Chancery Court Denies Defendant Fund Manager’s Request to Pay Ongoing Legal Fees from Disputed Assets; Permits Payment of Administrative Fees Incurred in Completing Necessary SEC and Tax Filings

By Scott Waxman and Max Kaplan

By letter-order dated November 25, 2015, Vice Chancellor John W. Noble issued a “Status Quo Order” in Capital Link Fund I, LLC v. Capital Point Management, LP. By this order, the court approved disbursement of certain administrative fees sought by defendants from the assets in dispute, but denied defendants’ request to pay its legal fees from the same disputed assets.

Plaintiffs in this action are limited partners to an investment fund of which defendant Capital Point Management, LP (“CPMLP”) is the general partner. In July of 2014, CPMLP caused the partnership to sell all of its assets to defendant Princeton Capital Corporation (“Princeton Capital”)—a CPMLP affiliate. Plaintiffs allege that CPMLP, in violation of the controlling partnership agreement, did so without providing notice to or obtaining approval from the limited partners or the partnership’s Board of Advisors.

The transaction resulted in an increase in Princeton Capital’s assets from $1 million to over $50 million, rendering the entirety of the defendant’s available capital “Disputed Assets.” As such, on October 26, 2015, the Court issued an initial Status Quo Order allowing only certain limited disbursements by Princeton Capital. Specifically, the court approved quarterly payment of asset management fees to defendant Princeton Investment Advisors, LLC (“Princeton Advisors”)—another CPMLP affiliate—to compensate it for its ongoing management of the Disputed Assets.

Subsequently, defendants sought an additional Status Quo Order allowing two further disbursements: (1) the ongoing payment of administrative fees to PCC Administrator, LLC (“PCC Administrator”), a wholly owned subsidiary of Princeton Advisors; and (2) the payment of legal fees incurred to defend this action. Plaintiffs objected to both as unnecessarily reducing the Disputed Assets.

After observing the utility of Status Quo Orders in maintaining stability during contests for corporate assets, the court proceeded to permit disbursement of the administrative fees. The court reasoned that because such administrative fees are incurred in preparing documents and financial reports required by U.S. regulators, they are necessary to the ongoing maintenance of the assets controlled by Princeton Capital. Thus, like the previously approved management fees, payment of the administrative fees further maintain the stability of the Disputed Assets.

However, the court reached the opposite conclusion with regard to legal fees. Principally, Defendants argued that Princeton Capital’s bylaws required it to indemnify certain defendants’ legal fees, and thus it was incumbent upon it to do so. The court disagreed. Unlike other cases involving similar indemnification provisions, the bylaws in this case governed a company that defendants created and capitalized solely by means of the disputed transaction. In other words, but for the disputed transaction, no bylaws would exist. For this reason, the court refused to allow such bylaws to finance the defense of the disputed transaction from the assets in dispute.

Capital Link Fund I, LLC v. Capital Point Management, LP, C.A. No. 11483-VCN (Nov. 9, 2015).