James Rivest v. Hauppauge Digital, Inc.

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
PATRICIA W. GRIFFIN CHANCERY COURTHOUSE
MASTER N CHANCERY 34 The Circle
GEORGETOWN, DELAWARE 19947
Final Report: August 3, 2020
Date Submitted: June 30, 2020
Marcus Montejo, Esquire
Jason W. Rigby, Esquire
Prickett Jones & Elliott, P.A.
1310 King Street, Suite 303
PO Box 1328
Wilmington, DE 19899
Douglas J. Cummings, Jr., Esquire
Kollias Law, LLC
3513 Concord Pike, Suite 330
Wilmington, DE 19803
RE: James Rivest v. Hauppauge Digital, Inc.
C.A. No. 2019-0848-PWG
Dear Counsel:
Pending before me is a Section 220 action filed by a stockholder demanding
financial information from an unregistered public corporation. The corporation
failed to answer and, following a court procedure adopted during the pandemic in
which defendants submit written responses to default judgments rather than appear
at a hearing, default judgment was entered against the corporation. Hours later, the
corporation’s late response to the motion for default judgment was received by the
court in the mail. The corporation seeks to vacate the default judgment and the
James Rivest v. Hauppauge Digital, Inc.
C.A. No. 2019-0848-PWG
August 3, 2020
stockholder disagrees. I find the corporation has met its burden of showing
excusable neglect, a meritorious defense and that the stockholder will not be
substantially prejudiced if the judgment is vacated. I recommend that the Court
grant the motion to vacate the default judgment. This is a final report.
I. Background
On October 8, 2019, Plaintiff James Rivest (“Rivest”), a beneficial holder of
common stock of Defendant Hauppauge Digital, Inc. (“Hauppauge”), sent a
demand letter (“Demand”) to Hauppauge at its principal place of business seeking
an inspection of Hauppauge’s financial statements and reports for 2016, 2017 and
2018, as well as any appraisals and valuations, in order to ascertain the value of
Hauppauge stock.1 Hauppauge, which “develops, manufactures and sells personal
computer based television tuners, data broadcast receivers and video capture
products,”2 did not respond. On October 24, 2019, Rivest filed a complaint
(“Complaint”) with this Court to compel inspection of Hauppauge’s books and
records under 8 Del. C. §220. Hauppauge failed to respond to the Complaint and,
on December 4, 2019, Rivest filed a motion for default judgment. A hearing on
the motion was scheduled for April 15, 2020, but was cancelled due to the judicial
1
Docket Item (“D.I.”) 1, Ex. A. In addition, Hauppauge did not respond to Rivest’s
previous demand on July 29, 2019, which requested Hauppauge’s financial statements for
the past three fiscal years to ascertain the value of Hauppauge’s stock. Id., ¶¶ 6 - 8.
2
Id., ¶ 3.
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C.A. No. 2019-0848-PWG
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emergency that went into effect on March 16, 2020.3 On March 30, 2020, the
parties were notified that, in lieu of rescheduling the hearing because of COVID-19
precautionary measures, Hauppauge had until April 20, 2020 to file a written
response to the motion with the Court.4 Having received no response, the Court
entered a default judgment against Hauppauge on April 24, 2020 at 9:50 a.m. 5
Later that day, a response from Ken Plotkin (“Plotkin”), Hauppauge’s Chief
Executive Officer, was received in the mail by the Court and docketed at 2:30
p.m.6 The letter, which was dated April 20, 2020, detailed Plotkin’s reasons for
not producing the requested financial documents. The Court asked Rivest to
respond to Plotkin’s letter. His response was received on May 7, 2020, and argued
Plotkin’s letter was legally deficient since a corporation must be represented by
counsel, and provided no basis for vacating the default judgment.7 On May 12,
2020, the Court received another letter from Plotkin dated May 5, 2020. 8 The
Court responded to Plotkin, on May 13, 2020, that there was nothing pending
3
See Admin. Order Declaring Judicial Emergency (Del. Mar. 13, 2020); Admin. Order
No. 4 Extending Judicial Emergency (Del. Apr. 14, 2020).
