It’s a Family Affair… but Not Any More, as Chancery Court Grants Motion to Dissolve General Partners Under Section 273 of the DGCL

By Annette Becker and Lauren Garraux

The Chancery Court granted a petition in accordance with Section 273 of the Delaware General Corporation Law to dissolve two Delaware corporations, the general partners of two Massachusetts limited partnerships, initially formed by the patriarchs of the Grossman and Cohen families to own three real estate properties for the benefit of their respective family members, after the families reached an impasse as to how to dispose of the assets of the business.

In 1992, the patriarchs of the Grossman and Cohen families formed two Massachusetts limited partnerships (the “Partnerships”) to own three real estate properties for the benefit of their family members (at the time of this dispute, 25 Grossmans and 6 Cohens), who are limited partners in the Partnerships.  The general partners of the Partnerships (the “General Partners”) are two Delaware corporations, each of which is a joint venture corporation with two 50% stockholders, at the time of the dispute, the petitioner, Louis Grossman (“Louis”), and the respondent, Claire Cohen (“Claire”).

In 2011 the limited partners from the Grossman side informed Louis that they wanted the Partnerships to generate liquidity.  Louis, in turn, proposed a refinancing, which Board members from the Cohen side opposed due to potential adverse tax implications and potential debt resulting from the proposal.  After discussions regarding a possible buyout of either family’s interests by the other failed, the parties met in February 2013 to discuss their disagreements regarding the direction of the Partnerships, but were unable to reach a resolution, both sides acknowledging that they had reached an impasse.

In March 2013, Louis filed two actions (which were consolidated) in the Chancery Court seeking dissolution of the General Partners pursuant to Section 273 of the Delaware General Corporations Law (“DGCL”), which authorizes the Court to dissolve a joint venture corporation with two 50% stockholders where the stockholders are deadlocked and cannot agree as to whether the corporation should be continued or how the corporation’s assets disposed of.  As the Court explained, once the requirements of Section 273 are met, the Court’s discretion to deny a petition is limited– the Court may only refuse to dissolve the corporation if the actual foundation for the petition is something other than a genuine inability to agree upon the desirability of continuing the joint venture.  If the facts support a genuine dispute over the desirability of continuing the joint venture, however, the inquiry ends there. 

A trial was held in January 2015, during which the Court concluded that evidence was presented to meet this standard and established that the joint venturers were unable to agree about how to dispose of the assets of the business.  Indeed, the parties themselves referred to their disagreement as a deadlock or impasse in pre-litigation communications. 

In reaching this conclusion, the Court rejected a number of arguments advanced by Claire against dissolution, namely that the dispute had not lasted long enough to warrant dissolution under Section 273 (to which the Court responded that Section 273 does not require extended suffering); that the dispute existed at the limited partnership level and not at the general partnership level (to which the Court responded that the limited partnership agreements grant the General Partners the exclusive ability to manage and control the Partnerships and, therefore, that any management dispute necessarily existed at the general partnership level); that dissolution would be improper because, in an ideal world, Louis would prefer not to dissolve the Partnerships (which the Court stated did not change the fact that an impasse existed at the General Partner level); and that Louis acted in bad faith by seeking the dissolution and was using the petition as a means of extorting Claire and her family into agreeing to Louis’ refinancing proposal (both of which the Court found the evidence did not support).

In addition to granting Louis’ petitions to dissolve the General Partners, the Court also stated that a trustee would be appointed by separate order to wind-up the affairs of the corporations, as provided for under Section 273.

In the Matter of Bermor, Inc.

 

 

 

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