ESG Capital Partners II, LP ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ESG CAPITAL PARTNERS II, LP, et al., )
)
Plaintiffs, )
)
v. ) C.A. No. 11053-VCL
)
PASSPORT SPECIAL OPPORTUNITIES )
MASTER FUND, LP, et al., )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: October 16, 2015
Date Decided: December 16, 2015
Philip Trainer, Marie M. Degnan, ASHBY & GEDDES, P.A., Wilmington, Delaware;
Madlyn Gleich Primoff, Benjamin Mintz, Kyle D. Gooch, KAYE SCHOLER LLP, New
York, New York; Counsel for Plaintiffs.
A. Thompson Bayliss, David A Seal, ABRAMS & BAYLISS LLP, Wilmington,
Delaware; Thomas K. Cauley, Jr., Steven E. Sexton, SIDLEY AUSTIN LLP, Chicago,
Illinois; Counsel for Defendants Passport Special Opportunities Master Fund, LP and
Passport Capital, LLC.
Richard W. Riley, DUANE MORRIS LLP, Wilmington, Delaware; Jeffrey W. Spear,
William C. Heuer, DUANE MORRIS, LLP, New York, New York; Counsel for
Defendant Pearl Capital Partners, LP.
David A. Felice, BAILEY & GLASSER, LLP, Wilmington, Delaware; James M. Wines,
LAW OFFICE OF JAMES M. WINES; Alexandria, Virginia; Counsel for Defendants
Phelim Dolan and Lauren Zalaznick.
Joanna J. Cline, James H. S. Levine, PEPPER HAMILTON LLP, Wilmington, Delaware;
Counsel for Defendants Michael Bateman, Brazos Global Investors LP, Fannie Calabro
Felice, Renee Luciano, Robert Luciano, Jeffrey E. Sefchok Sr., Gary Sefchok, Timothy
Sefchok, James J. White, and Tracy White.
LASTER, Vice Chancellor.
Non-party Timothy Burns formed ESG Capital Partners II, LP (the ―Partnership‖)
for a limited purpose. After raising money from investors, the Partnership would
purchase shares of stock of Facebook, Inc. before that company‘s then-anticipated initial
public offering. Preferably once Facebook had completed a successful IPO, the
Partnership would distribute to its investors either the Facebook shares themselves or
their cash value. After that, the Partnership would dissolve.
The constitutive agreement governing the Partnership (the ―Partnership
Agreement‖ or ―PA‖) divided the aggregate equity stake in the Partnership into ―Units.‖
Investors in the Partnership became limited partners by purchasing Units. The Partnership
Agreement made clear that any distributions would be made to all partners in proportion
to their respective ―Percentage Interests,‖ defined as the number of Units that each
partner held divided by the total number of Units outstanding.
Forty-four investors purchased Units, and the Partnership used their capital to buy
Facebook shares. But rather than making a distribution in compliance with the
Partnership Agreement, Burns made preferential transfers to certain limited partners. The
favored limited partners received one Facebook share for each of their Units, without
regard to their actual Percentage Interests. Other limited partners either did not receive
any Facebook shares or received less than one Facebook share for each of their Units,
again without regard to their actual Percentage Interests.
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In this action, the investors who got too little (the ―Disfavored LPs‖) sued the
investors who got too much (the ―Favored LPs‖).1 The plaintiffs contend that by
receiving excess Facebook shares, the Favored LPs breached the Partnership Agreement,
wrongfully converted property, and were unjustly enriched. The Favored LPs have
moved to dismiss the complaint for failing to state a cognizable claim for relief.
The defendants‘ motion is granted as to the claims against Passport Capital LLC,
which was not a limited partner and did not receive a preferential transfer. The
defendants‘ motion also is granted as to Count IV, which seeks redundant declaratory
relief regarding the meaning of the Partnership Agreement.
Otherwise, the defendants‘ motion is denied. The Favored LPs argue primarily
that they were entitled to one Facebook share for each Unit they owned, regardless of the
Percentage Interest that their Units represented. The Favored LPs then posit that they
received no more than what they were entitled to, so no one could have been harmed or
have a claim. These positions conflict with the Delaware Uniform Limited Partnership
Act (the ―LP Act‖), which distinguishes between the assets of a limited partnership and
an ownership interest in the limited partnership. The Favored LPs‘ positions also conflict
with multiple provisions in the Partnership Agreement and with language found
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The Disfavored LPs are plaintiffs Hawk Management, LP, Joelco. Investment
Company LLC, Speisman Family 2000 LP, David Brumbaugh, Scott Brumbaugh, Robert
Lee Hitchock, Johns Martin, Bernard Poussot, William Simon, and Jesse Haywood
Washburn. The Favored LPs are defendants Passport Special Opportunities Master Fund,
LP, Pearl Capital Partners, LP, Brazos Global Investors LP, Michael Bateman, Phelim
Dolan, Fannie Calabro Felice, Renee Luciano, Robert Luciano, Jeffrey F. Sefchok Sr.,
Gary Sefchok, Timothy Sefchok, James J. White, Tracey White, and Lauren Zalaznick.
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throughout the offering-related documents pursuant to which the Favored LPs purchased
Units. The Favored LPs‘ other grounds for dismissal fare no better. Counts I, II, III, and
V will proceed beyond the pleadings stage against the Favored LPs.
I. FACTUAL BACKGROUND
The facts for purposes of the motion to dismiss are drawn from the verified
complaint (the ―Complaint‖) and the documents it incorporated by reference. At this
stage of the case, the Complaint‘s well-pled allegations are assumed to be true, and the
plaintiffs receive the benefit of all reasonable inferences.
A. Burns Forms The Partnership And Raises Money From Investors.
In 2011, Burns formed the Partnership. He also formed non-party ESG Capital
Partners GP, Inc. (the ―Original GP‖), which served as the general partner of the
Partnership until December 2012. Burns controlled the Original GP and, through it, the
Partnership.
Between October 3, 2011 and April 26, 2012, Burns raised money from investors
by distributing a Confidential Private Placement Memorandum (the ―PPM‖) and a
Limited Partnership Interest Subscription Agreement (the ―Subscription Agreement‖ or
―SA‖). The PPM described the Partnership and the Units and contained the information
on which investors could rely when deciding whether to invest. The Subscription
Agreement defined the terms on which the investors agreed to purchase Units.
A total of forty-four investors purchased Units and became limited partners. The
Disfavored LPs executed the Subscription Agreement, made their capital contributions,
and became limited partners in the Partnership. So did the Favored LPs.
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Passport Capital is the investment manager for defendant Passport Special
Opportunities Master Fund, L.P. (the ―Passport Fund‖). Passport Capital attempted to
secure preferential treatment for the Passport Fund through a side letter with the
Partnership dated March 4, 2012 (the ―Side Letter‖). Passport Capital signed the Side
Letter on behalf of the Passport Fund. Burns signed the Side Letter on behalf of the
Original GP, which signed on behalf of the Partnership. The other limited partners were
not parties to the Side Letter and did not consent to its terms.
On March 5, 2012, Passport Capital executed a Subscription Agreement on behalf
of the Passport Fund. Pursuant to the Subscription Agreement, the Passport Fund
acquired 100,000 Units for a total purchase price of $3.3 million.