4
D.I. 10. See Standing Order No. 3 Concerning COVID-19 Precautionary Measures (Del.
Ch. Apr. 6, 2020) (implementing procedures during the Judicial Emergency authorizing
the handling of default judgments through appearance by written filing).
5
D.I. 11.
6
D.I. 12.
7
D.I. 15.
8
D.I. 17.
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C.A. No. 2019-0848-PWG
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before the Court since Hauppauge was not represented by counsel, but allowed
Hauppauge 10 additional days to file a response.9 Hauppauge’s counsel entered
his appearance on May 27, 2020 and the Court granted Hauppauge an extension
until June 8, 2020 to respond to the default judgment.10
In its June 9, 2020 motion to vacate the default judgment (“Motion”) and
July 1, 2020 reply, Hauppauge asserts that it made a good faith effort to comply
with the Court instructions, given that the Hauppauge employee responsible for
responding to Rivest was furloughed on March 15, 2020 in response to COVID-19
issues, and Plotkin’s mistaken belief that he could respond without assistance of
Delaware counsel; it has a meritorious defense seeking confidentiality restrictions
to protect Hauppauge from harm by disclosing nonpublic information; and Rivest
will not suffer prejudice if the Motion is granted.11 Hauppauge requests, in the
alternative, that the default judgment order be amended to implement reasonable
confidentiality restrictions.
Rivest’s June 24, 2020 response argues the Motion should be denied because
Hauppauge has offered no excuse for its seven months delay in responding to the
action, no meritorious defense, and he will be prejudiced due to Hauppauge’s
9
D.I. 18.
10
D.I. 22. Hauppauge requested an extension until June 15, 2020 to respond to the
default judgment, which was opposed by Rivest. See D.I. 19; D.I. 20.
11
D.I. 23.
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actions.12 He also opposes Hauppauge’s alternative request to amend the default
judgment to include confidentiality restrictions.
Both parties request attorneys’ fees related to the Motion.
II. Analysis
“Court of Chancery Rule 55(c) permits the court to set aside a default on the
grounds identified in Court of Chancery Rule 60(b).”13 Motions to vacate default
judgments under Rule 60(b) are addressed to the discretion of the court.14
“Delaware public policy favors deciding cases on the merits, leading to the
inference that ‘[a]ny doubt should be resolved in favor of the petitioner.’” 15 Rule
60(b) should be construed liberally to give effect to that underlying policy. The
Court considers three factors in determining whether to vacate a default judgment
under Rule 60(b)(1): “first, whether culpable conduct of the defendant led to the
default and, if so, was it excusable; second, whether the defendant has a
12
D.I. 24.
13
Organovo Holdings, Inc. v. Dimitrov, 162 A.3d 102, 112 (Del. Ch. 2017).
14
Cf. Old Guard Ins. Co. v. Jimmy’s Grille, Inc., 860 A.2d 811 (Del. 2004); Word v.
Balakrishnan, 2004 WL 780134, at *3 (Del. Super. Apr. 13, 2004), aff’d, 860 A.2d 809(Del. 2004).
15
Word, 2004 WL 780134, at *3 (citation omitted); see also Dishmon v. Fucci, 32 A.3d
338, 346 (Del. 2011); Deutsche Bank Nat’l Tr. Co. v. Vleugels, 2017 WL 2124425, at *2
(Del. Ch. May 10, 2017).
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C.A. No. 2019-0848-PWG
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meritorious defense; and third, whether the plaintiff will be prejudiced.”16
Excusable neglect has been described as “neglect which might have been the act of
a reasonably prudent person under the circumstances.”17 The defendant must first
establish excusable neglect before the Court considers whether the other factors
exist.18 To assert a meritorious defense, the defendant need only show that there is
a possibility of a different result.19 And, the defendant must show that the plaintiff
will not suffer substantial prejudice if the default judgment is vacated. Or, “[i]f
vacating the decision will result in prejudice to the non-defaulting party, the court
may remedy the prejudice by imposing terms or conditions, such as an award of
attorney’s fees, as part of the order to vacate.”20
Here, Hauppauge’s response was untimely but was received by the Court
four days after the date designated in the Court’s letter – and within a few hours of
16
Stevenson v. Swiggett, 8 A.3d 1200, 1204-05 (Del. 2010); Apartment Communities
Corp. v. Martinelli, 859 A.2d 67, 69-70 (Del. 2004); Deutsche Bank Nat’l Tr. Co., 2017
WL 2124425, at *2 (citation omitted).
