Derivative Action Brought by Limited Partner Dismissed

Derivative Action Brought by Limited Partner Dismissed

      A recent decision from California on a derivative action initiated by a limited partner addresses a pair of important points, namely that suits can be dismissed for lack of standing even on appeal and the ability of the general partner of a limited partnership to decide whether or not litigation will be brought. U. S. Fund and Investment Consultants, Inc. v. MaCauly, C083140, 2019 WL 5611894 (Ca. Ct. App. 3^rd Dist. October 31, 2019).

       Willow Family Housing, LP, organized in Delaware, had as its general partner Central Valley Coalition for Affordable Housing (“CVCAH”). U. S. Fund and Investment Consultants, Inc. (“U.S. Fund”) was one of the limited partners in Willow. Ultimately, a dispute would arise as to the nature of the obligations of Willow to maintain certain rental units for farmworker households under the Serna Program. After US Fund made demand upon CVCAH in connection with challenging actions of the Department of Housing and Community Development with respect to the project, it initiated this derivative action. In dismissing, on appeal, the derivative action, the court found that US Fund lacked standing. 

      CVCAH had informed US Fund that: 

As you are fully aware, Central Valley Coalition for Affordable Housing is the general partner of [Willow]. Management of the Partnership is its right and responsibility…. Without our consent, you, have filed a lawsuit against the State of California and its Department of Housing and Community Development and further have sought a Temporary Restraining Order. We have not even seen the moving papers. The following actions must be taken by you immediately: (1) dismiss the complaint in case number 2013-00152367; (2) take the TRO off calendar; and (3) communicate both actions to counsel for [the Department] and [Chief Executive Officer of CVCAH.]. 2019 WL 5611894, *4.

      After noting that a derivative action may be appropriate where the general partner has a conflict or has engaged in self-dealing with respect to partnership assets, “a limited partner may not sue to vindicate partnership rights whenever the limited partner disagrees with a refusal of the general partner to bring a proposal legal action. Instead, general partners entitled to deference under the business judgment rule.”  

      As there are no allegations of a conflict or self-interested transaction by CVCAH, its determination to not pursue the suit requested by U.S. Fund stands, and US Fund could not effectively override of that determination by bringing a derivative action.