Culverhouse v. Paulson & Co., Inc.
133 A.3d 195
Del.2016Background
- Culverhouse invested in a Delaware feeder fund (HedgeForum Paulson Advantage Plus, LLC) that in turn invested in a Delaware limited partnership master fund (Paulson Advantage Plus, L.P.).
- The master fund (Investment Fund) lost about $460 million on Sino-Forest investments; Culverhouse sued the master fund’s general partners/managers (Paulson Advisers, LLC and Paulson & Co.) for breach of fiduciary duty and related claims.
- Culverhouse alleged he and the putative class were harmed as investors "in the [Investment Fund]" or via feeder fund pass-through interests; defendants moved to dismiss for lack of standing and for failure to state a claim.
- The district court dismissed for lack of standing, treating the claims as derivative under Delaware law; the Eleventh Circuit certified the question whether feeder-fund investors can sue master-fund general partners directly when losses are allocated to investor capital accounts.
- Delaware Supreme Court applied Tooley’s two-part test (who suffered the harm; who would receive the benefit of recovery) and held Culverhouse’s claims are derivative because his contractual and legal relationship was with the feeder fund, not the master fund.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether diminution in value of a master limited partnership (via feeder structure) lets feeder investors bring a direct suit against the master fund's general partners | Culverhouse: feeder investors directly sued because losses flowed to their capital accounts and were shared proportionally, so injury is individual | Paulson: feeder investors lack standing; claims are derivative because investors' relationship and agreements are with the feeder fund, not the master fund | Held: No — under Tooley, claims are derivative; injury and recovery would be to the master fund, and feeder investors must look to the feeder fund/its agreements |
Key Cases Cited
- Tooley v. Donaldson, Lufkin & Jenrette, 845 A.2d 1031 (Del. 2004) (establishes two-part direct/derivative test)
- Anglo American Security Fund, L.P. v. S.R. Global Int’l Fund, L.P., 829 A.2d 143 (Del. Ch. 2003) (Chancery decision finding direct claims by limited partners on certain facts)
- Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286 (Del. 1998) (limited partnership claims use substantially the same direct/derivative test as corporations)
- Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160 (Del. 2002) (general partner owes fiduciary duties to the partnership and limited partners; duties may be modified by agreement)
- Espinoza v. Dimon, 124 A.3d 33 (Del. 2015) (explains Rule 41 certification requires a specific question and, ideally, stipulated facts)