17
Stevenson, 8 A.3d at 1205 (citing Ct. Super. R. 60(b)(1)); see also OneWest Bank,
F.S.B. v. Feeney, 2013 WL 5977066, at *3 (Del. Ch. June 27, 2013) (“Court of Chancery
Rule 60(b)(1) also lists excusable neglect as a reason for this Court to set aside a final
judgment or order.”).
18
Cf. Apartment Communities Corp., 859 A.2d at 72 (citations omitted); OneWest Bank,
F.S.B., 2013 WL 5977066, at *3.
19
Emory Hill & Co. v. Mrfruz LLC, 2013 WL 5347519, at *5 (Del. Super. Sept. 24,
2013), aff’d sub nom. Christiana Mall, LLC v. Emory Hill & Co., 90 A.3d 1087 (Del.
2014).
20
Word, 2004 WL 780134, at *3; see also Deutsch v. ZST Digital Networks, Inc., 2018
WL 3005822, at *9 (Del. Ch. June 14, 2018).
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the entry of the default judgment. The process followed in this case – requiring a
written response to a motion for a default judgment, rather than the standard in-
person hearing – was newly implemented through Court of Chancery Standing
Order No. 3, which was issued to facilitate court operations during the Judicial
Emergency due to COVID-19.21 The original hearing notice (which provided
notice of an April 15, 2020 hearing that was subsequently cancelled) contained the
statement that “[a]nyone who wishes to oppose the granting of relief as requested
should be present at the hearing with or without an attorney (emphasis added).”22
And, Hauppauge asserts that it furloughed many of its staff, including the person
tasked with handling this matter, as of March 15, 2020 because of COVID-19
concerns.23 A corporation must be represented before a court by a licensed
attorney.24 However, given the prior hearing notice’s language, and the unusual
circumstances under which Hauppauge was operating and economic difficulties at
that time (including the slowness of mail and building closures) because of
COVID-19, it is understandable that Plotkin responded to the Court directly (rather
21
See Standing Order No. 3 Concerning COVID-19 Precautionary Measures (Del. Ch.
Apr. 6, 2020).
22
D.I. 9. The order granted by the Court contained the language as proposed by Rivest.
D.I. 8.
23
D.I. 23, ¶ 20.
24
See Transpolymer Indus., Inc. v. Chapel Main Corp., 582 A.2d 936 (Del.
1990)(ORDER).
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than through an attorney) by mail. And, Hauppauge’s response was received by
the Court four days after the response date in the Court’s letter, and only a few
hours after the default judgment had been entered. I acknowledge that Hauppauge
failed to respond to Rivest’s prior demands, the complaint and the motion for
default judgment initially but I cannot conclude that its inaction constituted
negligence “so gross as to amount to sheer indifference,” or that it totally ignored
the process, since it did respond almost simultaneously with the default
judgment.25 Therefore, having considered all of the circumstances, I find
Hauppauge’s delay in responding in this action was the result of excusable neglect.
Next, I consider whether Hauppauge has shown it has a meritorious defense,
or the possibility of a different outcome. The issue in this case focuses on
Hauppauge’s claim that confidentiality protections are needed for the financial
information demanded by Rivest and the default judgment lacks confidentiality
limitations. Hauppauge contends unrestricted public disclosure of its nonpublic
financial information to market competitors would be harmful to it, given its
25
See, e.g., Rehoboth-By-The-Sea v. Baris, 2015 WL 3643496, at *3 (Del. Super. June
10, 2015) (citations omitted). Rivest cites Stevenson v. Swiggett as support that
Hauppauge has ignored the process and the default judgment should not be vacated. 8
A.3d 1200, 1205 (Del. 2010) (“a defendant ‘cannot have the judgment vacated where [the
defendant] has simply ignored the process’”) (citation omitted). The circumstances here
differ from those in Stevenson. Unlike this case, in Stevenson, the motion to vacate the
default judgment was filed almost three years after the entry of the default judgment and
was based upon lack of notice due to defective service, and the trial court found the
defendants were properly served. Id. at 1202, 1205.
