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Metropolitan Life Ins. Co. v. Tremont Group Holdings, Inc., C.A. No. 7092-VCP (Del. Ch. Dec. 20, 2012) (Parsons, V.C.)

December 20, 2012

In this memorandum opinion, the Delaware Court of Chancery granted a motion to dismiss for lack of personal jurisdiction, dismissed other claims under the principles of res judicata and release, and dismissed certain claims for failing to state a claim upon which relief could be granted. 

The Plaintiffs were insurance carriers and limited partners of Tremont Opportunity Fund III, L.P., a Delaware limited partnership (the “Partnership” or “TOF III”).  TOF III’s general partner was Tremont Partners, Inc. (“TPI” or the “General Partner”), which was the wholly owned subsidiary of Tremont Group Holdings, Inc. (“TGH” and collectively with TPI and TOF III, “Tremont”).  The General Partner caused the Partnership to invest in another fund, which invested substantially all of its investment capital in Bernie Madoff’s infamous Ponzi scheme.  Once Madoff confessed to the scheme, numerous lawsuits were filed and ultimately consolidated in the U.S. District Court for the Southern District of New York.  Although the case settled all Madoff-related derivative and direct claims (the “New York Settlement”), the Plaintiffs exercised their opt-out right and brought a lawsuit in the Delaware Court of Chancery against Tremont and certain officers of TPI and TGH (the “Individual Defendants” and collectively with Tremont, the “Defendants”) alleging numerous wrongdoings related to the Madoff investments.

The Defendants sought to dismiss the Plaintiffs’ claims on four separate grounds.  First, the Individual Defendants sought to dismiss the claims against them for lack of personal jurisdiction.  Second, the Defendants argued that a certain exculpation provision (the “Exculpation Provision”) in the Partnership’s Limited Partnership Agreement (the “Agreement”), which greatly limited the liability of the General Partner, barred numerous counts asserted in the Complaint.  Third, the Defendants sought to dismiss the derivative claims because (i) the claims were barred by principles of res judicata and release, and (ii) the Plaintiffs had not satisfied the demand requirements applicable to derivative claims.  Fourth, the Defendants sought dismissal of the remaining claims for failing to state a claim upon which relief could be granted.

The Court first dismissed the claims against the Individual Defendants for lack of personal jurisdiction.  The Court held that the Individual Defendants did not consent to personal jurisdiction, even though TPI, as general partner of the Partnership, did so pursuant to the Agreement.  The Court then held that the Individual Defendants did not have the requisite minimum contacts with the State of Delaware, nor did they satisfy Delaware’s long-arm statute, even though they accepted management positions in the Partnership, participated in negotiations and meetings concerning the Plaintiffs becoming limited partners, participated in the formation of the Partnership, appointed the General Partner, and reaped benefits from managing the Partnership.

Second, the Court held that the Exculpation Provision did not bar the Plaintiffs’ claims for breach of contract, breach of fiduciary duty, negligent misrepresentation, and unjust enrichment.  Although the Delaware Revised Uniform Limited Partnership Act permits the limitation or elimination of liability of a partner for breach of contract and breach of duties, the Exculpation Provision did not excuse TPI for gross negligence, willful misfeasance, bad faith, or reckless disregard of duties arising under the Agreement.  Because the Plaintiffs alleged that Tremont willfully and consciously ignored warning signs about the Madoff investments, the Court denied Tremont’s motion to dismiss based on the Exculpation Provision.

Third, the Court dismissed the Plaintiffs’ derivative claims under the principles of res judicata and release by operation of the New York Settlement.  The Court noted that in a stockholder’s derivative suit, a judgment entered upon an approved settlement is res judicata and bars subsequent suit on the same claim on behalf of the corporation.  Thus, according to the Court, the Plaintiffs were barred from bringing derivative claims in the Court of Chancery due to the New York Settlement.  The Plaintiffs, however, argued that equity required the Court to disregard the derivative nature of their derivative claims.  Although the Court acknowledged that in certain circumstances the distinction between direct and derivative claims can become irrelevant, this was not one of those circumstances.  According to the Court, “the relationships among the parties and the function and structure of the partnership itself may diverge from the corporate model so dramatically that some claims, which in a corporate context might be classified as derivative, must be brought as direct claims in order to enable the injured parties to recover while preventing a windfall to individuals or entities whose interests were not injured.”  Here, however, equity did not require the Court to disregard the distinction between derivative and direct claims because the Partnership had not dissolved and there was no risk that a derivative action would fail to reward the limited partners actually harmed.  As such, the Court dismissed these claims under the principles of res judicata and release.
 
Lastly, the Court addressed the Defendants’ motions to dismiss for failure to state a claim upon which relief could be granted.  In denying and granting certain motions, the Court stated that while a limited partnership, as an entity, owes no fiduciary duties to its limited partners, its general partner does.

The full opinion is available here