JER Hudson GP XXI LLC v. DLE Investors, LP
C.A. No. 2021-0478-MTZ
| Del. Ch. | May 2, 2022Background
- Fund XXI (a Delaware limited partnership) invests indirectly in LIHTC projects via intermediate entities; JER Hudson GP XXI LLC (Fund GP) is the general partner; DLE Investors, LP (DLE) is a post‑credit‑period limited partner that acquired its interest in 2007.
- The Kate’s Trace property (Virginia) completed its LIHTC Credit Period; the statutory ROFR/Extended Use mechanics contemplated a nonprofit purchase near or after the Compliance Period. Forecasts when DLE invested projected tax benefits only through the Credit/Compliance Period.
- In April 2021 Property GP designated an affiliated nonprofit and deeded the property to that nonprofit at the Section 42(i)(7) statutory price (the Disposition). Fund GP consulted counsel (Holland & Knight) and declined to challenge the Disposition.
- DLE (under new management/aggregator interest) demanded Fund GP block or unwind the disposition and, when Fund GP refused, served a Default Notice purporting to remove Fund GP for Cause under Fund LPA §7.2A (breach of fiduciary duty and breach of contract).
- Chancellor Zurn held a bench trial and found (1) the Fund LPA and the Fund’s purpose limit Fund GP’s duties to specified contractual duties (not broad common‑law loyalty/care); (2) Fund GP did not breach those duties or the LPA; (3) DLE therefore lacked Cause and its removal was invalid; Fund GP is entitled to fees and damages under the LPA once judgment is final.
Issues
| Issue | Plaintiff's Argument (Fund GP/Fund) | Defendant's Argument (DLE) | Held |
|---|---|---|---|
| Scope of Fund GP fiduciary duties | Fund GP: duties are defined and limited by the Fund LPA and the Fund’s purpose of syndicating tax‑credit investments; no duty to pursue post‑Compliance‑Period equity value | DLE: Fund GP owes traditional fiduciary duties (care/loyalty) to protect Fund assets, including suing to stop an improper ROFR exercise | Held: Fund LPA contractually narrows fiduciary duties to those enumerated (e.g., §6.4F "safekeeping and use"), and GP’s authority is circumscribed by the Fund’s purpose; no broad common‑law duties applied |
| Duty to challenge the ROFR/Disposition | Fund GP: no duty to litigate over Property GP’s ROFR exercise; Property is a lower‑tier partnership asset and disposition under §8.02(e) was within Property GP’s authority | DLE: Fund GP breached its duty by failing to investigate or sue to block an allegedly improper Disposition that destroyed potential value | Held: No duty to challenge — (i) the Property is not a Fund asset; (ii) Fund GP’s duty protects tax‑credit value, not chasing post‑Compliance‑Period equity; (iii) challenging disposition would conflict with Fund purpose |
| Breach of LPA consent or oversight provisions | Fund GP: did not breach Fund LPA; Section 6.8D requires Fund to pay fees but does not impose an affirmative oversight obligation; Fund LPA consent mechanics do not make DLE’s consent necessary for an ROFR disposition | DLE: Fund GP violated Fund LPA consent/oversight provisions (e.g., §§6.3A, 6.3B, 6.8D) by failing to ensure Property GP sought the required consents | Held: Fund GP did not breach the Fund LPA; Property LPA §8.02(e) (a "notwithstanding" clause) authorizes Property GP to designate and effect a Section 42 ROFR disposition without Special Limited Partner or Fund consent, so Fund LPA consent thresholds were not triggered |
| Validity of removal and remedies | Fund GP: Default Notice is invalid (no particularized cause, improper cure period, and no demonstrable Cause under §7.2A); Fund GP seeks declaratory relief and fees under §7.2B | DLE: removal was valid because Fund GP breached fiduciary duties and covenant obligations, justifying immediate removal | Held: Removal invalid — DLE lacked Cause; Fund GP remains general partner; upon final nonappealable judgment Fund GP is entitled to damages, costs, and attorneys’ fees under the LPA (and LPA limits liability to breaches producing a material adverse effect, which DLE failed to prove) |
Key Cases Cited
- Sonet v. Timber Co., 722 A.2d 319 (Del. Ch. 1998) (general partners owe fiduciary duties subject to the partnership agreement and purpose)
- El Paso Pipeline GP Co. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016) (partnership agreement governs rights/duties; court enforces contractual allocations)
- Abry Partners V, L.P. v. F & W Acq. LLC, 891 A.2d 1032 (Del. Ch. 2006) (interpreting contractual limitations on remedies and protections for negotiated allocation of risk)
- Allen v. Encore Energy P’rs, L.P., 72 A.3d 93 (Del. 2013) (limited partnership agreement can replace or limit common‑law fiduciary duties)
- Kahn v. Icahn, 746 A.2d 267 (Del. 2000) (contractual modifications of fiduciary duties will be enforced if clear and unambiguous)