Topic: Limited Partnership

CHANCERY COURT FINDS THAT LANGUAGE OF LIMITED PARTNERSHIP AGREEMENT GOVERNS WHICH CLAIMS SURVIVE SUMMARY JUDGMENT IN MASTER LIMITED PARTNERSHIP’S RELATED PARTY TRANSACTION

By Scott Waxman and Adrienne Wimberly

In Mesirov v. Enbridge Company, Inc., et al. C.A. No. 11314-VCS (Del. Ch. Aug.29, 2018), the Delaware Chancery Court dismissed five of eight counts alleged with respect to a transaction where Enbridge Energy Company (EEP) repurchased for $1 billion a two-thirds interest in Alberta Clipper Pipelines (AC interest), despite the fact that EEP had sold that same interest years prior for $800 million and the business had steadily declined since such sale.  The dismissals were based primarily upon the language and obligations included in EEP’s limited partnership agreement.

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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.”

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Court of Chancery Holds That Plaintiff Failed to Meet Burden of Proof With Respect to Mistake-Based Reformation Claim

By: Scott Waxman and Tami Mack

In Richard B. Gamberg 2007 Family Trust v. United Restaurant Group, L.P., C.A. No. 10994-VCMR (Del. Ch. January 26, 2018), the Court of Chancery held that limited partner, Richard B. Gamberg 2007 Family Trust (the “Plaintiff”), failed to meet its burden of proof with respect to various claims against United Restaurant Group L.P. (the “Partnership”), Atlantic Coast Dining, Inc. (the “General Partner”), and the directors/shareholders of the General Partner (the “Shareholder Defendants”; together with the Partnership and the General Partner, the “Defendants”), which included a mistake-based reformation claim, among other breach of contract and breach of fiduciary duty claims.

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Chancery Court Permits Limited Partners’ Claims Against General Partners to Proceed Despite Ongoing Bankruptcy of the Partnership

By: Scott Waxman and David Noll

On a motion to “’confirm the trial schedule,’” Vice Chancellor Glasscock determined that actions brought by the limited partners of a partnership based upon the general partner’s alleged fraud, self interest and breach of the partnership agreement were direct claims and therefore not subject to a stay pursuant to the partnership’s bankruptcy proceeding. Sehoy Energy LP et al. v. Haven Real Estate Group, LLC et al., C.A. No. 12387-VCG (Del. Ch. April 17, 2017), addressed a situation in which  the general partner of a limited partnership (and the person controlling the general partner) used funds of the limited partnership to make investments into the business of a personal friend  which ultimately resulted in the bankruptcy of the partnership.

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Court of Chancery Denies Cross-Motions for Partial Summary Judgment Pending Further Factual Development in Delaware Master Limited Partnership Unitholder Litigation

By: Scott E. Waxman and James R. Parks

Vice Chancellor Glasscock, by memorandum opinion dated February 28, 2017, dismissed cross-motions for partial summary judgment in a dispute over the issuance of partnership units of Energy Transfer Equity, L.P., a Delaware master limited partnership (“ETE”). The challenged issuance (the “Issuance”) arose out of a contemplated, but never consummated, merger between ETE and The Williams Companies, Inc. (“Williams”), and was designed, according to the defendants, as a tool to improve ETE’s ability to enter into the merger by deferring some of ETE’s obligations to make distributions to its unitholders. The Issuance was intended to accomplish this by having certain unitholders give up their common units, which were entitled to quarterly distributions from ETE, in exchange for convertible units, which received distributions on a different schedule. Not all unitholders, however, were afforded the opportunity to participate in the Issuance and not all of the unitholders given the opportunity to participate chose to do so.

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Chancery Court Finds Unqualified Inspection Right in Statutory Trust Agreement Renders Default Preconditions and Defenses Inapplicable

By: Scott Waxman and Eric Jay

In Grand Acquisition LLC v. Passco Indian Springs DST, C.A. No. 12003-VCMR (Del. Ch. Aug. 26, 2016) the Delaware Court of Chancery found that under the Delaware Statutory Trust Act (the “Act”), the governing instrument of a Delaware statutory trust (DST) does not need to affirmatively disavow the preconditions and defenses applicable to inspection rights related to a DST’s books and records under Section 3819 of the Act in order to create a separate and distinct contractual right that can, in some circumstances, render statutory preconditions and defenses inapplicable to such requests. Read More

Chancery Court Enforces Good Faith Standard of Care in Limited Partnership Agreement

By Eric Feldman and Priya Chadha

In Brinckerhoff v. Enbridge Energy Co., Inc., et al., C.A. No. 11314-VCS (April 29, 2016), the Delaware Court of Chancery reiterated its adherence to the principle stated in the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) of giving “maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements” as well as to the ability under DRULPA of parties to a limited partnership agreement to define their respective standards of care and scope of duties and liabilities, including to eliminate default fiduciary duties, and dismissed the plaintiff’s claims.

