Steven M. Mizel Roth IRA v. Laurus U.S. Fund, L.P., C.A. No. 5566-VCN (Del. Ch. Feb. 25, 2011) (Noble, V.C.)
In this memorandum opinion, the Court of Chancery dismissed the plaintiff’s request under 6 Del. C. § 17-802 for judicial dissolution of Laurus U.S. Fund, L.P. (the “Fund”), a Delaware limited partnership, where the plaintiff, a limited partner in the Fund, failed to allege facts sufficient to support a claim that it was not reasonably practicable to continue the Fund’s business. In addition, the Court dismissed the plaintiff’s request for the appointment of a receiver to manage the Fund’s affairs.
The Fund, formed as an investment vehicle, invested substantially all of its assets in Laurus Master Fund, Ltd. (the “Master Fund”), a Cayman Islands entity. Eugene and David Grin (the “Grin Brothers”) were the principals of the Fund’s general partner (the “General Partner”). In addition, the Grin Brothers controlled the Fund’s investment decisions through the Fund’s investment manager (the “Investment Manager”).
Following a period of diminished returns, the Grin Brothers placed the Master Fund into voluntary liquidation under the supervision of the Grand Court of the Cayman Islands (the “Cayman Court”). The Cayman Court appointed the General Partner as the Fund’s representative on the Master Fund’s six-member liquidation committee (the “Liquidation Committee”). The Investment Manager was a member of the Liquidation Committee in its role as a creditor of the Master Fund. In addition, the Cayman Court appointed two liquidators for the Master Fund (the “Liquidators”). The Liquidators retained the Investment Manager to liquidate the Master Fund’s investment portfolio.
The Fund had obligations to pay its pro rata share of certain fees and expenses associated with the Master Fund’s liquidation, including fees for the Investment Manager. From September 2008 to February 2010, expenses from the Master Fund’s voluntary liquidation exceeded $35 million. The plaintiff’s beneficiary sought information about the expense reports of the Liquidators and their consultants. In response, the General Partner provided only limited information. After the Cayman Court refused to order the Liquidators to provide the requested information to the plaintiff’s beneficiary, the plaintiff sought judicial dissolution of the Fund and the appointment of a receiver to manage the Fund’s affairs and to serve as the Fund’s representative on the Liquidation Committee in place of the General Partner.
The Court found that, even though the Master Fund was liquidating, the Fund continued to invest its assets passively in the Master Fund. As such, the Fund was still carrying out its business in accordance with the Fund’s purpose under the terms of its limited partnership agreement (the “LPA”). Finding that the plaintiff failed to allege facts sufficient to suggest that it was not reasonably practicable for the Fund to carry on its business in conformity with the LPA, the Court dismissed the plaintiff’s claim for judicial dissolution.
The Court then turned to the plaintiff’s request for the appointment of a receiver. The plaintiff alleged that its request for a receiver was appropriate because the Grin Brothers had an interest in prolonging the Master Fund’s liquidation process to increase their total fees. In addition, the plaintiff alleged that, because the Grin Brothers’ other managed funds purchased some of the Master Fund’s assets, the Grin Brothers were incentivized to liquidate those assets at lower prices.
Although the plaintiff requested the appointment of a receiver, the Court stated that the plaintiff mainly argued for the appointment of a liquidating trustee to wind up the Fund. The Court noted that dissolution precedes the winding up of a limited partnership by a liquidating trustee. The plaintiff, however, failed to allege that the Fund was dissolved under 6 Del. C. § 17-801 and failed to allege facts that would support a claim for judicial dissolution under 6 Del. C. § 17-802. Without a basis upon which to deem that the Fund was dissolved, the Court could not exercise its discretion to appoint a liquidating trustee.
The Court then found that there was no statutory basis for the appointment of a receiver and addressed whether such an appointment was appropriate under the Court’s general equity powers. Though acknowledging that the plaintiff suggested that the General Partner had incentives to act contrary to the interests of the Fund’s investors in the General Partner’s representative capacity on the Liquidation Committee, the Court found that the plaintiff made no specific allegations suggesting that the General Partner engaged in gross mismanagement of the Fund’s affairs or fraudulent activity. In addition, the Court found that General Partner’s actions in its role on the Liquidation Committee were tempered by the Cayman Court, four other members of the Liquidation Committee, and the Liquidators. The Court, therefore, dismissed the plaintiff’s request for the appointment of a receiver.