B. Burns’ Defalcations And The Preferential Transfers
In March 2012, the Partnership paid approximately $14 million to purchase
452,515 Facebook shares. In May 2012, Facebook completed its IPO.
After the IPO, Burns wrongfully diverted cash, shares, and other Partnership
property. Burns was indicted criminally and convicted for his misconduct.
In November 2012, before his wrongdoing was discovered, Burns caused the
Partnership to transfer 376,465 shares to the limited partners. Burns did not distribute the
shares in accordance with the Partnership Agreement. Instead, Burns made preferential
transfers to the Favored LPs.
In total, the Favored LPs received 136,350 shares of Facebook common stock, a
figure equating to one Facebook share for each Unit that they held. The transfer treated
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the Favored LPs as if all 452,515 shares of Facebook stock were available for
distribution. But because of Burns‘ defalcations, the Partnership had fewer shares.
The Disfavored LPs were not treated similarly. Some received less than one share
of Facebook common stock for each of their Units. Others did not receive anything.
Rather than all of the partners suffering proportionately, the Disfavored LPs alone bore
the costs of Burns‘ wrongdoing.
C. The Successor GP Replaces The Original GP And Seeks To Unwind The
Preferential Transfers.
In December 2012, certain limited partners uncovered what Burns had done. They
demanded that Burns and the Original GP either withdraw or resign. In response, Burns
signed a document dated December 19, 2012, stating that the Original GP would
immediately cease performing its duties as the general partner of the Partnership. Burns
also issued a Notice of Meeting for a special meeting of limited partners of the
Partnership to be held on December 20, 2012. At the special meeting, holders of a
majority of the limited partner interests in the Partnership elected plaintiff ESG Successor
II, LLC (the ―Successor GP‖), an entity unaffiliated with Burns, as the general partner of
the Partnership.
On March 13, 2015, the Successor GP sent letters on behalf of the Partnership to
the Favored LPs demanding that they return the shares they had received or pay the
Partnership the current market value of the shares. The letters stated that after recovering
the preferential transfers, the Successor GP would make a distribution of shares or cash to
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all limited partners based on their Percentage Interests. The Favored LPs did not return
their Facebook shares or otherwise repay the Partnership.
D. This Litigation
On May 20, 2015, the Disfavored LPs, the Successor GP, and the Partnership filed
this action against the Favored LPs and Passport Capital. The Complaint contained five
counts:
 Count I asserted a claim for breach of the Partnership Agreement.
 Count II asserted a claim for conversion and alleged that the Favored LPs were
wrongfully exercising dominion and control over the shares of Facebook stock
that they received.
 Count III asserted a claim for unjust enrichment based on the preferential transfers
of Facebook shares to the Favored LPs.
 Count IV sought a declaratory judgment that the preferential transfers violated the
Distribution Provisions.
 Count V sought to recover the plaintiffs‘ attorneys‘ fees and expenses under the
loser-pays clause in the Partnership Agreement.
The defendants moved to dismiss the Complaint. The parties passed over Count V, which
rises or falls depending on whether the plaintiffs prevail on their other claims. This
decision does not address Count V either.
II. LEGAL ANALYSIS
The defendants have moved to dismiss the Complaint for failing to state a claim
on which relief can be granted. When considering such a motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague
allegations are well-pleaded if they give the opposing party notice of the
claim; (iii) the Court must draw all reasonable inferences in favor of the
non-moving party; and (iv) dismissal is inappropriate unless the plaintiff
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would not be entitled to recover under any reasonably conceivable set of
circumstances susceptible of proof.
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (footnotes and internal
quotation marks omitted).
A. Count I: Breach Of Contract
Count I of the Complaint asserts a claim for breach of contract. To state a claim
for breach of contract, a plaintiff must allege the existence of a contract, breach, and
causally related damages. VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612
(Del. 2003).
The Complaint pleads that the Favored LPs are parties to the Partnership
Agreement. ―Limited partnership agreements are a type of contract.‖ Norton v. K-Sea
Transp. P’rs L.P., 67 A.3d 354, 360 (Del. 2013). By statute, ―[a] partner of a limited
partnership . . . is bound by the partnership agreement whether or not the partner . . .
executes the partnership agreement.‖ 6 Del. C. § 17-101(12). The Favored LPs are
therefore parties to the Partnership Agreement, which can be enforced against them.
―[P]artnership agreements should be and are enforceable against limited partners in
accordance with their terms.‖ Martin I. Lubaroff & Paul M. Altman, Delaware Limited
Partnerships § 5.7 (supp. 2012).
The Complaint pleads a breach of the Partnership Agreement. In multiple sections,
the Partnership Agreement required that any returns to investors take the form of
distributions proportionate to each investor‘s Percentage Interest. The Partnership
Agreement first introduced these concepts in Section 1.5, entitled ―Term,‖ which linked
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the termination of the Partnership‘s otherwise perpetual existence to fulfilling its purpose
of acquiring Facebook shares, then distributing the shares or their cash value to the
partners in proportion to their Percentage Interests. Section 1.5 stated:
The Partnership shall have perpetual existence unless sooner dissolved or
terminated as herein provided or otherwise by law.
Notwithstanding the foregoing, in the event Facebook undergoes an
[IPO] . . . , the Partnership shall either sell its shares of stock in Facebook
and distribute the proceeds therefrom or distribute its assets and proceeds to
the Partners in accordance with the terms and conditions set forth in greater
detail herein, after which the Partnership shall be dissolved.
. . . In the event Facebook does not undergo an IPO within a period of thirty
(30) months following the closing of the purchase of the shares of
Facebook stock, upon the request of a Limited Partner, the General Partner
shall . . . use commercially reasonable efforts to either distribute to such
Limited Partner, or liquidate and distribute the proceeds resulting
therefrom, a number of shares of Facebook held by the Partnership in
proportion to such Limited Partner‘s Percentage Interest in the Partnership.
PA § 1.5 (the ―Limited Term Provision‖; formatting as separate paragraphs added for
clarity).
Under the Limited Term Provision, once the Partnership purchased Facebook
shares, there were two ways for the limited partners to receive returns. One possibility
was for Facebook to conduct an IPO, in which case the Partnership would ―sell its shares
of stock in Facebook and distribute the proceeds therefrom or distribute its assets and
proceeds to the Partners . . . , after which the Partnership shall be dissolved.‖ The other
possibility was for Facebook not to conduct an IPO, in which case the Partnership would
―use commercially reasonable efforts to either distribute to such Limited Partner, or
liquidate and distribute the proceeds resulting therefrom, a number of shares of Facebook
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held by the Partnership in proportion to such Limited Partner‘s Percentage Interest in the
Partnership.‖ In either situation, the partners would receive their proportionate share of a
distribution.
Two other sections of the Partnership Agreement specified what was meant by a
distribution. Section 4.1 provided for distributions generally. It stated:
Any Cash Flow or other property of the Partnership that the General Partner
determines is available for distribution shall be distributed to the General
Partner and the Limited Partners from time-to-time as the General Partner
determines in proportion to each Partner’s respective Percentage Interests
[sic].
