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

Court of Chancery of Delaware

July 23, 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.

          ORDER REFUSING APPLICATION FOR CERTIFICATION OF INTERLOCUTORY APPEAL

          Joseph R. Slights III Vice Chancellor.

         WHEREAS:

         A. On April 2, 2018, Plaintiffs filed a complaint under 6 Del. C. §§ 17-110 and 17-111, seeking a declaration that (1) the Fund GPs[1] were not properly removed and continue to serve as general partners of the Funds; and (2) the Fund GPs and Bay Hills "have not breached, materially or otherwise, any contractual duty or other legal duty in connection with the Funds."[2]

         B. On July 2, 2018, this Court issued a Memorandum Opinion (the "Opinion") denying Defendants' motion to dismiss the complaint (the "Motion"). The Motion sought dismissal on the basis of a purported mandatory forum selection clause designating a court in the Commonwealth of Kentucky as the exclusive jurisdiction to resolve disputes arising out of the LPA that governed the limited partnerships at issue. Although the Court determined that dismissal was not justified because the purported forum selection clause was, in fact, a permissive consent to jurisdiction clause, the Court did determine, sua sponte, that a stay of this Delaware action in favor of a contemporaneously filed Kentucky action was justified in the interests of comity and judicial efficiency.[3]

         C. On July 6, 2018, Plaintiffs filed their Application for Certification of Interlocutory Appeal (the "Application").

         D. The Application asserts three grounds under Delaware Supreme Court Rule 42: (1) "the [Opinion] involves a novel question of law"; (2) "the [Opinion] conflicts with other trial court decisions on the applicable legal standard"; and (3) "interlocutory review [will] serve considerations of justice."[4]

         E. On July 16, 2018, Defendants filed their opposition to the Application.

         AND NOW, this 23rd day of July, 2018, the Court having considered the Application, Defendants' opposition and the criteria set forth in Supreme Court Rule 42, it appears to the Court that:

         1. Supreme Court Rule 42(b)(i) provides that "[n]o interlocutory appeal will be certified by the trial court or accepted by [the Delaware Supreme] Court unless the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment." Rule 42(b)(ii) provides that instances where the trial court certifies an interlocutory appeal "should be exceptional, not routine, because [interlocutory appeals] disrupt the normal procession of litigation, cause delay, and can threaten to exhaust scarce party and judicial resources." For this reason, "parties should only ask for the right to seek interlocutory review if they believe in good faith that there are substantial benefits that will outweigh the certain costs that accompany an interlocutory appeal."[5]

         2. When considering whether to certify an interlocutory appeal, "the trial court should identify whether and why the likely benefits of interlocutory review outweigh the probable costs, such that interlocutory review is in the interests of justice. If the balance is uncertain, the trial court should refuse to certify the interlocutory appeal."[6]

         3. After carefully considering the Application, I am satisfied that the Opinion does not decide a substantial issue of material importance that merits appellate review before a final judgment.[7] Specifically, the Opinion does not decide a novel issue of law or conflict with other trial court decisions, and interlocutory review would not serve considerations of justice. Consequently, and for the three reasons stated below, I cannot certify that interlocutory review of the Opinion is warranted on a cost-benefit basis or otherwise.

         4. First, the Application contends the Opinion "involves a novel question of law"[8]-specifically, "whether the same policy interests (recognized under McWane[9]) should be included in or even predominate and override a court's application of the Cryo-Maid[10] factors in deciding whether to stay a summary action in favor of a plenary action filed in another state."[11] Plaintiffs assert that, under Delaware law, the Court may not stay "a summary Delaware action in favor of a first-filed plenary action" and, accordingly, "it should follow that a contemporaneously filed (or first-filed) Delaware summary action should not be stayed in favor of out-of-state plenary litigation."[12]

         The Application mischaracterizes the bases for the Court's decision to order a stay and overstates the limitations on the Court's discretionary authority to stay statutory summary proceedings. As noted in the Opinion, "[a] court may, 'in the interests of comity and judicial efficiency, stay an action before it in favor of another with an identity of parties and issues pending in another forum.'"[13] "The Court's right to grant a stay is within the exclusive discretion of the Court. The discretion to issue a stay is inherent in every court and flows from its control over the disposition of cases on its docket."[14] "That authority, . . . is 'subject only to statutory and rule constraints and the requirement to exercise discretion rationally.'"[15] As the Opinion explained, "'[u]ltimately, the exercise of the court's discretion will depend upon review of the relevant practical considerations keeping in mind the broader policies of comity between the states and their courts and the orderly and efficient administration of justice.'"[16]

