Partners v. Hallwood Realty Partners

Full title: GOTHAM PARTNERS, L.P., a New York Limited Partnership, Plaintiff, v…

Court: Court of Chancery of Delaware, In And For New Castle County

Date published: Sep 27, 2000

Civil Action No. 15754 (Del. Ch. Sep. 27, 2000)

Opinion

Civil Action No. 15754.

Date Submitted: August 30, 2000.

Date Decided: September 27, 2000.

Edward M. McNally and Lewis H. Lazarus, Esquires, of MORRIS, JAMES, HITCHENS WILLIAMS, Wilmington, Delaware; OF COUNSEL: Philip H. Schaeffer, Dwight A. Healy, Karen M. Asner, David G. Hille, Esquires, of WHITE CASE, New York, New York, Attorneys for Plaintiff.

Michael D. Goldman, Stephen C. Norman, Matthew E. Fischer, Esquires, of POTTER ANDERSON CORROON, Wilmington, Delaware; Attorneys for Defendants Hallwood Realty Corporation, The Hallwood Group Incorporated, Anthony J. Gumbiner, Brian M. Troup and William L. Guzzetti.

John H. Small, Elizabeth M. McGeever, and Sheldon K. Rennie, Esquires, of PRICKETT, JONES ELLIOTT, Wilmington, Delaware, Attorneys for Defendants Alan G. Crisp, William F. Forsyth, Edward T. Story, and Udo H. Walther.

MEMORANDUM OPINION

STRINE, Vice Chancellor

This is the latest decision in this case brought by plaintiff Gotham Partners, L.P. challenging a series of transactions that Gotham alleges were designed to place a control block of limited partnership units in the hands of the parent corporation of a limited partnership's general partner at an unfair price.¹The various defendants affiliated with the corporate general partner, including the directors of the general partner and the general partner's corporate parent, have brought a motion for summary judgment.

1 See Gotham Partners, L.P. v. Hallwood Realty Partners, L.P. (" Gotham I"), Del. Ch., C.A. No. 15754, mem. op., Steele, V.C. (Nov. 10, 1998) (denying motion to dismiss for failure to make pre-suit demand); see also Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., Del. Ch., C.A. No. 15578, mem. op., Steele, V.C. (Apr. 29, 1998) (opinion in related books and record case); Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., Del. Gh., C.A. No. 15578, let. op., Steele, V.C. (Oct. 18, 1999) (same).

In this opinion, I conclude that:

1) the record contains facts from which one could conclude that the challenged transactions were undertaken in breach of the partnership agreement governing the partnership. Therefore, I deny the defendants motion for summary judgment as to Gotham's breach of contract claim;

2) the partnership agreement sets forth the standards that govern transactions between the partnership and general partner affiliates, and such contractual standards and not default fiduciary standards form the measure by which the general partner's conduct must be evaluated at trial. Thus, summary judgment on the breach of fiduciary duty count against the General Partner is granted. Nonetheless, because it is unclear whether certain other defendants would be culpable for breach of fiduciary duty or some form of aiding and abetting liability if they purposely caused the general partner to breach its contractual duties, I do not grant summary judgment as to the fiduciary duty claims against them;

3) there is a triable doubt regarding the good faith of those defendants whose economic interests were dependent on the good will of the general partner's parent corporation and thus those defendants are not entitled to summary judgment on the basis of the exculpatory provisions of § 17-1101(d)(1) of the Delaware Revised Uniform Limited Partnership Act ("DRULPA")²the partnership agreement; and

4) those defendants who were simply directors of the general partner and thus required to balance the interests of limited partners against the interests of the general partner's affiliate did not, in the absence of any evidence compromising their good faith or independence, have a conflict of interest sufficient to support a claim for the breach of duty of loyalty against them. As such, the exculpatory provision of the partnership agreement barring claims against directors for lack of due care entitles those defendants to summary judgment.

2 6 Del. C. § 17-1101 (d)(1).

I. The Defendants

For purposes of this motion, a proper grouping of the defendants is important. At the center of this case is nominal defendant Hallwood Realty Partners, L.P. (the "Partnership"), which owns office buildings and industrial parks. The Partnership's units are publicly traded on the American Stock Exchange ("AMEX").

All of the other defendants are aligned by their relationship to the Partnership, through the Partnership's General Partner, defendant Hallwood Realty Corporation ("the General Partner").

The first group of defendants I will define are those defendants who are affiliated not only with the General Partner, but also with the General Partner's sole owner and parent corporation, defendant Hallwood Group Incorporated ("HGI"). These defendants include not only HGI and the General Partner, but also three individual defendants: Anthony J. Gumbiner; Brian M. Troup; and William L. Guzzetti. At the relevant time, Gumbiner was HGI's Chairman of the Board, Chief Executive Officer, and director, and held the identical positions at the General Partner. Similarly, William L. Guzzetti was Executive Vice President at HGI, and the General Partner's President, Chief Operating Officer, and director. Finally, defendant Troup was President, Chief Operating Officer, and director of HGI as well as a director of the General Partner. It also appears that Gumbiner, and Troup held the major equity stakes in HGI.

Because all of these defendants have a substantial economic stake in HGI, they have aligned themselves in arguing this motion. Their relationships with HGI support an inference that they had a self-interest to advantage HGI in any transaction it entered with the Partnership. Thus, during the rest of this opinion I refer to this group as the "HGI Defendants." Where it is necessary to identify those directors of the General Partner who were officers of HGI, I identify them as the "HGI Directors."

Another group of defendants stands in a different position. These defendants are the four members of the General Partner's board who do not serve as an officer or director of HGI: Alan C. Crisp; William F. Forsyth; Edward T. Story; and Udo H. Walther. For purposes of deciding this motion, it suffices to say that Gotham has failed to produce evidence that any of these defendants was beholden to HGI or to any of the HGI Directors such that they could not have exercised an independent business judgment as a director of the General Partner. Similarly, it is sufficient to note that there is evidence that some or all of these directors devoted less than adequate care to examining the transactions at issue in this case, but that a due care claim is unavailable against these defendants due to an exculpatory provision in § 7.06 of the Partnership Agreement. Thus, the crucial issue regarding these defendants will be the implications of the fact that they had (arguably conflicting) fiduciary obligations to both the Partnership and to the General Partner (and its sole owner, HGI). For purposes of identification, I identify these defendants as the "Non-HGI Directors."

II. The Challenged Transactions

Gotham challenges a series of transactions (the "Challenged Transactions" or "Transactions") undertaken by the Partnership in 1995:

• The "Reverse Split" — A March 1995 reverse unit split in which five pre-Split units of the Partnership were exchanged for a new single post-Split unit.

In connection with the Reverse Split, HGI purchased 30,000 post-Split units at $11.88 a unit, which was the market-based price used to compensate unitholders for their fractional units.

Although the defendants claim the 30,000 figure was selected as an estimate of the fractional units to be generated by the Split, the estimate missed the mark. Only 14,694 fractional units were created by the Split, an amount less than half of the 30,000 units HGI acquired.

The Reverse Split was expected to and did generate a large increase in the number of unitholders who held blocks of fewer than 100 units.

• The "Option Plan" — A March 1995 stock option plan that granted 86,000 options to officers and employees of the General Partner, including Gumbiner, Guzzetti, and Troup.

The options granted equalled nearly 5.0% of the equity of the Partnership and the Partnership committed over $1 million to loan money to the optionees to fund their purchases under the Plan.

• The "Odd-Lot Offer" — A June 1995 odd-lot tender offer in which the Partnership bought 293,539 post-Split units in blocks of less than 100 units from June 5, 1995 to July 10, 1995.³

The Partnership then sold the units it purchased in the Odd-Lot Offer to HGI. The units cost HGI $4.1 million, or slightly less than $14.00 per unit. The price paid by HGI tracked the price the Partnership paid to tendering stockholders, which was based on a market price formula.

An odd-lot tender offer by an issuer like the Partnership is exempt from many of the federal disclosure regulations that govern other tender offers. Thus the disclosures made in connection with the Odd-Lot Offer were all contained on a single page in which the Partnership made clear that it was making no recommendation as to price and that HGI wished "to purchase the Units acquired by the Partnership pursuant to the Offer in order to increase its ownership interest in the Partnership."⁴

3 Norman Aff., Ex. 45, at 23.

4 Healy Aff., Ex. 15.

III. The Competing Arguments of The Parties A. Gotham's Claims Against The Defendants

Gotham alleges that the Challenged Transactions were designed by the General Partner as a method to entrench its owner, HGI, by placing a large number of units in HGI's hands at an unfairly low price. In support of that claim, Gotham points out that HGI ended up with 24.7% of the Partnership's units at the end of the Transactions. When the options are added in, HGI controlled nearly 29.4% of the Partnership's units. Because the Partnership Agreement provides that a two-thirds vote of unitholders is necessary to remove the General Partner, Gotham alleges that the Transactions gave HGI the effective power to stymie a removal vote.

