In Re USACafes, L.P. Litigation
600 A. 2d 43 (1991)
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Rule of Law:
Directors of a corporate general partner of a limited partnership owe a direct fiduciary duty of loyalty and care to the limited partners of the partnership.
Facts:
- USACafes, L.P. (the 'Partnership') was a Delaware limited partnership managed by its corporate general partner, USACafes General Partner, Inc. (the 'General Partner').
- Sam and Charles Wyly owned all the stock of the General Partner, served as its directors, and also owned 47% of the Partnership's limited partnership units.
- In October 1989, Metsa Acquisition Corp. purchased substantially all of the Partnership's assets for $72.6 million.
- In connection with this sale, the directors of the General Partner, including the Wylys, allegedly received substantial personal side payments from or with the approval of Metsa.
- These payments, totaling between $15 and $17 million, were allegedly disguised as covenants not to compete, loan forgiveness, and other benefits not shared with the other limited partners.
- Plaintiffs allege these side payments were financial inducements for the directors to approve the sale to Metsa at a low price without seeking higher offers.
Procedural Posture:
- Limited partnership unitholders (Plaintiffs) filed a class action lawsuit in the Delaware Court of Chancery against the Partnership, the General Partner, the directors of the General Partner, and Metsa Acquisition Corp.
- The director defendants filed a motion to dismiss for failure to state a claim under Rule 12(b)(6), arguing they owed no fiduciary duties to the limited partners.
- The director defendants also filed a motion to dismiss for lack of personal jurisdiction under Rules 12(b)(2) and (4).
- The Partnership, the General Partner, and the director defendants jointly moved to dismiss a claim related to an allegedly misleading prospectus issued in 1986.
- Metsa Acquisition Corp. filed a motion to dismiss the claim of aiding and abetting a breach of fiduciary duty under Rule 12(b)(6).
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Issue:
Do the directors of a corporate general partner of a limited partnership owe fiduciary duties directly to the limited partners?
Opinions:
Majority - Chancellor Allen
Yes, the directors of a corporate general partner of a limited partnership owe fiduciary duties directly to the limited partners. The principle of fiduciary duty holds that one who controls the property of another may not use that control to benefit themselves to the detriment of the property's beneficial owner. Analogizing to trust law, where directors of a corporate trustee owe fiduciary duties to the trust's beneficiaries, the court reasons that directors of a corporate general partner similarly owe duties to the limited partnership and its partners. The corporate form of the general partner does not insulate its directors from these duties, as they are the individuals who ultimately control the partnership's property. This duty surely entails the obligation not to use control over partnership property to advantage the director at the expense of the partnership.
Analysis:
This case is significant for extending fiduciary duties beyond the corporate entity of a general partner directly to its directors. It establishes that directors cannot use the corporate form as a shield to engage in self-dealing or breaches of loyalty at the expense of limited partners. By applying principles from trust law, the court reinforced the idea that fiduciary obligations follow the locus of control over property, not just formal corporate structures. This decision makes it easier for limited partners to hold the individuals controlling the general partner accountable for breaches of duty, preventing them from diverting value that rightfully belongs to the partnership.