         It is true, as Plaintiffs point out, that Delaware courts should, and do, consider the summary nature of a Delaware action when determining whether a stay of that action is appropriate.[17] But the mere fact that the Delaware action is a statutory summary proceeding will not prohibit a trial court from staying that proceeding when "otherwise legally warranted and [when the stay] would not undermine or defeat the statutory purposes."[18] For instance, in Japan Lease International Corp. v. Mediatrics, Inc., the court began its stay analysis by acknowledging that plaintiff had initiated the Delaware action under 8 Del. C. § 225 (the corporate analogue of 6 Del. C. § 17-110)[19] with the legitimate expectation that the proceedings would be summary in nature.[20] The court also acknowledged that Section 225 charges the Court of Chancery with the responsibility of "supervis[ing] the internal affairs of Delaware corporation[s]."[21] Nevertheless, then-Chancellor Duffy explained that the court was not "mandate[d] to decide any controversy submitted under the corporation law statutes no matter what actions may be pending between the parties in other jurisdictions."[22] He continued, "I think we still have an obligation to look at all of the attendant circumstances and make a decision which includes a consideration of the orderly and efficient administration of justice as we see it in light of the binding case law."[23]

         In the Opinion, the Court determined a stay was warranted "in the interests of the orderly and efficient administration of justice" because "[t]he Kentucky and Delaware Actions overlap[ped] substantially[, ] [t]he parties [were] functionally identical[, ] both actions w[ould] require the courts to adjudicate the same contract dispute . . . [and] the simultaneous procession of both actions risk[ed] the significant waste of scarce judicial resources and, more importantly, the inconsistent resolution of relevant issues."[24] The Opinion applied well-settled Delaware law and considered the same policy interests embodied in legion authority where our courts have recognized the court's discretion to manage its docket.[25] Thus, the Opinion did not decide a novel question of law.

         5. Second, the Application mischaracterizes the scope of, and differences between, the Delaware and Kentucky actions. According to the Application, interlocutory review of the Opinion would serve considerations of justice because the "Delaware forum offers an expedited means of resolving this control dispute that the Kentucky Action does not."[26] The Application continues, because "this Court['s procedures under Section 17-110] . . . are designed 'to prevent a Delaware entity from being immobilized by controversies about whether a given . . . general partner [] 'is properly holding office, '" this action "should be decided promptly by the Delaware Court of Chancery."[27] In contrast, Plaintiffs point out that Defendants' claims in Kentucky are plenary, broader in scope and "threaten to undermine the Delaware courts' authority and independence."[28]

         As mentioned in the Opinion, notwithstanding Plaintiffs' characterization of their claims, this action most certainly does not present a narrow governance dispute that can be resolved with the development of a downsized factual record and summary application of Delaware law. Instead, Plaintiffs have sought declarations under Section 17-111 that they did not breach the LPA (or other duties they may owe the limited partners) in a manner that would justify their removal as general partners. Plaintiffs' claims do not implicate discreet matters of Delaware entity law; they are, instead, straight-up contract claims involving a complex, long-term relationship between determinate parties who have agreed that their disputes would be decided under Kentucky law (and who have expressly consented to the jurisdiction of the Kentucky court).[29] Those same claims will be litigated in Kentucky whether or not this action is stayed. To suggest that the Delaware action is a typical summary proceeding, or that the dispute can be resolved substantially more quickly here than in Kentucky, is to blink at the reality of the scope of the controversy between these parties and what will be required to adjudicate it.[30]

         Moreover, contrary to Plaintiffs' protestation that a stay of this action will somehow immobilize the Delaware entities, the Funds are "funds-of-funds" that have but one limited partner-Defendant, KRS. Accordingly, there is no concern that a stay in Delaware will cause uncertainty among other investors or potential investors.[31] As in any dispute over the control of an operating business entity, whether based in contract or otherwise, interim measures will have to be taken to minimize disruption and ensure proper management while the control issues are resolved. The Kentucky court is certainly ...


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