Brian Jones v. FON Holdings, LLC

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
LOREN MITCHELL LEONARD L. WILLIAMS JUSTICE CENTER
MAGISTRATE IN CHANCERY 500 NORTH KING STREET, SUITE 11400
WILMINGTON, DE 19801-3734

Final Report: July 23, 2024
Date Submitted: March 27, 2024

John M. Seaman, Esquire Andrea S. Brooks, Esquire
Joseph A. Sparco, Esquire Wilks Law, LLC
Abrams & Bayliss LLP 4250 Lancaster Pike, Suite 200
20 Montchanin Road, Suite 200 Wilmington, DE 19806
Wilmington, DE 19807

Re: Brian Jones v. FON Holdings, LLC,
C.A. No. 2023-0968-LM

Dear Counsel:

This matter began as a traditional Books and Records dispute. The Plaintiff

issued a demand upon Defendant Company, a Limited Liability Company, pursuant

to 6 Del. C. § 18-305 and Section 7.1 of the Third Restated Limited Liability

Company Agreement of FON Holdings, LLC (the “LLC Agreement”).

Pending before me are the parties’ competing motions for fee shifting

regarding the Demand. The parties both argue two bases for seeking fee shifting.

One is a contractual provision in the LLC agreement. The other is the exception to

the American Rule for litigation conducted in bad faith. For reasons further

explained herein, I recommend denying both motions for fees. I find neither party to
Brian Jones v. FON Holdings, LLC,
C.A. No. 2023-0968-LM
July 23, 2024
Page 2 of 20

be a prevailing party under the LLC Agreement nor any bad faith to justify fee-

shifting under the American Rule.

I. Background

A. Plaintiff’s Employment with FON Holdings

FON Holdings, LLC (the “Company”) provides investment banking,

valuation, consulting and related services to the aerospace, defense and government

services industries.1 Plaintiff became employed as the Chief Operating Officer of

Biconvex, a division of the Company on or about March 1, 2022.2 On July 15, 2022,

Plaintiff purchased 42,857 Preferred Units of Defendant’s stock for $150,000. 3 The

investment made him a member of the company, and a party to the Third Amended

and Restated Limited Liability Company Agreement dated February 21, 2023 (the

“LLC Agreement).4 On April 13, 2023, Plaintiff resigned his employment with the

Company, which constituted a triggering event under Section 10.2(a)(vii) of the LLC

Agreement, allowing the Company the right to repurchase the Purchase units within

1
Pl.’s Mot. for fees, ¶ 7.
2
Compl. ¶ 8; Def.’s Mot., ¶ 2.
3
Pl.’s Mot., ¶13; Def.’s Mot. ¶2.
4
See supra note 3.
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180 days of the triggering event. 5 The deadline for the Company to repurchase the

units was October 10, 2023.6

B. Plaintiff Serves a Demand to Inspect FON Holdings Books and
Records

On August 1, 2023 Plaintiff served a demand to inspect books and records under

6 Del. C. § 18-305 and also under Section 7.1 the LLC Agreement.7 In his demand,

Plaintiff explained that he was seeking books and records for the following purposes:

a) to investigate possible breaches of fiduciary duty, mismanagement,
self-dealing, corporate waste, unfair business practices, and
improper influence and conduct by David Walsh and other officers,
directors or members of the Company;

5
D. I. 7.
6
D. I. 1 (Compl.) at 26.
7
D. I. 1 (Exhibit B). Section 7.1 of the LLC agreement states:
The Company shall keep appropriate books and records
pertaining to the business of the Company. The books and
records of the Company shall be kept at the principal office of
the Company or at such other place, within or without the State
of Delaware, as the Board shall reasonably from time to time
determine. All books and records of the Company required to
be maintained under this Section 7.1, as well as complete and
accurate information regarding the Company’s business,
financial condition and other information regarding the affairs
of the Company as is just and reasonable and any other
information described in Section 18-305(a) of the Delaware
Act, shall be made available upon reasonable demand by any
Member for any purpose reasonably related to such Member’s
interest in the Company, during ordinary business hours, for
inspection and copying at the expense of such Member.
Id. (Exhibit A pg. 43-44).
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b) to investigate the negotiation process, valuation process, timing and
terms of the Company’s issuance of 300,000 Founder Class A
Common Units to TFH Partners, LP, an entity controlled by George
Hanley, on or about April 27, 2020, and whether that transaction
complied with the LLC Agreement. 8
c) to investigate whether the Company complied with the Preemptive
Rights provisions of the LLC Agreement in connection with its
capital raises in March 2023;
d) to value Plaintiff’ Preferred Units in connection with the Triggering
Events provision under Section 10.2 of the LLC Agreement;
e) to enable Plaintiff to file his taxes for the 2022 tax year;
f) to consider any remedies to be sought in respect of the foregoing,
including but not limited to further communication with the board,
potential derivative litigation, or other corrective measures; and
g) to evaluate the independence and disinterestedness of the members
of the Board and its advisors.

