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Policemen's Annuity & Benefit Fund of Chicago v. DV Realty Advisors LLC

Court of Chancery of Delaware

November 27, 2013

Policemen's Annuity and Benefit Fund of Chicago, Illinois
v.
DV Realty Advisors LLC

Date Submitted: August 26, 2013

Bradley R. Aronstam, Esquire Seitz Ross Aronstam & Moritz LLP

Andrew D. Cordo, Esquire Ashby & Geddes

Henry E. Gallagher, Jr., Esquire Connolly Gallagher LLP

Dear Counsel:

The Plaintiffs, five Chicago public employee pension plans and the limited partners of Nominal Defendant DV Urban Realty Partners I L.P. (the "Partnership"), removed Defendant DV Realty Advisors LLC ("DV Realty") as General Partner of the Partnership and then obtained the Court's confirmation of the validity and effectiveness of their action.[1] The Court reserved jurisdiction to address follow-on matters. The first of those issues is whether DV Realty's interest in the Partnership, as a general partnership interest, converted into a limited partnership interest on its removal or, as the Plaintiffs call it, "a mere economic interest." The second issue involves valuation of DV Realty's interest in the Partnership or, to use the concepts of the limited partnership agreement, a determination of its capital account.

A. DV Realty's Status

Under the Delaware Revised Uniform Limited Partnership Act ("DRULPA"), unless the partnership agreement provides otherwise, a person may be admitted to the partnership as a limited partner only upon the consent of all of the limited partners. By Section 17-301(b)(1) of the DRULPA:

(b) After the formation of a limited partnership, a person is admitted as a limited partner of the limited partnership:

(1) In the case of a person who is not an assignee of a partnership interest, including a person acquiring a partnership interest directly from the limited partnership and a person to be admitted as a limited partner of the limited partnership without acquiring a partnership interest in the limited partnership, at the time provided in and upon compliance with the partnership agreement or, if the partnership agreement does not so provide, upon the consent of all partners and when the person's admission is reflected in the records of the limited partnership; . . . .[2]

Because none of the existing limited partners consented to DV Realty's becoming a limited partner, it has no specific statutory claim to that status. Moreover, nothing in DRULPA supports the claim that a removed general partner's interest somehow automatically converts into a limited partnership interest.[3] Thus, consideration of the Partnership's limited partnership agreement is necessary.[4]

Partnership law generally embraces freedom of contract, and, through the partnership agreement, the partners may provide different procedures for becoming a limited partner. The LPA allows for the transfer of a limited partnership interest to a "substitute Limited Partner."[5] Any such transfer of an interest in the partnership requires approval of the General Partner, and that has not been obtained.[6] Thus, no provision of the LPA expressly establishes a process— automatic or otherwise—by which DV Realty may claim to have achieved limited partnership status.

The LPA addresses the rights of a removed General Partner:
In the event of the removal of a General Partner . . . such General Partner . . . shall retain 100% of its Capital Account . . . with 50% of such Capital Account . . . being maintained on the same basis as any other Limited Partner's Capital Account, while the other 50% of such Capital Account . . . shall be ...

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