Delaware Supreme Court Holds That Breach of Limited Partnership Agreement is a Derivative, and Not a Direct, Claim

Delaware Supreme Court Holds That Breach of Limited Partnership Agreement is a Derivative, and Not a Direct, Claim

      In a recent decision from the Delaware Supreme Court, it reversed a holding of the Chancery Court and found that claims by a limited partner challenging a drop-down transaction were derivative, and not direct. Consequent to that classification, a subsequent merger deprived the limited partners of continued standing to pursue a derivative action. El Paso Pipeline GP Company, LLC v Brinckerhoff, No. 103, 2016, 2016 WL 7380418 (Del. Dec. 20, 2016).

      El Paso Corporation (“El Paso”) was the sole member in El Paso Pipeline GP Company, LLC (“GP LLC”), which company in turn served as the sole general partner of El Paso Pipeline Partners, L.P. (the “LP”). El Paso sold certain assets to the LP in a master limited partnership drop-down transaction. Brinckerhoff, a limited partner in the LP filed a derivative action challenging that drop-down transaction. While that matter remained in dispute, El Paso was acquired and the LP was merged out of existence. Thereafter, the defendants moved to dismiss, arguing that Brinckerhoff's claims were exclusively derivative and that standing was lost consequent to the merger. The Chancery Court issued an opinion holding that GP LLC was liable for a breach of the partnership agreement on the basis there was not a reasonable belief that the drop-down transaction was in the best interest of the partnership; damages of $171 million were assessed. The Chancery Court rejected this claim that the injuries were derivative, finding that the limited partners were individually harmed.

      That classification was rejected by the Delaware Supreme Court, it finding that the injuries were suffered exclusively by the limited partnership and then only derivatively by the partners therein. No longer being partners in the LP, the former limited partners lacked standing to continue to pursue the derivative action.

      This is an important decision in that it adds to the line of authority standing for the proposition that the breach of the organizational documents of a limited partnership/LLC will typically be derivative, and not direct, in nature.