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In re Bay Hills Emerging Partners I, L.P.

Court of Chancery of Delaware

July 2, 2018

In re BAY HILLS EMERGING PARTNERS I, L.P.; BAY HILLS EMERGING PARTNERS II, L.P.; BAY HILLS EMERGING PARTNERS II-B, L.P.; and BAY HILLS EMERGING PARTNERS III, L.P., Delaware limited partnerships

          Date Submitted: May 17, 2018

          A. Thompson Bayliss, Esquire and E. Wade Houston, Esquire of Abrams & Bayliss LLP, Wilmington, Delaware and James C. Rutten, Esquire and Erin J. Cox, Esquire of Munger, Tolles & Olson LLP, Los Angeles, California, Attorneys for Plaintiffs BHEP GP I, LLC; BHEP GP II, LLC; BHEP GP II-B, LLC; BHEP GP III, LLC; and Bay Hills Capital Management, LLC.

          Kevin M. Gallagher, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware and Mark C. Goodman, Esquire of Baker & McKenzie LLP, San Francisco, California, Attorneys for Plaintiffs/Nominal Plaintiffs Bay Hills Emerging Partners I, L.P.; Bay Hills Emerging Partners II, L.P.; Bay Hills Emerging Partners II-B, L.P.; and Bay Hills Emerging Partners III, L.P.

          Brett D. Fallon, Esquire, Patricia A. Winston, Esquire and Travis J. Ferguson, Esquire of Morris James LLP, Wilmington, Delaware and Mark A. Cameli, Esquire, Ryan S. Stippich, Esquire and Brent A. Simerson, Esquire of Reinhart Boerner Van Deuren S.C., Milwaukee, Wisconsin, Attorneys for Defendants Kentucky Retirement Systems, Kentucky Retirement Systems Pension Fund, and Kentucky Retirement Systems Insurance.

          MEMORANDUM OPINION

          SLIGHTS, VICE CHANCELLOR

         A limited partner in four Delaware limited partnerships invoked its "for cause" removal rights to remove the general partners of each of the four entities. The general partners challenge the bona fides of their removal. They filed this action against the limited partner and two related entities (collectively, "Defendants") to obtain declarations that the removal was improper and that they continue as the rightful managers of the limited partnerships. Shortly after this action was filed, the limited partner initiated litigation in the Commonwealth of Kentucky in which it seeks judicial declarations that its removal of the general partners was proper along with other legal and equitable relief.

         Defendants have moved to dismiss this action principally on the ground that a forum selection clause in the relevant entity agreements requires Plaintiffs to litigate this dispute in Kentucky-more specifically, in Franklin County Circuit Court. I disagree and, thus, deny dismissal. The operative forum selection clause is permissive, not mandatory. It provides that Kentucky's Franklin County Circuit Court is a proper venue for the resolution of partnership-related disputes, but it does not designate that court as the exclusive forum for the resolution of such disputes. Nevertheless, because there is a nearly identical action pending in Kentucky-albeit one that was filed eight days after this action-and because the relevant entity agreements are principally governed by Kentucky law, the Court will stay this action sua sponte in favor of the Kentucky action.

         I. BACKGROUND

         The facts are drawn from the complaint and documents incorporated therein as well as additional materials submitted by the parties in connection with Defendants' motion to dismiss.[1]

         A. The Parties

         Plaintiffs are four Delaware limited partnerships (each a "Fund" and collectively the "Funds"), [2] their respective general partners (each a "Fund GP" and collectively the "Fund GPs"), [3] all of which are Delaware limited liability companies, and Bay Hills Capital Management, LLC ("Bay Hills"), [4] also a Delaware limited liability company. Bay Hills is an investment firm that created the Funds between 2007 and 2013 as "funds of funds"-"i.e., investment funds that invest in underlying private equity funds"-pursuant to the Delaware Revised Uniform Limited Partnership Act ("DRULPA").[5] Around the same time, Bay Hills also created the Fund GPs to act as sole general partners of the Funds.[6] Bay Hills itself serves as the investment advisor for each Fund, and Bay Hills' employees manage and operate the Fund GPs.[7] All Plaintiffs are headquartered in San Francisco, California.[8]

         Defendant, Kentucky Retirement Systems ("KRS"), is "a statutorily created entity that manages and administers the retirement system of the Commonwealth of Kentucky." [9] KRS is the sole limited partner of each of the Funds. [10]Defendants, Kentucky Retirement Systems Pension Fund and Kentucky Retirement Systems Insurance Fund, are also "statutorily created entit[ies]" responsible for "certain pension [and insurance] plans that KRS oversees and manages."[11]

         B. The LPA

         Each Fund is governed by a limited partnership agreement (the "LPA").[12]Relevant to the parties' dispute are the LPA's provisions governing removal of the general partner, forum selection and choice of law.