Specifically, the Plaintiff requested the following documents from January 1,

2020, to the present (unless otherwise indicated):

1. A copy of each federal, state, and local income tax return for the
Company;
2. A copy of Mr. Jones’ K-1 for 2022;
3. A copy of any written limited liability company agreements and
certificates of formation and all amendments thereto, together with
executed copies of any written FON Holdings, LLC powers of
attorney pursuant to which those limited liability company
agreements, certificates, and amendments have been executed;
4. True and full information regarding the amount of cash and a
description and statement of the agreed value of any other property
or services contributed by each member and which each member has
agreed to contribute in the future, and the date on which each
became a member;
5. The Company’s annual and quarterly financial statements, whether
audited or unaudited, including but not limited to any balance sheets,
8
Id. (Exhibit B).
Brian Jones v. FON Holdings, LLC,
C.A. No. 2023-0968-LM
July 23, 2024
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profit and loss statements, and surplus statements, and including
both consolidated and consolidating statements and the
accompanying notes to such financial statements;
6. All valuations of the Company, its equity, or its assets;
7. All documents evidencing the Company’s issuance of 300,000
Founder Class A Common Units to TFH Partners, LP, an entity
controlled by George Hanley, on or about April 27, 2020;
8. Documents sufficient to show the negotiation process, valuation
process, timing and terms of any repurchase, cancellation, buyback
or other disposition of the 300,000 Founder Class A Common Units
formerly owned by TFH Partners, LP;
9. All documents evidencing the transfer of any ownership interest in
the Company involving Mr. Walsh, Mr. Hanley or any entity
controlled by or affiliated with either of them;
10.Documents sufficient to identify any transactions between the
Company and Mr. Walsh, including but not limited to transactions
that were or should have been submitted to the Board of Managers
for approval;
11.Documents sufficient to show all compensation, reimbursement of
expenses, advancement of expenses, loans or other amounts paid or
owed by the Company to Mr. Walsh;
12.Documents sufficient to show the Company’s processes and
procedures for determining and/or authorizing all compensation
paid or owed by the Company to Mr. Walsh;
13.Documents sufficient to show the Company’s efforts to comply with
the Preemptive Rights provisions in the LLC Agreement; and [sic]9

The Demand also indicated that Plaintiff agreed to treat any documents the Company

produced as “attorneys’ eyes only until the execution of a customary confidentiality

agreement.”10

9
Id. (Exhibit B pg. 5).
10
Id. (Exhibit B at pg. 6).
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C.A. No. 2023-0968-LM
July 23, 2024
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After communications with the Plaintiff, the Company provided a formal

response to the demand on August 15, 2023, in essence, agreeing to produce the

majority of the document categories in Plaintiff’s Demand. 11 For two of the

document requests (categories 6 and 8 of the Demand), the Company only agreed to

partially produce the documents.12 For category 6, while the Company agreed to

provide the document set, the Company limited the production to “the most recent

valuation” as opposed to the Plaintiff’s requested period, from 2020.13 For category

8, the Company agreed to provide “final transaction documents” as opposed to the

“documents sufficient to show the negotiation process, valuation process, timing and

terms of any repurchase, cancellation, buyback or other disposition” of the stock

formerly owned by TFH Partners, LP under Plaintiff’s request.14

Plaintiff questioned these and other responses by the Company in an August

18, 2023, letter to the Company. 15 The Company denied being aware of the

additional documents Plaintiff requested in a September 6, 2023 letter. 16 A few days

