Limited Partnership – Page 2

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

Apr 23 2015

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”).

Chancery Court Finds No Fiduciary Duty for Limited Partners

Feb 13 2015

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”).

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.)

Oct 15 2014

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.

Levey v. Brownstone Asset Mgmt., LP, et al., C.A. No. 5714-VCL (Del. Ch. Aug. 1, 2014) (Laster, V.C.)

Aug 09 2014

By Scott Waxman and Marisa DiLemme

In Levey v. Brownstone Asset Mgmt., LP, et al., the plaintiff, Gordon Levey (“Levey”), and the three individual defendants worked together as principals in a financial services boutique, Brownstone Investment Group LLC. Operating out of the same office, Levey and the three defendants also ran a hedge fund. In this action, Levey, after resigning from the financial services boutique, sought a declaration that he continued to own equity in two of the entities through which the boutique operated: (1) Brownstone Investment Partners LLC, a Delaware limited liability company, which was the passive manager of the hedge fund (the “Passive Manager”); and (2) Brownstone Asset Management LP, a Delaware limited partnership, which was the active manager of the hedge fund (the “Active Manager”). Levey sought a declaration that he continued to hold a 5% interest in the Passive Manager and the Active Manager, and if he did remain an owner of those interests, he demanded his proportionate share of all past distributions made by those entities. He also sought an order requiring the defendants to identify any undisclosed profits (from which he would presumably also seek his share).

The court first addressed the critical factual issue of whether Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006. Levey argued that he may have tried to withdraw but failed in the attempt, while the defendants argued that he could and did withdraw. The court found that an objective viewer would regard Levey as withdrawing, listing actions that support this conclusion – he turned in his keys, he cut up his corporate charge card and building identification card, and the other principals and employees of the firm gathered together and said goodbye to him. He also withdrew his personal funds that were invested in the hedge fund. Levey argued that he intended to resign as an employee and to withdraw from the financial services boutique, but not to withdraw from the Passive Manager and the Active Manager. However, based on the dislike Levey had expressed for his partners, the court did not find it credible that he wanted to maintain his relationship with his partners through the Passive Manager and the Active Manager. Therefore, the court found that Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006.

Lucas v. Hanson, C.A. No. 9424-ML (July 1, 2014)

Jul 11 2014

By Eric Feldman and Claire White

Lucas v. Hanson involves two procedural questions – standing and personal jurisdiction – with respect to the plaintiff’s claims for declaratory and injunction relief against the forced distribution of assets of a limited partnership, Covenant Investment Fund LP (“Covenant”), to its limited partners. Prosapia Capital Management LLC (“Prosapia Capital”) is the general partner and limited partner of Covenant, and a wholly owned subsidiary of Prosapia Financial LLC (“Prosapia Financial”). The plaintiff, Alan Lucas, is a member of Prosapia Financial and the manager of both Prosapia Capital and Prosapia Financial. The defendants are limited partners of Covenant, none of whom are residents of Delaware or involved in the management of Covenant. Following Mr. Lucas’ criminal conviction in Iowa for theft involving expenditures and the liquidation of Covenant’s funds and assets, the Iowa courts declared that the cash held in Covenant’s accounts was the property of its limited partners and should have been distributed to the defendants.

Catagory:Limited Partnership