Delaware judiciary has revisited the issue under review and has departed from the rule set down by the Supreme Court in Guthrie. Thus, the Court will grant the defendants' motion to amend the Court's judgment, in part, limiting the plaintiffs' access to HWC's books and records to those which address the one proper purpose stated by the plaintiffs.

II. DISCUSSION

Delaware recognizes both a statutory right to inspect a corporation's books and records, Del.Code Ann. tit. 8 § 220 (1983), and a common law right permitting the same. See Miller v. Loft, 34 Del. 538, 156 A. 170, 171 (Del.Super.Ct.1931). The statutory right supplements and does not supplant the common law right to inspect books and records. See, e.g., Henshaw v. American Cement Corp., 252 A.2d 125, 128 (Del.Ch.1969). Cf. Theile v. Cities Service Co., 31 Del. 514, 115 A. 773, 777 (Del. 1922) (common law right to inspect stock ledger not supplanted by statutory provision providing for same). In this case, Delaware's inspection statute does not consider the right of members to inspect mutual corporation's books and records. See Fleisher II, supra, 647 F.Supp. at 665-68. Since statutory law is inoperative, the common law controls. See, e.g., Henshaw, supra, 252 A.2d at 128.

Delaware common law treats petitions to examine a corporation's books and records as applications for a writ of mandamus. See, e.g., Nodana Petroleum Corp. v. State, 50 Del. 76, 123 A.2d 243, 244 (Del. 1956); Miller, supra, 156 A. at 171-72; Brumley, 77 A. at 17. Cf. Guthrie, supra, 199 U.S. at 156, 26 S.Ct. at 6-7. Such a writ will issue only when a court, in its sound discretion, determines that the facts presented justify inspection. See Miller, supra, 156 A. at 172. Cf. Guthrie, supra, 199 U.S. at 156, 26 S.Ct. at 6-7. In exercising this discretion, Delaware courts recognize that a stockholder or member's right to inspect a corporation's books and records is a qualified one. Inspection will be ordered only if a member establishes a proper purpose for the inspection. Nodana Petroleum Corp., supra, 123 A.2d at 246; Miller, supra, 156 A. at 172. Cf. Guthrie, supra, 199 U.S. at 153, 26 S.Ct. at 5. As stated in Fleisher II, "the pivotal question is what constitutes a proper purpose under the common law." Fleisher II, supra, 647 F.Supp. at 668. In its October, 1986, Memorandum, the Court answered this question as follows:

The common law is lenient in its definition of the burden a party requesting inspection of corporate books and records must surmount. Applying the test articulated in Guthrie, the plaintiffs in this case will be entitled to inspect, `though their only object is to ascertain whether their affairs have been properly conducted by the directors or managers.' Guthrie, supra, 199 U.S. at 154-55, 26 S.Ct. at 6. The Supreme Court explained the laxity of this burden as follows:

Such a right is necessary to their shareholders protection. To say that they have the right, but that it can be enforced only when they have ascertained, in some way without the books, that their affairs have been mismanaged, or that their interests are in danger, is practically to deny the right in the majority of cases....

Id. The Guthrie court held it clearly improper to request inspection, `for speculative purposes or to gratify idle curiosity or to aid a blackmailer.' Id. at 156, 26 S.Ct. at 6. In sum, the Supreme Court wrote, the right to inspect should `not be denied to the stockholder who seeks the information for legitimate purposes.' Id.

Id. The stated purpose of Fleisher's request to inspect was, inter alia, to determine whether the mutual company was being prudently managed, particularly with respect to its fiscal affairs. See letter from Thomas A. Paparone (member-builder) to Hamilton H. Boykin (HWC secretary) (April 16, 1985) ("Paparone Letter"). Applying the Guthrie standard to the aforementioned purpose, the Court concluded that the plaintiffs' purpose was a proper one and comported with the Supreme Court's policy of protecting shareholders' interests. Because there was no evidence of bad faith on the part of the plaintiffs, the Court ruled that they were entitled to inspect the books and records of HWC pursuant to the teaching of Guthrie.

In their motion to amend the judgment, the defendants claim that there is one significant distinction between the Guthrie rule and the right to inspect found by the Delaware courts. Under the Supreme Court's formula, there is a presumption that inspection will go forward unless it is "for speculative purposes or to gratify idle curiosity or to aid a blackmailer." Guthrie, supra, 199 U.S. at 156, 26 S.Ct. at 6. To the contrary, Delaware has created a presumption against permitting inspection of a corporation's books and records unless there is a specific dispute between the shareholder or member and the corporation in aid of which examination is necessary. See Annot., 15 A.L.R.2d 11, 21 (1951). Delaware requires a plaintiff to plead this proper purpose with particularity. A plaintiff's failure to be sufficiently specific will result in the dismissal of his request to inspect for failure to make out a prima facie case of proper purpose. See Nodana Petroleum Corp., supra, 123 A.2d at 246; Henshaw, supra, 252 A.2d at 129; Miller, supra, 156 A. at 172; Brumley, supra, 77 A. at 22. Delaware appears to have added this requirement to ensure that an inspection will advance the interests of the corporation and is not a mere "fishing expedition." Nodana Petroleum Corp., supra, 123 A.2d at 246; Miller, supra, 156 A. at 172.

A survey of the relevant Delaware cases is illustrative. Those courts considering the issue have uniformly denied common law inspection of a corporation's books and records where the requisite specificity of pleading is lacking. In Nodana Petroleum Corp., supra, 123 A.2d 243, a mandamus action was commenced to compel inspection of the books and records of the Nodana Petroleum Corporation. In considering whether a proper purpose was alleged, the Court considered two letters transmitted by the inquiring stockholder to the corporation. The first letter stated the stockholder's purpose as follows:

As you know, I am the owner of a substantial interest in the Company and have become concerned that improper transactions might have occurred of which I have no knowledge and which are contrary to my interests as a stockholder. ...

Id. at 245. On the basis of this apprehension, the stockholder sought inspection. The Court noted that this letter had not stated a proper purpose because it was not "sufficiently specific." Id. at 246. A second...