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Greenhouse v. Polychain Fund I LP

Court of Chancery of Delaware

May 29, 2019


          Date Submitted: February 25, 2019

          Joseph H. Huston, Jr., Esquire and Stacey A. Scrivani, Esquire of Stevens & Lee, P.C., Wilmington, Delaware and Todd C. Toral, Esquire and AnnaMarie A. Van Hoesen, Esquire of Jenner & Block LLP, Los Angeles, California, Attorneys for Plaintiff.

          Jeffrey M. Gorris, Esquire and Christopher P. Quinn, Esquire of Friedlander & Gorris, P.A., Wilmington, Delaware and J. Noah Hagey, Esquire and Taylor Altman, Esquire of Braunhagey & Borden LLP, New York, New York, Attorneys for Defendants.


          SLIGHTS, Vice Chancellor

         This action involves a demand by Plaintiff, Harry Greenhouse, to inspect the books and records of Defendant, Polychain Fund I LP ("Polychain" or the "Fund"), under Delaware Revised Uniform Limited Partnership Act ("DRULPA") Section 17-305.[1] Plaintiff purportedly seeks to inspect Polychain's books and records for the purpose of investigating the value of his capital account and the amount paid to him upon his withdrawal from the partnership. At first glance, the demand and its purpose appear proper enough. But Plaintiff has a standing problem. When he withdrew from Polychain, he ceased being a limited partner and lost standing to demand inspection of Polychain's books and records.

         Plaintiff resists the premise of lost standing by pointing to the fact that Polychain withheld 5% of his redemption upon withdrawal as an audit holdback and then later provided him with an additional cash distribution based on assets that could not be valued at the time of his investment. Neither the holdback nor the cash distribution reflects equity in the firm, however, because they do not reflect an interest that rises or falls with the value of the Fund. They are, instead, discrete obligations and rights unique to Plaintiff in his capacity as a redeemed member. Because Plaintiff no longer possesses an equity interest in Polychain, he has no statutory or contractual right to inspect its books and records.

         Polychain has moved for judgment on the pleadings. According to Polychain, the facts as admitted by Plaintiff demonstrate, as a matter of law, that Plaintiff is no longer a limited partner with rights to inspect the partnership's books and records. For the reasons explained below, I agree. The motion for judgment on the pleadings is granted.

         I. BACKGROUND

         The facts are drawn from the well-pled allegations in the complaint and documents incorporated by reference, including Polychain's limited partnership agreement (the "LPA") and correspondence by and between Plaintiff and Polychain.[2] I have afforded Plaintiff all reasonable inferences, as I must on a motion for judgment on the pleadings.[3]

         A. Parties and Relevant Non-Parties

         Defendant, Polychain, is a Delaware limited liability company. It is a fund comprising a portfolio of blockchain assets that includes digital currencies and "Simple Agreements for Future Tokens" ("SAFTs").[4] Defendant, Polychain 2030, LLC, is Polychain's current general partner.[5] Nonparty, Polychain Capital LP ("Polychain Capital"), was the general partner of the Fund at the time of Plaintiff's withdrawal from the partnership.[6] Plaintiff, Harry Greenhouse, claims to be a limited partner of Polychain.[7]

         B. Plaintiff Redeems His Interest in Polychain

         On November 13, 2017, Polychain Capital requested that the limited partners consent to, among other things, the designation of "side pockets" for certain of the Fund's investments, including SAFTs.[8] Limited partners were told that if they did not provide their consent by November 30, 2017, they would be withdrawn from the partnership as of December 31, 2017.[9]

         Two weeks later, on November 27, 2017, Plaintiff notified Polychain Capital that he intended to make a full redemption of his capital account.[10] He alleges that he based this decision on assurances from Joseph Eagan, Polychain Capital's Chief Operating Officer, that the Fund's most liquid assets would be valued for redemption at prices as of December 31, 2017, and that there would be a framework to value less liquid assets.[11] Eagan also stated that the illiquid assets would be placed in side pockets and excluded from the redemption until they were deemed to be liquid by Polychain Capital.[12] Two days after Plaintiff determined to withdraw, Polychain Capital's chief of staff, Caroline Jaquiss, informed Plaintiff that his redemption would be valued "under the old terms," and that no assets would be side-pocketed.[13]