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Chancery Court Holds That a Limited Partner’s Claims are Dual-Natured and Can Be Pursued After a Related-Party Merger; $171 Million Award to Be Recovered Pro Rata By Unaffiliated Limited Partners

By Scott Waxman and Joshua Haft

The Chancery Court held that a plaintiff’s claim that a general partner was liable for breach of a limited partnership agreement, for which the general partner was previously found liable by the Chancery Court, was best viewed as a dual-natured claim.  Dual-natured claims should be viewed as derivative for purposes of Chancery Court Rule 23.1 and the demand doctrine, but should be viewed as direct for purposes of claim termination after a merger that extinguished a limited partnership.  Thus, the Chancery Court granted pro-rata recovery of a liability award for breach of a limited partnership agreement to limited partners who were not affiliated with the general partner at the time of the related-party merger that resulted in termination of the limited partnership.

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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.

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Chancery Court Holds That a General Partner Breached a Limited Partnership Agreement for Failure to Act in the Best Interests of the Master Limited Partnership; $171 Million in Damages

By Scott Waxman and Joshua Haft

The Chancery Court held that a general partner of a master limited partnership breached the entity’s limited partnership agreement by failing to act in the best interests of the entity and instead acting in a manner that benefited the parent of its general partner and increased distributions to the entity’s common unitholders. The Chancery Court focused on the general partner’s failure to consider lessons learned from a similar past transaction and the inadequacy of the financial advisor’s fairness opinion.

In In re: El Paso Pipeline Partners, L.P. Derivative Litigation, plaintiff challenged two transactions in which El Paso Corporation (“Parent”) sold to El Paso Pipeline Partners, L.P., a master limited partnership (“El Paso MLP”), its interest in two subsidiaries of Parent, Southern LNG Company, L.L.C. and Elba Express, L.L.C. (collectively, “Elba”). Both subsidiaries were engaged in the liquefied natural gas (“LNG”) business. Parent is the parent company of El Paso MLP’s general partner, El Paso Pipeline GP Company, L.L.C. (the “General Partner”); and thus, Parent exercised control over El Paso MLP through the General Partner. In the first transaction, in March 2010, Parent dropped-down a 51% interest in Elba to El Paso MLP for total consideration of $963 million (the “Spring Dropdown”). In the second transaction, in November 2010, Parent dropped-down to El Paso MLP the remaining 49% interest in Elba for at least $931 million and 15% of another Parent subsidiary, for total consideration of $1.412 billion (the “Fall Dropdown”).

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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”).

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Lake Treasure Holdings, Ltd., et al v. Foundry Hill GP, LLC, et al and Foundry Hill Holdings, LP and CP-1 LLC, C.A. No. 6546-VCL (October 10, 2014) (Laster, V.C.)

By Eric Feldman and Porter Sesnon

In Lake Treasure Holdings, Ltd., the plaintiffs, investors in a now-defunct start-up, Foundry Hill Holdings LP (the “Partnership”), sued the Partnership, one of its founders (Ulric Taylor (“Taylor”)),  one of Taylor’s subsequent business partners (Christopher Klee (“Klee”)), and various other Partnership-related entities and operating subsidiaries for breach of fiduciary duty and aiding and abetting the breach of fiduciary duty, as well as under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) and Delaware Uniform Trade Secrets Act (“DUTSA”), in connection with a series of transactions whereby all of the assets of the Partnership were ultimately transferred to entities owned and/or controlled by Taylor and Klee. 

Taylor controlled the Partnership through his control of the Partnership’s general partner.  As a result, the Court initially found that Taylor owed fiduciary duties, including the duty of loyalty, to the Partnership and its limited partners.  In analyzing the transactions at issue, the Court further found that Taylor stood on both sides of such transactions and that therefore the entire fairness standard applied in analyzing such transactions.  In applying the entire fairness test, the Court held that Taylor had breached his duty of loyalty when he granted a security interest in all of the assets of the Partnership, including its primary asset, high frequency trading software, to Klee in exchange for a $28,000 loan from Klee to the Partnership.  Prior to the $28,000 loan by Klee, Taylor and Klee had previously contemplated Klee purchasing the software for $500,000 with an enterprise valuation of $3 million. 3 months following the granting of the security interest, as foreseen by Taylor and Klee at the time the loan was made, the Partnership defaulted on the loan, Klee foreclosed on the security interest, and Taylor amicably surrendered all of the assets of the Partnership, including all interest in the software, to an entity controlled by Klee.  The Court determined that Taylor and Klee “acted in concert to move the Partnership’s high frequency trading software out of the Partnership and into an entity where Taylor and Klee could enjoy its benefits.”  Upon finding the fiduciary duty breach by Taylor, the Court then also found that Klee had aided and abetted such breach of fiduciary duty.

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