Not only that, Gotham claims that the General Partner timed the Transactions so as to enable HGI to grab up a control block at a depressed price. Possessing evidence that the real estate market had improved and that the Partnership's own performance was quite promising, but knowing that the market had not yet recognized those factors in valuing the Partnership's units,⁵ HGI, according to Gotham, seized the opportunity to snap up a control block on the pretext that the Partnership itself could not afford to finance the Challenged Transactions. Yet, Gotham claims, the Transactions were easily financeable by the Partnership itself. In support of this argument, Gotham notes that: (i) the General Partner never even attempted to finance the Challenged Transactions; (ii) the Partnership sold HGI twice as many units as were required to effect the Split; (iii) the General Partner was comfortable committing a quarter of the resources needed to purchase the units in the Transactions to fund the Option Plan; (iv) the Partnership had a healthy amount of cash on hand; (v) the General Partner obtained a firm commitment to refinance the entire debt of the Partnership within a month of the Odd-Lot Offer;⁶ and (vi) the General Partner committed the Partnership to a unit repurchase plan in December 1995 (the "Repurchase Plan").

5 See, e.g., id., Exs. 11, 12.

6 The refinancing actually closed in September 1995, but had been under negotiation while the Odd-Lot Offer was on-going.

In further support of its argument, Gotham notes that while purporting to accomplish the major Transaction at issue — the Odd-Lot Offer — as an issuance of securities, there is no record evidence that the General Partner in fact issued new securities to HGI in that Transaction. Rather, it appears that the General Partner simply resold the units it purchased in the Offer to HGI.

As a result, Gotham contends that the Odd-Lot Offer was clearly subject to §§ 7.05 and 7.10(a) of the Partnership Agreement. Section 7.05 states that the Partnership "is expressly permitted to enter into transactions with the General Partner or any affiliate thereof provided that the terms of any such transaction are substantially equivalent to terms obtainable by the Partnership from a comparable unaffiliated third party." ⁷ Section 7.10(a), meanwhile, states that the General Partner shall "form an Audit Committee . . . comprised of two members of the board of directors who are not affiliated with the General Partner or its Affiliates except by reason of such directorship. . . . The function of the Audit Committee shall be to review and approve . . . transactions between the Partnership and the General Partner and any of its Affiliates." ⁸

7 (emphasis added).

8 (emphasis added).

Gotham contends that both sections of the Partnership Agreement were breached. As to § 7.05, Gotham notes that an internal asset valuation (the "Net Asset Valuation") prepared by the General Partner for the year ending December 31, 1994 valued the Partnership's net asset value per unit at $58 — four to five times the prices paid by HGI for units in the Transactions.⁹ It also points to expert affidavits it has submitted expressing the view that the block purchased by HGI could have sold for a higher price in the market, as well as the fact that the Partnership bought back units at twice the price HGI paid just a year later pursuant to the Repurchase Plan.¹⁰

9 Healy Aff., Ex. 12.

10 Norman Aff. Ex. 9, at 22, Ex. 51.

As to § 7.10(a), Gotham notes the undisputed fact that the Audit Committee never met separately to "review and approve" the Challenged Transactions. At the three brief meetings held to approve the Transactions, the closest the Audit Committee members got to compliance with § 7.10(a) was the fact that they voted to approve certain of the Transactions with the HGI Directors abstaining. At no time, however, did the Audit Committee convene as an independent body, nor did it retain any outside advisors, but contented itself with relying upon management and outside advisors who owed their compensation to the General Partner and/or HGI.

Therefore, Gotham alleges that the General Partner breached its duties under the Partnership Agreement (the "Contract Claim"). Gotham also contends that the General Partner and the HGI Directors breached the fiduciary duties of loyalty and care that they owed to the Partnership's unitholders (the "Breach of Fiduciary Duty Claim"). HGI is alleged to have aided and abetted these breaches of duty.

B. The Basis For The Defendants' Motion For Summary Judgment

The defendants, of course, tell quite a different tale in support of their motion for summary judgment. They argue that the record is clear that the Challenged Transactions were undertaken for a proper Partnership purpose and filly comported with the terms of the Partnership Agreement.

With regards to substance, the defendants note that the Partnership was not in the best of financial health as of October 1994, when the Transactions were first approved in principle by the General Partner. The early 1990s had been a rough period for real estate partnerships including the Partnership at issue in this case. The Partnership's units were trading at around $2 a pre-Split unit, and the Partnership had failed in efforts to obtain a significant debt restructuring or capital infusion. By conducting a reverse split and an odd-lot tender offer, the Partnership would bolster the market price of units by increasing the unit price into the double digits, offer liquidity to small holders without brokerage costs, reduce the administrative costs the Partnership incurred to communicate with holders of small blocks, and avoid any risk of having its units delisted (the units having traded near the minimum dollar a unit AMEX listing level in late 1993).

Moreover, the defendants argue that the price paid by HGI was fair because it tracked the market price that the Partnership paid in the Split and the Odd-Lot Offer. In this regard, the defendants to some extent disclaim the Partnership's own internal Net Asset Valuation, claiming that it was simply something prepared for tax reporting purposes¹¹and cannot be taken seriously as an authentic value of the Partnership's assets.

11 Defs. Reply Br. at 33 n. 17 (stating that calculations were performed exclusively for tax reporting purposes and were not intended to reflect, and did not reflect, an estimate of the actual or fair market value of the properties).

Most significantly, however, the defendants note that their procedural defense also answers the fair price point. According to the defendants, the shares that were purchased by HGI and its affiliates in the Challenged Transactions all constituted "issuances" of new Partnership units and not mere "resales" of units purchased by the Partnership on the market.

As a result, the defendants contend that § 9.01 of the Partnership Agreement clearly governed the Transactions to the total exclusion of §§ 7.05 and 7.10(a). Section 9.01 provides in pertinent part that:

(a) Subject to Sections 9.01(b) and (c) hereof, the General Partner is authorized to cause the Partnership to issue Units at any time or from time to time to the General Partner, to Limited Partners or to other Persons . . . without any consent or approval of the Limited Partners or Assignees. . . . Subject to Section 9.01(b) hereof the General Partner shall have sole and complete discretion in determining the rights, powers, preferences, and duties.., and the consideration and terms and conditions with respect to any future issuance of Units. . . .

(b) The General Partner or any Affiliate thereof may, but is not obligated to, make Capital Contributions to the Partnership in the form of cash or other property in exchange for Units. Except as set forth above, the number of Units issued to the General Partner or any such Affiliate in exchange for any Capital Contribution shall not exceed the Net Agreed Value of the contributed property or the amount of cash, as the case may be, divided by the Unit Price of a Unit as of the day of such issuance.¹²

12 Partnership Agreement § 9.01 (emphasis added).

The defendants claim that the Transactions were in fact carried out as issuances under § 9.01 and that the price paid by HGI complied with the floor set by § 9.01(b) for issuances to affiliates of the General Partner.

Noting that, subject to this floor price, § 9.01(a) vests "sole and complete" discretion to set the terms of issuances, the defendants claim that the plain language of the Partnership Agreement precludes the operation of §§ 7.05 and 7.10(a). In further support of this argument, the defendants note that § 7.10(c) provides:

Whenever in this Agreement . . . the General Partner is permitted or required to make a decision (i) in its "sole discretion or "discretion" or under a similar grant of authority or latitude, the General Partner shall be entitled to consider only such interests and factors as it desires and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Partnership, . . . the Limited Partners or the Assignees, or (ii) in its "good faith" or under another express standard, the General Partner shall act under such express standard and shall not be subject to any other or different standards imposed by this Agreement, . . . or any other agreement contemplated herein or therein. Each Limited Partner or Assignee hereby agrees that any standard of care or duty imposed in this Agreement, . . . or any other agreement contemplated herein or under the Delaware RULPA or any other applicable law, rule or regulation shall be modaied, waived or limited in each case as required to permit the General Partner to act under this Agreement, . . . or any other agreement contemplated herein and to make any decision pursuant to the authority prescribed in this Section 7.10(c) so long as such action or decision does not constitute willful misconduct and is reasonably believed by the General Partner to be consistent with the overall purposes of the Partnership.

To superimpose either the substantive requirement of § 7.05 or the procedural requirement of § 7.10(a) on § 9.01 Transactions, the defendants contend, would conflict with the clear mandate of § 7.10 (b) by fettering the General Partner's complete discretion with conflicting substantive and procedural "standards" and by requiring it to consider "interests of . . . or factors . . . affecting the Limited Partners."¹³ Rather, the only duty of the General Partner was to ensure that HGI paid a price in compliance with § 9.01(b) and that duty was carried out.

13 Id. (emphasis added).

Furthermore, the defendants contend that they are entitled to summary judgment regardless of whether the Challenged Transactions were consummated in breach of the Partnership Agreement. They raise three affirmative defenses in support of this contention.

First, the defendants contend that at worst they relied on a good faith misinterpretation of the Partnership Agreement in concluding that § 9.01 governed the Transactions to the exclusion of §§ 7.05 and 7.10 (a). Thus, they argue, § 17-1101(d) of the DRULPA provides them with immunity from liability. That section states:

To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) and liabilities relating thereto to a limited partnership or to another partner, (1) any such partner or other person acting under a partnership agreement shall not be liable to the limited partnership or to any such other partner for the partner's or other person's good faith reliance on the provisions of such partnership agreement. . . .¹⁴

14 6 Del. C. § 17-1101(d)(1).

Relatedly, the Non-HGI Directors also rely upon § 17-1101(d)(2) of DRULPA, which permits a partnership agreement to limit the liabilities of partners even further.¹⁵ Section 7.06 of the Partnership Agreement utilizes that flexibility by stating as follows:

15 6 Del. C. § 17-1101 (d)(2).

