Sehoy Energy LP, et al. v. Haven Real Estate Group, LLC, et al., C.A. No. 12387-VCG (Del. Ch. Apr. 17, 2017) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery held that certain claims plead against non-bankrupt defendants were direct claims not subject to an automatic stay resulting from a partnership’s Chapter 11 bankruptcy filing. Investors in a partnership brought suit against the partnership, its general partner, the founder and an affiliate, alleging that the defendants falsely induced them to invest in the partnership, breached Plaintiffs’ information rights under the partnership agreement, and breached contractual and fiduciary duties of loyalty and candor by making self-interested investment decisions. The Court analyzed whether the claims against the non-bankrupt defendants were direct or derivative under the well-known Tooley case, to determine whether they were subject to the automatic stay.
Nominal defendant Haven Real Estate Focus Fund LP (the “Partnership”) is a Delaware limited partnership, and was founded by Defendant Albert Adriani. In January 2013, Adriani and the Plaintiffs began discussions about a potential investment in the Partnership. Ultimately, Plaintiffs invested approximately $1.6 million in the Partnership.
After Plaintiffs filed this action, the Partnership, along with its affiliate, filed for Chapter 11 bankruptcy. Plaintiffs filed a motion to confirm the trial schedule with respect to their claims against non-bankrupt defendants Adriani and the general partner (the “NB Defendants”), arguing that certain counts in the complaint were direct claims not subject to the automatic stay. The NB Defendants argued that all claims against them were derivative in nature and must be stayed.
The Court first held that it had jurisdiction to determine whether the automatic stay applied to the claims in the pending case, finding that “because determination of this issue ultimately turns on a question of Delaware law regarding derivative and direct claims, I consider this Court—not the bankruptcy court—in the best position to evaluate the matter.”
The Court next determined that, while claims against the bankrupt defendants and claims belonging to the bankrupt defendants (including any derivative claims) would be subject to the automatic stay, direct claims are the individual property of the investors and are not subject to the automatic stay.
When considering whether a claim is direct or derivative under the test set forth in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), the Court asks “(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” In order to show that a claim is direct, a plaintiff must “demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.” The Court separated Plaintiffs’ claims into three categories before analyzing whether they were direct or derivative: (1) the contract claims; (2) the breach of fiduciary duty claim; and (3) the fraud claims.
The Court relied on El Paso Pipeline GP Co. L.L.C. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016) in finding the Tooley analysis applicable to Plaintiffs’ contract claims, as the El Paso Court clarified that all contract claims are not direct by default. Plaintiffs alleged that the NB Defendants breached the limited partnership agreement by refusing to produce the Partnership’s audited financial statements and denying them their inspection rights. The Court held that this was a direct claim under Tooley because “the alleged harm to the Plaintiffs is the deprivation of their right to timely withdraw their investment, a type of injury that the Partnership could not itself sustain.” And, any damages would flow directly to the limited partners.
Plaintiffs alleged that the NB Defendants breached their fiduciary duty of loyalty through false statements which infringed on Plaintiffs’ right to withdraw from their investment in the Partnership. The Court held that “such a disclosure violation involves injury to the limited partners individually and not to the Partnership, and is thus properly treated as a direct claim” under Tooley, and further observed that Plaintiffs “have alleged a distinct injury from the deprivation of their right to withdraw their investment from the Partnership.” In so holding, the Court rejected the NB Defendants’ argument that pursuant to Manzo v. Rite Aid Corporation, 2002 WL 31926606 (Del. Ch.), all breach of fiduciary duty claims based upon misrepresentations are necessarily derivative. Rather, the Manzo Court required additional allegations identifying “some resultant injury that either affects some shareholders disproportionately to their pro rata stock ownership, or affects those rights of shareholders that are traditionally regarded as incidents of stock ownership” to state a direct claim based on a misrepresentation. Plaintiffs met this burden by alleging that the misrepresentations effectively deprived them of the right to withdraw from the Partnership.
Plaintiffs brought claims alleging that the NB Defendants, through false and misleading statements, fraudulently induced Plaintiffs to invest in the Partnership. The Court found that these common-law tort claims were “[q]uintessential examples of personal claims” and not potential derivative claims subject to the Tooley analysis, although “[a] Tooley analysis of both claims would reach the same result.” Thus, the Court held that the fraud claims were also direct and not subject to the automatic stay.