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Grand Acquisition, LLC v. Passco Indian Springs DST, C.A. No. 12003-VCMR (Del. Ch. Sep. 7, 2016)

September 7, 2016

In this case, the Delaware Court of Chancery for the first time interpreted the rights of a beneficial owner of a Delaware statutory trust to inspect the trust’s books and records.  The Court granted summary judgment in favor of the beneficial owner, granting it the right to obtain the information it requested based entirely upon a contractual information right created by the trust agreement. 

Passco Indian Springs DST (“Passco Trust”) is a Delaware statutory trust that owns an apartment complex in Louisville, Kentucky.  Grand Acquisition, LLC (“Grand Acquisition”) owns roughly .19 percent of Passco Trust.  On September 30, 2015, Grand Acquisition submitted a letter demanding books and records regarding the Trust’s beneficial owners, including their contact information and their respective ownership interests in the Trust (the “Requested Information”).  Passco Trust denied the demand, contending in part that inspection must be related to the beneficial owner’s interest in the statutory trust.  Grand Acquisition replied that fostering communications with other investors is traditionally considered a proper purpose for an inspection request.

When Passco Trust did not respond, Grand Acquisition filed suit to obtain the information it had requested.  Grand Acquisition’s complaint asserted that it was entitled to the Requested Information under both Passco Trust’s Statutory Trust Agreement (the “Passco Agreement”) and under 12 Del. C. § 3819 (“Section 3819”), which is the portion of the Delaware Statutory Trust Act that creates an inspection right.  After engaging in discovery, the parties agreed to resolve the case through cross motions for summary judgment.  The Court ordered the information to be produced, for three reasons.

First, the Court drew on law developed in the limited partnership and limited liability company context to hold that the Passco Agreement affords each owner a contractual right to information independent of the rights established in Section 3819.  Specifically, the Passco Agreement grants a right to “inspect, examine and copy the Trust’s books and records,” subject only to the requirement that the inspection must be carried out during normal business hours.  Because the Passco Agreement does not mention the preconditions to statutory inspection that are specified in Section 3819, those statutory preconditions do not apply to requests asserted pursuant to the contractual right.  The Court suggested that if the Passco Agreement did not provide for inspection rights, then the statutory inspection right would exist, including any statutory preconditions. 

Second, the Court held that the contractual inspection right was broad enough to encompass the Requested Information.  Information about other owners is traditionally available to equity holders exercising inspection rights under Delaware books and records statutes, so the Requested Information was held to fit within the broad phrase “books and records” contained in the Passco Agreement 

Third, the Court denied Passco Trust’s improper purpose defense but expressly avoided resolving the novel issue of whether the improper purpose defense could apply to a request for inspection from a Delaware statutory trust.  Even if the improper purpose defense were to apply, Passco Trust would have to prove that releasing the information would damage the value of the joint investment.  The Court held that the evidence revealed only “run-of-the-mill business conflicts between an investor in a real estate asset and that asset’s manager.”  Absent proof of actual harm, the Court held only that even if the improper purpose defense could apply in the context of a statutory trust, Passco Trust had not made the necessary showing for the defense. 

The full opinion is available here