Id. § 4.1 (emphasis added). Section 4.4 provided for distributions following a defined
―Sales of Assets.‖ It stated:
All net cash proceeds arising as a result of a Sale of Assets not required to
pay, discharge or provide for the Partnership‘s debts and obligations or to
fund other reserves shall, within thirty (30) days after receipt thereof by the
Partnership, be distributed among the Partners in proportion to their
respective Percentage Interests.
Id. § 4.4 (jointly with Section 4.1, the ―Distribution Provisions‖; emphasis added). The
plain language of both provisions contemplated distributions to the partners as a class, not
as one-off transfers to certain limited partners. The provisions also contemplated that
each partner would share in any distribution based on that partner‘s Percentage Interest,
an amount determined by ―dividing the number of Units held by [a] Partner by the total
number of Units then outstanding.‖ Id. at sched. B (defining Percentage Interest); accord
id. § 1.7 (―Each Unit shall entitle the holder thereof to an ownership interest in the
Partnership equal to a percentage equal to 1 divided by the total number of Units
outstanding as of the time of determination of such percentage.‖).
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The Complaint adequately pleads that the Distribution Provisions were breached
and that the Disfavored LPs suffered harm. Contrary to the terms of the Partnership
Agreement, the Favored LPs received preferential transfers at the expense of the
Disfavored LPs. Rather than receiving Facebook shares in accordance with their
Percentage Interests, the Favored LPs received one Facebook share for each Unit they
held. Meanwhile, the Disfavored LPs received either zero Facebook shares or less than
one Facebook share for each Unit they held.
In an effort to defeat this claim at the pleadings stage, the Favored LPs offer a
number of responses. Their arguments fall into two groups: (i) arguments that apply to all
of the Favored LPs, and (ii) arguments unique to the Passport Fund.
1. The Claim To Own Specific Facebook Shares
The Favored LPs‘ primary defense to the breach of contract claim is that they each
had an ownership interest in the Partnership‘s shares of Facebook stock equal to the
number of Units they held. From that premise, they argue that no breach of contract could
have occurred because they each received a number of Facebook shares equal to the
number of Units they held. According to the Favored LPs, they effectively received a
ratable distribution, so the Complaint should be dismissed. These arguments are
frivolous.
a. No Ownership Interest In Partnership Property
The Favored LPs argue in the first instance that they had an ownership interest in
the Partnership‘s underlying Facebook shares. That is wrong.
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By claiming an ownership interest in particular Facebook shares, the Favored LPs
are claiming an ownership interest in specific Partnership property. By statute, a limited
partnership is a separate entity, and individual partners do not have any rights in specific
partnership property. The LP Act says just that: ―A partner has no interest in specific
limited partnership property.‖ 6 Del. C. § 17-701. What a partner instead owns is a
―partnership interest.‖ The LP Act defines that term as ―a partner‘s share of the profits
and losses of a limited partnership and the right to receive distributions of partnership
assets.‖ Id. § 17-101(13). Ownership of a partnership interest does not carry with it any
rights to specific limited partnership property.
Although clear as a matter of statutory law, the Partnership Agreement reiterated
these propositions. Section 1.4 of the Partnership Agreement, titled ―Purposes, Business
and Objections,‖ confirmed that investors in the Partnership were not obtaining an
ownership interest in Facebook shares. It stated:
The purpose of the Partnership and the business to be carried on and the
objectives to be attached by it are to invest its funds in the stock of
Facebook. Notwithstanding the foregoing, each Limited Partner hereby
acknowledges and agrees that he is investing in the Partnership and will
acquire an equity interest in the Partnership, and will not, in connection
with this Agreement or related investment, own nor acquire any shares of
stock in Facebook.
PA § 1.4 (the ―Limited Purpose Provision‖; emphasis added).
Section 1.7 of the Partnership Agreement addressed the nature of an ownership
interest in the Partnership. It stated:
The Partnership shall have two (2) classes of Partnership Interests:
―General Partnership Interests‖, [sic] and ―Limited Partnership Interests.‖
Limited Partnership Interests and General Partner Interests shall be
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reflected by the issuance of units (―Units‖). Such Units shall represent an
ownership interest in the Partnership (which shall be considered personal
property for all purposes), consisting of (a) an interest in Profits and Losses,
specially allocated items and distributions pursuant to this Agreement, and
(b) to the extent provided in this Agreement or required under the [LP Act],
the right to vote or grant or withhold consents with respect to Partnership
matters.
Id. § 1.7 (the ―Partnership Interest Provision‖).
The very next provision, Section 1.8, distinguished between an interest in the
Partnership and ownership of Partnership property. It stated:
(a) . . . All real and personal property owned by the Partnership shall be
owned by the Partnership as an entity. The General Partner‘s and each
Limited Partner‘s interest in the Partnership shall be personal property for
all purposes.
(b) No limited Partner shall, either directly or indirectly, take any action to
require partition or appraisement of the Partnership or of any of its assets or
cause the sale of any Partnership assets for other than a Partnership
purpose, and notwithstanding any provision of applicable law to the
contrary, each Limited Partner . . . hereby irrevocably waives any and all
right to maintain any action for partition or to compel any sale with respect
to its, his or her Limited Partnership Interest or with respect to any assets of
the Partnership, except as expressly provided in this Agreement.
Id. § 1.8 (the ―Entity Ownership Provision‖). Along similar lines, Section 3.4 stated that
―[e]xcept as otherwise expressly provided herein, the Limited Partners shall not . . . have
any control over the Partnership‘s business or assets.‖ Id. § 3.4.
Under these provisions, the Partnership owned its assets. No partner owned
specific Partnership assets. Nor could a partner seek to establish ownership rights in
Partnership assets, whether by an action for partition or otherwise.
In addition to the LP Act and the Partnership Agreement, the PPM described the
nature of the ownership interest that investors were purchasing. In three locations, each
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set off from the remainder of the text in a block paragraph and printed entirely in
capitalized letters, the PPM stressed that investors would own Units representing a
partnership interest, not any rights in individual Facebook shares.
On the first substantive page of the PPM, in the ―EXECUTIVE SUMMARY,‖
under the heading ―Overview,‖ the PPM stated:
THIS OFFERING IS FOR LIMITED PARTNERSHIP INTERESTS IN
ESG CAPITAL PARTNERS II, LP, AND IS NOT AN OFFERING FOR
SHARES OF FACEBOOK STOCK. IF YOU PURCHASE LIMITED
PARTNERSHIP INTERESTS IN THIS OFFERING, YOU WILL NOT
OWN SHARES OF FACEBOOK STOCK AS A RESULT OF SUCH
PURCHASE.
PPM at 1.
On the third page of the document, under the heading ―EXECUTIVE SUMMARY
OF PRINCIPAL TERMS,‖ the PPM stated:
THIS OFFERING IS FOR LIMITED PARTNERSHIP INTERESTS IN
ESG CAPITAL PARTNERS II, LP, AND IS NOT FOR SHARES OF
FACEBOOK STOCK. IF YOU PURCHASE LIMITED PARTNERSHIP
INTERESTS IN THIS OFFERING, YOU WILL NOT OWN SHARES OF
FACEBOOK STOCK AS A RESULT OF SUCH PURCHASE.
Id. at 3.
