226 A.3d 1117
Del.2020Background
- JKJ Partnership 2011 LLP (a Delaware limited liability partnership formed by three individuals) was created solely to file and prosecute a qui tam False Claims Act action against pharmaceutical defendants.
- JKJ’s Partnership Agreement (1) expressly opts out of DRUPA’s default entity status: “the Partnership shall not be a separate legal entity distinct from its Partners,” and (2) states that a partner’s withdrawal “shall not cause a dissolution of the Partnership,” and that the partnership continues until final resolution of the Action.
- After the original complaint, one founding partner (Partner B) withdrew and was replaced by Dr. Paul Gurbel; a second amended complaint (SAC) was then filed naming the new partner composition.
- Defendants moved to dismiss under the FCA’s first‑to‑file bar, arguing the membership change created a new relator; the District Court dismissed, concluding the membership change created a new partnership and thus a new relator.
- The Third Circuit certified three Delaware‑law questions to the Delaware Supreme Court: (1) whether the membership change produced a new partnership; (2) whether the original partnership survived long enough in winding up to have filed the SAC; and (3) whether original partners may prosecute the suit during winding up. The Delaware Supreme Court answered: change created a new partnership; it could not determine from undisputed facts whether winding up had terminated the old partnership but the SAC was filed by the new partnership; and the old partnership may not continue prosecution in winding up given the Agreement and the litigation’s early/sole‑purpose status.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1. Does substitution of a partner create a new partnership or keep the same partnership? | The Agreement preserves continuity: withdrawals won’t cause dissolution; partners can admit transferees; partnership term runs until final resolution, so substitution does not create a new partnership. | By opting out of entity status (aggregate model), the partnership is identical with its original members; replacing a partner changes the aggregation and thus dissolves the old partnership and forms a new one. | Holding: The membership change created a new partnership and dissolved the original JKJ; Section 1.03 (no separate entity) controls over conflicting provisions. |
| 2. If a new partnership formed, did the old partnership immediately terminate or continue in winding up (and who filed the SAC)? | The old partnership continued in winding up and could prosecute, so the original partnership’s existence continued for litigation purposes. | Winding up is for liquidation/closing affairs; here the SAC was filed by the new partnership and the old partnership did not continue to prosecute. | Holding: Under DRUPA dissolution does not terminate the partnership (it continues until winding up completes). The court could not decide from undisputed facts whether winding up completed, but the SAC (on its face and per undisputed facts) was filed by the new partnership; whether the litigation asset transferred is a factual question. |
| 3. May original partners continue to prosecute the lawsuit as part of winding up if the old LLP did not survive? | Original partners could pursue unfinished partnership business during winding up, including litigation. | Winding up requires liquidation and distribution; continuing the partnership’s primary business (here, prosecuting the Action at an early stage) is inconsistent with winding up. | Holding: The dissolved JKJ may not continue to prosecute the Action in winding up because the Agreement requires prompt liquidation of partnership property and the Action was the partnership’s sole purpose and at an early stage. |
Key Cases Cited
- Silliman v. DuPont, 302 A.2d 327 (Del. Super. 1972) (discusses aggregate theory and historical partnership treatment)
- Fike v. Ruger, 752 A.2d 112 (Del. 2000) (discusses partner withdrawal and dissolution principles)
- Caines Landing Wildlife Preserve Ass’n v. Kirkpatrick, 633 A.2d 369 (Del. 1993) (winding up duties after dissolution)
- Paciaroni v. Crane, 408 A.2d 946 (Del. Ch. 1979) (partnership continues after dissolution only to wind up affairs)
- Helvering v. Smith, 90 F.2d 590 (2d Cir. 1937) (historical discussion of UPA and entity/aggregate debate)