Lewis v. Aimco Properties, L.P, et al., C.A. No. 9934-VCP (Del. Ch. Feb. 10, 2015) (Parsons, V.C.)
In this memorandum opinion, the Court of Chancery (i) granted in part certain defendants’ motion to dismiss for lack of subject matter jurisdiction, specifically ordering a stay pending arbitration; and (ii) granted certain defendants’ motion to dismiss for failure to state a claim, concluding that the defendants did not exercise the degree of control over limited partnerships necessary to trigger a fiduciary duty to the minority owners.
Plaintiffs were minority owners of four Delaware limited partnerships (collectively, the “LPs”), which owned and operated residential real estate. Each LP had a corporate entity as a general partner, with each general partner being indirectly owned by Apartment Investment and Management Company (“AimCo”), a non-party. AimCo held a majority of the limited partnership units in each of the LPs. AimCo’s subsidiary ConCap Equities, Inc. (“ConCap”), a Delaware corporation, was the managing general partner of two of the LPs (the “ConCap LPs”). The general partners of the remaining two LPs also were subsidiaries of AimCo.
On July 28, 2011, the LPs were merged (the “Merger”) into a subsidiary of Aimco Properties, L.P. (“Aimco OP”), a Delaware limited partnership and affiliate of AimCo. The Merger was executed without a separate vote from the unaffiliated, minority owners of the LPs. Plaintiffs filed a complaint against, among others, the LPs, ConCap, Aimco OP, and the CEO of AimCo, Terry Considine (“Considine”). The complaint asserted breach of fiduciary duties, alleging that the Merger constituted a freeze-out transaction arising from self-dealing that was inadequate in terms of both price and process.
ConCap, the ConCap LPs and defendant John E. Bezzant (“Bezzant”) sought dismissal for lack of subject matter jurisdiction due to mandatory arbitration clauses contained in the ConCap LPs limited partnership agreements. The relevant arbitration clause provided for the arbitration of “[a]ny dispute or controversy arising under, or out of, or in connection with or in relation to this Agreement . . . in accordance with the rules then applicable of the American Arbitration Association.” The Court applied the standard of James & Jackson, LLC v. Willie Gary to ascertain whether the parties demonstrated “clear and unmistakable evidence” of the parties’ intent to submit issues of substantive arbitrability to arbitration. Specifically, the Court examined whether the arbitration clause (i) provided broadly for arbitration of all disputes, and (ii) incorporated a set of rules to empower an arbitrator to decide arbitrability.
The Court found that the arbitration clause satisfied this standard because it (i) provided for arbitration of the widest array of potential claims, and (ii) incorporated the AAA Commercial Arbitration Rules, which rules provided in relevant part that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” The Court concluded that these factors produced a “heavy presumption” in favor of the parties’ intent to have an arbitrator, and not the Court, decide substantive arbitrability. The Court therefore stayed the action against ConCap, the ConCap LPs and Bezzant pending arbitration.
The Court then considered the motion to dismiss of Aimco OP and Considine under Rule 12(b)(6) on the grounds that neither defendant owed any fiduciary duty to the plaintiffs. The Court recognized the principle established in In re USACafes, L.P. Litigation that entities or individuals who control a general partner owe to the limited partners a duty of loyalty, and that this doctrine extends to alternative entities such as limited liability companies and statutory trusts. The Court concluded, however, that the non-conclusory factual allegations in the complaint failed to establish that either Aimco OP or Considine exercised the degree of control over the LPs necessary to trigger a fiduciary duty.
The Court first rejected the argument that because AimCo was the majority owner of the LPs and Aimco OP was an affiliate of AimCo, that AimCo OP could be deemed to be in “control” of the LPs. The Court explained that this position was flawed both because (i) Aimco OP’s affiliate status did not confer any right of control that AimCo may have had as majority owner of limited partnership units in the LPs, and (ii) moreover, the fact of AimCo’s majority ownership of limited partnership units in the LPs did not equate to a position of “control” over the business and affairs of the LPs under the Delaware Revised Uniform Limited Partnership Act. Given the absence of factual allegations to support an inference that Aimco OP exercised any “ultimate decision-making power” over the LPs with respect to either the Mergers or overall partnership policy, the Court found no justification to impose a fiduciary duty and dismissed the complaint with prejudice as to Aimco OP.
The Court then applied the same reasoning to and found that it applied with “even greater force” in concluding that he owed no fiduciary duty to the LPs or plaintiffs. Since the complaint asserted only that Considine was an officer of AimCo and the president of the general partners of the entities into which the LPs were merged into, the Court found there were no allegations to “create a reasonable inference that he occupied a position of control” or “personally exercised control” over the LPs in any way. The Court therefore dismissed the breach of fiduciary claim against Considine with prejudice.