11
D. I. 15 (Exhibit D).
12
Id.
13
Id.
14
Id.
15
Id.
16
Id. (Exhibit F).
Brian Jones v. FON Holdings, LLC,
C.A. No. 2023-0968-LM
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later, on September 8, 2023, the Plaintiffs produced a standard confidentiality

agreement to the Company.17 On September 21, 2023, the Company proposed its

revision to the confidentiality agreement. 18

Counsel for the parties exchanged emails following the Company’s revision

of the confidentiality agreement. 19 On September 22, 2023, Plaintiff’s counsel

indicated via email at 4:19 p.m. that he could not agree to many of the changes

Defendant’s counsel proposed to the confidentiality agreement. 20 In turn, counsel

returned a version with proposed changes and explanations for why they did or did

not accept certain suggestions and further requested that a signed copy of the

agreement be returned “no later than Monday September 25 at 12:00 p.m.”21 The

Defendant’s counsel informed Plaintiff’s counsel that she would be out of the office

on Monday September 25th due to the Yom Kippur holiday but agreed to provide

comments by close of business the following day, Tuesday September 26th.22

17
D. I. 15 (Exhibit F).
18
Id. (Def.’s Mot. for fees at ⁋5). Defendant’s motion does not cite the actual agreement;
however, Plaintiff supplied a redlined copy of the agreement as Exhibit I of the Complaint.
The Company struck the prevailing party provision from the proposed confidentiality
agreement. D. I. 1 (Exhibit I).
19
Id. (Exhibit H).
20
Id.
21
Id.
22
Id.
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C. Plaintiff Sues to Compel Inspection

Due to the holiday, the Company’s counsel did not respond with a signed

copy of the agreement by the September 25th deadline requested by Plaintiff’s

counsel. On the evening of September 25, 2023, the Plaintiff filed a complaint with

this Court to inspect the Company's books and records.23 Three days later,

Chancellor McCormick reassigned this case to me and requested that the parties

prepare to resolve this action within sixty days.24 In accordance with the

Chancellor’s Assignment Letter, on October 5, 2023 counsel for both parties agreed

to and submitted a stipulated scheduling order.25 Five days later, Defendant

answered the complaint. 26 On November 7, 2023, both parties filed a joint status

report, agreeing that the disputes over the scope of the Section 220 demands had

been resolved. 27 However, both parties asserted that fee-shifting issues still needed

to be resolved through litigation.28

23
D. I. 1 (Compl.).
24
D. I. 4 at ¶2.
25
D. I. 5.
26
D. I. 7.
27
D. I. 10.
28
Id.
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C.A. No. 2023-0968-LM
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The cross motions for fees were filed with the Court, simultaneously on

February 14, 2024. 29 In addition to the argument under the LLC Agreement, both

parties asserted a bad faith argument for fees. 30 I heard oral argument on the motions

on March 27, 2024. This is my final report.

II. Analysis

Both parties claim to be the prevailing party in the litigation. 31 Plaintiff argues

that attorneys’ fees should be shifted onto the Company because the Company

agreed only after Plaintiff brought this lawsuit seeking to “(1) lift an “Attorneys’

Eyes Only” (“AEO”) restriction which prohibited Plaintiff from inspecting the

requested information, (2) produce all information requested in Plaintiff’s inspection

demand, and (3) repurchase Plaintiff’s equity at the Market Valuation required under

the LLC Agreement.” 32 Plaintiff asserts these three agreements between the parties

are sufficient to make him the prevailing party. 33

29
D. I. 21-22.
30
D. I. 20.
31
D. I. 20; D. I. 22.
32
D. I. 20.
33
Id.
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July 23, 2024
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Defendant contests that Plaintiff’s requests would have occurred absent the

lawsuit.34 Defendant notes that “the vast majority” of documents requested in the

Demand were previously provided to Plaintiff. 35 Defendant further claims this

litigation was only brought to leverage a favorable redemption price. 36 Defendant

asserts itself as the prevailing party because the Company produced the necessary

documents in response to the Demand.37

When an operating agreement contains a valid prevailing party provision,

Delaware courts will enforce such a provision and in doing so “must honor the

language chosen by the parties.” 38 Absent an order of the court, I must “evaluate[]

the substance of a litigation to determine which party predominated.”39 When an

agreement is silent on the definition of a term, Delaware courts must supply a

definition. Here, case law is clear that the prevailing party in these circumstances is