On the fourth page of the document, under the heading the ―THE FUND,‖ the
PPM stated:
THE FUND IS OFFERING FOR SALE LIMITED PARTNERSHIP
INTERESTS. ANY INVESTOR IN THE FUND WILL NOT, AS A
RESULT OF THIS OFFERING, OWN SHARES OF FACEBOOK
STOCK.
Id. at 4.
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The PPM described with similar precision the fact that investors would not
necessarily receive one Facebook share for each Unit they purchased. The PPM advised
that ―[t]he Fund intends to liquidate its position [in Facebook shares] at the termination of
any lock-up period following an Initial Public Offering of Facebook, or at such other time
when the General Partner determines is in the best interests of the Fund.‖ Id. at 9. Any
cash distribution would be made after accounting for the General Partner‘s management
fee, a one-time incentive fee equal to ten percent of the net profits generated during the
life of the Partnership, as well as other Partnership expenses. Id. at 10. The PPM noted
that the General Partner could make partial distributions, but that in the event the General
Partner did so, the Partnership would ―promptly distribute to the Limited Partners a pro
rata portion of the proceeds to which each Limited Partner shall be entitled, subject to
any fees, expenses, funding of reserves, etc.‖ Id. at 5; accord id. at 4.
Finally, there was the Subscription Agreement. The formal title of that document
was the ―Limited Partnership Interest Subscription Agreement,‖ which made clear that
each subscriber was buying a ―Limited Partnership Interest,‖ not a particular number of
Facebook shares. Anyone who skipped the title encountered the same concept in the
introductory paragraphs, which recited that the subscriber was ―purchasing the limited
partnership interests hereunder‖ and that the ―[s]ubscriber desires to subscribe for certain
limited partnership interests in the Partnership.‖ SA at 1. And Section 4(b) of the
Subscription Agreement stated that ―[e]ach Unit entitles the holder thereof to a
percentage of ownership in the Partnership,‖ not specific Facebook shares.
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The plain language of the LP Act, the Partnership Agreement, the PPM, and the
Subscription Agreement made clear what the limited partners bought when they
purchased Units. The first step in the Favored LPs syllogism—that by purchasing Units
they acquired the right to a particular number of Facebook shares—is frivolous.
b. Preferential Transfers Are Not A Ratable Distribution
The Favored LPs next argue that because the number of shares they received
matched the number of Units they held, they effectively received a ratable distribution
that complied with the Distribution Provisions. That is not correct either.
The Distribution Provisions require that any distribution be made in accordance
with the partners‘ Percentage Interests. Although the calculation of each partner‘s
Percentage Interest uses the number of Units held as the numerator and the total number
of Units outstanding as the denominator, it is the resulting percentage that determines
what portion of the distribution each limited partner receives. The number of Units that a
limited partner holds is only an input to that calculation. There is no right under the
Partnership Agreement to receive a number of Facebook shares equal to the number of
Units held.
An example with numbers may help. Assume that the Partnership acquired 100
Facebook shares and issued a total of 100 Units. Assume that a limited partner purchased
10 Units. The limited partner‘s Percentage Interest is 10%, so if the Partnership
distributed all of the Facebook shares, the limited partner would receive 10 shares. Now
assume that before making the distribution, the Partnership became liable to a third party
and sold 10 of the Facebook shares to pay the debt, leaving only 90 Facebook shares. The
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limited partner‘s Percentage Interest is still 10%, but that percentage now results in the
limited partner receiving 9 shares. Under the terms of the Distribution Provisions, Units
do not correspond on a one-for-one basis with shares.
In this case, Burns‘ defalcations reduced the number of Facebook shares below a
one-for-one correspondence with the number of Units. The Distribution Provisions called
for distributions based on Percentage Interests. As in the simplified example, a limited
partner owning the same number of Units continued to own the same Percentage Interest,
but that Percentage Interest yielded fewer shares. When the Favored LPs received one
Facebook share for each Unit they held, they received more than what their Percentage
Interest in a distribution would have generated. They received preferential treatment, not
the practical equivalent of a ratable distribution.
The Favored LPs‘ syllogism thus fails again for want of its second critical
premise. Just as the Favored LPs did not have an ownership interest in the Partnership‘s
Facebook shares, so too they did not receive the equivalent of a ratable distribution from
the Partnership.
2. Section 17-607 Of The LP Act
As a backstop to their primary argument, the Favored LPs contend that Section 17-
607(b) of the LP Act provides the exclusive means for challenging any distribution. See 6
Del. C. § 17-607. There are at least two fundamental problems with this contention. The
Partnership did not make a distribution, and Section 17-607(b) is not exclusive.
In its entirety, Section 17-607 states:
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(a) A limited partnership shall not make a distribution to a partner to the
extent that at the time of the distribution, after giving effect to the
distribution, all liabilities of the limited partnership, other than liabilities to
partners on account of their partnership interests and liabilities for which
the recourse of creditors is limited to specified property of the limited
partnership, exceed the fair value of the assets of the limited partnership,
except that the fair value of property that is subject to a liability for which
the recourse of creditors is limited shall be included in the assets of the
limited partnership only to the extent that the fair value of that property
exceeds that liability. For purposes of this subsection (a), the term
―distribution‖ shall not include amounts constituting reasonable
compensation for present or past services or reasonable payments made in
the ordinary course of business pursuant to a bona fide retirement plan or
other benefits program.
(b) A limited partner who receives a distribution in violation of subsection
(a) of this section, and who knew at the time of the distribution that the
distribution violated subsection (a) of this section, shall be liable to the
limited partnership for the amount of the distribution. A limited partner
who receives a distribution in violation of subsection (a) of this section, and
who did not know at the time of the distribution that the distribution
violated subsection (a) of this section, shall not be liable for the amount of
the distribution. Subject to subsection (c) of this section, this subsection
shall not affect any obligation or liability of a limited partner under an
agreement or other applicable law for the amount of a distribution.
(c) Unless otherwise agreed, a limited partner who receives a distribution
from a limited partnership shall have no liability under this chapter or other
applicable law for the amount of the distribution after the expiration of 3
years from the date of the distribution.
Id.
The three subsections of Section 17-607 work together. Section 17-607(a) places a
statutory limitation on a limited partnership‘s ability to make a distribution. In simplified
terms, a limited partnership cannot make a distribution when it is balance-sheet insolvent
or if the distribution would render the limited partnership insolvent. The limitation
roughly parallels the statutory restriction on the ability of a corporation to pay dividends
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or repurchase its shares, although Section 17-607(a) makes the test turn on balance-sheet
solvency rather the concept of available surplus.2
Next, Section 17-607(b) limits the available remedies for a violation of Section 17-
607(a). In three places, Section 17-607(b) references a distribution ―in violation of
subsection (a) of this section.‖ Subsection (b) does not purport to apply to other
restrictions on distributions. Indeed, subsection (b) makes this explicit by stating:
―Subject to subsection (c) of this section, this subsection shall not affect any obligation or
liability of a limited partner under an agreement or other applicable law for the amount of
a distribution.‖
Last, Section 17-607(c) establishes a three-year statute of limitations for claims to
recover distributions. Unlike subsections (a) and (b), Section 17-607(c) speaks to
distributions generally. It also makes clear, consistent with the LP Act‘s contractarian
approach, that parties may ―otherwise agree[].‖
Given the language of Section 17-607, the Favored LPs cannot invoke subsection
(b) as a defense. First, Section 17-607 applies to distributions. For the reasons discussed
in the preceding section, the Favored LPs did not receive a distribution. They received
preferential transfers.
