Lipman v. GPB Capital Holdings LLC, C.A. No. 2020-0054-SG (Del. Ch. Nov. 18, 2020) (Glasscock, V.C.)
In this memorandum opinion, the Delaware Court of Chancery denied a motion to dismiss claims for breach of fiduciary duties brought by limited partners of several partnerships against the controller of the partnerships’ general partner.
The plaintiffs, Jeff and Carol Lipman (the “Lipmans”), derivatively on behalf of GPB Holdings II (“Holdings II”) and GPB Automotive Portfolio, LP (“Auto” and together with Holdings II, the “Partnerships”), alleged that defendants GPB Capital Holdings, LLC (“GPB Capital”), the general partner of the Partnerships, and David Gentile (“Gentile”), the sole member and Chief Executive Officer of GPB Capital, engaged in various schemes of self-dealing and other financial misconduct that effectively looted the Partnerships’ assets by (i) diverting assets of the Partnerships to Gentile and other executives without disclosing their self-interested transactions and (ii) inflating the Partnerships’ financial results. Gentile and GPB Capital allegedly tried to disguise their financial misconduct by using the individual capital accounts of limited partners to fund GPB Capital’s monthly distributions and delayed providing audited financial statements to the limited partners of the Partnerships. The Lipmans made a demand on GPB Capital for an inspection of the Partnerships’ books and records relating to, among other things, the failure to provide audited financial statements, and later amended their derivative complaint to seek declaratory relief that GPB Capital and Gentile had breached their fiduciary duties to the Partnerships.
GPB Capital and Gentile asserted the following four arguments in support of their motion to dismiss: (i) demand should not be excused as futile, (ii) the Lipmans’ own allegations (and not allegations sourced from other pleadings) only amounted to allegations of breach of the limited partnership agreements of the Partnerships and not allegations of breach of fiduciary duties, (iii) the limited partnership agreements of the Partnerships contained provisions limiting liability for fiduciaries only to bad faith actions, which were not alleged, and (iv) no breach of fiduciary duty had occurred because GPB Capital’s duty to disclose financial statements was a contractual rather than a fiduciary duty. The Court rejected all four of these arguments, finding that (i) the Lipmans alleged sufficient threats of liability to GBP Capital and Gentile that demand was excused as futile, (ii) the allegations incorporated from other pleadings were permissible and sufficient to allege breaches of duty even without giving them full weight, (iii) the exculpation provision in the limited partnership agreements did not limit liability for gross negligence, which was alleged and is different than bad faith, and (iv) the Lipmans alleged more than a contractual duty to provide audited financial statements -- they alleged that GBP Capital had engaged in self-dealing at the direction of Gentile. The Court also rejected the argument that Gentile did not owe any fiduciary duties to the Partnerships. The Court cited Gotham Partners, L.P. v. Hallwood Realty Partners, L.P. for the proposition that directors of corporate general partners of limited partnerships have been held to be fiduciaries of the limited partners where adequate allegations of wrongful exercise of control exist. The Court stated that “those who effectively control a partnership, via control of its assets, owe fiduciary duties to the entity.” The Court held that the complaint satisfactorily pled that Gentile exercised control over the Partnership’s assets by alleging that Gentile engaged in several self-dealing transactions involving funds that belonged to the Partnerships, through his exercise of control over GPB Capital.