         LPA § 7.4 addresses removal of the general partner, and provides:

[each Fund's] General Partner may be removed as General Partner for Cause upon the written notice of the Limited Partner. Such written notice shall be delivered to the General Partner and shall state in reasonable detail the Cause for removal and the effective date of such removal, which effective date may be immediately upon delivery of the notice or thereafter; provided, however, that the General Partner shall have sixty (60) days from receipt of such notice to remedy or otherwise cure such Cause for removal. For purposes of this Section 7.4, "Cause" shall mean (i) the commission by the General Partner of any act of gross negligence or reckless or willful misconduct which, in each case, materially and adversely affects the Partnership, (ii) the conviction of the General Partner of any felony, or (iii) the commission by the General Partner of a material violation of applicable United Stated federal securities law.

         LPA § 12.8, under the heading "Applicable Law; Jurisdiction and Venue," provides:

[e]xcept as otherwise provided by the [DRULPA], this Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws of the Commonwealth of Kentucky (regardless of the choice of law principles of the Commonwealth of Kentucky or of any other jurisdiction). Each of the Partners hereby consents to the jurisdiction of the courts of the Commonwealth of Kentucky and further consents that venue shall lie in the Franklin Circuit Court located in Franklin County, Kentucky.

         C. Purported Removal of the Fund GPs

         On May 10, 2017, KRS served a notice of removal on the Fund GPs in which it claimed, among other things, that the Fund GPs (1) "engaged in willful and reckless disregard of KRS's rights" by replacing an auditor without consulting or obtaining approval from KRS, (2) manipulated overhead expenses in a grossly negligent manner and (3) deliberately attempted to misappropriate assets.[13] Given these infractions, KRS asserted it had "Cause" under the LPA to remove the Fund GPs as general partners of the Funds.[14] KRS withdrew its May 2017 notice of removal in July 2017.[15] The parties disagree as to the reasons for the withdrawal.[16]

         On February 8, 2018, KRS served a second notice of removal on the Fund GPs.[17] In this second notice, KRS alleged, among other things, that Fund GP III materially breached Fund III's LPA by being "'lukewarm' to KRS' desired transfer of Fund III's assets and by not 'enthusiastically endors[ing] that course of action.'"[18] KRS has declined to withdraw the second notice, which purports to be effective as of April 9, 2018.[19]

         D. Procedural Posture

         On April 2, 2018, Plaintiffs filed their "Verified Complaint Pursuant to 6 Delaware Code §§ 17-110 and 17-111" along with a "Motion to Expedite and for Status Quo Order." The Court heard Plaintiffs' motions on April 5, entered the parties' stipulated Status Quo Order and reserved decision on the motion to expedite.[20] On April 9, Plaintiffs filed their "Amended Verified Complaint Pursuant to 6 Delaware Code §§ 17-110 and 17-111" (the "Complaint").[21]The Complaint sets forth two counts for declaratory relief: Count I seeks a declaration pursuant to 6 Del. C. § 17-110 and 10 Del. C. § 6501 that KRS lacks Cause to remove the Fund GPs and that the Fund GPs have a right to and do remain as general partners of the Funds[22]; Count II seeks a declaration pursuant to 6 Del. C. § 17-111 and 10 Del. C. § 6501 that the Fund GPs and Bay Hills "have not breached, materially or otherwise, any contractual duty or other legal duty in connection with the Funds."[23]

         On April 10, Defendants filed an action in Franklin County, Kentucky, requesting "remov[al] of Bay Hills as its investment manager and [] recover[y] [of] damage[s] caused by Bay Hills' misconduct" (the "Kentucky Action").[24]Defendants bring nine counts in the Kentucky Action, one of which seeks a declaratory judgment that the Fund GPs were properly removed as general partners of the Funds.[25]

         On April 12, Defendants filed their motion in which they seek dismissal of the Complaint on three grounds: (1) the LPA's forum selection clause; (2) the interests of comity and the doctrines of sovereign immunity and abstention; and (3) forum non conveniens.[26] According to Defendants, Plaintiffs were required to bring their claims in Kentucky pursuant to the LPA's mandatory forum selection clause. Alternatively, if the Court determines that the LPA does not mandate dismissal, Defendants argue that the Court should still dismiss because "Plaintiffs seek to have the rights and obligations of the sovereign Commonwealth of Kentucky adjudicated in another state, even though the Kentucky legislature has unambiguously stated that the Commonwealth shall only be sued by a contractual counter-party in Franklin County, Kentucky."[27] Finally, Defendants contend that the doctrine of forum non conveniens mandates dismissal in favor of the Kentucky Action.