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current financial difficulties.26 Rivest responds that, based upon Tiger v. Boast
Apparel, Inc., there is no presumption of confidentiality in Section 220 productions
and since Hauppauge is a public company that publicly disclosed its financial
difficulties in case filings, there is no manifest injustice to publicly disclosing the
requested financial information.27 Rivest indicates he “has not flatly refused to
agree to any confidential restrictions,” providing the example of his offer of
confidentiality protections for his supplemental request of Hauppauge’s 2020
financial information.28
The Delaware Supreme Court held, in Tiger v. Boast Apparel, Inc., that
Section 220 inspections are “not subject to a presumption of confidentiality.”29 It
also held that the Court of Chancery “has the power to impose reasonable
confidentiality restrictions,” if it weighs the “stockholder’s legitimate interests in
26
D.I. 23, ¶ 30. Hauppauge points to industry competitors’ actions in the past to
weaponize “poor performance displayed on financial statements as well as
representations alluding to or summarizing that information,” to cause a loss of business
with “reputable, large-scale sale platforms . . . for audio-visual and technology products.”
Id., ¶ 15. It also claims that Rivest attempted to “extort extra-pleading, public disclosure
using the Default Judgment, unfairly, as leverage,” when he demanded updated financial
information for 2019 and 2020 in the April 24, 2020 letter that sought production of
financial information under the default judgment. See id., ¶ 14, Ex. A. Rivest responds
that he filed a supplemental demand with Hauppauge, consistent with Section 220
requirements. D.I. 24, ¶ 20. I find no evidence that the letter was inappropriate in
attempting to accomplish dual purposes.
27
D.I. 24, ¶¶ 9-14.
28
Id., ¶ 18, Ex. C.
29
214 A.3d 933, 935 (Del. 2019), reargument denied (Aug. 26, 2019).
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free communication against the corporation’s legitimate interests in
confidentiality.”30 And, a corporation does not need to “show specific harm that
would result from disclosure,” but a court “cannot conclude reflexively that the
need [for confidentiality] is readily apparent.”31 Hauppauge argues that the
information being sought is nonpublic since, during the timeframes requested
(2016 - 2018), its registration statement was terminated and its stock delisted so its
financial information was not reported publicly. 32 I find Hauppauge has met its
burden of showing a meritorious defense, or the possibility of a different result
regarding the imposition of confidential protections. Without presuming
confidential protections are needed, I find sufficient evidence has been presented to
support the possibility that, after an assessment of the associated benefits and
harms, the Court may determine that some confidential restrictions should be
imposed. This conclusion is based on the fact that the information demanded is
not currently disclosed publicly,33 and the allegations that disclosing the
30
Id. at 939, 935.
31
Id. at 939 (citations omitted).
32
D.I. 26, ¶ 12; see also D.I. 23, Ex. B.
33
Rivest argues that Hauppauge’s repeated statements to the Court that it is undergoing
“severe financial strain” and its previous voluntary disclosure of its financial condition to
others shows that Hauppauge voluntarily disclosed financial information publicly. D.I.
