Delaware Chancery Dismisses, Stays Fiduciary Breach Claims Pending Arbitration

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By Michael Greene

Feb. 11 — The Delaware Chancery Court Feb. 10 stayed a breach of fiduciary claim against one set of defendants pending arbitration and dismissed the fiduciary claim against another set of defendants for failure to state a claim upon which relief can be granted.

The plaintiffs, minority unitholders of four limited partnerships, alleged that they received insufficient merger consideration in a freeze-out transaction.

In staying the claims against one set of defendants, Vice Chancellor Donald F. Parsons Jr. determined that the parties had agreed that an arbitrator would decide whether it has jurisdiction over the claim.

Vice Chancellor Parsons also granted a separate motion to dismiss by a second set of defendants, finding unpersuasive the plaintiffs' argument that the defendants owed a fiduciary duty because they exercised control over the limited partnership.

Challenged Merger

Apartment Investment and Management Company (“AimCo”), a publicly traded Maryland Real Estate Investment Trust, announced that four limited partnerships would merger into Aimco Properties, L.P. (“Aimco OP”), a subsidiary of an Aimco affiliate.

Aimco indirectly held a majority of the limited partnership units and several of its subsidiaries were general partners of the limited partnerships.

The plaintiffs filed a class action lawsuit on behalf of minority unitholders of the LPs alleging fiduciary duty breaches because the merger was not entirely fair in terms of price or process.

Substantive Arbitrability

Several of the general partner defendants moved to dismiss claims against them for lack of subject-matter jurisdiction because the relevant partnership agreement contained broad, mandatory arbitration clauses.

Echoing a recent opinion, Vice Chancellor Parsons noted that the question of substantive arbitrability—whether the parties agreed to arbitrate—is generally decided by the courts.

However, he added that under the Delaware Supreme Court’s holding in James & Jackson, LLC v. Willie Gary, if the parties agree to allow the arbitrator to determine the issue of substantive arbitrability, “the courts should defer to that manifestation of intent.”

“Here, the Arbitration Clauses provide for the widest array of potential claims—that is, ‘[a]ny dispute or controversy arising under, or out of, or in connection with or in relation to this Agreement …,’” he wrote.

Moreover, the parties also agreed that the arbitration would be conducted in accordance with American Arbitration Association rules, which state that the arbitrator has to power to determine its jurisdiction.

Accordingly, the court stayed the complaint against these defendants because the arbitration clause at issue was broadly written so that it “clearly and unmistakably” suggested that the parties agreed, as a threshold matter, that arbitrability would be decide by the arbitrator.

Corporate Controller Cases Inapplicable

The court additionally granted Aimco OP’s and one of Aimco’s officers separate motions to dismiss on the ground that the plaintiff failed to bring a reasonably conceivable breach of fiduciary claim against them.

In doing so, Vice Chancellor Parsons rejected the plaintiffs’ attempt to equate the status of the defendants to that of a controlling stockholder in the corporate context—an issue the court has tackled in myriad recent cases. 

He found this argument to be “unpersuasive because of the differences between corporations and limited partnerships.”

Instead, he found that any conceivable fiduciary duty the defendants could owe would be found in the limited partnership agreements and Delaware’s Revised Uniform Limited Partnership Act.

Because the plaintiff pled no allegations that subjected the defendants to liability on these grounds, he determined that no fiduciary duty was owed.

He additionally found that even if he applied his earlier corporate controller ruling—In re Crimson Exploration Inc. Stockholder Litigation—the plaintiff failed to plead facts that showed the defendants controlled the limited partnerships with respect to the merger.

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