         Plaintiffs counter that LPA § 12.8-the forum selection and choice of law provision-is not a mandatory venue provision but rather provides "that if one partner sues another partner in Franklin County, the defendant cannot move to dismiss for lack of jurisdiction or improper venue."[28] Moreover, Plaintiffs read 6 Del. C. § 17-109(d) as rendering the forum selection clause (if mandatory) unenforceable because Section 17-109(d) prohibits limited partners from waiving the right to litigate "matters relating to the organization or internal affairs of a limited partnership" in the courts of Delaware.[29] According to Plaintiffs, since KRS, a limited partner, did precisely that through LPA § 12.8, the provision violates Section 17-109(d) and is, therefore, unenforceable.

         With regard to comity, Plaintiffs argue that Delaware has a strong interest in resolving disputes regarding the de jure management of a Delaware limited partnership and this interest must trump any notions of comity that may be implicated here. As for sovereign immunity, Plaintiffs argue that the doctrine does not justify dismissal because (1) Delaware can exercise jurisdiction over Kentucky under federal and state law notwithstanding sovereign immunity; (2) the Section 17-110 claim is in rem and does not implicate sovereign immunity; and (3) Kentucky statutory law does not give KRS immunity from Delaware actions.

         Finally, Plaintiffs contend Defendants have failed to show any "overwhelming hardship" that would justify dismissal on forum non conveniens grounds. According to Plaintiffs, their claims relate to the governance of Delaware entities so it would be peculiar, to say the least, for a Delaware court to dismiss the claims based on a finding that Delaware is not a convenient forum in which to adjudicate them.

         II. ANALYSIS

         "The proper procedural rubric for addressing a motion to dismiss based on a forum selection clause is found under Rule 12(b)(3), improper venue. Although Delaware courts have, in the past, framed a forum selection clause analysis as jurisdictional in some sense, recent cases have all proceeded under Rule 12(b)(3)."[30] When addressing a motion under Rule 12(b)(3), "the court is not shackled to the plaintiff's complaint and is permitted to consider extrinsic evidence from the outset."[31] In cases involving a contractual agreement to litigate in a particular forum, "the well-settled rule is that the court should give effect to the terms of private agreements to resolve disputes in [that] forum out of respect for the parties' contractual designation."[32]

         A. The Forum Selection Clause

         "The courts of Delaware defer to forum selection clauses and grant Rule 12(b)(3) motions to dismiss where the parties use express language clearly indicating that the forum selection clause excludes all other courts before which those parties could otherwise properly bring an action."[33] "When a contract contains a forum selection clause, this court will interpret the forum selection clause in accordance with the law chosen to govern the contract."[34]

         1. No Choice of Law Analysis is Necessary

         LPA § 12.8 provides, "[e]xcept as otherwise provided by the [DRULPA], this Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws of the Commonwealth of Kentucky (regardless of the choice of law principles of the Commonwealth of Kentucky or of any other jurisdiction)." The parties agree that Kentucky law applies to the LPA[35] and "Delaware courts will generally honor a contractually-designated choice of law provision so long as the jurisdiction selected bears some material relationship to the transaction."[36] Here, there is little doubt that the Commonwealth of Kentucky has a "material relationship" to the Funds and their internal governance; the limited partner in each of the Funds is a "statutorily created entity that manages and administers the retirement systems of the Commonwealth of Kentucky."[37]

         The fact that Kentucky has a material relationship to the dispute, however, does not end the choice of law inquiry. In cases where there is a "false conflict"- meaning there is no material difference between the laws of competing jurisdictions-the court "should avoid the choice of law analysis altogether."[38]Such is the case here. As relates to the enforcement of forum selection clauses, Delaware and Kentucky law are in harmony. In both states, "forum selection clauses are prima facie valid" and will be enforced unless unreasonable.[39] Both jurisdictions define a valid waiver-such as the waiver of the right to bring an action outside a particular forum-as "an intentional relinquishment or abandonment of a known right or privilege."[40] And, in both jurisdictions, forum selection clauses, like other contractual provisions, are interpreted consistent with the principle that "[w]here the [contractual language] is clear and unambiguous, courts [should] interpret the contract in accordance with the ordinary and usual meaning of the language."[41] Thus, there is no meaningful conflict of laws. Accordingly, the Court declines to undertake a choice of law analysis.

         2. The Forum Selection Clause Is Permissive

         Forum selection clauses may be permissive or mandatory. "Permissive forum selection clauses, often described as 'consent to jurisdiction' clauses, authorize jurisdiction and venue in a designated forum, but do not prohibit litigation elsewhere." [42] In contrast, "[m]andatory forum selection clauses contain clear language ...


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