Liability of General Partner to the Partnership and Limited Partners or Assignees. The General Partner, its Affiliates and all officers, directors, partners, employees and agents of the General Partner and its Affiliates shall not be liable to the Partnership, any Limited Partner, Assignee or any other Person who has acquired an interest to the Partnership for any losses sustained or liabilities incurred, including monetary damages, as a result of any act or omission, unless such act or omission constitutes (a) a breach of any duty of loyalty to the Partnership, (b) an act or omission in bad faith which involves intentional misconduct or a knowing violation of law, or (c) a transaction from which an improper personal benefit is derived.¹⁶

16 (emphasis in original).

Finally, all the defendants proffer their alleged good faith reliance upon advice of counsel as an independent defense. Under § 7.08(b) of the Partnership Agreement:

The General Partner may consult with legal counsel . . . selected by it, and any opinion of any such Person as to matters that the General Partner reasonably believes to be within its professional or expert competence (including, without limitation, any opinion of legal counsel to the effect that the Partnership would "more likely than not" prevail with respect to any matter) shall be fill and complete authorization and protection with respect to any action taken, suffered or omitted by the General Partner hereunder in good faith and in accordance with such opinion.

As to all these defenses, the defendants claim that the record is indisputably clear that they had been advised by counsel that § 9.01 governed these Transactions, that they had never been advised by counsel that § 7.05 or § 7.10(a) applied, and that there is no evidence casting doubt on the good faith of any of them in structuring the Transactions in compliance with § 9.01 and not §§ 7.05 and 7.10 (a).

With regard to these affirmative defenses, the Non-HGI Directors distance themselves a bit from their fellow defendants. The Non-HGI Directors note that unlike HGI or its officers, they had no reason to be other than a faithful broker in ensuring that the Transactions were fair to all Partnership constituencies, in particular to the unitholders other than to HGI. That is, the Non-HGI Directors argue that even were I to conclude that there is evidence in the record that casts a triable doubt over the good faith of the HGI Defendants and precludes an award of summary judgment to those defendants, there is nothing in the record that compromises their own good faith.

III. The Order In Which The Issues Will Be Resolved

I will address the defendants' arguments in the following order. The opinion will first examine whether the defendants are entitled to summary judgment on Gotham's Contract Claim. I will then address whether there is any room left by the Partnership Agreement for the application of general fiduciary duty principles to analyze the General Partner's conduct in the Challenged Transactions and thus whether Gotham's Fiduciary Duty Claim withstands summary judgment. Then I will tackle Gotham's self-styled "Fraud Claim, " which involves a rather convoluted twist on its Contract and Fiduciary Duty Claims.

After that, I will examine separately the affirmative defenses raised by the HGI Defendants and the Non-HGI Directors.

IV. The Applicable Procedural Standards

To prevail on their motion, the defendants must persuade me that upon a review of the evidence in the light most favorable to Gotham, no genuine issues of material fact exist that preclude the entry of judgment for the defendants.¹⁷ An important element of discretion is left to the trial court in applying Rule 56, which enables the court to deny "summary judgment if it decides that a more thorough development of the record would clarify the law or its application."¹⁸ In discussing the various claims, I have consciously avoided deciding the numerous subsidiary factual skirmishes between the parties in the 223 pages of briefs they filed, and concentrate on the major questions that will determine whether a trial is necessary. Given the procedural posture, I focus in particular on the admissible evidence that bolsters Gotham's claims.

17 Ct. Ch. R. 56(c); Brown v. Ocean Drilling Exploration Co., Del. Supr., 403 A.2d 1114, 1115 (1979).

18 In re Dairy Mart Convenience Stores, Inc., Del. Ch., Cons. C.A. No. 14713, mem. op. at 31, Chandler, C. (May 24, 1999) ( citing Alexander Indus., Inc. v. Hill, Del. Supr., 211 A.2d 917, 918 (1965); Ebersole v. Lownegrub, Del. Supr., 180 A.2d 467 (1962)).

A. Gotham's Contract Claim

In addressing the Contract Claim, I apply Delaware's well-established contract interpretation principles, which direct the court in the first instance to discern the meaning of a contract and the intent of the parties from the language they used, as read from the perspective of a hypothetical, objective third party.¹⁹ It is only when that approach does not yield an unambiguous result that the court will resort to secondary techniques of construction. In the limited partnership context, those secondary methods fall into two primary categories. Where a limited partnership agreement was drafted exclusively by the general partner, the court will interpret ambiguities against the drafter, rather than examine extrinsic evidence.²⁰ But if a limited partnership agreement was the product of negotiations among the parties, the court will resolve an ambiguity by examining relevant extrinsic evidence.²¹ The Partnership Agreement here appears to fall into the former category and was exclusively crafted by the General Partner.

19 US. West, Inc. v. Time Warner Inc., Del. Ch., C.A. No. 14555, mem. op. at 21, Allen, C. (June 6, 1996).

20 M.I. LUBAROFF P.M. ALTMAN, LUBAROFF ALTMAN ON DELAWARE LIMITED PARTNERSHIPS (hereinafter "LUBAROFF ALTMAN") § 11.1, at 11-3-11-4 (Supp. 2000) ( citing SI Management L.P. v. Winninger, Del. Supr., 707 A.2d 37, 43 (1998); Arvida/JMB Partners, L.P. v. Vanderbilt Income Growth Associates, L.L.C., Del. Ch., C.A. No. 15238, mem. op. at 11, Balick, V.C. (May 23, 1997), aff'd, 712 A.2d 475 (1998) (ORDER)).

21 Id. at 11-3 ( citing U.S. West v. Time Warner, Inc., mem. op.).

The defendants' position that summary judgment should be granted on Gotham's Contract Claim centers on its view that § 9.01 applies to all of the Challenged Transactions, including the Odd-Lot Offer, which was the Transaction in which HGI acquired most of its Partnership units. Without belaboring what will be a major issue at trial, I conclude that a grant of summary judgment on this issue is inappropriate for two reasons.

The most important is that there is abundant record evidence that supports Gotham's assertion that the Odd-Lot Offer did not involve an issuance of units governed by § 9.01. This evidence is consistent with the Offer as being a transaction in which the Partnership took the units it purchased from tendering unitholders and simply resold those same units to HGI. In fact, most of the documents created by the defendants and their agents in connection with the Offer describe the Transaction in just such terms. Moreover, the record is devoid of any evidence that shows when the Odd-Lot Offer-related units were "issued" to HGI or that the Partnership calculated the floor price in § 9.01 (b) by reference to such (unknown) date of issuance, as is required by that provision.

As such, the Transaction might well be found to fall under the plain terms of § 7.09 of the Partnership Agreement, which provides as follows:

Section 7.09 Purchase or Sale of Units. The General Partner may, on behalf of and for the account of the Partnership, purchase or otherwise acquire Units and, following any such purchase or acquisition, may sell or otherwise dispose of such Units in accordance with applicable law. In addition to the foregoing, the General Partner and its Affiliates from time to time also may purchase or otherwise acquire Units other than from the Partnership for their own account and may, subject to the provisions of Section 13.03 hereof; sell or otherwise dispose of such Units.²²

22 For many reasons discussed at oral argument, I reject: I) the defendants' argument that § 7.09 did not provide clear authorization, as required by § 17-702(d) of DRULPA, for the General Partner to purchase units on behalf of the Partnership, hold them for the account of the Partnership, and then sell them later; and 2) Gotham's argument that the second sentence of § 7.09 implicitly precludes the General Partner from purchasing units from the Partnership itself.

If the Transaction was accomplished under authority of § 7.09 and not § 9.01, then there seems to be little doubt that both § 7.05 and § 7.10(a) would apply. Because there is a triable question regarding whether the price paid by HGI was equivalent to what a third party would have paid and because it is clear that the Audit Committee did not meet to review and approve the Transaction, the defendants' motion for summary judgment must be denied.

A second reason exists why summary judgment is unwarranted. To the extent § 9.01 applies to the units purchased by HGI in the Reverse Split, the options issued in the Option Plan, and even to the units purchased in the Odd-Lot Offer, I am not convinced that the Partnership Agreement unambiguously precludes the operation of § 7.10(a)'s Audit Committee approval requirement.

I agree with the defendants that there is no way to reconcile the substantive fair price requirement of § 7.05 with § 9.01(a)'s provision granting the General Partner the substantive discretion to issue shares to itself or affiliates on terms it establishes subject to the floor set by § 9.01(b). By contrast, however, it is conceivable to reconcile the requirement of Audit Committee "review and approval" with the discretion accorded the General Partner by § 9.01. The Audit Committee, after all, is not a separate entity from the General Partner. The Audit Committee is created by and is a constituent part of the General Partner itself. The defendants have not convinced me at this stage that the procedural requirement in § 7.10(a) that the General Partner's own Audit Committee review and approve transactions between the Partnership and the General Partner or its affiliates is inconsistent with the substantive grant of discretion to the General Partner in § 9.01. The fact that § 7.10(a) might require the General Partner to follow a certain process in "exercising its sole and complete discretion" does not so clearly create a "different standard" as to necessarily preclude a joint operation of § 7.10(a) and § 9.01 with respect to issuance to affiliates of the General Partner.²³ Indeed, it may have been thought by the drafters that the floor price in § 9.01(b) and the procedural protections of § 7.10(a) were sufficient to protect the unitholders from overreaching by the General Partner so as to eliminate the need to subject issuances to § 7.05.

