236 A.3d 337
Del.2020Background
- Two trusts (Spencer and Cynthia Murfey) as limited partners demanded books and records from three WHC limited partnerships and their general partner, including copies of partnership tax returns and attached Schedule K-1s for the last six years.
- The partnerships produced most records and allowed plaintiffs’ adviser to review K-1s under a confidentiality/professionals-eyes-only arrangement; plaintiffs sought copies and the ability to consult with advisers about the K-1s.
- The Court of Chancery found plaintiffs had a proper valuation purpose but concluded the K-1s were not "necessary and essential" to that purpose and, relying on its §17-305/§220 jurisprudence, denied plaintiffs copies and direct access to K-1 contents.
- The partnerships’ agreements (Sections 12.1 and 12.2.1) expressly list the partner roster, capital contributions/percentages, and tax returns among documents limited partners may obtain "for purposes reasonably related" to their interest.
- The Delaware Supreme Court reversed: it held the K-1s fall within the contractual categories (partner list and tax returns), declined to imply a "necessary and essential" limitation into the partnership agreements, and remanded for compliance while allowing redaction of sensitive identifiers and continued confidential treatment under Court of Chancery Rule 5.1.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether documents listed in the partnership agreement (including K-1s) must be "necessary and essential" to the stated purpose (as in §220/§17-305 case law) | The statutory "necessary and essential" gloss should not apply to the expressly enumerated contractual categories; plaintiffs need only show a proper purpose (valuation) | The agreement "tracks" §17-305, so the judicially created §220 "necessary and essential" limitation applies to the contract | Court declined to decide the statutory question but held plaintiffs prevail under the contract; it refused to import a "necessary and essential" condition into the agreement and ordered production of K-1s to plaintiffs (with confidentiality/redactions) |
| Whether the Partnership Agreements independently entitle limited partners to K-1s and partner-identifying data | The agreements (Sections 12.1, 12.2.1) expressly list tax returns and partner name/address/capital/percentages, so plaintiffs are entitled to copies upon showing a purpose reasonably related to their interest | GP argued the agreements incorporate §17-305/§220 limitations (including "necessary and essential") and §12.2.1(c) permits withholding investor information | Held for plaintiffs: the K-1s fall within Sections 12.1.1 and 12.1.3; because the agreements do not expressly impose a "necessary and essential" condition, the court will not imply one and ordered production under confidentiality terms |
| Whether plaintiffs satisfied any "necessary and essential" standard and/or showed a credible basis to investigate wrongdoing | Plaintiffs argued K-1s help value their stakes and could show mismanagement admitted at trial | GP argued K-1s were unnecessary to valuation and plaintiffs lacked a credible basis to suspect wrongdoing | Court of Chancery found plaintiffs did not meet the "necessary and essential" or credible-basis tests; Supreme Court did not adopt that standard for the contract claim and reversed on contractual grounds (did not rely on plaintiffs meeting the statutory test) |
| Confidentiality and redaction of K-1s; admissibility of emails offered by GP | Plaintiffs sought lifting confidentiality except for SSNs and sought to exclude hearsay emails | GP sought to keep K-1s confidential and used emails at trial to rebut wrongdoing claims | Held: K-1s must be produced to plaintiffs and advisers but may remain confidential under Ct. Ch. R. 5.1; Social Security/tax ID numbers may be redacted. Email admissibility issues rendered largely moot by reversal (dissent would have found emails admissible) |
Key Cases Cited
- Madison Ave. Inv. P’rs, LLC v. Am. First Real Estate Inv. P’rs, L.P., 806 A.2d 165 (Del. Ch.) (recognizing valuation is a proper purpose and discussing scope limits on inspection requests)
- Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 714 A.2d 96 (Del. Ch.) (explaining use of §220 jurisprudence to interpret §17-305)
- Schwartzberg v. CRITEF Assocs. Ltd. P’ship, 685 A.2d 365 (Del. Ch.) (articulating when courts may imply contractual limitations and the "more likely than not" test)
- In re Paine Webber Qualified Plan Prop. Fund Three, L.P. Litig., 698 A.2d 389 (Del. Ch.) (holding contractual inspection rights that do not track statute may be enforced without statutory preconditions)
- Bond Purchase, L.L.C. v. Patriot Tax Credit Props., L.P., 746 A.2d 842 (Del. Ch.) (discussing when contractual provisions create rights independent of statutory inspection rights)
- Grand Acquisition, LLC v. Passco Indian Springs DST, 145 A.3d 990 (Del. Ch.) (treating contractual inspection rights as independent where agreement did not incorporate statutory preconditions)
- Katz v. Oak Indus., Inc., 508 A.2d 873 (Del. Ch.) (Delaware precedent on implying contractual obligations)
- Oxbow Carbon & Minerals Hldgs., Inc. v. Crestview-Oxbow Acq., LLC, 202 A.3d 482 (Del.) (cautioning against implying contract terms or using the implied covenant to rebalance bargains)
- U.S. v. Sanofi-Aventis U.S. LLC, 226 A.3d 1117 (Del.) (construing partnership agreements as contracts and emphasizing freedom of contract)