Second, Section 17-607(b) is not the exclusive means of challenging a
distribution. It does not contain any text implying exclusivity. It rather states that ―this
2
Compare 6 Del. C. § 17-607 with 8 Del. C. §§ 154, 160, 170. See generally SV
Inv. P’rs, LLC v. ThoughtWorks, Inc., 7 A.3d 973 (Del. Ch. 2010), aff’d, 37 A.3d 205(Del. 2011); Bayless Manning & James J. Hanks, Jr., Legal Capital (3d ed. 1990).
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subsection shall not affect any obligation or liability of a limited partner under an
agreement or other applicable law for the amount of a distribution.‖ Section 17-504 of the
LP Act provides that ―[d]istributions . . . shall be allocated among the partners . . . in the
manner provided in the partnership agreement.‖ Consequently, ―the partners of a
Delaware limited partnership have complete contractual flexibility to provide in a
partnership agreement how distributions of cash or other assets of a limited partnership
are to be allocated among the partners.‖ Lubaroff & Altman, supra, § 6.5.
Rather than providing the exclusive means of challenging a distribution, Section
17-607(b) applies exclusively to a claim that a limited partnership violated Section 17-
607(a). The Disfavored LPs are not claiming a violation of Section 17-607(a). They are
claiming violations of the Partnership Agreement. As here, partners can enforce
provisions in a partnership agreement, and Sections 17-607(a) and (b) do not prevent
them from doing so. The broader coverage of the statute of limitations in Section 17-
607(c) reinforces the narrower scope of Section 17-607(a) and (b).
To support the contrary proposition that Section 17-607 is the exclusive means of
challenging a distribution, the defendants excise language from Techmer Accel Holdings,
LLC v. Amer, 2010 WL 5564043 (Del. Ch. Dec. 29, 2010). In that case, a creditor sought
to claw back a distribution made to a limited partner of a dissolved limited partnership.
The decision predominantly analyzed Section 17-804, which governs the dissolution of a
limited partnership. Id. at *8. In passing, the court noted that Section 17-607 did not
apply once a limited partnership had dissolved. As the court explained, ―[u]nder § 17–
804(e), distributions made to partners by a dissolved limited partnership are exclusively
19
controlled by § 17–804, while § 17–607 governs distributions at all other times during the
limited partnership‘s existence before dissolution.‖ Id. at *7. Reading too much into this
language, the defendants construe Techmer as holding that (i) Sections 17-607 and 17-
804 are ―exclusive‖ provisions that bar any other restrictions on distributions and (ii)
Section 17-607 applies exclusively until a partnership dissolves.
That is not what Techmar held, nor what the LP Act provides. Techmar
recognized that there could be ―additional protective measures‖ against distributions that
creditors or other parties could bargain for. Id. at *9. One obvious example is a restriction
in a limited partnership agreement. In fact, Delaware law presumes that provisions in a
partnership agreement are separate and independent of statutory rights:
It is not necessary for . . . partnership provisions to include explicit
language that they are creating contractual rights separate and independent
of statutory rights in order for those provisions to in fact create a separate
and independent contractual right. Rather, where a provision in a
partnership agreement appears on its face to create a right separate and
independent from a statutory right or a right granted in another section of
the partnership agreement, the partnership agreement must explicitly state
that the provision is merely clarifying or placing additional conditions on
the other statutory or contractual right if in fact that is the provision‘s
intended purpose. Otherwise, this Court will conclude that the parties
intended the provision to create the separate and independent contractual
right that the provision on its face purports to create.
Bond Purchase, L.L.C. v. Patriot Tax Credit Props., L.P., 746 A.2d 842, 855 (Del. Ch.
1999). Consistent with this approach, the plain language of the LP Act makes clear that
Section 17-607(a) imposes one limitation on distributions, but it is not the exclusive
limitation. In this case, it is not even an applicable limitation. The Favored LPs cannot
rely on Section 17-607 as a defense.
20
3. The Dispute Resolution Provision
In another of their secondary arguments, the Favored LPs rely on Section 10.5 of
the Partnership Agreement, which they claim established a ten-day contractual limitations
period for bringing claims. Because the provision is ambiguous and the underlying
purpose of the provision unclear, it cannot operate at this stage to foreclose this lawsuit.
Section 10.5 of the Partnership Agreement provides as follows:
The parties hereby agree to cooperate in good faith with each other for a
period of thirty (30) days after receiving formal written notice from the
party who claims a dispute has arisen to resolve any dispute whatsoever
relating to the interpretation, validity or performance of this Agreement or
any other disputes arising in any way out of this Agreement. To the extent
such dispute is not resolved within such thirty-day period, the parties shall
resolve such dispute in the venue and jurisdiction set forth in Section 10.12
hereof, which determination shall be made within ten (10) days following
such thirty-day period.
PA § 10.5 (emphasis added). To my mind, the meaning of this provision is not clear.
What is the ―determination‖? Is it a complete resolution of the dispute itself? That seems
highly unlikely; even an expedited proceeding can rarely be determined within ten days.
Is it a determination that the dispute has not been resolved within the thirty-day period?
That seems most likely, as the parties may have different views about the productivity of
further discussions. Is it a determination about the ―venue and jurisdiction‖ in which to
seek a determination? That seems possible, as Section 10.12 contemplates the prospect of
suit in the United States District Court for the District of Delaware or in any state court in
New Castle County, Delaware (making both this court and the Superior Court
candidates). Or is it a time period in which suit must be filed? That seems least likely, as
the filing of a suit is not a ―determination.‖
21
The defendants, however, argue that the last possibility is the only possibility, and
that Section 10.5 thus imposes a 10-day contractual statute of limitations. ―Delaware law
does not have any bias against contractual clauses that shorten statutes of limitations
because they do not violate the legislatively established statute of limitations, there are
sound business reasons for such clauses, and our case law has long upheld such clauses as
a proper exercise of the freedom of contract.‖ GRT, Inc. v. Marathon GTF Tech., Ltd.,
2011 WL 2682898, at *3 (Del. Ch. July 11, 2011) (Strine, C.).
[S]tatutes of limitation are founded in wisdom and sound policy. They have
been termed statutes of repose, and are regarded as highly beneficial. They
proceed on the principle, that it is to the interest of the public to discourage
the litigation of old or stale demands; and are designed not merely to raise a
presumption of payment, but to afford a security against the prosecution of
claims where, from lapse of time, the circumstances showing the true
nature or state of the transaction, may have been forgotten; or may be
incapable of explanation by reason of the uncertainty of human testimony,
the death or removal of witnesses, or the loss of receipts, vouchers, or other
papers.