23 In fairness, I note that there are other factors weighing in favor of the defendants' argument, including the fact that § 9.01(a) expressly states that the powers it sets forth are subject to §§ 9.01 (b) and (c) and does not refer to § 7.10(a). As Gotham points out, however, § 9.01 nowhere expressly excludes operation of § 7.10 (a), a section of the Agreement that clearly purports to have a fairly wide scope of intended operation. In other places in the Agreement, moreover, the Agreement expressly states when particular sections modify or exclude the operation of generally applicable sections. E.g., Agreement §§ 13.01(a) 16.03 (both starting with the phrase "Except as otherwise provided in Sections . . . "). Therefore, I balk at relying on this method of resolution without the benefit of a trial and further briefing that might shed greater light on the precise contexts in which these different approaches were used in the Agreement.

Likewise, because I am not convinced that § 7.10(a) is irreconcilable with § 9.01, I will not resort to resolution of the claim on the basis that § 9.01 is the more specific provision and must trump a more general provision of the Agreement. Without certainty that the two provisions were not meant to operate in tandem, the court cannot resort to that rule of contract construction.²⁴

24 Sonitrol Holding Co. v. Marceau Investissements, Del. Supr., 607 A.2d 1177, 1184 (1992).

Lastly, because Gotham has not moved for summary judgment, I need not address the potential applicability of the principle that contractual ambiguities should be construed against the drafter, in this case, the General Partner. Nor should Gotham read this opinion as precluding a ruling in the defendants' favor on these interpretive issues after trial. For now, I merely conclude that there is sufficient uncertainty regarding § 9.01's applicability and the implications of its applicability on the operation of § 7.10(a) as to preclude an award of summary judgment for the defendants on Gotham's Contract Claim.²⁵

25 In re Marriott Hotel Properties II Limited Partnership Unitholders Litig. (" Marriott III"), Del. Ch., Cons. C.A. No. 14961, mem. op. at 19, Lamb, V.C. (Jan. 24, 2000) ("if 'a more thorough development of the record would clarify the law or its application,' the court may, in its discretion, deny summary judgment") ( quoting In re Dairy Mart Convenience Stores, Inc. Deny. Litig., Del. Ch., Cons. C.A. No. 14713, mem. op. at 31, Chandler, C. (May 24, 1999)). Cf. US. West v. Time Warner, Inc., Del. Ch., C.A. No. 14555, mem. op. at 21 n. 10, Allen, C. (June 6, 1996) (in determining whether the language of a contract is ambiguous, it is sometimes necessary to understand the context and business circumstances in which the contract was created).

B. The Breach of Fiduciary Duty Claim

The identical conduct that Gotham complains breached the Agreement is said by it to have breached fiduciary duties owed by the defendants to the unitholders. Thus, this court once again faces an effort by a plaintiff in the limited partnership context to bring to the fore the default rules that operate when a limited partnership agreement fails to define the duties and liabilities of the partners.²⁶

Absent a contrary provision in the partnership agreement, the general partner of a Delaware limited partnership owes the traditional fiduciary duties of loyalty and care to the Partnership and its partners.²⁷ But § 17-1101(d)(2) of DRULPA expressly authorizes the elimination, modification, or enhancement of these fiduciary duties in the written agreement governing the limited partnership.²⁸ "When a particular limited partnership has plainly opted out of the statutory default scheme, judicial review . . . must look to the limited partnership's distinct doctrinal foundation in contract law."²⁹ Therefore, where the Partnership Agreement provides the standard that will govern the duty owed by a General Partner to its partners in self-dealing transactions, it is the contractual standard and not the default fiduciary duty of loyalty's fairness standard that exclusively controls.³⁰

27 Sonet v. Timber Company, L.P., Del. Ch., 722 A.2d 319, 322 (1998); E.P. WELCH A.J. TUREZYN, FOLK ON THE DELAWARE GENERAL CORPORATION LAW (hereinafter "FOLK"), Pt. V Limited Partnerships (Robert S. Saunders) § 17-403.5 at LP-IV-37-38 (2000) (general partner of L.P. owes fiduciary duties to limited partnership unless such duties are modified by the partnership agreement).

28 Sonet, 722 A.2d at 323.

29 Id.

30 In re Marriott Hotel Properties II Limited Partnership Unitholders Litigation (" Marriott I"), Del. Ch., Cons. C.A. No. 14961, mem. op. at 11, Allen, C. (June 12, 1996) ("[W]here the parties have a more or less elaborated statement of their rights and duties, absent fraud, those rights and duties, where they apply by their terms, and not the vague language of a default fiduciary duty, will form the metric for determining breach of duty."); In re: Cencom Cable Income Partners, L.P. Litig., Del. Ch., Cons. C.A. No. 14634, mem. op. at 10, Steele, V.C. (Feb. 15, 1996) (DRULPA "recognizes [that] partners may modify fiduciary duties through contract. In other words, whether a general partner operates in good faith, with due care, or with requisite loyalty may be determined by the consistency with which the general partner adheres to its contractual obligations. Put another way, the limited partnership agreement may authorize actions creating a "safe harbor' for the general partner under circumstances that might otherwise be questionable or impose a stricter standard of scrutiny than the norm.").

Here, the defendants have convinced me that the Partnership Agreement leaves no room for the application of common law fiduciary duty principles to measure the General Partner's conduct. The Partnership Agreement is hardly a model of clarity. Indeed, it is filled with provisions that appear to render illusory protections that other provisions accord the unitholders. But there is no doubt that the Agreement attempts to set forth the duties owed by the General Partner in self-dealing transactions between the Partnership and General Partner affiliates in a comprehensive manner. The provisions of the Agreement that articulate these duties filly encompass Gotham's claims.

For example, if the defendants are correct that § 9.01 of the Agreement applies to the exclusion of §§ 7.05 and 7.10(a), then the parties to the Agreement have consciously chosen to apply another standard than "fairness" to issuances of securities to the General Partner or its affiliates. There is simply no way to square a duty of generalized fairness with the sole and complete discretion³¹ accorded to the General Partner under that reading of the contract.

31 A discretion that is subject, of course, to the floor price set in § 9.01(b).

Furthermore, because the sole and complete discretion possessed by the General Partner under that reading is as broad as it is, it would also subsume any concern that the number of units issued would have an entrenching effect, even though the Agreement does provide the limited partners with the right to remove the General Partner by a two-thirds vote. However harsh it sounds, I find no way to square a corporate law-derived Revlon ³² claim with contractual provisions that give the General Partner "sole and complete" discretion to issue units to itself and to decide whether to admit unitholders as voting limited partners.³³ These provisions are inconsistent with an expectation by unitholders that the General Partner would govern the Partnership subject to the identical strictures that apply to corporate boards in managing change of control situations. But they are in keeping with a contractual expectation on the part of the General Partner that it would have substantial authority to maintain its position, subject to only such constraints as are imposed by the contract itself.

32 Revlon, Inc. v. MacAndrews Forbes Holdings, Del. Supr., 506 A.2d 173 (1985).

33 Partnership Agreement § 13.05.

In fact, the original offering prospectus for the Partnership advised investors in very plain terms that this was so:

The decision to admit an Assignee will be in the sole discretion of [the General Partner]. As a result, [the General Partner] will be able to prevent non-limited partners from voting for its removal by preventing Assignees from becoming limited partners.³⁴

34 See Norman Aff., Ex. 2.

In the Marriott Hotel limited partnership cases, the investment of power of this nature in a general partner was found by this court to be at odds with an expectancy of a control premium on the part of unitholders.³⁵

35 See In re Marriott I, mem. op. at 15 (June 12, 1996); In re Marriott Hotel Properties II Limited Partnership Unitholders Litig. (" Marriott II"), Cons. C.A. No. 14961, mem. op. at 10-12, Lamb, V.C. (Sept. 17, 1997). While it is true that the Marriott cases apparently involved a partnership agreement with no removal provision, the lack of such a removal provision was but one of several features that was found inconsistent with Revlon's applicability. Most important among those was the general partner's ability to defeat an insurgency by the simple measure of denying the insurgent admission as a limited partner. See Mariott II mem. op. at 10-11 (Vice Chancellor Lamb discussing the fact that Chancellor Allen had correctly concluded that the absolute discretion the general partner had over admission decisions was "entirely inconsistent" with the existence of Revlon duties).

The reasoning of those cases applies here and bars the use of generalized Revlon principles. If § 9.01 applies to the exclusion of §§ 7.05 and 7.10(a), then Gotham can prevail only by showing, per § 7.10(c), that the Transactions resulted from "willful misconduct" by the defendants or were not "reasonably believed . . . to be consistent with the overall purposes of the Partnership."

Similarly, if Gotham is correct about the interpretation of the Agreement, the Agreement's provisions cover any ground that might be occupied by backdrop fiduciary duties. Assuming § 7.05 applies to the Challenged Transactions, the validity of those Transactions would be measured by its terms, which in substance match the entire fairness standard.³⁶ An identical result pertains to the extent that § 7.05 does not apply (because all or some of the Transactions were accomplished under § 9.01) but that § 7.10(a) does. In that scenario, Gotham might be entitled (subject to the affirmative defenses of the defendants) to relief for the failure of the defendants to comply with § 7.10(a)'s terms. But it would be inconsistent with the plain terms of the contract to superimpose a generalized fairness duty on § 9.01.

