CONSENT TO JURISDICTION DOES NOT EQUAL MANDATORY FORUM SELECTION

By Scott E. Waxman and Annamarie C. Larson

In In re Bay Hills Emerging Partners I, L.P., et al (C.A. No. 2018-0234-JRS), Vice Chancellor Slights denied the defendants’ motion to dismiss claims related to their “for cause” removal as general partners, instead staying the action pending resolution of the claims filed in a Kentucky court.  Regarding the forum selection issue, the Court of Chancery held that “the inclusion of the consent language and the lack of language indicating that Kentucky is the exclusive forum—such as by the use of the term ‘any’—[the LPA] does not contain clear language indicating that jurisdiction and venue must lie exclusively in Kentucky.”

Defendant Kentucky Retirement System (“KRS”) invested in four Delaware limited partnerships managed by Bay Hills Capital Management, LLC (“Bay Hills”). The general partners of the funds are all affiliates of Bay Hills, and the sole limited partner of each fund is KRS.  The limited partnership agreement (“LPA”) of each fund grants KRS the right to remove the general partner “for cause” if the general partner commits certain bad acts.  KRS served two different notices to remove the Funds’ general partners, claiming willful and reckless disregard of KRS’s rights, manipulation of overhead expenses, deliberate misappropriation of assets, and material breach of the LPA.

The general partners filed this suit in Delaware, arguing KRS lacks cause to remove them as general partners, and that they did not breach any duties owed to the funds. Eight days later, KRS filed suit in Kentucky, seeking a declaratory judgment that the general partners were properly removed.  Two days later, in the Delaware Court of Chancery, KRS filed a motion to dismiss this suit based on the LPAs’ forum selection clause, the interests of comity and sovereign immunity, and forum non conveniens.

At issue, the forum selection clause of the LPAs provides, “Each of the Partners hereby consents to the jurisdiction of the courts of the Commonwealth of Kentucky and further consents that venue shall lie in the Franklin Circuit Court located in Franklin County, Kentucky.” The Court of Chancery found that this language is permissive in nature because it uses the word “consents” and does not clearly state that the Franklin County Circuit Court is the exclusive forum for the resolution of fund-related disputes.  The Court of Chancery compared the LPAs’ language to other agreements’ mandatory forum selection language, which provide that “any” or “all” actions brought by the parties “shall” be brought in Kentucky.

Nevertheless, in the interests of comity and judicial efficiency, the Court of Chancery stayed this action pending resolution of the claims brought in Kentucky. The actions overlap substantially and both forums are equally convenient, so the Court of Chancery found it appropriate that a Kentucky court take the lead in interpreting Kentucky law.

In re Bay Hills Emerging Partners I, L.P., et al, CA No. 2018-0234-JRS (Del Ch. July 2, 2018).