Keller v. Farmers Bank, 24 A.2d 539, 542 (Del. Super. 1942) (internal quotation marks
omitted). But there is a difference between a general proposition and its application to the
facts of a particular case. Parties do not have unbridled discretion to shorten the statute of
limitations: ―Delaware decisions follow the general principle that contractual limitation
of actions periods are valid if they are reasonable.‖ Shaw v. Aetna Life Ins. Co., 395 A.2d
384, 386 (Del. Super. 1978); accord Aircraft Serv. Int’l, Inc. v. TBI Overseas Hldgs.,
Inc., 2014 WL 4101660, at *3 (Del. Super. Aug. 5, 2014).
At present, the meaning of Section 10.12 is ambiguous. To the extent that extrinsic
evidence clarifies the ambiguity and demonstrates that it was intended to operate as a
22
limitations period, it is possible that a ten-day limitations period could be unreasonable. It
seems too short to serve the goals identified in Keller, such as discouraging litigants from
pursuing old or stale claims and ensuring that cases are brought before evidence has been
lost or memories faded. Rather than protecting the courts and the public from the burden
of tardily filed litigation, it seems to create the opposite problem by forcing a party to
rush into court before properly investigating the factual and legal bases for its suit. In any
event, the interpretation of Section 10.12 and any potential challenge to its
reasonableness must await a more developed record. The provision does not establish a
limitations period that can be applied at the pleading stage.
4. Estoppel
In a final secondary argument, and one made at best in passing, the Favored LPs
suggest that the Successor GP should be estopped from bringing this litigation. They do
not flesh out this theory, nor identify the species of estoppel on which they rely, and the
two cases they cite do not involve estoppel but rather acquiescence. They nevertheless
seem to posit that the Successor GP stands in the shoes of the Original GP, and that the
Original GP could not challenge the preferential transfers because it made them.
As with the meaning of the dispute resolution provision, a ruling on estoppel is
premature. Estoppel is an affirmative defense that will turn on facts that are not yet
known at this stage. Regardless, assuming that the Successor GP was estopped, that
defense would not extend to the Disfavored LPs, who also are entitled to enforce the
terms of the Partnership Agreement. At present, estoppel does not provide a basis for
dismissal.
23
5. The Passport Fund And The Side Letter
The defendants‘ arguments up to this point applied to all of the Favored LPs. In
addition, the Passport Fund has unique defenses based on the Side Letter. Those defenses
can be rejected as a matter of law.
a. The Integration Clause
As a threshold matter, the integration clause in the Subscription Agreement
rendered the Side Letter a nullity. It stated that the Subscription Agreement ―constitutes
the entire understanding among the parties with respect to the subject matter hereof, and
supersedes any prior understanding and/or written or oral agreements among them.‖ SA §
7. Passport Capital and the Original GP signed the Side Letter on March 4, 2012. On
March 5, the next day, Passport Capital signed the Subscription Agreement. The Side
Letter was a ―prior agreement‖ relating to the subject matter of the Subscription
Agreement. The subsequent agreement therefore superseded its terms.
b. The Invalid Provisions
Assuming for the sake of argument that the Side Letter remained in effect, it only
could bind the Partnership to the extent that the Original GP had the necessary authority
to commit to its terms. When a representative seeks to bind an entity to a contract,
ordinary principles of agency law come into play. See Penington v. Commonwealth Hotel
Constr. Corp., 156 A. 259, 262 (Del. Ch. 1931) (Wolcott, C.).
[I]f a principal holds out a person and places him in such a position in the
community that he is apparently authorized to deal with persons as the
agent of the company or person, without any known restriction or limitation
upon his authority, he may be so held out as to bind the principal. And the
courts in this state have well said that, if a person is held out to third
24
persons or to the public at large by his principal as having a general
authority to act for him in a particular business or employment, he cannot
limit his authority by private or secret instructions.3
But if an agent‘s authority is limited and the counterparty knows about the limitations,
then the agent cannot bind the principal beyond the scope of its authority.4
The terms of the Subscription Agreement and the Partnership Agreement establish
that the Passport Fund knew about the limitations that the Partnership Agreement
imposed on the Original GP‘s authority. Under the Subscription Agreement, the Passport
Fund agreed ―to sign and become a party to the Partnership‘s Limited Partnership
Agreement in substantially the form as accompanies this Agreement.‖ SA § 3(l). In the
Partnership Agreement, the Passport Fund represented and warranted that it had
―received, read, and fully understands this Agreement, along with the Subscription
Agreement and the Confidential Private Placement Memorandum in connection with his
investment in the Partnership and acquisition of Limited Partnership Interests therein.‖
3
Excelsior Ref. Co. v. Murphey, 73 A. 1040, 1040 (Del. Super. 1906); accord In
re Mulco Prods., Inc., 123 A.2d 95, 106 (Del. Super. 1956), aff'd sub nom., Mulco
Prods., Inc. v. Black, 127 A.2d 851 (Del. 1956).
4
Cohen v. Home Ins. Co., 97 A. 1014, 1017 (Del. Super. 1916) (―No rule is better
settled than where a limitation on the power of an agent is brought home to the person
dealing with him, such person relies upon any act in excess of such limited authority at
his peril.‖) (internal quotation marks omitted), aff’d, 111 A. 264 (Del. 1920); see State v.
Edwards, 1995 WL 44267, at *4 (Del. Super. Jan. 31, 1995); Arthur Jordan Piano Co. v.
Lewis, 154 A. 467, 469 (Del. Super. 1930). See generally Restatement (Second) of
Agency § 49 cmt. b (1958) (―[I]f the principal manifests to the third person that the agent
is authorized to conduct a transaction, there is apparent authority in the agent to conduct
it in accordance with the ordinary usages of business and to do the incidental things
which ordinarily accompany the performance of such transaction, unless the third person
has notice that the agent‘s authority is limited.‖).
25
PA § 3.4; see also PA § 2.2 (providing that the ―General Partner shall require any Person
acquiring Partnership Interests to, prior thereto or contemporaneously therewith, enter
into and agree to be bound by this Agreement, and in no event shall any Person be
deemed to be a Limited Partner until such person has entered into and is bound by this
Agreement‖).
Under the Partnership Agreement, the Original GP lacked authority to grant the
Passport Fund many of the rights that the Side Letter purportedly provided. Most
significantly for present purposes, the Original GP could not grant the following rights
that appeared in paragraph 8:
Allocation of Shares. The parties hereby agree that the allocation of the
Facebook shares (―Shares‖) . . . and the corresponding percentage
allocation of the Shares shall be as follows and no action shall be taken by
the Partnership or General Partner that serves to dilute the number of
Shares held by the Investor:
Investor: 22.11%, which, for the avoidance of doubt, will be reflected
accordingly in the Investor‘s Capital Account as the indirect ownership of
100,000 Shares at $33 per share
Other Limited Partners: 77.89%,
General Partner: 0.00%.
Side Letter ¶ 8.
By its terms, paragraph 8 purported to provide that the Passport Fund ―held‖ a
specific number of Facebook shares. But the Original GP lacked authority to grant the
Passport Fund an ownership interest in specific partnership property in light of Section
17-701 of the LP Act, the Limited Purpose provision (PA § 1.4), the Partnership Interest
Provision (PA § 1.7), the Entity Ownership Provision (PA § 1.8), and other provisions of
26
the Partnership Agreement (see PA §§ 3.4, 10.8). Having agreed that it knew about the
contractual limitations on the Original GP‘s authority, and being presumed as a matter of
law to know about the statutory limitation, the Passport Fund cannot claim that the Side
Letter conferred this right.