36 Sonet 722 A.2d at 324 n. 12 (applying agreement provisions to exclusion of fiduciary duty principles while recognizing that some of the agreement's provisions were "in some sense . . . an explicit acceptance of the default duty of loyalty and fair dealing . . .").

Therefore, as I understand this case, Gotham's ability to obtain relief will rise or fall with its Contract Claim. If it loses its Contract Claim, its Fiduciary Duty Claim falls as well. If it wins its Contract Claim, then it will have in substance proven that the General Partner was subject, by contract, to a fairness standard akin to the common law one applicable to self-dealing transactions by fiduciaries. In either event, the Partnership Agreement, and not default rules of fiduciary duty, control.³⁷ As such, defendants' motion to dismiss Gotham's Fiduciary Duty Claim is granted as against the General Partner.

37 Any interstitial issues in this case are best dealt with through cautious application of the implied covenant of good faith and fair dealing. If the General Partner's behavior cannot be said to violate an express term of the Agreement or an implied covenant to that Agreement, the court should be all the more reticent to conclude that the conduct was invalid on fiduciary grounds.

I leave open the following issue that was not addressed by the parties. The fiduciary duties owed by directors of a corporate general partner to the limited partnership under DRULPA have yet to be fully defined. In view of the teaching of cases like In re USA Cafes, L.P. Litigation,³⁸ I am not confident that the HGI Directors might not be culpable for breach of fiduciary duty or as aider and abettors if they intentionally caused the General Partner to violate the Partnership Agreement. Likewise, if HGI purposefully induced a breach of contract by the General Partner, I cannot confidently conclude that it has no exposure. Thus, while I am certain that the liability of all the defendants will turn primarily on whether the General Partner complied with the Agreement, questions of fiduciary liability regarding the other HGI Defendants exist that I am presently unprepared to answer.

38 Del. Ch., 600 A.2d 43 (1991).

C. Gotham's Fraud Claim

Gotham's Fraud Claim is pled in the following conclusory manner:

COUNT XI-FRAUD * * *

191. Defendants owe the Partnership and the Limited Partners a fiduciary duty of fill and fair disclosure.

192. The General Partner misrepresented or concealed from the Partnership and the Limited Partners the true value of the Partnership's assets and the real reason for the transactions alleged above.

193. The General Partner acted with intent to deceive or with reckless disregard for the truth.

194. The Partnership relied to its detriment on such misrepresentations and facts which the General Partner knew to be false, causing injury to the Partnership and the Limited Partners.³⁹

39 Am. Comp. ¶¶ 191-194.

During briefing, Gotham sought to flesh out this vague claim. Hence, it now contends that there are two specific items of information that should have been disclosed (the "Allegedly Material Facts"). First, Gotham claims that the General Partner should have disclosed the Net Asset Valuation that showed a value per unit well in excess of the Odd-Lot Offer purchase price. Second, Gotham distances itself from its complaint's claim that it was improper for the General Partner not to make a self-flagellating disclosure about its "real reasons."⁴⁰ Gotham now claims that the General Partner should have disclosed factual information describing the effect that the resale of the Units to HGI contemplated in the Odd-Lot Offer could have had on HGI's equity share in the Partnership and thus on the unitholders' ability to remove the General Partner pursuant to the two-thirds removal provision.

40 Loudon v. Archer Daniels-Midland Co., Del. Supr., 700 A.2d 135, 143 (1996) (self-flagellating disclosures are not mandated).

But even with this additional meat on the bone, Gotham's Fraud Claim fails as a matter of law. One obvious problem with Gotham's claim is that it is unclear to whom Gotham is contending that disclosure of the Allegedly Material Facts should have been made. In this regard, it is critical that Gotham's disclosure claim rests on a fraud theory and not on the duty of disclosure owed in certain circumstances by fiduciaries.

That is, Gotham does not purport to bring this action on behalf of unitholders who sold in the Odd-Lot Offer on the basis that the General Partner breached any fiduciary duty of disclosure owed to them. As a result, any argument that the General Partner had the duty to disclose all the material facts bearing on the value of the Partnership units it sought to purchase in that Offer is unavailing to Gotham.⁴¹ Gotham simply cannot claim any harm to it or the unitholders who did not tender from that lack of disclosure. Rather, any harm to the non-tendering unitholders resulted not from the Odd-Lot Offer itself but from the terms and entrenching effect of the resale of the purchased units to HGI. The resale was not approved by the unitholders. It was approved by the General Partner.

41 In re Marriott I, mem. op. at 20 ("It is unquestioned that, in extending an offer to the limited partners to buy their limited partnership units the general partner owes a duty of full disclosure of material information respecting the business and value of the partnership which is in its possession."). I note that this statement in Marriott I does not address an offer by the limited partnership itself. If it were applied mechanistically to an offer by a limited partnership, such an application would appear to substantially limit any benefit to Delaware limited partnerships from the relaxed requirements apparently afforded to odd-lot tender offerors under federal law. In this case, there is no question that the Partnership made no attempt to make such full disclosure, and thus if this case were brought on behalf of selling unitholders a nice question of law would have been presented regarding: i) the Delaware disclosure requirements applicable in a circumstance when federal law specifically contemplates quite limited disclosures; and ii) whether the Offer was in fact one by the Partnership, the direct purchaser and conduit, or the General Partner, the ultimate purchaser.

As a result, Gotham has failed to present evidence that would support a finding that it or any other non-tendering unitholder relied to its detriment on information omitted from the Odd-Lot Offer information sheet. Because a showing of detrimental reliance is required to prove a fraud claim, Gotham's claim fails as a matter of law.⁴²

42 The elements of common law fraud are: 1) deliberate concealment of a material past or present fact, or silence in the face of a duty to speak; 2) scienter; 3) an intent to induce reliance; 4) causation; and 5) damages resulting from the concealment. Nicolet, Inc. v. Nun, Del. Supr., 525 A.2d 146, 149 (1987). Taken together, elements 3), 4), and 5) require the plaintiff to show that it detrimentally relied upon the defendant's disclosures.

Recognizing this flaw in its claim, Gotham refined its fraud theory at oral argument. At that time, Gotham contended that its claim is that the Partnership itself was somehow defrauded by the failure of at least certain of the HGI Directors or HGI agents to disclose the Allegedly Material Facts to the full board of the General Partner. But this argument does not obviate a grant of summary judgment.

As the record now stands, there is no evidence from which one can infer that this particular alleged "fraud on the board" occurred. Nothing in the record suggests that the Non-HGI Directors voted to approve the Challenged Transactions in ignorance of the value of the Partnership's assets.⁴³ While the General Partner's full board may not have considered the Net Asset Valuation in connection with these Transactions, there is no record evidence from which one can infer that the directors were unaware of the approximate value of the Partnership assets they were entrusted to manage. Nor is there a record basis to support an inference that the HGI Directors consciously decided not to make the Net Asset Valuation part of the board's deliberations. Moreover, the board packages, in connection with the Challenged Transactions, contained information regarding the effect the resales to HGI were likely to have on HGI's equity stake in the Partnership.⁴⁴ Therefore, Gotham has failed to generate a triable issue that the Non-HGI Directors were deliberately misled into supporting the Transactions by non-disclosures of the Allegedly Material Facts by other directors and officers of the General Partner.⁴⁵

43 In contrast, there is evidence that suggests that they had no real knowledge of the Partnership's ability to secure financing for the sales at that time, or the likely effect the Split would have on the relationship between the net asset value of the Partnership and the market price of Partnership units.

44 Healy Ex. 16, at HR 28168; see also Kailer Dep. at 252-253.

45 I therefore do not reach the defendants' other reasons why the Fraud Claim fails, including their argument that the Allegedly Material Facts were in fact immaterial.

Granting summary judgment on Gotham's elusive Fraud Claim does not, of course, render irrelevant the quality of the communications that occurred among directors and officers of the General Partner. Suppose evidence emerges at trial that certain of the HGI Defendants: (i) purposely misled the Non-HGI Directors about (a) the underlying value of the Partnership units or (b) the ability of the Partnership to get a higher price for the units than HGI was willing to pay, (ii) in order to induce the Non-HGI Directors to approve a sale to HGI at an unfair price. If so, that proof will be compelling evidence of a violation by the culpable defendants, even if the restrictive "willful misconduct" liability provision of § 7.10(c) of the Agreement is the measure of liability against the General Partner. Likewise, if Gotham shows that HGI had a secret plan to snatch up a large number of units that could entrench it at a bargain price before an expected up-turn in the market and did not disclose that plan to the Non-HGI Directors, that will also be evidence of willful misconduct. Such a showing will be even more powerful, of course, if the more stringent requirements of § § 7.05 and 7.10(a) apply to the Challenged Transactions.

C. The Affirmative Defenses Asserted By The HGI Defendants

The HGI Defendants argue that they are entitled to summary judgment even if the Challenged Transactions were consummated in a manner that breached the Partnership Agreement. This argument is based on what the HGI Defendants claim is the clear and undisputed evidence that they relied in good faith on the terms of the Partnership Agreement in implementing the Transactions, a conclusion buttressed by the advice given to them by the General Partner's counsel, Alan Kailer.

For the following reasons, the HGI Defendants have not persuaded me that they are entitled to summary judgment.