34
D. I. 15.
35
Id. (Defendant produced 24 of the 29 documents on an AEO basis pending a resolution
of the confidentiality agreement).
36
D. I. 15.
37
Id. ¶ 10-11.
38
Autumn Entertainment, Inc. v. Pavr, LLC, 2019 WL 6878577, at *3 (Del.Ch. Dec. 13,
2019) (citing Avaya, Inc. v. Charter Commc'ns Hldg. Co., LLC, 2016 WL 381261, at *3
(Del. Ch. Jan. 29, 2016)).
39
Id. (Citations omitted).
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C.A. No. 2023-0968-LM
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the party who “predominates in the litigation.”40 The party needn’t have prevailed

on every issue, the Court looks to who’s favor the outcome is predominantly in. 41

Finally, “[a]bsent any qualifying language that fees are to be awarded claim-by-

claim or on some other partial basis, a contractual provision entitling the prevailing

party to fees will usually be applied in an all-or-nothing manner.” 42

A. No Fee shifting under the LLC Agreement

In both motions, the parties disagree on who qualifies as a “prevailing party”

under the provision. Plaintiff’s basis for claiming to have predominated the

litigation is rooted in his belief that proceeding forward on the Demand through

litigation lead to the ultimate production of the books and record requested under

inspection. Plaintiff relies on PAVR 43 and Digitz 44, asserting that Defendant, like the

defendant company in PAVR, ‘consistently recognized’ Plaintiffs’ right to inspection

but only did so after he instituted this litigation.

40
Curry v. Digitz Sols., Inc., C.A. No. 2022-0205-JTL (Del. Ch. Nov. 2, 2022)
(TRANSCRIPT) (citations omitted).
41
Id.
42
Autumn Entertainment, Inc., at *3 (Del.Ch. Dec. 13, 2019) (ORDER) (citing Aveta,
Inc. v. Bengoa, 2010 WL 3221823, at * 6 (Del. Ch. Aug. 13, 2010)).
43
Id. at *4.
44
Digitz Sols., Inc., C.A. No. 2022-0205-JTL (TRANSCRIPT).
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In PAVR, the company’s operating agreement provided a right to the

plaintiff’s request for quarterly financial information in addition to the plaintiff’s

statutory right under Section 18-305 of the Delaware Limited Liability Company

Act. 45 The company had been complying with the operating agreement and

providing Plaintiff with the quarterly financial information consistently but abruptly

stopped in the fourth quarter of 2017. 46 The Plaintiff made at least nine requests for

the information between March and June of 2018. 47 “PAVR either ignored the

requests or avoided providing the information.”48 Following those requests, plaintiff

sent an official demand for the financial information under both the operating

agreement and Section 18-305.49 In response to the demand, the company notified

the plaintiff that it had engaged litigation counsel and notably, did not state any

defects in the plaintiff’s demand. 50 Two months after plaintiff filed the action, the

company produced the requested information.51 Importantly, the company never

45
Autumn Entertainment, Inc., at *1 (Del.Ch. Dec. 13, 2019).
46
Id.
47
Autumn Entertainment, Inc., at *2 (Del.Ch. Dec. 13, 2019).
48
Id.
49
Id.
50
Id.
51
Id.
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disputed the Plaintiff’s right to the requested information. 52 Vice Chancellor Zurn

determined the plaintiff was the prevailing party of the litigation and thus entitled to

fees because the company continued to deny the plaintiff’s request for documents

despite having recognized the plaintiff’s right to the information and justified its

denial by relying issues unrelated to the merits of the claim. 53

In Digitz, the parties settled their books and records dispute shortly before the

company’s pretrial answering brief was due. 54 The settlement came following the

Vice Chancellor’s denial of the company’s motion to compel where he also held that

the plaintiff had a proper purpose as a former director.55 The parties filed a stipulated

and proposed order of settlement to stay the proceedings and reserved the plaintiff’s

right to pursue fees which was granted three days later. 56 A little over a month later,

the plaintiff moved for fees and Vice Chancellor Laster determined that the plaintiff

was the prevailing party because he had a clear contractual right from the beginning