24, ¶ 12. Those statements signal financial difficulties in a public manner but are not
likely to have the same effect as if detailed financial statements are released. In addition,
Rivest asserts that Hauppauge is an unregistered public company so the public has a
“manifest interest in [its] financial performance.” Id., ¶ 14. Hauppauge’s situation, as a
10
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information without any confidentiality protections will inflict injury on
Hauppauge’s business. Rivest further argues that confidentiality protections are
not warranted because of the age of the information demanded (from 2016 through
2018).34 The materiality of financial information “lessens as it ages.”35 However,
courts have recognized the difficulty in setting a precise “moment in time” when
non-public financial information becomes stale, and have varied in their
determinations as to when confidential treatment becomes unnecessary.36 The
delisted public company, appears more similar to the circumstance in Southpaw Credit
Opportunity Master Fund LP v. Advanced Battery Techs., Inc., in which the defendant,
although a public company, was not publicly reporting financial information, and the
Court held it was “more akin to a private company for purposes of this analysis.” 2015
WL 915486, at *9 (Del. Ch. Feb. 26, 2015). In Southpaw, the Court found that the nature
of the information and the defendant’s confidential treatment of the information
supported the execution of a confidentiality agreement, with the caveat that older
financial records may not be entitled to confidential treatment. Id., at *10.
34
D.I. 24, ¶¶ 9, 15.
35
Ravenswood Inv. Co., L.P. v. Winmill & Co. Inc., 2014 WL 7451505, at *1 (Del. Ch.
Dec. 31, 2014).
36
See, e.g., id. (“financial information does not warrant confidential treatment after three
years from the date of the document or information”); Baker v. Sadiq, 2016 WL 4988427,
at *2 (Del.Ch. June 8, 2016)(ORDER) (denying confidential designation of financials
“from more than three years ago” because of staleness); Quantum Tech. Partners IV, LP
v. Ploom, Inc., 2014 WL 2156622, at *18 (Del. Ch. May 14, 2014) (upholding a five year
sunset provision for confidential designation since the information “will likely be so stale
that its competitive value will be non-existent”); Ad-Venture Cap. Partners, LP v. ISN
Software Corp., CA. No. 6618-VCG, at 6-7 (Del. Ch. Mar. 5, 2012) (TRANSCRIPT)
(“[I]t seems to me that it is likely that whatever the competitive value of the documents
that I have ordered disclosed is that it will be so significantly reduced over a two-year
period that that’s the appropriate length of time.”).
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question whether the information demanded (from 2016 to 2018) is stale so that no
confidential protections are needed remains to be determined.
Finally, I consider the third factor – whether Rivest has suffered prejudice
because of Hauppauge’s delay. Hauppauge argues Rivest will not suffer prejudice
if the merits of the confidentiality issues are litigated, since Rivest had indicated, in
the Demand that he would “agree to appropriate and reasonable confidentiality
terms,” and Plotkin’s letter was received five hours after the default judgment was
issued.37 Rivest alleges he will be prejudiced because “for over a year, [he] has
“sought books and records from [Hauppauge]” that he is “fundamentally entitled to
as a stockholder.”38 I find no substantial prejudice to Rivest if the Motion is
granted because the delay is not sufficient to overcome public policy favoring
decision on the merits.
Accordingly, I conclude that Hauppauge has met its burden of showing
excusable neglect, a meritorious defense and that Rivest will not suffer substantial
prejudice if the Motion is granted.39 However, recognizing that Section 220
37
D.I. 23, ¶¶ 26, 27; see also D.I. 1, Ex. A.
38
D.I. 24, ¶ 7.
39
Since I recommend that the judgment be vacated, I do not address Hauppauge’s
alternative argument seeking to amend the judgment to implement reasonable
confidentiality restrictions. The parties’ requests for attorneys’ fees related to the Motion
will be addressed later.
12
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actions are intended to be summary proceedings,40 and given the delays that have
occurred related to this Section 220 action, I intend, once this report becomes final,
to ensure that this matter proceeds as expeditiously as possible in the future.
III. Conclusion
Based upon the reasons set forth above, I recommend that the Court grant
Hauppauge’s motion to vacate the default judgment. This is a final report and
notice of exceptions shall be filed within three days of the date of this report,
pursuant to Court of Chancery Rule 144(d)(2), given the summary nature of
Section 220 proceedings.
Respectfully,
/s/ Patricia W. Griffin
Patricia W. Griffin
Master in Chancery
40
See, e.g., KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 754-55 (Del. 2019)
(as the statutory text of § 220 itself reflects, the Court of Chancery is entitled to
“summarily order” an inspection).
13