         Over the next few weeks, Plaintiff attempted to obtain more information regarding the valuation of his redemption. On December 13, 2017, an email from counsel for Polychain Capital, Karl Cole-Frieman, to Greenhouse largely confirmed Eagan's prior assurances concerning the valuation procedures.[14] Because Plaintiff requested full withdrawal before Polychain had designated any side pockets, however, Polychain Capital determined that his redemption would be valued without the benefit of excluding less liquid assets from the valuation process until their liquidity improved.[15]

         In the following weeks, counsel for Plaintiff sought information regarding the valuation policy but was told the policy would not be disclosed.[16] Hoping to reach an agreement on the side pockets or at least on a more beneficial procedure for valuing Plaintiff's interests, Plaintiff's counsel requested on December 26, 2017, that Polychain suspend Plaintiff's redemption request.[17] Polychain refused.[18]

         On January 25, 2018, Plaintiff received an investor statement indicating that his account had been fully redeemed; four days later, he received and accepted a wire transfer for the withdrawal.[19] Polychain withheld 5% of Plaintiff's capital account as an audit holdback per the LPA.[20]

         C. The Books and Records Demand

         Section 10.2 of the LPA permits the Fund's limited partners to inspect the books and records of the partnership as provided under DRULPA.[21] After his repeated efforts to obtain information through other means failed to yield results, on February 28, 2018, Plaintiff finally made a written demand to inspect Polychain's books and records under Section 17-305.[22] The demand seeks all books and records from the time Plaintiff first invested to the date of his demand relating to: a. Any assets held by Polychain;

b. Any transactions Polychain consummated with any person, entity, and/or investee, regarding any assets held by Polychain, including, without limitation, any SAFT entered into with any enterprise;
c. Any performance, management, or consulting fees and their calculation paid by Polychain to anyone, including the General Partner;
d. The mathematical methodology used in respect of Mr. Greenhouse's account statements and/or redemption;
e. Any side deals or binding side letters Polychain and/or the General Partner entered into with any person, including, without limitation, any limited partner, if such side deals or letters affected or could have possibly affected the value of Mr. Greenhouse's interest in Polychain; and
f. Any agreements or engagements with any third parties (paid or otherwise) that might have affected the treatment of Mr. Greenhouse's interest or its value.[23]

         D. Procedural Posture

         When Polychain failed to respond to his demand, [24] Plaintiff filed his Verified Complaint for Inspection of Partnership Books and Records (the "Complaint") on March 26, 2018. On June 1, 2018, the Court stayed the action pending a determination of arbitrability by an appointed arbitrator.[25] On October 22, 2018, a JAMS arbitrator determined that Plaintiff's books and records action should be adjudicated in this Court.[26] Defendants answered the Complaint on May 11, 2018, [27] and moved for judgment on the pleadings the following day.[28] The motion was submitted to the Court on February 25, 2019.

         II. ANALYSIS

         Defendants contest Plaintiff's standing to inspect Polychain's books and records. They argue that because Plaintiff has withdrawn from the partnership and fully redeemed his partnership interest, he is no longer a limited partner. Instead, at most, Plaintiff is now a creditor of the Fund and, in that capacity, he no longer possesses inspection rights. Plaintiff counters that he continues to hold an equity interest in Polychain because his withdrawal was partial and involuntary. He contends that Polychain redeemed him over his objection, withheld 5% of his interest as an audit holdback and later gave him a cash distribution based on assets in which he continued to have an interest after his redemption.

         Plaintiff's arguments in support of his standing to seek inspection are unpersuasive. The law is clear that only current limited partners can inspect books and records. Unless the partnership agreement provides otherwise, limited partners who have withdrawn from the partnership have rights and remedies as creditors of the partnership but no longer maintain an equity interest that would entitle them to rights as limited partners. The Complaint does not allege that Plaintiff resisted Polychain's refusal to suspend his withdrawal from the partnership or that he sought to return the distribution of his capital account when he received it. His arguments in briefing and at oral argument-that he did not want to be redeemed and, in fact, continues to have a small ongoing equity interest based on the audit holdback and assets that yielded a subsequent cash distribution-do not change the fact that he has withdrawn from the partnership and no longer has rights as a limited partner. Because he no longer retains an equity interest in the partnership, he is not entitled to inspect the partnership's books and records.[29]

         A. ...

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