52
Id.
53
Autumn Entertainment, Inc., at *5 (Del.Ch. Dec. 13, 2019).
54
C.A. No. 2022-0205-JTL (Del. Ch. Nov. 2, 2022) (TRANSCRIPT).
55
Id.
56
Id., D.I. 47-48 (C.A. No. 2022-0205-JTL).
Brian Jones v. FON Holdings, LLC,
C.A. No. 2023-0968-LM
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and ultimately, the company provided substantially everything that he had asked

for.57

I don’t find PAVR or Digitz instructive in this instance. PAVR differs here

because although, like in PAVR, the Company does not deny the Plaintiff’s right to

the information, here, the Company gave the Plaintiff most of the requested

information prior to the Plaintiff filing this action. Moreover, the remaining

documents produced by the Company after the litigation was filed, were the result

of a narrowed down search requests. Furthermore, unlike in PAVR, there is no

indication that the Company produced the remaining documents and lifted the AEO

restriction because of the litigation. Simply because these actions occurred after the

lawsuit was filed does not correlate to the belief that they happened because the

lawsuit was filed when the Company’s actions show they were in the process of

providing this information and negotiating a confidentiality agreement.

Digitz is instructive, but also very particularized for the facts in its case. There,

the company did not cooperate with the demand. It initially rejected the demand,

then required inspection only in person, and then ultimately produced 32 documents,

most of which the plaintiff already received in the past. 58 Due to the uncooperation

57
Digitz Sols., Inc., C.A. No. 2022-0205-JTL (TRANSCRIPT).
58
Digitz Sols., Inc., C.A. No. 2022-0205-JTL (TRANSCRIPT).
Brian Jones v. FON Holdings, LLC,
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of the company, the plaintiff filed the 220 lawsuit which ultimately settled before

trial. In addition, in Digitz, the parties settled on the eve of trial with a settlement

agreement in front of the court. In both instances, the pre and post litigation positions

of the parties drastically changed. Here, not so much. The Defendant here

maintained from initially receiving the demand, that it was willing to work with the

Plaintiff to provide documents responsive to the Demand. In addition, I reject the

Plaintiff’s notion that the AEO restriction served as a method to deny the Plaintiff

direct access to the documents, when the AEO was first offered as part of the

Plaintiff’s Demand, and the Company continued to make efforts to come to a

mutually agreeable confidentiality agreement, which would remove the AEO

restriction.

Plaintiff also likens his case to the plaintiff in Christian59, where Vice

Chancellor Cook opined that a prevailing party provision applied where a Company

was “litigating and delaying and delaying until the last minute.”60 However, here, I

don’t find the Company created any unreasonable delays. The Company agreed to

the Plaintiff’s request to provide relevant documents in its possession on an attorneys

59
Gerard J. Christian v. Cultural Experiences Abroad, LLC, C.A. No. 2023-0558-NAC
(Del.Ch. November 13, 2023).
60
D. I. 59 (C.A. No. 2023-0558-NAC) Tr. at 42.
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eyes only basis while the parties ironed out a confidentiality agreement. An action

that was allowed per the Plaintiff’s own demand. 61 I also find that the Company also

acted in good faith in continuing discussions and negotiations on the language in the

confidentiality agreement and at no time, did the Company refuse to do such.

As previously noted, the Company believes it is the prevailing party because

it completed its production of documents in response to the Demand. 62 In addition,

in support of their argument, the Company argues that Plaintiff abandoned his claims

related to mismanagement, whereas the Company succeeded completely in its

efforts in response to the Demand. However, as noted in PAVR, a party needn’t have

prevailed on every issue.63 Nonetheless, I reject the Defendant’s rationale that it is

the prevailing party because it produced responsive documents. I also do not find

the Plaintiff’s arguments persuasive that he is the prevailing party.

Accordingly, I find the facts here show that neither party predominated in the

litigation more than the other. Rather, they both equally prevailed in their efforts.