Paragraph 8 also purported to provide the Passport Fund with a specific and fixed
percentage interest in the Partnership. But the Original GP lacked authority to grant this
right as well, both in light of the provisions defining and governing the calculation of a
Percentage Interest (PA §§ 1.1 sched. B, 1.7), and the other provisions that relied on that
calculation (PA §§ 1.6, 4.1-4.4). This aspect of paragraph 8 also conflicted with the
provisions in the Partnership Agreement governing a partner‘s capital account. Contrary
to what the Side Letter envisioned, a limited partner‘s capital account was not an escrow
account in which the General Partner could park shares tagged for a preferential transfer.
It was a set of accounting entries used to track the limited partner‘s net investment in the
Partnership. See PA § 2.4(a).
The provisions of the Partnership Agreement that paragraph 8 sought to override
were mandatory and inured to the benefit of the Partnership and all of its partners. The
Partnership Agreement did not authorize the Original GP to waive those provisions or
grant rights that ran contrary to them. The other limited partners were entitled to enforce
the terms of the Partnership Agreement as written, and any contrary commitment that the
Original GP purported to make was not binding on the partners who did not sign the Side
Letter. Am. Legacy Found. v. Lorillard Tobacco Co., 831 A.2d 335, 343 (Del. Ch. 2003)
(―[O]nly parties to a contract are bound by that contract.‖).
27
In this regard, the rights purportedly granted in paragraph 8 differed from other
provisions of the Side Letter in which the Original GP agreed to exercise a discretionary
power in favor of the Passport Fund. For example, a provision in the Side Letter stated
that the General Partner would not enforce against the Passport Fund the prohibition in
the Partnership Agreement against assignments of limited partner interests. The
Partnership Agreement authorized the General Partner to consent to assignments, so the
Original GP had the power to grant the waiver that the Passport Fund requested. As to
areas where the General Partner lacked authority, however, the Passport Fund could not
secure a contrary right without an amendment to the Partnership Agreement. The Side
Letter recognized that at least one of the rights it wanted—the ability of 65% of the
limited partners to remove the General Partner—required an amendment. See Side Letter
¶ 15. So did the rights purportedly granted in paragraph 8.
The Original GP could not use the Side Letter to amend the Partnership
Agreement unilaterally. Section 10.7 of the Partnership Agreement provided that any
amendment that ―would materially and adversely change the specifically enumerated
rights or duties of a party or of a class of parties‖ must be approved by a majority of the
adversely affected partners. PA § 10.7. Without the required approval, the purported
amendment was ineffective. Although the Passport Fund attempted to argue that the
provisions of the Side Agreement on which it relied did not ―materially and adversely
change the specifically enumerated rights‖ of the Partnership or the other limited
partners, that position is frivolous. In contrast to the provisions of the Partnership
Agreement as a whole, which envisioned all partners enjoying gains or suffering losses in
28
proportion to their Percentage Interests, paragraph 8 of the Side Letter sought to insulate
the Passport Fund from any downside by fixing its right to a specific number of Facebook
shares. By protecting the Passport Fund, the Side Letter tried to shift its share of any
losses onto the other investors.
Ironically, the first paragraph of the Side Letter recognized the detrimental effects
of investor-specific side letters on non-signatory limited partners by requiring that (i) the
Partnership inform the Passport Fund of any future side letters and (ii) grant the Passport
Fund the option of receiving most-favored-nations treatment. The full paragraph stated:
Side Letters. Neither the Partnership, the General Partner nor any of their
respective Affiliates has entered into any side letter or similar agreement
with any investor in the Partnership in connection with the admission of
such investor to the Partnership as a Limited Partner (a ―Side Letter‖) on or
prior to the date hereof, except as disclosed to the Investor in writing on or
prior to the date hereof. Neither the Partnership, the General Partner nor
any of their respective Affiliates will enter into a Side Letter with an
existing or future investor in connection with the admission of such
investor to the Partnership after the date hereof that has the effect of
establishing rights or otherwise benefitting such investor (in its capacity as
a Limited Partner) in a manner more favorable in any material respect to
such investor than the rights and benefits established in favor of the
[Passport Fund] by the Partnership Agreement or pursuant to this letter
agreement unless, in any such case and except as provided below, the
[Passport Fund] has been offered in writing the opportunity to receive the
same rights and benefits granted under such Side Letters to the extent that
such rights and benefits may be fairly and reasonably applied to the
[Passport Fund].
Side Letter ¶ 1. In other words, the Passport Fund did not want anyone else doing to it
what it was doing to the other limited partners, or at least not without the Passport Fund
getting the same sweetened deal.
29
The Passport Fund has pointed to two other provisions that it claims authorized the
Original GP to grant it special rights. One is Section 1.9 of the Partnership Agreement,
which authorizes the Partnership and the General Partner to pursue transactions involving
conflicts of interest, including by conducting business with individual limited partners.
PA § 1.9. That provision does not contemplate granting specific limited partners special
rights. It instead permits the General Partner to contract with limited partners in
alternative capacities, such as if a limited partner loaned money to the Partnership in
addition to purchasing limited partner interests. The Passport Fund did not conduct other
business with the Partnership. It purchased Units like any other limited partner.
The Passport Fund also points to Section 2.2 of the Partnership Agreement, which
authorizes the Partnership to issue ―Partnership Interests, rights, options, or warrants
exercisable for or convertible into Partnership Interests, or other securities or instruments
of any type of class whatsoever,‖ and it provides that those securities can be issued for
―cash, property, services, or such other type, form, and amount of consideration
(including notes, other evidences of indebtedness or obligations of the person acquiring
the interest, instrument, or security, as the case may be) as the General Partner may
determine to be appropriate.‖ PA § 2.2(a). While that provision authorizes the General
Partner to create new types of securities with different rights, it does not authorize the
General Partner to give certain purchasers of Units special rights that other purchasers of
Units do not enjoy. In this case, the Passport Fund purchased Units. It did not purchase a
different Partnership security. In any event, Section 2.2 provides that ―the General
Partner shall require any Person acquiring Partnership Interests to . . . enter into and agree
30
to be bound by this Agreement, and in no event shall any person be deemed to be a
Limited Partner until such person has entered into this Agreement,‖ and it also states that
the General Partner‘s ability to issue securities is ―subject to the express requirements
hereof.‖ Id. § 2.2(b); accord PA 3.3(b). In other words, Section 2.2(b) does not empower
the General Partner to use the issuance of a new security to circumvent a mandatory
aspect of the Partnership Agreement.
Paragraph 8 of the Side Letter could not give the Passport Fund the rights that it
claims. The integration clause in the Subscription Agreement wiped out the Side Letter,
which could not confer super-limited-partner status on the Passport Fund in any event.
