LIMITED PARTNERSHIP IS DISSOLVED BECAUSE IT CANNOT FULFILL ITS PURPOSE

By Scott E. Waxman and Annamarie C. Larson

In GMF ELCM Fund L.P. et al v. ELCM HCRE GP LLC et al, C.A. No. 2018-0840-SG (Del. Ch. August 7, 2019), the Delaware Court of Chancery granted a petition for dissolution of a Delaware limited partnership, ELCM Healthcare Real Estate Fund LP (the “Fund”), because the principal of the general partner, Andrew White, was unwilling or unable to conduct the business of the Fund to fulfill the purpose set forth in its limited partnership agreement.

Mr. White organized several dozen entities, including the Fund, to invest in and operate nursing homes in Oklahoma and other states.  The Court found that Mr. White engaged in “unsatisfactory practices” such as failure to invoice patients and failure to cash checks for rent and services (or diversion of such income to his own accounts) which led to inability of the nursing homes to pay staff or buy food for patients.

In a prior lawsuit, plaintiff investors successfully brought an action against Mr. White alleging contractual and fiduciary breaches, and the Court of Chancery granted receivership over the Fund.  In this lawsuit, the plaintiffs requested judicial dissolution of the Fund on the ground that it could no longer fulfill its purpose.

Under Section 17-802 of the Delaware Code, “[o]n application by or for a partner the Court of Chancery may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the purpose of the business in conformity with the partnership agreement.”  The Court orders dissolution under Section 17-802 in instances of deadlock or where the limited partnership’s purpose can no longer be achieved. 

The Fund’s limited partnership agreement defines its purpose as “(a) making real estate and real estate-related investments related to senior housing…(b) managing, supervising, renovating, repositioning, developing, redeveloping, holding for investment and otherwise dealing with and disposing of such investments and (c) engaging in other such activities related, incidental or ancillary thereto…” 

After a thorough analysis of the factual background and procedural history, the Court found many indications that the Fund was not able to fulfill its purpose.  In addition to Mr. White’s payment failures described above, Mr. White on several occasions failed to appear in court and “evaded” legal proceedings by claiming he was ill and unable to travel.  The Court appointed two successive interim receivers of the Fund, and Mr. White repeatedly failed to assist the interim receivers in accessing the Fund’s bank accounts or providing other necessary information so that the interim receivers could operate the Fund’s business.  The Fund experienced a myriad of litigation in other jurisdictions which had a “significant drain” on its resources, so the Court found that the Fund was not in a financial position to undertake new investments.

The Court noted, “Dissolution is an extraordinary equitable remedy.  It should not be invoked—and is never applied—lightly.”  However, under these circumstances, the Court found that the Fund’s business must be liquidated to preserve what value was left.

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