Initially, I note that there is evidence in the record that is at odds with the conclusion that the HGI Defendants acted in good faith. Start with the strong self-interest that HGI had in the Challenged Transactions. It is no small thing for the parent of a General Partner to quintuple its stake in a partnership, especially if by doing so it was putting itself in an excellent position to block a removal vote. If it could do so at a low price through Transactions that gave it all the benefits of a direct tender offer but with few of the securities law obligations that would have attended a direct tender offer, so much the better.

HGI's self-interest is coupled with record evidence that casts doubt on the HGI Defendants' explanation as to why the Challenged Transactions were undertaken in the manner they were. For example, the HGI Defendants claim that the Partnership could not finance the purchase of the units sold to HGI in connection with the Challenged Transactions. Yet they rely upon stale efforts to obtain much greater financing in 1991 and 1992 as the primary evidence to support that claim and concede that they never attempted to look for financing for the Challenged Transactions themselves. In addition, there is room for doubt regarding their belief that the Partnership's own balance sheet would not have permitted it to finance the purchases, especially because the General Partner obligated the Partnership to fund the Option Plan and all the transaction costs in connection with the Transactions. The fact that the Partnership was able to refinance its whole balance sheet shortly after the Odd-Lot Tender Offer closed adds to this doubt.

Similarly, the HGI Defendants' claim that the real estate market was in the dumps in 1995 and that no one would have wished to buy into the Partnership at the time of the Challenged Transactions is, at best, debatable. At worst, it is flatly inconsistent with contemporaneous documents created by officers of the General Partner. The objective circumstances as revealed by the record do not exclude the possibility that the General Partner knew that the market was undervaluing the Partnership's units at the time of the Challenged Transactions, that the Partnership's prospects were quite promising, and that it was an advantageous time for HGI to increase its stake in and control over the Partnership at a bargain price. The chronology of events in the year of the Transactions is consistent with that possibility. In the first half of 1995, the General Partner concluded that the Partnership could not afford to fund the $4.4 million to make the purchases in the Challenged Transactions. Thus HGI bought those units for its own account. But a mere five months after the Challenged Transactions closed, the Partnership decided to engage in the Repurchase Program, during which it later bought units at an average price nearly twice that paid by HGI in the Transactions.

Contributing to my conclusion that there is a triable issue regarding good faith is the lack of any strong reason for the Odd-Lot Offer to have been undertaken when it was. Significantly, the Odd-Lot Offer was the Transaction in which HGI obtained most of its units. Although the Offer did offer liquidity to unitholders with small blocks without the obligation to pay brokerage fees, it was also made at a time when the market had not yet begun to value the units of the Partnership in a manner more in keeping with the assets it owned. Put simply, it is quite plausible that HGI realized that it was a good time to buy, but not to sell Partnership units. And the administrative cost savings likely to be achieved by reducing the number of mailings to unitholders with small blocks were so insubstantial that: (1) the General Partner's board was not presented with any written estimate of the savings; and (2) it would take several years before the savings would exceed the costs of implementing the Transaction itself. Given these factors, why not have waited until the Partnership itself could fund the purchases so that all unitholders who chose not to sell could reap the price-bolstering benefits of the Offer?

By raising these concerns, I do not mean to imply that there was no rational business purpose for the Odd-Lot Offer. Rather, I do so because the rather tepid benefits of that Transaction to the non-HGI unitholders and the timing of the Transaction help create doubt regarding the HGI Defendants' motive for recommending that Transaction.

Thus, in view of the record evidence that suggests that HGI not only had a motive to advance its own interests at the expense of the other unitholders but in fact achieved that very result, HGI has failed to persuade me that there is no need for a trial to evaluate its good faith defense, a defense which HGI bears the burden to prove.

In view of the triable doubt that exists regarding HGI's good faith in undertaking the Transactions, I decline to grant summary judgment to the HGI Defendants on the basis of § 17-1101(d)(1) of DRULPA, which exculpates any person who relies in good faith on the provisions of a partnership agreement from liabilities for breach of duties existing "at law or in equity."

As written, § 17-1101(d)(1) appears to have quite broad application. For example, the statute quite clearly states that it applies to all claims for breach of duty at law or in equity "including" a claim for breach of fiduciary duties. The inclusion of fiduciary duty claims in this manner logically suggests that the statute reaches other claims, such as claims for breach of contract. Likewise, unlike 8 Del. C. § 102 (b)(7), § 17-1101(d)(1) of DRULPA applies to all "liabilities" and not just to claims for monetary damages. This suggests that the statute may be read to bar rescissionary relief. For all these reasons, the defendants argue that the statutory exculpatory provision applies to exonerate even a breach of the partnership agreement itself so long as the breach was due solely to a good faith misreading of the partnership agreement.

Gotham retorts that, read this way, § 17-1101 (d)(1) sanctions abuse because a general partner can exploit ambiguities in the partnership agreement to advance its own self-interest. Gotham also notes that the statute has, to date, apparently not been applied in any decision to exculpate a general partner against a claim for breach of a partnership agreement.

For the following reasons, I decline to make a definitive ruling about the scope of the statute at this point in the case. Initially, I note that the decisional law interpreting § 17-1101(d)(1) is slight. While there are decisions applying the statute to bar claims for breach fiduciary duty,⁴⁶ the parties have cited only one case in which a Delaware court has discussed the applicability of the statute to a claim for breach of contract. In Continental Ins. Co. v. Rutledge Co.,⁴⁷ this court indicated that § 17-1101(d)(1) would bar a breach of contract action in a situation where the general partner had made a good faith misreading of an ambiguous contract provision. The court held that the statute would not, however, exculpate a breach of an unambiguous contractual provision. Because the contract provision at issue in that case was unambiguous, the court refused the defendants' attempt to use § 17-1101(d)(1) to bar the plaintiffs' breach of contract claim.

46 US. Cellular Inv. Co. of Allentown v. Bell Atlantic Mobile Systems, Inc., Del. Ch., C.A. No. 12984, mem. op., Berger, V.C. (March 11, 1994), generally supports the defendants' position, but highlights the fact that the emphasis of practice under § 17-1101(d)(1) has thus far focussed on breach of fiduciary duty claims. In that case, then Vice Chancellor Berger did not dismiss a breach of contract claim against a corporate general partner because the agreement was ambiguous and could be construed to bar the conduct about which the plaintiff complained. Id. at 3-5. Nonetheless, on the basis of § 17-1101(d)(1) she dismissed the breach of fiduciary duty claim against the general partner — which was based on the same conduct — because the complaint did not plead facts that supported an inference that the general partner's contract interpretation was made in bad faith. Id. at 5. The Supreme Court affirmed and stated:

The Court of Chancery's dismissal of the fiduciary duty claim was based on the failure of [plaintiff] to plead that [the general partner] acted in bad faith. A general partner acting in good faith reliance on the provisions of the partnership agreement is shielded from liability for breach of fiduciary duty. 6 Del. C. § 17-1101 (d). The complaint as it now reads is consistent with the interpretation that [the general partner] believed its actions were permitted under the Agreement, i.e., that [it] took its action in good faith. . . . [The complaint] does not assert that [the general partner] acted in knowing breach of the Agreement. The 1994 order therefore properly dismissed the complaint as failing to state a cause of action under Delaware law.

US. Cellular Inv. Co. of Allentown v. Bell Atlantic Mobile Systems, Inc., Del. Supr., 677 A.2d 497, 504 (1996).
It is interesting that neither the Supreme Court nor this court resolved the breach of contract claim against the general partner on the basis of § 17-1101 (d)(1). Most likely that is because no argument was made along those lines, but even so it is at least eye-brow raising that neither this court nor the Supreme Court adverted to the potentially broader applicability of § 17-1101(d)(1) in the case. In this respect, respected commentators on DRULPA center their discussion of § 17-1101(d)(1) solely on breach of fiduciary claims and not on claims based on breach of the partnership agreement itself, even though the statute itself addresses liabilities at "law or in equity." FOLK § 17-1101.4 at LP-XI-21 ("Section 17-1101(d)(1) provides a safe harbor against claims of breach of fiduciary duty for general partners who act in good faith reliance on the partnership agreement. In other words, a general partner cannot be liable to a partner for breach of fiduciary duties when the general partner relied in good faith on the provisions of the partnership agreement. Accordingly, a claim for breach of fiduciary duty may be dismissed for failure to state a claim where it does not allege a knowing breach of the partnership agreement."); LUBAROFF ALTMAN § 11.2.6 (focussing discussion of § 17-1101(d)(1) on claims for breach of fiduciary duty).

47 Del. Ch., 750 A.2d 1219, 1240 (2000).

The Rutledge interpretation might pose an interesting question in this case, depending on the facts. Suppose that the sales to HGI in connection with the Odd-Lot Offer are ultimately found not to have involved an issuance. As such, they would not fall under § 9.01, but § 7.09, and be governed by § 7.05 and § 7.10(a). Assume further that I conclude that the General Partner's board believed that new units would be issued to HGI but that they were not because of an administrative error. In that scenario, the agreement's terms would not be ambiguous, but the circumstances would seem to present a good case for the invocation of the statute to bar liability.