B. Count II: Conversion
Count II asserts a claim for conversion. Conversion is an ―act of dominion
wrongfully exerted over the property of another, in denial of his right, or inconsistent
with it.‖ Drug, Inc. v. Hunt, 168 A. 87, 93 (Del. 1933). Conversion does not require a
―‗subjectively wrongful intent‘ to be actionable‖; a defendant motivated by a mistaken
belief may be held liable. Segovia v. Equities First Hldgs., LLC, 2008 WL 2251218, at
*19 (Del. Super. May 30, 2008). To state a claim for conversion, a party must allege that
(i) it has a property interest in the allegedly converted property; (ii) it had a right to
possession of the property; and (iii) the defendants wrongfully possessed or disposed of
such property as if it were their own. Israel Disc. Bank of N.Y. v. First State Depository
Co., 2013 WL 2326875, at *19 (Del. Ch. May 29, 2013).
The Complaint states a claim for conversion. The Disfavored LPs had a property
interest in the Facebook shares that were transferred to the Favored LPs, at least to the
31
extent that the number of shares transferred exceeded each Favored LP‘s respective
Percentage Interest. If a distribution had been made properly in compliance with the
Distribution Provisions, then those Facebook shares would have gone to the Disfavored
LPs. Instead, the shares went to the Favored LPs, who have treated them as if they were
their own.
The Favored LPs make the same arguments in response to Count II that they
advanced in response to the breach of contract claim in Count I. Those arguments fail for
the same reasons. They also argue that the Disfavored LPs should not be permitted to sue
both for breach of contract and for conversion. The Disfavored LPs can plead in the
alternative, as they have done. See Ct. Ch. R. 8(e)(2).
C. Count III: Unjust Enrichment
Count III asserts a claim for unjust enrichment. ―The elements of unjust
enrichment are: (1) an enrichment, (2) an impoverishment, (3) a relation between the
enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a
remedy provided by law.‖ Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
―Restitution is permitted even when the defendant retaining the benefit is not a
wrongdoer.‖ Schock v. Nash, 732 A.2d 217, 232 (Del. 1999). The Favored LPs make the
same arguments in response to Count III that they advanced in response to Counts I and
II. Those arguments fail on the same grounds.
D. Count IV: Declaratory Judgment
Count IV of the Complaint asserts a duplicative claim for a declaratory judgment
regarding the meaning of the disputed provisions of the Partnership Agreement. Under
32
the Declaratory Judgment Act, the court has the power to ―construe‖ the Partnership
Agreement and declare the parties‘ respective ―rights, status or other legal relations
thereunder.‖ 10 Del. C. § 6502. The court may also provide supplementary relief
―whenever necessary or proper‖ to resolve the parties‘ dispute. Id. § 6508.
Supplementary relief may include damages for past breaches. Sullivan v. Local Union
1726 of AFSCME, AFL-CIO, 464 A.2d 899, 903 (Del. 1983). The court has to make the
necessary determinations in the course of resolving the claim for breach of contract.
Because the declaratory judgment count does not add anything, it is dismissed. If for
some currently unforeseeable reason it turns out later that the declaratory judgment claim
was not superfluous, it can be reinstated without any prejudice to the defendants.
E. Who Is The Proper Plaintiff?
The defendants last argue that only the Partnership, not the Disfavored LPs, can
bring the claims set forth in the Complaint. They combine this argument with assertions
about why the Successor GP was not properly elected and therefore cannot sue itself or
cause the Partnership to sue. By making these arguments, the Favored LPs hope to put off
the day when suit can be brought against them.
The claim for breach of contract alleged in Count I is a cause of action that the
Disfavored LPs can assert in their capacity as limited partners. The Disfavored LPs are
parties to the Partnership Agreement and so can assert a claim for breach. See Allen v. El
Paso Pipeline GP Co., L.L.C., 90 A.3d 1097, 1110 (Del. Ch. 2014).
The claims for conversion and unjust enrichment have dual aspects. See In re El
Paso Pipeline P’rs, L.P. Deriv. Litig., --- A.3d ---, 2015 WL 7758609, at *24-25 (Del.
33
Ch. Dec. 2, 2015). Assuming that these claims are treated appropriately as derivative for
pleading-stage purposes, the Disfavored LPs can proceed with this lawsuit.
In asserting their proper-plaintiff argument, the defendants have posited two
alternatives. Either the Successor GP was validly elected to fill a vacancy created when
the Original GP resigned, or the Successor GP was not validly elected and there is
currently no General Partner. If the former scenario is true and the Successor GP was
validly elected, then the Successor GP‘s presence in the case demonstrates its support for
the litigation, which therefore can go forward. See In re Am. Int'l Gp., Inc., 965 A.2d 763,
808 (Del. Ch. 2009) (Strine, V.C.). The concepts of demand and demand futility, and
indeed derivative actions in general, operate to benefit the entity, and do ―not [operate]
for the benefit of defendants.‖ Id. When the authoritative decision-maker for the entity
does not object to investors pursuing a claim, they can proceed. See Kaplan v. Peat,
Marwick, Mitchell & Co., 540 A.2d 726, 731 (Del. 1988).
If the latter scenario is true and the Successor GP was not validly elected, then this
litigation again can go forward. In that scenario, there is currently no General Partner
who can cause the Partnership to sue. Consequently, ―an effort to cause [the General
Partner] to bring the action is not likely to succeed.‖ 6 Del. C. § 17-1001.
F. Passport Capital
The Complaint names Passport Capital as a defendant, but it is not clear why. The
foundation for potential liability in this case is the Favored LPs‘ receipt of Facebook
shares exceeding what they should have received based on their Percentage Interests in
the Partnership. Passport Capital is not a Favored LP. It manages the Passport Fund.
34
The Complaint alleges that Passport Capital received Facebook shares, but that is
not a reasonable inference to draw at this stage. Because of Passport Capital‘s role vis-à-
vis the Passport Fund, the reasonable inference is that the Passport Fund received the
shares, and that the Passport Fund paid management fees to Passport Capital and made
distributions to its investors that benefitted Passport Capital through a carried interest or
similar incentive compensation structure. Another reasonable inference is that the amount
of fees and incentive compensation that Passport Capital received took into account the
performance of the Passport Fund‘s investment in the Partnership. That is a different
thing, however, than being a party to the Partnership Agreement and receiving Facebook
shares in violation of the provisions set forth in that agreement.
Depending on the fruits of discovery and the outcome of the case, it is possible
that the Disfavored LPs might have a claim against Passport Capital. If the plaintiffs
prevail on the merits, and if the Passport Fund is not able to satisfy its share of liability
for the plaintiffs‘ claim, and if at that point it appears that excess Facebook shares or the
proceeds from a sale of those shares reached Passport Capital, then some form of
disgorgement or other remedy might be appropriate. But at present it is not reasonably
conceivable that a claim exists against Passport Capital, rather than the Passport Fund.
The Complaint also alleges that Passport Capital entered into the Letter
Agreement on behalf of the Passport Fund and that Passport Capital subsequently
executed the Subscription Agreement on behalf of the Passport Fund. The Complaint
does not contain allegations suggesting grounds why Passport Capital would face liability
because of these acts.
35
To the extent the Complaint asserted claims against Passport Capital, the motion
to dismiss is granted. Passport Capital is dismissed from the case.
III. CONCLUSION
Count IV is dismissed as redundant of Count I. All claims against Passport Capital
are dismissed. Otherwise, the motion is denied.
36