Plaintiff to obtain documents in response to the Demand and lift the AEO restriction,

and the Defendant to only produce documents it deemed responsive, and to obtain a

61
D. I. 1 (Exhibit B at pg. 6).
62
Def.’s Mot. ¶ ¶ 10-11.
63
Id.
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signed confidentiality agreement. I disagree with both parties that the scenarios they

have identified warrant a finding that either party is the prevailing party and each

shall pay its own attorneys fees.

B. Fee Shifting under the American Rule

Defendant also asserts that Plaintiff initiated this litigation in bad faith.

“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.’”64 An

exception exists in equity, however, when a party litigates in bad faith. 65 This Court

has recognized that in “extraordinary circumstances,” “overly aggressive litigation

strategies” employed to improperly resist a books and records demand may warrant

fee-shifting.66 A party seeking to shift fees must satisfy “the stringent evidentiary

burden of producing ‘clear evidence’ of bad faith . . . .” 67 To warrant fees, a litigant’s

conduct must be “glaring[ly] egregious.”68

64
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)).
65
Rice v. Herrigan-Ferro, 2004 WL 1587563, at *1 (Del. Ch. July 12, 2004).
66
Pettry, 2020 WL 6870461, at *29-30 (citation and internal quotation marks omitted).
67
Dearing v. Mixmax, Inc., 2023 WL 2632476, at *5 (Del. Ch. Mar. 23, 2023) (ORDER)
(quoting Beck v. Atl. Coast PLC, 868 A.2d 840, 851 (Del. Ch. 2005)).
68
Seidman v. Blue Foundry Bancorp, 2023 WL 4503948, at *6 (Del. Ch. July 7, 2023).
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The Company argues the exception to the American rule. The Company

argues that its fees should be shifted onto the Plaintiff because the Plaintiff acted in

bad faith in filing this litigation. According to the Company, Plaintiff filed this books

and records lawsuit to pressure the Company to redeem Plaintiff’s shares at a certain

value. Moreover, the Company argues that the Company deliberately filed this

litigation on Yom Kippur, when they knew counsel was not available to provide

additional comments on the proposed draft of the confidentiality agreement.

The Plaintiff also argues the bad faith exception to the American rule. The

Plaintiff argues that the Company refused to comply with the Plaintiff’s document

request until after litigation was filed. Plaintiff also argues that the Defendant

unnecessarily delayed this litigation and refused to lift the AEO restriction to allow

the Plaintiff to review the initial documents produced.

Neither party has met the high bar to demonstrate clear evidence of bad faith

warranting fee-shifting. Plaintiff has not shown that the Company acted in bad faith

by improperly withholding books and records to which Plaintiff had “‘a clearly

defined and established right[.]’”69 In addition, as noted previously, the idea that the

69
Pettry, 2021 WL 3087027, at *1 (quoting McGowan v. Empress Ent., Inc., 791 A.2d 1,
4 (Del. Ch. 2000)).
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Company failed to produce documents, directly to the Plaintiff but did produce the

majority of documents to Plaintiff’s counsel, is not a showing of bad faith when the

Company continued to work with the Plaintiff on a mutually agreeable

confidentiality agreement.

With respect to the Company’s argument that the Plaintiff’s books and records

lawsuit was simply to pressure the Company to redeem Plaintiff’s shares at a certain

value, it seems reasonable that the Plaintiff would file a books and records request

when there was uncertainty from the Plaintiff on how the shares would be valued

Additionally, on its own, I cannot find that Plaintiff acted in bad faith in filing this

lawsuit on the Yom Kippur holiday, when he put the Company on notice of his

deadline to receive the edits for the confidentiality agreement.

III. Conclusion

Under the circumstances, I recommend that the Court exercise its discretion

to deny both parties’ requests for fee-shifting, whether framed under the bad-faith

exception to the American Rule or under the LLC agreement as the prevailing party.
Brian Jones v. FON Holdings, LLC,
C.A. No. 2023-0968-LM
July 23, 2024
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Accordingly, both Motions are DENIED. This is a final report. Exceptions may be

taken within three business days pursuant to Court of Chancery Rule 144(d)(2).70

Respectfully,
/s/ Loren Mitchell
Magistrate in Chancery

70
See Ct. Ch. R. 144(d)(2) (“In actions that are summary in nature or in which the Court
has ordered expedited proceedings, any party taking exception shall file a notice of
exceptions within three days of the date of the report.”).