In view of the sparseness of our case law on the statute to date and the importance of the competing public policies at stake,⁴⁸ I prefer to examine these questions on a full record. Although the statutory text and the caselaw provide me with a jumping off point, the parties have not burdened me with any of the legislative history of § 17-1101(d)(1) and it seems to me to be prudent to consider such history before opining about the statute's full scope.⁴⁹ I am also interested in receiving more detailed attention to the issue of whether § 17-1101(d)(1)'s definition of liability extends only to monetary damages, or whether it also extends, as the defendants argue, to bar an order of rescission necessary to rectify a breach of a partnership agreement.⁵⁰

48 Note that the defendants' reading of § 17-1101(d)(1) diminishes the pro-unitholder effect of recent decisions holding that ambiguities in general partner-drafted partnership agreements must be resolved in favor of the unitholders. A collateral consequence may well be an increase in requests for injunctive relief to halt potential breaches before they occur and become potentially irremediable.

49 I note in this regard the cautious approach recently taken by this court in applying § 18-1101 of the Delaware Limited Liability Company Act, 6 Del. C. § 18-1101, which is virtually identical to § 17-1101(d)(1) of DRULPA. The court refused to use the statute to prevent relief to a member whose interest in the LLC had been taken away allegedly based on a good faith interpretation of the LLC agreement. The court found that there was no provision in the agreement on which a good faith basis for the defendants' actions could be said to rest, a finding sufficient to bar the defendants' use of the statute. Nonetheless, the court provided an additional statute-based reason for its decision:

Further, I must view the cited provision allowing members of an LLC to rely in good faith on the terms of the operating agreement in the context in which it appears in the statute, and with regard to the general tenor of the statute as a whole. This provision is intended, for example, to make clear that an apparent limit on liability for breach of fiduciary duty is to be interpreted broadly. I have no doubt that the legislature never intended this provision to allow the members of an LLC to misappropriate property from another member and avoid returning that property or otherwise compensating the wronged member.

Walker v. Resource Dev. Co., Del. Ch., C.A. No. 1843-S, mem. op. at 40-41, Lamb, V.C. (Aug. 29, 2000).

50 By its own terms § 17-1101(d)(1) of DRULPA appears to sweep more widely than 8 Del. C. § 102 (b)(7), which expressly addresses only "liability . . . for monetary damages."

My reticence to speak definitively at this juncture is overridingly influenced by my view that there is a substantial fact question regarding whether the good faith element of the statute is satisfied. Even if the defendants are correct that § 17-1101(d)(1) bars any relief for breach of contract unless the plaintiff can prove a knowing breach, the HGI Defendants have not convinced me that Gotham will be unable to prove such a breach.

I conclude so despite the HGI Defendants' additional claim that they relied in good faith on the advice of Kailer that they could effect the Transactions so long as they complied with the floor price in § 9.01 (b). The written work product Kailer gave to the General Partner's board indicates that the Transactions were subject to § 9.01, but did not discuss whether § 7.05 or § 7.10(a) were applicable.

But Kailer did not advise the defendants that they were free to undertake the Transactions without considering other factors so long as the § 9.01(b) floor price was met. Kailer in fact testified that he advised the board that they had to make an informed decision that the transactions were "fair" and "in the best interests of the partnership."⁵¹ Kailer was careful not to opine on the substantive merits of the Transactions but simply to inform the board that the General Partner had the authority to approve them if the board concluded that the Transactions met these criteria. Likewise, Kailer testified that the directors who were not affiliated with HGI should make the decision about the sales to HGI.⁵² But he did not specifically address whether Audit Committee review and approval was required.⁵³

51 Kailer Dep. at 306; see also Gumbiner Dep. at 570.

52 Kailer Dep. at 275, 314.

53 Id. at 261-262.

Under § 7.08 of the Partnership Agreement, the General Partner is only exculpated when it relies on counsel in good faith and acts in accordance with counsel's opinion. As noted previously, there is a triable doubt regarding the HGI Defendants' good faith, a doubt that is fair to impute to the General Partner as an entity. That doubt extends to: 1) whether the General Partner in fact implemented the transactions under § 9.01 at all pursuant to Kailer's advice; and 2) whether the General Partner acted in accordance with Kailer's advice that it could approve the Transactions only if it concluded that the Transactions were fair and in the best interests of the Partnership. I address these doubts in order.

It is obvious that HGI had a substantial interest in structuring the Transactions in a manner that would avoid the strict fair price requirements of § 7.05 of the Agreement. One way of doing that was to craft the Transactions as an "issuance" of units to HGI rather than as a simple resale of existing units to it. Although the General Partner vigorously asserts that the units acquired by HGI in the Transactions were in fact "issued" to it, there is little evidence to support that assertion as to the shares HGI acquired in connection with the Odd-Lot Offer. Certainly, the Partnership did not account for the Odd-Lot-related sale to HGI as an issuance and the record is devoid of any evidence as to when the issuance occurred. Given the substantial self-interest HGI had in avoiding the application of § 7.05, the fact that there is a real question about whether the General Partner actually consummated the Odd-Lot Offer-related sale to HGI as an issuance raises the further question of whether the General Partner was simply looking for a pretext to avoid paying a fair price. While the defendants would claim that any failure to strictly comply with § 9.01 can be attributed to an honest mistake, the record as it stands does not rule out a less savory explanation.

Similarly, if the General Partner structured the Transactions to place over 20% of the units in HGI's hands at a low price even though the General Partner's officers knew that the Partnership could have financed those purchases itself, one could reasonably conclude that the General Partner did not comply in good faith with Kailer's advice that the General Partner had to determine that the Transactions were "fair" and in the "best interests of the Partnership."

I note another issue that troubles me. The defendants refused to disclose any advice that Kailer gave to officers of the General Partner that did not go to the full board of the General Partner. At an office conference that was not transcribed, then-Vice Chancellor, now Justice Steele refused to order the disclosure of such advice. It is not apparent to me whether the court knew then that the defendants would be relying so substantially upon advice of counsel as an affirmative defense. I invite the parties to revisit this issue before trial based on concerns that are best expressed by way of a hypothetical.

Suppose that Kailer gave advice to officers of the General Partner that suggested that it was unclear whether the Transactions were subject to § 7.05 and § 7.10(a) and that he could not say with certainty that § 9.01 applied to their exclusion. If Kailer then provided the full board with bullet points that do not even mention § 7.05 or § 7.10(a), would that not cast doubt on the good faith reliance of the General Partner — as the responsible entity — on counsel? Would the knowing exploitation of an ambiguity in a partnership agreement by the General Partner with the aid of a lawyer be consistent with the good faith requirement of § 7.08 of the Partnership Agreement and § 17-1101(d)(1) of DRULPA?

This issue bleeds into another concern raised by Gotham. Gotham points out that Kailer had a long-standing attorney-client relationship with HGI. They also note that the only lawyer who apparently did any work for HGI in connection with the Transactions was Kailer himself, the very lawyer who was supposed to be representing the Partnership. While the defendants claim that Kailer merely prepared implementing board resolutions for HIGI and that performing that task did not make him HGI's lawyer in connection with the sales, the fact that the defendants have blocked inquiry into the full scope of Kailer's advice in connection with the Transactions precludes the court from accepting their contention that Kailer was not simultaneously both HGI's and the Partnership's lawyer in the Transactions.

While § 7.08 of the Agreement invests the General Partner with the flexibility to rely in good faith upon a lawyer of its own choosing, the defendants have not persuaded me that the possibility that Kailer had two conflicting masters does not bear on the question of good faith reliance. The record evidence does not rule out the possibility that the major sale to HGI was shoehorned into § 9.01 to avoid the application of § 7.05, an avoidance that benefited HGI to the exclusion of the other unitholders. Then that sale was quite possibly not even carried out as an issuance. If those possibilities are later found to have in fact occurred, the awkward position Kailer seems to have occupied as advisor to two clients with conflicting aims would contribute to concerns about the good faith with which the General Partner sought and accepted his advice. The parties' inability to point to legal precedent addressing a potential conflict situation like this in the limited partnership context also makes me reluctant to resolve this issue without the benefit of live trial testimony by Kailer and his client defendants.

2. The Affirmative Defenses Raised By The Non-HGI Directors

The Non-HIGI Directors argue that their actions must be viewed in a very different light than those of the HGI Defendants. Unlike the HGI Defendants, the Non-HGI Directors had no personal pecuniary interest in favoring HGI's interests over the interests of the other unitholders other than that they were elected to the General Partner's board with the votes of HGI.

Undoubtedly, the Non-HGI Directors were forced to balance the interests of constituencies whose interests were in conflict. By virtue of long-established principles of Delaware corporation law, the Non-HGI Directors owed fiduciary duties to the General Partner and its sole owner, HGI. Under the less venerable but largely unquestioned precedent of USA Cafes,⁵⁴ the non-HGI director-defendants also owed fiduciary duties to the Partnership and its unitholders.

54 Del. Ch., 600 A.2d 43 (1991).

But the Non-HGI Directors contend that this sort of structural conflict does not preclude a grant of summary judgment to them under § 7.06 of the Partnership Agreement, which exculpates them for any breach of duty that does not involve a breach of the duty of loyalty⁵⁵ or the receipt of an improper personal benefit.

55 I include within this traditional concept the contract's list of bad faith acts, intentional misconduct, and knowing violations of law; a list which was obviously inspired by 8 Del. C. § 102 (b)(7).

Gotham retorts by analogy to corporation law principles. Posit a scenario in which Director Jones serves on the board of Corporation A, which is the majority stockholder of Corporation B. Assume that Director Jones also serves as a director of Corporation B. Further assume that Corporation A buys a major asset from Corporation B. In that context, Gotham claims, plain principles of Delaware corporation law would treat Director Jones who was on both boards as having her loyalty (whether framed in terms of independence or interest) compromised.⁵⁶ If there were a triable question about the fairness of the underlying transaction, Director Jones would have a difficult time escaping a trial because her conflicted loyalties would raise a question of scienter difficult to resolve before trial. Gotham argues that the same approach must be taken in this situation involving a challenge to conduct by directors of a corporate general partner.

