Policemen’s Annuity and Benefit Fund of Chicago, Illinois v. DV Realty Advisors LLC, C.A. No. 7204-VCN (Nov. 27, 2013) (Noble, V.C.)

In this letter opinion, the Court of Chancery (1) ruled that the removal of a general partner did not convert the general partner’s interest into a limited partnership interest, and (2) valued the removed general partner’s interest in the limited partnership at the current fair market value.

Plaintiffs, comprising the five limited partners of a limited partnership, executed a written consent purporting to remove defendant as general partner.  Plaintiffs then sought a declaration that their removal of defendant was valid.  In a prior opinion, the Court confirmed the validity of the removal of defendant and reserved jurisdiction for any follow-on matters.  This letter opinion addressed two remaining issues: (1) whether, because of the removal, defendant’s interest was converted into a limited partnership interest, and (2) the value of defendant’s interest.

With respect to the nature of defendant’s interest, the Court found nothing in the Delaware Revised Uniform Limited Partnership Act automatically converted defendant’s interest into a limited partnership interest upon defendant’s removal as general partner.  Instead, the Act states that, unless the partnership agreement provides otherwise, a person may be admitted as a limited partner only upon the consent of all limited partners.  The Court found that none of the limited partners had consented to defendant’s becoming a limited partner and that no provision in the partnership agreement supported defendant’s claim that its interest was converted into a limited partnership interest.  Specifically, the Court rejected defendant’s argument that it had a limited partnership interest merely because a provision in the partnership agreement provided for equal treatment of the capital accounts of “limited partners” and “removed general partners.”  The Court also rejected defendant’s reasoning that, because it no longer was a “general partner” and only “partners” had capital accounts under the partnership agreement, it therefore had to be a “limited partner.”

With respect to the valuation of defendant’s interest, the Court noted that the partnership agreement required plaintiffs to buy back half of defendant’s interest in the partnership.  Plaintiffs argued that the interest should be valued at the current fair market value, while defendant argued that the value should be determined based on defendant’s tax basis capital account.  The Court agreed with plaintiffs and held that two provisions in the partnership agreement allowed the partnership to value capital accounts based on the fair market value of the partnership property.  The Court found, however, that the partnership agreement did not provide clear guidance for setting the appropriate date for the valuation.  As a result, the Court looked to the end of the preceding year as the most accurate reflection of the partnership’s value.  The Court also rejected defendant’s argument that its capital account should be increased by the amount of certain loans or guarantees.  Lastly, the Court held that interest on the amount due to defendant began to accrue thirty days after the Supreme Court’s decision affirming the Court’s prior opinion regarding the validity of the removal of defendant.

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