El Paso Pipeline GP Company, LLC v. Brinckerhoff
2016 Del. LEXIS 653
| Del. | 2016Background
- El Paso Pipeline Partners, L.P. (the Partnership) was an MLP controlled by El Paso Corporation (the Parent) through the General Partner; public limited partners held the remaining economic interests.
- Parent completed two conflicted "dropdown" asset transfers (Spring and Fall Dropdowns) to the Partnership; conflicts committees (advised by Akin Gump and Tudor) approved each dropdown.
- Brinckerhoff, a limited partner, sued derivatively alleging the Fall Dropdown breached the Limited Partnership Agreement (LPA) and caused the Partnership to overpay; trial focused on entity-level damages (Court of Chancery found $171M overpayment).
- While post-trial proceedings were pending, Kinder Morgan acquired the Parent and then the Partnership in a merger; by statute and precedent, derivative claims belonging to the acquired entity pass to the acquirer.
- The Court of Chancery held Brinckerhoff’s claim could be treated as direct or dual-natured (allowing him to continue post-merger); the Delaware Supreme Court reversed, holding the claim was exclusively derivative and extinguished by the merger.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tooley applies to LPA-based contract claims | Brinckerhoff: LPA is a commercial contract right; Tooley does not govern contract claims so he can sue directly | Defendants: Tooley governs whether entity-based harms are derivative even if arising from LPA duties | Held: Tooley applies; LPA duties owed to the Partnership, so contractual form alone does not make the claim direct |
| Whether the alleged harm (overpayment) injured Brinckerhoff individually or only the Partnership | Brinckerhoff: Parent’s enrichment at unitholders’ expense caused direct injury to limited partners | Defendants: Overpayment depleted Partnership assets; any unit-holder loss is derivative and pro rata | Held: Harm was to the Partnership only; overpayment claims are classically derivative |
| Whether claim is dual-natured (direct + derivative) like Gentile dilution claims | Brinckerhoff: the transaction expropriated value to the controller, creating direct unitholder injury | Defendants: Gentile is narrow; dual-nature requires transfer of economic value plus increased control/dilution of voting power | Held: Gentile’s narrow rule not extended; no voting-power dilution here, so claim is not dual |
| Whether the merger extinguished Brinckerhoff’s standing to continue the derivative suit | Brinckerhoff: Court of Chancery should allow suit to survive to protect unaffiliated unitholders | Defendants: Under statutory law and Lewis/Ark. Teacher, derivative claims transfer to acquirer and plaintiff loses standing | Held: Merger transferred the Partnership’s claims to the acquirer; Brinckerhoff lost standing and his remedy was to challenge the merger consideration |
Key Cases Cited
- Lewis v. Anderson, 477 A.2d 1040 (Del. 1984) (plaintiff who ceases to be a shareholder loses standing to continue a derivative suit)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (two-prong test: who suffered the harm and who would get the benefit determines direct vs. derivative)
- Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (recognized narrow dual-nature dilution claims where controller gained both economic value and increased voting power)
- NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175 (Del. 2015) (commercial-contract claims brought on a party’s own rights are not subject to derivative suit rules)
- Ark. Teacher Ret. Sys. v. Countrywide Fin. Corp., 75 A.3d 888 (Del. 2013) (derivative claims of an acquired entity transfer to the acquirer as a matter of law)