56 Cf. 8 Del. C. § 144.

For the following reasons, I conclude that the analogy to corporation law Gotham seeks to make is inapt and would produce unproductive results in contexts like the ones presented here.

To understand why I reach this conclusion, it is necessary to reflect on this court's decision in USA Cafes. In that decision, Chancellor Allen concluded that the directors of a corporate general partner owed certain fiduciary duties to the limited partners of the limited partnership the general partner controlled.⁵⁷ He did so, for among other reasons, because the directors of the general partner play a key role in controlling the assets of the limited partnership for the benefit of the limited partners, a traditional indicator of a fiduciary relationship.⁵⁸

57 600 A.2d at 48-49.

58 Id. The facts in USA Cafes involved serious accusations of actual personal self-dealing by the individual directors of a corporate general partner. Even then Chancellor Allen was careful to indicate that the scope of duty owed by the general partner's directors "may well not be so broad as the duty of the director of a corporate trustee." .Id., at 49. "But [those duties] surely entail the duty not to use control over the partnership's property to advantage the corporate partner at the expense of the partnership." Id.

This decision was in some senses unorthodox. When limited partners contract to join a limited partnership run by a corporate general partner, a rote traditional approach would impose fiduciary duties solely upon the corporate general partner as an entity. After all, it is the entity that the limited partners agreed would manage their assets.⁵⁹

59 The earlier decision in this case holding that the derivative demand excusal test must focus on the General Partner's ability as an entity to consider a demand reflects the more traditional approach. See Gotham I mem. op. at 15-16 (finding that a contrary rule "would undermine this state's established policy of respecting the legal fiction of the business entity" and that any other approach "would ignore the reality that it is the general partner who owes the limited partners fiduciary duties, not the management of the general partner even though they make the decisions for the business entity.").

Under this more strictly traditional approach, the limited partners would therefore be able to look to only the corporate general partner in the first instance to seek redress for any breach of duty. Only if there had been abuse of the corporate form by the owners of the corporate general partner that would justify veil piercing would the limited partners be able to look beyond the corporate partner to others for redress.

As the leading treatise on Delaware limited partnerships puts it:

The directors of a corporate general partner of a Delaware limited partnership owe fiduciary duties to the stockholders of the corporate general partner. A corporate general partner itself owes a fiduciary duty to limited partners of the limited partnership of which it is a general partner . . . Prior to USA Cafes, L.P., the authors did not believe that the fiduciary duty of directors of a corporate general partner to the limited partners of the limited partnership of which it is a general partner would, in and of themselves, justify a court's holding that the directors of the corporate general partner owed a fiduciary duty to the limited partners of the limited partnership of which the corporation (and not the directors) was the general partner. If the directors were to have managed the corporate general partner in such a way that the corporate general partner damaged a limited partnership, many practitioners believed that the stockholders of the corporate general partner might have had a cause of action against the directors of the corporate general partner for mismanagement or breach of fiduciary duty to the extent of any loss, suffered by the corporation either directly or as a result of a limited partner action against the corporate general partner resulting in a recovery by the limited partners, but that the limited partners would not have had a claim directly against the directors. The limited partners' claim would have been against the corporate general partner itself. Under such an approach, the corporate general partner is viewed as an entity with duties flowing from its relationship with the limited partnership of which it is the general partner. It was felt that such an approach would avoid putting directors in the situation of having potentially conflicting and irreconcilable fiduciary duties to stockholders of the corporation and to limited partners of the limited partnership.⁶⁰

60 LUBAROFF ALTMAN § 11.2.11, at 11-32-11-32.1.

The question presented here is whether § 7.06 of the Agreement can be read as including the structural conflict faced by the Non-HGI Directors within its concept of a loyalty breach. That is, if the Non-HGI Directors unintentionally struck a contractually improper balance between HGI's interests and the Partnership's interests that was unfair to the Partnership, would the structural conflict elevate such a breach to the level of disloyalty?

To conclude so would be to rewrite the understanding that exists between the parties to the Partnership Agreement. Regardless of the decision in USA Cafes, the parties here agreed that the General Partner as an entity was the general partner. While the directors of the General Partner were not named as general partner, the Agreement does recognize that the directors of the General Partner would play a role in the decisionmaking process of the General Partner. But that recognition does not aid Gotham because the Agreement contemplates that the Non-HGI Directors would be responsible for reviewing and approving certain transactions between General Partner affiliates and the Partnerships. Put simply, the Agreement contemplates that the Non-HGI Directors will operate in situations involving structural conflicts as a protective mechanism for the unitholders unaffiliated with the General Partner.

As such, it is inconceivable that § 7.06 of the Agreement can be read as precluding exculpation of the Non-HGI Directors when they play the role specifically envisioned for them by the Agreement. Absent some indication that they conducted themselves in a structural conflict situation in a bad faith manner, for their own personal self-interest, or to intentionally injure the other unitholders for the benefit of the General Partner's affiliate, § 7.06 bars a recovery against them.

In an important sense, this conclusion can be said to rest on an analogy to decisional law under the Delaware General Corporation Law. On several occasions, our courts have held that directors did not lack independence simply because they were required to balance the interests of different stockholder classes whose interests were at odds as to a particular transaction.⁶¹ For example, this court recently stated:

61 Gilbert v. El Paso Co., Del. Supr., 575 A.2d 1131, 1147-48 (1990); In re General Motors Class H Stockholders Litig., Del. Ch., 734 A.2d 611, 618-619 (1999); Solomon v. Armstrong, Del. Ch., 747 A.2d 1098, 1118 n. 63 (1999); Freedman v. Restaurant Assocs. Indus., Del. Ch., C.A. No. 9212, 1987 WL 14323 at *10, mem. op. at 27-28, Allen, C. (Oct. 16, 1987).

At essence, therefore, the plaintiffs' duty of loyalty claim hinges on the following. In structuring the Hughes Transactions, the GM Board had the duty to balance fairly the interests of two groups of stockholders to whom they owed fiduciary duties. Since the two stockholders groups had potentially divergent interests, plaintiffs believe that they state a duty of loyalty claim merely by alleging that the Board treated one group unfairly — even if it was for reasons unrelated to director self-interest. In my view, that is not the law. Rather, the plaintiffs must plead facts from which one could infer disloyalty or bad faith on the part of GM's directors, in the sense that the directors acted for reasons inimical to their fiduciary responsibilities. An allegation that properly motivated directors, for no improper personal reason, advantaged one class of stockholders over the other in apportioning transactional consideration does not state a claim for breach of the duty of loyalty.⁶²

62 In re General Motors Class H Stockholders Litig., 734 A.2d at 618-619.

This strand of our corporate decisional law logically extends to the limited partnership context, wherein it will usually be (as in this case) inferable that the limited partners explicitly recognized that the directors of the general partner would be the ones entrusted with balancing the interests of the corporate general partner and its affiliates against the interests of the other unitholders. In analogous circumstances, this court's decisions have precluded limited partners from complaining about a general partner's conflict of interest that was clearly disclosed to the limited partners in the partnership agreement.⁶³

63 Seaford Funding L.P. v. MM Associates II, L.P., Del. Ch., 672 A.2d 66, 72 (1995) (stating that if limited partners had accepted an investment knowing of a conflict of interest on the part of the general partner in making certain decisions, they will be precluded from asserting a breach based on the general partner's later engagement in that contemplated conduct); Boxer v. Husky Oil Co., Del. Ch., C.A. No. 6261, 1983 WL 17937, at * 6, Hartnett, V.C. (June 28, 1983) (where partnership agreement and prospectus specifically contemplated that a general partner with a disclosed conflict would play a role in selecting an appraiser, the plaintiffs could not base a cause of action on the mere fact that the general partner in fact played the very role contemplated for it when it came time to select an appraiser), aff'd, Del. Supr., 483 A.2d 633 (1984) (ORDER).

As a final factor, I must also confess concern that adopting Gotham's argument would create a disincentive for qualified persons to serve as directors of corporate general partners. While anyone who serves in such a capacity must expect to deal with the possibility of litigation, it is quite another thing for such a person to accept service that potentially exposes her to a triable claim for breach of the duty of loyalty whenever she makes a good-faith decision about a transaction between the partnership and an affiliate of the general partner.

For all these reasons, summary judgment will be entered for the Non-HGI Directors. Because I resolve the issue under § 7.06, I do not reach the defenses under § 17-1101(d)(1) of DRULPA and § 7.08 of the Agreement, other than to note that there is no record evidence that suggests that the Non-HGI Directors acted other than in a good faith belief that the Transactions complied with the Agreement.

V. Conclusion

In accordance with the reasons set forth in this opinion, this motion is disposed of as follows. The HGI Defendants' motion for summary judgment is DENIED as to Gotham's Contract Claim, is GRANTED as to Gotham's Fiduciary Duty against the General Partner only, and is GRANTED as to Gotham's Fraud Claims against all the HGI Defendants. The Non-HGI Directors' motion for summary judgment on all the claims against them is GRANTED. All claims on which the defendants have obtained summary judgment are dismissed with prejudice. IT IS SO ORDERED.