Chancery Court Finds No Fiduciary Duty for Limited Partners

By Scott Waxman and Eric Jay

Chancery Court grants motion to dismiss against former limited partners seeking damages for a freeze-out merger they claimed was a self-dealing transaction by the general partner and its affiliates.  The Court granted the motion to dismiss for lack of subject matter jurisdiction with regard to the general partner defendants based on a standard arbitration clause that referenced AAA Rules. The Court also granted the motion to dismiss for failure to state a claim with regard to the affiliated limited partner defendants because majority ownership of the merged entities, without more, did not create a fiduciary duty to the plaintiffs.

On February 10, 2015, Vice Chancellor Parsons issued a memorandum opinion in Lewis v. AimCo Properties, L.P., 2015 WL 557995, (Del. Ch. Feb. 10, 2015) granting Motions to Dismiss for each group of defendants in the case. The case was brought by several former holders of limited partnership units (“Plaintiffs”) in four Delaware limited partnerships (the “Partnerships”). Each of the Partnerships was managed by corporate entity general partners (“GP Defendants”) that were each indirectly owned by Apartment Investment and Management Company (“AimCo”).  AimCo also indirectly held a majority of the limited partnership units of each Partnership through various affiliates (together with various officers, the “LP Defendants”).

On July 28, 2011, the Partnerships were merged into a single AimCo affiliate without a separate vote from unaffiliated, minority unitholders including the Plaintiffs. The Plaintiffs brought suit against both GP Defendant and LP Defendants asserting that the mergers were self-dealing transactions that violated the fiduciary duties owed by them to the Plaintiffs.  The GP Defendants moved to dismiss the case as it pertained to them for lack of subject matter jurisdiction based on the arbitration provision in each Partnership’s operating agreement. The LP Defendants moved to dismiss for failure to state claim based on the lack of any fiduciary duties owed by the LP Defendants to the Plaintiffs.

Regarding the GP Defendants, Vice Chancellor Parsons noted that Delaware courts favor arbitration, however, the threshold question of substantive arbitrability still requires “clear and unmistakable evidence” that the parties intended to submit the issue to the arbitrator rather than the courts. Citing the Delaware Supreme Court’s ruling in James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006), the Chancellor explained that the test is met when there is an arbitration clause that “generally provides for arbitration of all disputes and also incorporates a set of arbitration rules that empower the arbitrators to decide arbitrability.”

The arbitration clause in each Partnership’s operating agreement is broadly written to include “any dispute or controversy arising under, or out of, or in connection with or in relation to [the] Agreement” and also provide that all such arbitrations will be conducted in accordance with the “rules then applicable of the American Arbitration Association.” Those rules provide that the arbitrator will have the power to rule on arbitrability. Vice Chancellor Parsons found that the arbitration clauses “clearly and unmistakably” indicate that the parties intended to submit the issue to an arbitrator rather than the courts, and therefore stayed the Plaintiff’s claims against the GP Defendants to be submitted to arbitration.

Regarding the LP Defendants, the Vice Chancellor found that the Plaintiffs were inappropriately relying on the corporate law concept that a controlling stockholder owes fiduciary duties to the corporation and its minority stockholders.  Limited Partnerships have a fundamentally different structure under the Delaware Revised Uniform Limited Partnership Act (“DRULPA”), which emphasizes freedom of contract to structure partnerships however the unitholders see fit.  Vice Chancellor Parsons noted that, unlike directors in a corporate structure, the general partner of a limited partnership can have a small ownership stake even though it may have complete power to manage and control the entity so that the limited partners are not subject to liability.

Vice Chancellor found that a majority interest in a limited partnership is not enough to support a reasonable inference that the LP Defendants exercised control over the Partnerships and had any fiduciary duties to those Partnerships or their limited partners. Furthermore, in order for a limited partner to owe any fiduciary duties it would need to be included in the terms of the limited partnership agreements.  Because the Plaintiffs did not allege that the LP Defendants were a general partner under any of the Partnerships’ organizational agreements or that they had acted in a manner that would subject them to liability as general partners under the applicable organizational agreement, Vice Chancellor granted the LP Defendant’s Motion to Dismiss and dismissed the Plaintiff’s claims with prejudice.

Lewis v. AIMCO Properties, L.P., C.A. No. 9934-VCP (Del. Ch. February 10, 2015) (Parsons, V.C.)

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